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EX-23.1 - LifeMD, Inc.ex23-1.htm
EX-5.1 - LifeMD, Inc.ex5-1.htm

 

As filed with the U.S. Securities and Exchange Commission on December 29, 2020

 

Registration No. 333-250985

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No.1 to

FORM S-1/A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

CONVERSION LABS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2833   76-0238453
(State of
Incorporation)
  (Primary Standard Industrial
Classification Number)
  (IRS Employer
Identification Number)

 

800 Third Avenue, Suite 2800

New York, New York 10022

Tel: (855) 743-6478

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

 

Copies to:

 

Joseph M. Lucosky, Esq.

Lawrence Metelitsa, Esq.

Lucosky Brookman LLP

101 Wood Avenue South, 5th Floor

Woodbridge, New Jersey 08830

Tel. No.: (732) 395-4400

Fax No.: (732) 395-4401

(Address, including zip code, and telephone, including area code)

 

Approximate date of proposed sale to the public: From time to time after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Securities to be Registered   Number of shares of common stock to be
registered(1)
    Proposed
Maximum
Offering Price
Per Share
    Proposed
Maximum
Aggregate
Offering Price
    Amount of
Registration
Fee(2)
 
                         
Common Stock     3,368,421     $ 7.27 (3)   $ 24,488,420.67     $ 2,671.68  
Common Stock underlying Common Stock Purchase Warrants     101,053     $ 4.75 (4)   $ 480,001.75     $ 49.32  
Total     3,469,474             $

24,968,422.42

    $

2,721

 

 

(1) Includes up to an aggregate of 3,469,474 shares of the Company’s (as defined herein) common stock, par value $0.01 per share (the “Common Stock”) consisting of 3,368,421 shares of Common Stock, and up to 101,053 shares of Common Stock issuable upon exercise of warrants (the “PA Warrants”) that may be sold from time to time pursuant to this registration statement by the Selling Stockholders (as defined herein) identified herein.
   
(2) The fee is calculated by multiplying the aggregate offering amount by .0001091, pursuant to Section 6(b) of the Securities Act of 1933.
   
(3)

Based on the closing price for our common stock on December 28, 2020 of $7.27. The shares offered, hereunder, may be sold by the Selling Stockholders from time to time in the open market, through privately negotiated transactions, or a combination of these methods at market prices prevailing at the time of sale or at negotiated prices.

   
(4) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, based on exercise price applicable to shares issuable upon exercise of warrants.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

 

 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED DECEMBER ___, 2020

 

 

Conversion Labs, Inc.

3,368,421 Shares of Common Stock

101,053 Shares of Common Stock underlying Common Stock Purchase Warrants

 

Conversion Labs, Inc., a Delaware corporation (the “Company”), consummated a private placement offering (the “Offering”), whereby pursuant to that certain securities purchase agreement (the “Purchase Agreement”) entered into by the Company and certain accredited investors (collectively, the “Investors”) the Company sold to such Investors an aggregate of 3,368,421 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”).

 

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 101,053 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”).

 

This prospectus relates to the offering and resale by the Investors, the Placement Agent or their registered assigns (each a “Selling Stockholder” and collectively the “Selling Stockholders”) identified herein of up to an aggregate of 3,469,474 shares of Common Stock of the Company. These shares include 3,368,421 shares of Common Stock, and 101,053 shares of Common Stock issuable upon exercise of the PA Warrants, issued pursuant to that certain Securities Purchase Agreement, dated October 30, 2020, by and among the Company and the Selling Stockholders.

 

The Selling Stockholders may from time to time sell, transfer or otherwise dispose of any or all of the securities in a number of different ways and at varying prices. See “Plan of Distribution” beginning on page 29 of this prospectus for more information.

 

We are not selling any shares of Common Stock in this offering, and we will not receive any proceeds from the sale of shares by the Selling Stockholders.

 

Our Common Stock is quoted on The Nasdaq Capital Markets (the “Nasdaq”) under the symbol “CVLB.” On December 28, 2020 the closing price as reported on the Nasdaq was $7.27 per share. This price will fluctuate based on the demand for our Common Stock.

 

The Selling Stockholders may offer all or part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices.

 

This prospectus provides a general description of the securities being offered. You should this prospectus and the registration statement of which it forms a part before you invest in any securities.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.

 

You should rely only on the information contained in this prospectus or any prospectus supplement or amendment hereto. We have not authorized anyone to provide you with different information.

 

Our auditors have issued a going concern opinion. For more information please see the going concern opinion on page F-1 and the risk factors herein.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is December __, 2020.

 

 
 

 

TABLE OF CONTENTS 

 

Prospectus Summary 1
Summary Consolidated Financial Information 6
Risk Factors 10
Cautionary Note Regarding Forward-Looking Statements 25
Use of Proceeds 26
Determination of Offering Price 26
Selling Stockholders 26
Plan of Distribution 29
Market for Our Common Stock and Related Stockholder Matters 31
Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
Business 48
Directors, Executive Officers and Key Employees 56
Executive Compensation 63
Security Ownership of Certain Beneficial Owners and Management 67
Certain Relationships and Related Party Transactions 69
Description of Capital Stock 71
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73
Interests of Named Experts and Counsel 73
Experts 73
Legal Matters 73
Where You Can Find More Information 74
Index to Consolidated Financial Statements F-1

 

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Common Stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Common Stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus is correct as of any time after its date.

 

i
 

 

PROSPECTUS SUMMARY

 

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be important information about us, you should carefully read this entire prospectus before investing in our Common Stock and warrants, especially the risks and other information we discuss under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes beginning on page F-1. Our fiscal year end is December 31 and our fiscal years ended December 31, 2018 and 2019 are sometimes referred to herein as fiscal years 2018 and 2019, respectively. Some of the statements made in this prospectus discuss future events and developments, including our future strategy and our ability to generate revenue, income and cash flow. These forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those contemplated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”. Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our”, the “Company” or “our Company” or “Immudyne” refer to Conversion Labs, Inc., a Delaware corporation, our wholly owned subsidiaries, Conversion Labs PR LLC, Conversion Labs Media LLC, Conversion Labs Asia Limited, and our majority owned subsidiary, Conversion Labs PR, LLC, unless the context indicates otherwise. Except as otherwise indicated in this prospectus, all common stock and per share information and all exercise prices with respect to our warrants reflect, on a retroactive basis, a 1-for-5 reverse stock split of our common stock, which became effective on October 14, 2020.

 

Business Overview

 

The Company is a telehealth business with a direct-to-consumer approach, offering a convenient, cost-effective and smarter way for consumers to access medical treatment and when appropriate receive prescription and OTC products from the comfort of their home. The U.S. healthcare system is undergoing a paradigm shift largely due to new technologies and the emergence of direct-to-consumer healthcare. The traditional model of visiting a doctor’s office, receiving a physical prescription, visiting a neighborhood 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. Direct-to-consumer telemedicine companies, like our Company, offer patients immediate and virtual treatment from licensed physicians, and the home delivery of prescription medications, devices and diagnostics bundled with over-the counter wellness products.

 

We believe that many people can relate to the hassle and inconvenience of seeking medical care. According to a November 2018 Merritt Hawkins Survey, the average wait time to see a doctor is now 29 days, and in major cities such as Boston, the average wait is now 109 days. With the U.S. projected to be short 121,300 doctors by 2030, wait times are likely to grow worse. Timely and convenient access to healthcare and prescription medications is a critical factor in improving quality of care and patient outcomes. We believe that, because of this importance and the growing demand from patients, telemedicine platforms like ours can fundamentally change the market for healthcare in the U.S. Our mission is to continue to build a portfolio of direct-to-consumer telemedicine brands that offer on-demand, virtual medical treatment. We want our brands to be top-of-mind for consumers and sought after for their proprietary characteristics and endorsements by thought leading physicians and influencers.

 

While not the first in direct-to-consumer telemedicine, Conversion Labs enjoys early-mover advantage. The Company’s current infrastructure and the scale it has reached has only been achieved by a handful of other players in the rapidly growing U.S. telemedicine market. As the handful of leading players continue to scale at a robust pace, it will be increasingly difficult for other players to enter the market as it is unlikely they will have the resources to scale and compete. According to a 2018 Euromonitor estimate, the market for direct-to-consumer healthcare products is estimated to reach $700 billion in global annual sales. Alliance Bernstein estimates that the disruptable market for online pharmacy in the U.S. is in the $300 billion dollar range, and they estimate that up to 70% of this market will move from traditional pharmacies to online pharmacies over the next ten years. The opportunities are immense, and we believe that we are well positioned to capitalize on these large-scale economic shifts in healthcare.

 

We believe that product innovation and excellence are at the heart of our business. As is exemplified with our first brand, Shapiro MD, we have built a full line of proprietary Over-The-Counter (“OTC”) products for male and female hair loss including products such as our FDA approved OTC minoxidil and an FDA-cleared medical device. We have recently launched a personalized telemedicine offering that gives consumers access to virtual medical treatment and a full line of oral and topical prescription medications for hair loss that we anticipate to be a major driver of near-term growth. Our men’s health brand, Rex MD, currently offers treatment for erectile dysfunction as well as premature ejaculation. In the coming quarters we will have several other indications launching that will continue to enhance Rex MD’s footprint as a leading provider of all men’s health related solutions. We have built a platform that allows us to efficiently launch telehealth and wellness product lines wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands. The Company will be officially launching a new brand, Nava MD, a teledermatology platform, in the first quarter of 2021.

 

1
 

 

Telemedicine Platform

 

In early 2020, Conversion Labs made the strategic decision to acquire a cloud-based telemedicine technology platform, Veritas MD. Veritas MD serves as the backbone of our telemedicine business which includes our physician network, pharmacy providers, CRM software, third-party advertising platforms and more. This platform facilitates patient consultation scheduling, virtual visits, prescription routing, fulfillment, and messaging between patients, physicians and our patient care team. Veritas MD was formally launched in Q4 2020.

 

Direct-To-Consumer Channel

 

Our telemedicine products and services are marketed and sold directly to consumers via an omnichannel approach which includes advertisements on online platforms including Facebook and Google as well as offline channels such as television and radio. We also are the majority controlling shareholder of a subsidiary called Legal Simpli Software. Legal Simpli Software owns and operates PDF Simpli, a software product for editing, converting and signing PDF documents. This division of Conversion Labs has experienced rapid growth and is expected to achieve profitability in the first half of 2021. Aside from PDF Simpli, we are solely focused on growing our telemedicine products and services.

 

Brands

 

Hair Loss: Shapiro MD

 

Launched in 2017, Shapiro MD is a brand for hair loss in both men and women. Shapiro MD’s product offerings include both over-the-counter and prescription products and/or ingredients that have been rigorously studied for their effects in treating hair loss / hair thinning. Upon its launch in 2017, Shapiro MD’s offering consisted of a proprietary and patented hair loss product line consisting of shampoo, conditioner, and leave-in-foamer. Over the past 12 months Shapiro MD’s product portfolio has grown to now include U.S. Food and Drug Administration (“FDA”) approved medications such as minoxidil and finasteride, an over-the-counter supplement for hair loss, and an FDA 510(k) cleared Laser Hair Restoration Device.

 

Hair loss is a deeply personal problem that affects people psychologically in addition to its physical effects; Conversion Labs is committed to using its telemedicine platform and patented technology platform to ensure that men and women affected by this condition can access the best medical care and treatment options from the comfort of their own home.

 

On February 21, 2020, ConsumersAdvocate.org ranked Shapiro MD as the third best hair loss treatment provider in the United States, ahead of other household brands such as Bosley, Keeps and Rogaine.

 

Men’s Health: RexMD

 

Launched in 2019, RexMD is a digital health clinic for men currently offering personalized treatment plans from licensed physicians in 50 states for erectile dysfunction. After a personalized consultation with a physician, if appropriate, we dispense and ship prescription E.D. medications directly to our patients’ homes. We are initially focused on erectile dysfunction and recently have launched our premature ejaculation products. We intend to expand our product offering to include treatment for cold sores, mental health and stress, insomnia, energy, and many other common medical conditions faced by men.

 

2
 

 

Teledermatology: NavaMD

 

NavaMD, launching in the first quarter of 2021, is a female-oriented teledermatology and skincare brand. In addition to a full line of patented and clinically studied OTC skincare products, Nava MD will connect patients with board-certified dermatologists to receive treatment and when appropriate prescription medications for many of the most common skin conditions. NavaMD’s proprietary products leverage intellectual property and proprietary formulations licensed from Restorsea, a leading medical grade skincare technology platform.

 

Restoresea’s clinically proven skincare technology platform is the result of more than $50 million invested in R&D and intellectual property development and has received 35 patents along with broad industry and academic acclaim, with its breakthrough clinical results having been published in the peer-reviewed Journal of Drugs in Dermatology and Journal of Clinical and Aesthetic Dermatology. Nava MD will be one the first direct-to-consumer product lines to offer this advanced skincare technology.

 

Nava MD will be positioned as an online skincare and telehealth brand that will offer teledermatology services to patients in all 50 states. Teledermatology represents one of the fastest growing segments of the U.S. telehealth market. According to Fortune Business Insights, the teledermatology market is expected to grow at a 24.3% CAGR to $44.9 billion by 2027.

 

Majority Owned Subsidiary: PDFSimpli

 

PDFSimpli is a PDF conversion software product, which was acquired through the purchase of 51% of the membership interests of LegalSimpli Software, LLC, a Puerto Rico limited liability company, which operates a marketing-driven software solutions business. PDFSimpli enables users to convert, edit and sign PDF documents. As of March 1, 2020, PDFSimpli was ranked in the top 5,750 websites globally, in which it was also ranked in the top 1,200 for specific countries with more than 4.5 million registrants globally. Since its launch, PDFSimpli has converted or edited over 5 terabytes of documents for customers from the legal, financial, real-estate and academic sectors. PDFSimpli has over 39,000 active subscriptions as of March 1, 2020.

 

Recent Developments

 

Securities Purchase Agreement

 

On November 3, 2020, the Company consummated an initial closing of a private placement offering, whereby pursuant to the Purchase Agreement entered into by the Company and the Investors, the Company sold to such Investors an aggregate of 3,044,529 shares of Common Stock, for an aggregate purchase price of $14,461,512.75. The purchase price was funded on November 3, 2020 (the “Closing Date”) and resulted in net proceeds to the Company of approximately $13.2 million.

 

On November 19, 2020, the Company consummated the second closing of a private placement offering, whereby pursuant to Purchase Agreement entered into by the Company and an Investors, the Company sold to the Investor 323,892 shares of Common Stock, for a purchase price of $1,538,487. The purchase price was funded on November 19, 2020 and resulted in net proceeds to the Company of approximately $1.4 million. The aggregate net proceeds to the Company from the Offering was $16,000,000.

 

Pursuant to the 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 the PA Warrants to purchase 101,053 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 may be exercised on a “cashless” basis and will expire on November 3, 2025 and November 19, 2025.

 

3
 

 

Registration Rights Agreement

 

On October 30, 2020, in connection with the Purchase Agreement, the Company entered into a registration rights agreement with the Investors (the “Registration Rights Agreement”). The Registration Rights Agreement requires the Company to use its reasonable best efforts to register the resale of the Shares by the Investors and the shares of Common Stock underlying the PA Warrants by the Placement Agent in a registration statement on Form S-1 to be filed with the Securities and Exchange Commission (“SEC”), under the Securities Act of 1933, as amended (the “Securities Act”), within 15 business days from the Closing Date, and to use its reasonable best efforts to have such registration statement declared effective by the SEC as soon as practicable, but not later than 60 days from the Closing Date (or 120 days from the Closing Date in the event that such registration statement is subject to a full review by the SEC).

 

Lock-Up Agreement

 

Further, in connection with the Purchase Agreement, the Company’s officers and directors have entered into lock-up agreements (each a “Lock-Up Agreement” and collectively, the “Lock-Up Agreements”), pursuant to which the Company’s officers and directors have agreed, for a period of 180 days from the Closing Date, not to sell or transfer any shares of the Company’s common stock or common stock equivalents held by each respective officer or director of the Company.

 

Except as otherwise indicated in this prospectus, all common stock and per share information and all exercise prices with respect to our warrants reflect, on a retroactive basis, a 1-for-5 reverse stock split of our common stock, which became effective on October 14, 2020.

 

THE OFFERING

 

This prospectus relates to the offer and sale from time to time of up to an aggregate of 3,469,474 shares of the Company’s Common Stock, consisting of 3,368,421 shares of our common stock by the Selling and up to 101,053 shares of our common stock by the Selling Stockholders that may be issued upon the exercise of PA Warrants.

 

In connection with the Private Offering, under the terms of the Registration Rights Agreement entered into with the Selling Stockholders on the same date and in connection with the Securities Purchase Agreement, we must register with the U.S. Securities and Exchange Commission 3,368,421 shares of common stock, and 101,053 shares of common stock underlying the PA Warrants. The number of shares ultimately offered for resale by the Selling Stockholders depends upon how much of the PA Warrants the Selling Stockholders elect to convert and exercise, respectively, and the liquidity and market price of our common stock.

 

Common Stock to be offering by the Selling Stockholders offered by us:   We are offering 3,469,474 shares of Common Stock consisting of: (i) 3,368,421 shares of Common Stock and (ii) 101,053 shares underlying the PA Warrants. The PA Warrants are exercisable immediately, have an exercise price of $4.75 per share and expire five years from the date of issuance.
     
Common Stock outstanding prior to this offering (1)   23,180,831
     
Common stock to be outstanding after the offering (1)   23,281,884 shares of common stock if all the PA Warrants that are a part of this offering are also exercised in full.
     
Use of proceeds   We will not receive any proceeds from the sale of common stock by the Selling Stockholders. All of the net proceeds from the sale of our Common Stock will go to the Selling Stockholders as described below in the sections entitled “Selling Stockholders” and “Plan of Distribution”. We have agreed to bear the expenses relating to the registration of the Common Stock for the Selling Stockholders.

 

4
 

 

Risk factors   Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 10 before deciding to invest in our securities.
     
Trading symbol   Our common stock is currently quoted on the Nasdaq under the trading symbol “CVLB”.
     
Lock-ups   Pursuant to the 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. Additionally, the Company’s officers and directors have entered into the Lock-Up Agreements, pursuant to which they agreed, for a period of 180 days from the Closing Date, not to sell or transfer any shares of the Company’s common stock or common stock equivalents held by each respective officer or director of the Company.

 

 

(1)

The number of shares of our Common Stock outstanding prior to and to be outstanding immediately after this offering, as set forth in the table above, is based on 23,180,831 shares outstanding as of December 28, 2020, and including or excluding the following as of such date:

 

 

Excludes 4,641,400 shares of Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $2.00 per share.

     
 

 

Excludes 3,550,471 shares of Common Stock issuable upon exercise of warrants outstanding having a weighted average exercise price of $4.56 per share;
     
  Excludes 101,053 shares of Common Stock issuable upon exercise of the PA Warrants offered in this offering; and
     
 

Excludes 1,200,000 shares of common stock issuable under Amended Consulting Agreement dated September 29, 2020 with Blue Horizon Consulting, LLC (“Blue Horizon”)

     
 

Excludes 300,000 shares of common stock issuable under Amended Employment Agreement dated December 8, 2020 with our Chief Acquisition Officer.

     
 

Excludes 1,076,923 shares of common stock issuable upon conversion of our Series B Preferred Stock.

 

5
 

 

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

 

The following summary consolidated statements of operations data for the fiscal years ended December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Additionally, the nine months ended September 30, 2019 and 2020 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of September 30, 2020 are derived from our consolidated financial statements that are included elsewhere in this prospectus. The historical financial data presented below is not necessarily indicative of our financial results in future periods, and the results for the quarter ended September 30, 2020 is not necessarily indicative of our operating results to be expected for the full fiscal year ending December 31, 2020 or any other period. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods.

 

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended September 30,  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
                 
Product revenues, net  $9,433,136   $2,461,765   $20,258,750   $7,309,524 
Software revenues, net   1,567,627    664,962    4,136,608    1,214,600 
Service revenues, net   5,000    -    5,000    - 
Total Revenues, net   11,005,763    3,126,727    24,400,358    8,524,124 
                     
Cost of product revenue   2,338,831    612,072    5,800,992    1,811,938 
Cost of software revenue   396,105    68,009    883,791    201,327 
Cost of revenues   2,734,936    680,081    6,684,783    2,013,265 
                     
Gross Profit   8,270,827    2,446,646    17,715,575    6,510,859 
                     
Expenses                    
Selling & marketing expenses   10,528,833    2,073,016    21,669,046    5,580,276 
General and administrative expenses   17,589,366    929,471    20,096,893    2,034,067 
Operating expenses   336,001    216,065    663,752    700,225 
Customer service expenses   230,788    140,579    488,455    408,795 
Development Costs   118,346    61,221    288,813    157,736 
Total expenses   28,803,334    3,420,352    43,206,959    8,881,099 
                     
Operating Loss   (20,532,507)   (973,706)   (25,491,384)   (2,370,240)
                     
Interest expense, net   (291,096)   (130,936)   (1,313,010)   (430,956)
                     
Loss from operations before provision for income taxes   (20,823,603)   (1,104,642)   (26,804,394)   (2,801,196)
                     
Provision for income taxes   -    -    -    - 
                     
Net Loss   (20,823,603)   (1,104,642)   (26,804,394)   (2,801,196)
                     
Net (loss) attributable to noncontrolling interests   (201,233)   (160,838)   (408,180)   (375,540)
                     
Net loss attributable to Conversion Labs, Inc.  $(20,622,370)  $(943,804)  $(26,396,214)  $(2,425,656)
                     
Deemed distribution to holders of common and Series B Preferred stock   (3,573,636)   -    (4,716,021)   - 
                     
Net loss attributable to Conversion Labs, Inc. common stockholders  $ (24,196,006 )  $(943,804)  $ (31,112,235 )  $(2,425,656)
                     
Basic loss per share attributable to Conversion Labs, Inc. common stockholders  $(1.65)  $(0.09)  $(2.47)  $(0.25)
Diluted loss per share attributable to Conversion Labs, Inc. common stockholders  $(1.65)  $(0.09)  $(2.47)  $(0.25)
                     
Weighted Average number of common shares outstanding:                    
Basic   14,674,693    10,134,968    12,581,401    9,627,093 
Diluted   14,674,693    10,134,968    12,581,401    9,627,093 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

 

CONVERSION LABS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended December 31, 
   2019   2018 
Product revenues, net  $9,919,506   $8,044,416 
Software revenues, net   2,539,129    277,713 
Service revenues, net   9,943    2,000 
Total revenues, net   12,468,578    8,324,129 
           
Cost of product revenue   2,643,281    1,974,781 
Cost of software revenue   627,315    21,441 
Cost of revenues   3,270,596    1,996,222 
           
Gross Profit   9,197,982    6,327,907 
           
Operating expenses          
Selling & marketing expenses   8,170,929    5,079,091 
General and administrative expenses   2,398,751    2,288,580 
Other operating expenses   724,270    516,979 
Customer service expenses   570,763    378,856 
Development Costs   222,877    120,541 
Total operating expenses   12,087,590    8,384,047 
           
Operating Loss   (2,889,608)   (2,056,140)
           
Interest (expense), net   (761,150)   (354,388)
           
Loss from continuing operations before provision for income taxes   (3,650,758)   (2,410,528)
           
Income taxes (Benefit)   (122,500)   (124,700)
           
Income from discontinued operations, including gain on sale, net of income taxes   -    925,738 
           
Net Income (Loss)   (3,528,258)   (1,360,090)
           
Net (loss) income attributable to noncontrolling interests   (391,055)   (119,262)
           
Net Income (loss) attributable to Conversion Labs, Inc.   (3,137,203)   (1,240,828)
           
Basic loss per share attributable to Conversion Labs, Inc. from continuing operation  $(0.35)  $(0.25)
Basic income per share attributable to Conversion Labs, Inc. from discontinued operation   -    0.10 
Diluted loss per share attributable to Conversion Labs, Inc. from continuing operation  $(0.35)   (0.25)
Diluted income per share attributable to Conversion Labs, Inc. from discontinued operation   -   $0.10 
           
Weighted Average number of common shares outstanding          
Basic   9,897,745    8,837,475 
Diluted   9,897,745    8,837,475 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7
 

 

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2020   December 31, 2019 
         
ASSETS          
           
Current Assets          
Cash  $916,637   $1,106,624 
Accounts receivable, net   414,342    97,448 
Product deposit   1,093,388    150,000 
Inventory, net   1,858,545    950,059 
Other current assets   370,078    442,971 
Total Current Assets   4,652,990    2,747,102 
           
Non-current assets          
Right of use asset, net   18,173    23,625 
Capitalized Software, net   334,585    - 
Intangible assets, net   423,743    675,452 
Total non-current assets   776,501    699,077 
           
Total Assets  $5,429,491   $3,446,179 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current Liabilities          
Accounts payable and accrued expenses  $7,269,145   $3,051,156 
Notes payable, net   1,754,143    814,734 
Contract liabilities   412,616    109,552 
Total Current Liabilities   9,435,904    3,975,442 
           
Long-term Liabilities          
Lease Liability   28,241    29,978 
Contingent consideration on purchase of LegalSimpli   100,000    500,000 
Liability to issue common stock   218,848    - 
Series B Preferred Stock - put liability   3,541,137    - 
Deferred tax liability   70,000    70,000 
Total Liabilities   13,394,130    4,575,420 
           
Commitments and contingencies (Note 7)          
           
Stockholders’ Deficit          
Preferred Stock, $0.0001 per value; 4,996,500 and 5,000,000 shares authorized          
Series B Preferred Stock, $0.0001 per value; 5,000 and 0 shares authorized, 3,500 and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively   -    - 
Common stock, $0.01 par value; 100,000,000 shares authorized, 15,634,962 and 10,680,730 shares issued, 15,531,922 and 10,577,690 outstanding as of September 30, 2020 and December 31, 2019, respectively   156,349    106,807 
           
Additional paid-in capital   40,614,348    15,663,626 
Accumulated deficit   (47,901,176)   (16,594,917)
    (7,130,479)   (824,484)
Treasury stock, 103,040 and 103,040 shares, at cost   (163,701)   (163,701)
Total Conversion Labs, Inc. Stockholders’ Deficit   (7,294,180)   (988,185)
           
Non-controlling interest   (670,459)   (141,056)
           
Total Stockholders’ Deficit   (7,964,639)   (1,129,241)
           
Total Liabilities and Stockholders’ Deficit  $5,429,491   $3,446,179 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

8
 

 

CONVERSION LABS, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2019   December 31, 2018 
         
ASSETS          
           
Current Assets          
Cash  $1,106,624   $180,093 
Accounts receivable, net   97,448    99,053 
Product deposit   150,000    33,302 
Inventory, net   950,059    1,022,616 
Other current assets   442,971    270,006 
Total Current Assets  $2,747,102   $1,605,070 
           
Non-current assets          
ROU Asset   23,625    - 
Intangible assets, net   675,452    1,011,065 
Total non-current assets   699,077    1,011,065 
           
Total Assets  $3,446,179   $2,616,135 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
           
Current Liabilities          
Accounts payable and accrued expenses  $3,051,156   $868,997 
Notes payable, net   814,734    247,416 
Contract liabilities   109,552    75,984 
Total Current Liabilities   3,975,442    1,192,397 
           
Long-term Liabilities          
Lease Liability   29,978    - 
Contingent consideration on purchase of LegalSimpli   500,000    600,000 
Liability to issue shares   -    - 
Deferred tax liability   70,000    4,000 
Total Liabilities   4,575,420    1,796,397 
           
Stockholders’ Equity (Deficit)          

Common stock, $0.01 par value; 100,000,000 shares authorized, 10,680,809 and 9,156,540 shares issued, 10,577,690 and 9,053,421 outstanding as of December 31, 2019 and 2018, respectively

   106,809    91,566 
Additional paid-in capital   15,663,624    13,110,505 
Accumulated (deficit)   (16,594,917)   (12,140,668)
    (824,484)   1,061,401 

Treasury stock, 103,040 and 103,040 shares, at cost

   (163,701)   (163,701)
Total Conversion Labs, Inc. Stockholders’ (Deficit)   (988,185)   897,700 
           
Non-controlling interest   (141,056)   (77,962)
           
Total Stockholders’ (Deficit)   (1,129,241)   819,738 
           
Total Liabilities and Stockholders’ (Deficit)  $3,446,179   $2,616,135 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9
 

 

RISK FACTORS

 

Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and results of operations.

 

Risks Related to Our Company and Business

 

The report of our independent registered public accounting firm contains explanatory language that substantial doubt exists about our ability to continue as a going concern.

 

Our independent auditor’s report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern as of December 31, 2019. If we are unable to fund operations through our operating business and are unable to obtain sufficient financing in the near term as required or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.

 

We have generated losses and not yet achieved positive cash flows, which may adversely affect our liquidity and ability to continue as a going concern.

 

We cannot assure you that we will be able to achieve revenue growth, profitability or positive cash flow, on either a quarterly or annual basis, or that profitability, if achieved, will be sustained. Our ability to meet our long-term business objectives likely will be dependent upon establishing increased cash flow from operations or securing other sources of financing. If our losses continue, however, our liquidity may be severely impaired, our stock price may fall, and our shareholders may lose all or a significant portion of their investment.

 

We may not be able to implement our growth and marketing strategy successfully or on a timely basis or at all.

 

Our future success depends, in large part, on our ability to implement our growth strategy of expanding distribution and sales of our product portfolio, attracting new consumers to our brand and introducing new product lines and product extensions. Our ability to implement this growth strategy depends, among other things, on our ability to:

 

enter into distribution and other strategic arrangements with other potential distributors of our all-natural raw material products;
increase our brand recognition;
expand and maintain brand loyalty; and
research new applications for existing products and develop new product lines and extensions.

 

Cyber security risks and the failure to maintain the integrity of data belonging to our Company could expose us to data loss, litigation and liability, and our reputation could be significantly harmed.

 

We collect and retain large volumes of data relating to our business and from our customers for business purposes, including for transactional and promotional purposes, and our various information technology systems enter, process, summarize and report such data. The integrity and protection of this data is critical to our business. We are subject to significant security and privacy regulations, as well as requirements imposed by the credit card industry. Maintaining compliance with these evolving regulations and requirements could be difficult and may increase our expenses. In addition, a penetrated or compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss or fraudulent or unlawful use of data relating to our company or our employees, independent distributors or preferred customers, which could harm our reputation, disrupt our operations, or result in remedial and other costs, fines or lawsuits.

 

Our Revenue Growth Depends on Consumers’ Willingness to Adopt our Products.

 

Our growth is highly dependent upon the adoption by consumers of our products, and we are subject to a risk of any reduced demand for our products. If the market for our products does not gain broad market acceptance or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed. The market for our products is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, and changing consumer demands and behaviors.

 

10
 

 

If we undertake product recalls or incur liability claims with respect to our products, such recalls or claims could increase our costs and adversely affect our reputation, business and results of operations.

 

Some of our products are designed for human consumption and use, and we face product recalls or liability claims if the use of our products is alleged to have resulted in injury or death. To date, we have not (i) conducted any product recalls, (ii) received any product liability claims from third parties, or (iii) received any reports from an end consumer of any adverse effect resulting from our products. A product recall or liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which, in turn, could have an adverse effect on our business, financial condition and results of operations. While we do maintain product liability insurance coverage, we cannot be sure that we will be able to maintain insurance coverage at acceptable costs or in a sufficient amount, that our insurer will not disclaim coverage as to a future claim or that a product liability claim would not otherwise adversely affect our business, financial condition and results of operations. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. Uncertainties resulting from the initiation and continuation of product liability litigation or other proceedings could have an adverse effect on our ability to compete in the marketplace.

 

If we lose our President and Chief Executive Officer or are unable to attract and retain additional qualified personnel, the quality of our products may decline, and our business may be adversely affected.

 

We rely heavily on the expertise, experience and continued services of our President and Chief Executive Officer, Justin Schreiber. We estimate that Mr. Schreiber spends approximately 90% of his time related to the Company’s activities. Loss of his services could adversely affect our ability to achieve our business objectives, if we are unable to find a suitable replacement. Mr. Schreiber is an integral factor in establishing relationships and the continued development of our business depends upon his continued employment. If he were to resign or retire, we would have to find a suitable replacement who shared his expertise and relationships. Any delay in finding a suitable replacement would adversely affect the pace at which we are able to successfully grow our business and could harm our existing business, resulting in a decrease in sales and revenue.

 

We believe our future success will depend upon our ability to retain key employees and our ability to attract and retain other skilled personnel and consultants. While we have been able to find a sufficient number of skilled personnel consistent with our growth to date, we cannot guarantee that any employee will remain employed by us for any period of time or that we will be able to attract, train or retain qualified personnel in the future consistent with our growth. Such loss of personnel could have a material adverse effect on our business and company. Furthermore, we may need to employ additional personnel to expand our business. Qualified employees and consultants in the dietary supplement industry are in great demand and may be unavailable in the time frame required to satisfy our customers’ requirements. There is no assurance we will be able to attract and retain sufficient numbers of highly skilled employees in the future. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates could impair the growth of our business.

 

We face risks that may arise from acquisitions.

 

We may pursue strategic acquisitions in the future. Risks in acquisition transactions include difficulties in the integration of acquired businesses into our operations and control environment, difficulties in assimilating and retaining employees and intermediaries, difficulties in retaining the existing clients of the acquired entities, assumed or unforeseen liabilities that arise in connection with the acquired businesses, the failure of counterparties to satisfy any obligations to indemnify us against liabilities arising from the acquired businesses, and unfavorable market conditions that could negatively impact our growth expectations for the acquired businesses. Fully integrating an acquired company or business into our operations may take a significant amount of time. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with acquisitions and other strategic transactions. These risks may prevent us from realizing the expected benefits from acquisitions and could result in the failure to realize the full economic value of a strategic transaction or the impairment of goodwill and/or intangible assets recognized at the time of an acquisition. These risks could be heightened if we complete a large acquisition, multiple acquisitions within a short period of time, or miscalculate expected returns on an acquisition.

 

11
 

 

The Success of Our Business Depends in Large Part on Our Ability to Protect and Enforce Our Intellectual Property Rights.

 

We rely on a combination of patent, copyright, service mark, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We cannot assure you that any patents will issue with respect to our currently pending patent applications, in a manner that gives us the protection that we seek, if at all, or that any future patents issued to us will not be challenged, invalidated or circumvented. Our currently issued patents and any patents that we may issue in the future, with respect to pending or future patent applications, may not provide sufficient broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark registrations will be issued with respect to pending or future applications or that any registered service marks will be enforceable or provide adequate protection of our proprietary rights.

 

We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business in order to limit access to and disclosure of our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed.

 

Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available over the Internet.

 

Changes to Federal, State or International Laws or Regulations Applicable to Our Company Could Adversely Affect Our Business.

 

Our business is subject to a variety of federal, state and international laws and regulations. These laws and regulations, and the interpretation or application of these laws and regulations, could change. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management’s attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.

 

We may be subject to environmental, health and safety laws, which could increase our costs and restrict our operations in the future.

 

Our operations may be subject to environmental, health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations concern, among other things, the generation, handling, transportation and disposal of hazardous substances or wastes, the clean-up of hazardous substance releases, and the emission or discharge of materials into the air or water. Although we currently incur limited expenditures in connection with these environmental, health and safety laws and regulations, if we fail to comply with the requirements of such laws and regulations or if such laws change significantly in the future, we could incur substantial additional costs to alter our manufacturing processes and/or adjust our supply chain management. Such changes could also result in significant inventory obsolescence. Compliance with environmental, health and safety requirements could also restrict our ability to expand our facilities in the future.

 

Our business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide the full range of our services in certain jurisdictions.

 

Our ability to conduct telehealth services and expert medical services in a particular U.S. state or non-U.S. jurisdiction is directly dependent upon the applicable laws governing remote healthcare, the practice of medicine and healthcare delivery in general in such location which are subject to changing political, regulatory and other influences. With respect to telehealth services, in the past, state medical boards have established new rules or interpreted existing rules in a manner that has limited or restricted our ability to conduct our business as it was conducted in other states. With respect to expert medical services, we believe we are correct in the view that they do not constitute the practice of medicine in any jurisdiction in which we provide them. However, the extent to which a U.S. state or non-U.S. jurisdiction considers particular actions or relationships to constitute practicing medicine is subject to change and to evolving interpretations by (in the case of U.S. states) medical boards and state attorneys general, among others, and (in the case of non-U.S. jurisdictions) the relevant regulatory and legal authorities, each with broad discretion. Accordingly, we must monitor our compliance with law in every jurisdiction in which we operate, on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare, in one or more jurisdictions may change in a manner deleterious to our business. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.

 

12
 

 

In our U.S. telehealth business, we are dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and our business would be adversely affected if those relationships were disrupted.

 

There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with our physician networks providing telehealth violate laws prohibiting the corporate practice of medicine. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing a physician’s professional judgment. The extent to which each state considers particular actions or contractual relationships to constitute improper influence of professional judgment varies across the states and is subject to change and to evolving interpretations by state boards of medicine and state attorneys general, among others. As such, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis and we cannot guarantee that subsequent interpretation of the corporate practice of medicine laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage physicians from participating in our network of providers. Any scrutiny, investigation, or litigation with regard to our arrangement with our physician networks. could have a material adverse effect on our business, financial condition and results of operations.

 

Evolving government regulations may require increased costs or adversely affect our results of operations.

 

In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to change our practices at an undeterminable and possibly significant initial monetary and recurring expense. These additional monetary expenditures may increase future overhead, which could have a material adverse effect on our results of operations.

 

We have identified what we believe are the areas of government regulation that, if changed, would be costly to us. These include: rules governing the practice of medicine by physicians; licensure standards for doctors and behavioral health professionals; laws limiting the corporate practice of medicine; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees; and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us.

 

In the jurisdictions in which we operate, we believe we are in compliance with all applicable laws, but, due to the uncertain regulatory environment, certain jurisdictions may determine that we are in violation of their laws. In the event that we must remedy such violations, we may be required to modify our services and products in a manner that undermines our solution’s attractiveness to our customers, Members or providers or experts, we may become subject to fines or other penalties or, if we determine that the requirements to operate in compliance in such jurisdictions are overly burdensome, we may elect to terminate our operations in such places. In each case, our revenue may decline, and our business, financial condition and results of operations could be materially adversely affected.

 

Additionally, the introduction of new services may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate licenses or certificates, increasing our security measures and expending additional resources to monitor developments in applicable rules and ensure compliance. The failure to adequately comply with these future laws and regulations may delay or possibly prevent some of our products or services from being offered to customers, which could have a material adverse effect on our business, financial condition and results of operations.

 

13
 

 

Additionally, the introduction of new services may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate licenses or certificates, increasing our security measures and expending additional resources to monitor developments in applicable rules and ensure compliance. The failure to adequately comply with these future laws and regulations may delay or possibly prevent some of our products or services from being offered to customers, which could have a material adverse effect on our business, financial condition and results of operations.

 

In the U.S., we conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, financial condition, and results of operations.

 

The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payors, our contractual relationships with our providers, vendors and customers, our marketing activities and other aspects of our operations. Of particular importance are:

 

the federal physician self-referral law, commonly referred to as the Stark Law, that, subject to limited exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity, and prohibit the entity from billing Medicare or Medicaid for such designated health services;
   
the federal Anti-Kickback Statute that prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
   
the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which we collectively refer to as HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment, recoupment, imprisonment. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and result in adverse publicity.

 

14
 

 

To enforce compliance with the federal laws, the U.S. Department of Justice and the U.S. Department of Health and Human Services Office of Inspector General, or OIG, have recently increased their scrutiny of healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $11,463 to $22,927 per false claim or statement, healthcare providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws.

 

The laws, regulations and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations or standards will not materially adversely affect our business. We cannot assure you that a review of our business by judicial, law enforcement, regulatory or accreditation authorities will not result in a determination that could adversely affect our operations.

 

The impact of recent healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is currently unknown, but may adversely affect our business, financial condition and results of operations.

 

Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act or PPACA made major changes in how healthcare is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured population of the United States.

 

PPACA, among other things, increased the number of individuals with Medicaid and private insurance coverage, implemented reimbursement policies that tie payment to quality, facilitated the creation of accountable care organizations that may use capitation and other alternative payment methodologies, strengthened enforcement of fraud and abuse laws and encouraged the use of information technology.

 

Such changes in the regulatory environment may also result in changes to our payor mix that may affect our operations and revenue.

 

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and other third-party payors will pay for healthcare products and services, which could adversely affect our business, financial condition and results of operations.

 

The telehealth market is immature and volatile, and if it does not develop, if it develops more slowly than we expect, if it encounters negative publicity or if our solution does not drive member engagement, the growth of our business will be harmed.

 

With respect to our telehealth services, the telehealth market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market adoption. Our success will depend to a substantial extent on the willingness of our Members to use, and to increase the frequency and extent of their utilization of, our solution, as well as on our ability to demonstrate the value of telehealth to employers, health plans, government agencies and other purchasers of healthcare for beneficiaries. Negative publicity concerning our solution or the telehealth market as a whole could limit market acceptance of our solution. If our customers do not perceive the benefits of our solution, or if our solution does not drive member engagement, then our market may not develop at all, or it may develop more slowly than we expect. Similarly, individual and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could limit market acceptance of our healthcare services. If any of these events occurs, it could have a material adverse effect on our business, financial condition or results of operations.

 

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Rapid technological change in our industry presents us with significant risks and challenges.

 

The telehealth market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. Our success will depend on our ability to enhance our brands with next-generation technologies and to develop or to acquire and market new services to access new consumer populations. There is no guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, there can be no assurance that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete.

 

We rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third parties and our own systems for providing services to our customers and vendors, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with customers, adversely affecting our brand and our business.

 

While we control and have access to our servers, we do not control the operation of these facilities. The cloud vendor and the owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our cloud vendors or data center operators is acquired, we may be required to transfer our servers and other infrastructure to a new vendor or a new data center facility, and we may incur significant costs and possible service interruption in connection with doing so. Problems faced by our cloud vendors or third-party data center locations with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our cloud vendors or third-party data center operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy faced by our cloud vendors or third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.

 

Additionally, if our cloud or data centers vendors are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect the service levels at our cloud vendors or data centers or cause such cloud systems or data centers and systems to fail. Any changes in third-party service levels at our cloud vendors or data centers or any disruptions or other performance problems with our solution could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscriptions, subject us to potential liability or adversely affect client renewal rates.

 

In addition, our ability to deliver our Internet-based services depends on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity and security. Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced and expect that we may experience future interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with customers. To operate without interruption, both we and our service providers must guard against:

 

damage from fire, power loss, natural disasters and other force majeure events outside our control;
communications failures;
software and hardware errors, failures and crashes;
security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems;
business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as the recent outbreak of COVID-19, or the novel coronavirus); and
other potential interruptions.

 

We exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services they provide. Interruptions in our network access and services may in connection with third-party technology and information services reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability or adversely affect client renewal rates. Although we maintain a security and privacy damages insurance policy, the coverage under our policies may not be adequate to compensate us for all losses that may occur related to the services provided by our third-party vendors. In addition, we may not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.

 

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If our security measures fail or are breached and unauthorized access to a consumer’s data is obtained, our services may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed, and we could lose sales and customers.

 

Our services involve the storage and transmission of customers’ and our vendors’ proprietary information, sensitive or confidential data, including valuable intellectual property and personal information of employees, consumers, customers and others, as well as the protected health information, or PHI, of our customers. Because of the extreme sensitivity of the information we store and transmit, the security features of our computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our security measures could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors, or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. As cyber threats continue to evolve, we may be required to expend additional resources to further enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. If our security measures fail or are breached, it could result in unauthorized persons accessing sensitive consumer or partner data (including PHI), a loss of or damage to our data, an inability to access data sources, or process data or provide our services to our customers. Such failures or breaches of our security measures, or our inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect customers, vendors or investor confidence in us, and reduce the demand for our services from existing and potential customers. In addition, we could face litigation, damages for contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

 

We may experience cyber-security and other breach incidents that remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales, customers, and vendors which could have a material adverse effect on our business, operations, and financial results.

 

We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.

 

We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans, increased difficulty and cost in implementing these efforts, including difficulties in complying with new regulatory requirements and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be materially adversely affected.

 

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Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our customer base and revenue.

 

Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of PII, including protected health information. These laws and regulations include HIPAA. HIPAA establishes a set of basic national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services, which includes us.

 

HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.

 

HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $114 per violation and are not to exceed $57,051 per violation, subject to a cap of $1.7 million for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts will be able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.

 

In addition, HIPAA mandates that the Secretary of Health and Human Services, or HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator.

 

HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.

 

Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personally identifiable information, or PII, including PHI. These laws in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our customers and potentially exposing us to additional expense, adverse publicity and liability.

 

New health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle healthcare related data, and the cost of complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil sanctions.

 

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Because of the extreme sensitivity of the PII we store and transmit, the security features of our technology platform are very important. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to sensitive client and member data, including HIPAA-regulated PHI. As a result, our reputation could be severely damaged, adversely affecting client and member confidence. Members may curtail their use of or stop using our services or our client base could decrease, which would cause our business to suffer. In addition, we could face litigation, damages for contract breach, penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and for measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to customers or other business partners in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. While we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

 

We outsource important aspects of the storage and transmission of client and member information, and thus rely on third parties to manage functions that have material cyber-security risks. We attempt to address these risks by requiring outsourcing subcontractors who handle client and member information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard personal health data to the same extent that applies to us and in some cases by requiring such outsourcing subcontractors to undergo third-party security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of Client and Members’ proprietary and protected health information.

 

We also publish statements to our Members that describe how we handle and protect personal information. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders.

 

We also send short message service, or SMS text messages to potential end users who are eligible to use our service through certain customers and partners. While we obtain consent from or on behalf of these individuals to send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our SMS texting practices, are not adequate. These SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in the past year against companies who conduct SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. Any future such litigation against us could be costly and time-consuming to defend.

 

We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed.

 

While the telehealth market is in an early stage of development, it is competitive and we expect it to attract increased competition, which could make it difficult for us to succeed. We currently face competition in the telehealth industry for our brands from a range of companies, many of which have substantially more resources, and that are continuing to develop additional products and becoming more sophisticated and effective. In addition, large, well-financed health plans have in some cases developed their own telehealth or expert medical service tools and may provide these solutions to their customers at discounted prices. Competition from specialized software and solution providers, health plans and other parties will result in continued pricing pressures, which is likely to lead to price declines in certain product segments, which could negatively impact our sales, profitability and market share.

 

Some of our competitors may have greater name recognition, longer operating histories and significantly greater resources than we do. Further, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the telehealth market, which could create additional price pressure. In light of these factors, even if our solution is more effective than those of our competitors, current or potential customers may accept competitive solutions in lieu of purchasing our products. If we are unable to successfully compete in the telehealth market, our business, financial condition and results of operations could be materially adversely affected.

 

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The estimates of market opportunity and forecasts of market growth included in this Form 10-K may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

 

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this Form 10-K relating to the size and expected growth of the telehealth market may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

 

Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations.

 

Our offices may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters and acts of terrorism or other criminal activities, which may render it difficult or impossible for us to operate our business for some period of time. For example, our headquarters are located in the greater New York City area, a region with a history of terrorist attacks and hurricanes. Any disruptions in our operations related to the repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damage to property we rent, such insurance may not be sufficient to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations.

 

Our marketing efforts for in direct-to-consumer telehealth may not be successful or may become more expensive, either of which could increase our costs and adversely affect our business, financial condition, results of operations and cash flows.

 

Direct-to-consumer telehealth represents a material portion of our overall business. We spend significant resources marketing this aspect of our business. We rely on relationships for our direct-to-consumer telehealth marketing with a wide variety of third parties, including Internet search providers such as Google, social networking platforms such as Facebook, Internet advertising networks, co-registration partners, retailers, distributors, television advertising agencies and direct marketers, to source new customers and to promote or distribute our services and products. In addition, in connection with the launch of new services or products for our direct-to-consumer telehealth business, we may spend a significant amount of resources on marketing. If our marketing activities are inefficient or unsuccessful, if important third-party relationships or marketing strategies, such as Internet search engine marketing and search engine optimization, become more expensive or unavailable, or are suspended, modified or terminated, for any reason, if there is an increase in the proportion of consumers visiting our websites or purchasing our services by way of marketing channels with higher marketing costs as compared to channels that have lower or no associated marketing costs or if our marketing efforts do not result in our services being prominently ranked in Internet search listings, our business, financial condition, results of operations and cash flows could be materially and adversely impacted.

 

Risks Related to Marketing

 

Our future growth and profitability of our consumer product business will depend in large part upon the effectiveness and efficiency of our marketing efforts and our ability to select effective markets and media in which to advertise.

 

Our consumer products business success depends on our ability to attract and retain customers, which significantly depends on our marketing practices. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:

 

create greater awareness of our brand;

 

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identify the most effective and efficient levels of spending in each market, media and specific media vehicle;
determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures;
effectively manage marketing costs (including creative and media) to maintain acceptable customer acquisition costs;
acquire cost-effective television advertising;
select the most effective markets, media and specific media vehicles in which to advertise; and
convert consumer inquiries into actual orders.

 

Unfavorable publicity or consumer perception of our products and any similar products distributed by other companies could have a material adverse effect on our business.

 

We believe the nutritional supplement market is highly dependent upon consumer perception regarding the safety, efficacy and quality of nutritional supplements generally, as well as of products distributed specifically by us. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding the consumption of nutritional supplements. We cannot assure you that future scientific research, findings, regulatory proceedings, litigation, media attention or other favorable research findings or publicity will be favorable to the nutritional supplement market or any product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, such earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and consequently on our business, results of operations, financial condition and cash flows.

 

Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, if accurate or with merit, could have a material adverse effect on the demand for our products, the availability and pricing of our ingredients, and our business, results of operations, financial condition and cash flows. Further, adverse public reports or other media attention regarding the safety, efficacy and quality of nutritional supplements in general, or our products specifically, or associating the consumption of nutritional supplements with illness, could have such a material adverse effect. Any such adverse public reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed and the content of such public reports and other media attention may be beyond our control.

 

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

 

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread adoption of our solution and attracting new customers. Our brand promotion activities may not generate consumer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in doing so, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness that is critical for broad client adoption of our brands.

 

Many of our competitors are larger and have greater financial and other resources than us.

 

Our products and telemedicine services compete and will compete with other similar products and services produced and offered by our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distributional, personnel and other resources than we possess. Using these resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by competitors and enter into new markets more rapidly to introduce new products. In certain instances, competitors with greater financial resources also may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products and services that compete with our products or present cost features that consumers may find attractive.

 

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We may never develop any additional products to commercialize.

 

We have invested a substantial amount of our time and resources in developing various new products. Commercialization of these products will require additional development, clinical evaluation, regulatory approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue. Despite our efforts, these products may not become commercially successful products for a number of reasons, including but not limited to:

 

we may not be able to obtain regulatory approvals for our products, or the approved indication may be narrower than we seek;
our products may not prove to be safe and effective in clinical trials;
we may experience delays in our development program;
any products that are approved may not be accepted in the marketplace;
we may not have adequate financial or other resources to complete the development or to commence the commercialization of our products or will not have adequate financial or other resources to achieve significant commercialization of our products;
we may not be able to manufacture any of our products in commercial quantities or at an acceptable cost;
rapid technological change may make our products obsolete;
we may be unable to effectively protect our intellectual property rights, or we may become subject to claims that our activities have infringed the intellectual property rights of others; and
we may be unable to obtain or defend patent rights for our products.

 

Our business relies heavily on email, and any restrictions on the sending of emails or an inability to timely deliver such communications could materially adversely affect our net revenue and business.

 

Our business is highly dependent upon email for promoting our brands and products. Periodic promotions offered through emails sent by us generate a portion of our net revenue. We provide periodic emails to customers and other visitors informing them of what is available for purchase on our websites that day, and we believe these messages are an important part of our customer experience and help generate a portion of our net revenue. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline to open our emails or other messages, our net revenue and profitability would be materially adversely affected. Changes in how webmail applications organize and prioritize email may reduce the number of subscribers opening our emails. For example, Google’s Gmail service has a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time, internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications. Our use of email and other messaging services to send communications about our sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could materially adversely affect our business, financial condition, and operating results.

 

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Our business relies heavily on Facebook, Google, Amazon and many other social networks and search engines for customer acquisition, and any changes and restrictions to the advertising policy of these platforms could materially adversely affect our net revenue and business.

 

Our business is highly dependent upon online advertising platforms for promoting our brands and products. Changes to advertising policies by these platforms could restrict or eliminate our ability to run advertisements for our products which would adversely impact our business. Changes in advertising costs could dramatically increase our customer acquisition costs, which could adversely affect profitability and result in us having to raise more capital to grow our business.

 

Risks Related to Our Securities

 

Our capital requirements will depend on many factors.

 

Our capital requirements will depend on many factors, including:

 

the revenues generated by sales of our products;
the costs associated with expanding our sales and marketing efforts, including efforts to hire independent agents and sales representatives and obtain required regulatory approvals and clearances;
the expenses we incur in developing and commercializing our products, including the cost of obtaining and maintaining regulatory approvals; and
unanticipated general and administrative expenses.

 

Because of these factors, we may seek to raise additional capital both to meet our projected operating plans and to fund our longer-term strategic objectives. Additional capital may come from public and private equity or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. There can be no assurance we will be successful in raising these additional funds. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.

 

Our stock price may be volatile or may decline regardless of our operating performance, and you may lose part or all of your investment.

 

The market price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control, including:

 

market conditions or trends in the dietary supplement industry or in the economy as a whole;
actions by competitors;
actual or anticipated growth rates relative to our competitors;
the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
economic, legal and regulatory factors unrelated to our performance;
any future guidance we may provide to the public, any changes in such guidance or any difference between our guidance and actual results;
changes in financial estimates or recommendations by any securities analysts who follow our common stock;
speculation by the press or investment community regarding our business;
litigation;
changes in key personnel; and
future sales of our common stock by our officers, directors and significant shareholders.

 

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In addition, the stock markets, including the over-the-counter markets where we are quoted, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These broad market fluctuations may materially affect our stock price, regardless of our operating results. Furthermore, the market for our common stock historically has been limited and we cannot assure you that a larger market will ever be developed or maintained. The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, these factors may make it more difficult or impossible for you to sell our common stock for a positive return on your investment. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources, and the attention of management could be diverted from our business.

 

Future sales of shares of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

We have issued shares of common stock and warrants and options to purchase shares of our common stock in connection with our private placement and certain employment, director and consultant agreements. In addition, we issued shares of our common stock, and options and warrants to purchase shares of our common stock, in financing transactions and pursuant to employment agreements that are deemed to be “restricted securities,” as that term is defined in Rule 144 promulgated under the Securities Act. From time to time, certain of our shareholders may be eligible to sell all or some of their restricted shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, subject to certain limitations. The resale pursuant to Rule 144 of shares acquired from us in private transactions could cause our stock price to decline significantly.

 

The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

 

Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to issuers whose common stock does not trade on a national securities exchange and trades at less than $5.00 per share, or that have a tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC that contains the following information:

 

a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities laws;
a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and the significance of the spread between the “bid” and “ask” prices;
a toll-free telephone number for inquiries on disciplinary actions;
definitions of any significant terms in the disclosure document or in the conduct of trading in penny stocks; and
such other information and is in such form (including language, type, size and format), as the SEC shall require by rule or regulation.

 

Prior to effecting any transaction in a penny stock, the broker-dealer also must provide the customer with the following information:

 

bid and offer quotations for the penny stock;
compensation of the broker-dealer and our salesperson in the transaction;
number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
monthly account statements showing the market value of each penny stock held in the customer’s account.

 

The penny stock rules further require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks and a signed and dated copy of a written suitability statement.

 

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Due to the requirements of the penny stock rules, many broker-dealers have decided not to trade penny stocks. As a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. Moreover, if our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. In particular, these include statements relating to future actions, prospective products, market acceptance, future performance or results of current and anticipated products, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.

 

Examples of forward-looking statements in this prospectus include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, terms and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions and general economic conditions. These statements are based on our management’s expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.

 

Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:

 

  changes in the market acceptance of our products;
     
  increased levels of competition;
     
  changes in political, economic or regulatory conditions generally and in the markets in which we operate;
     
  our relationships with our key customers;
     
  our ability to retain and attract senior management and other key employees;
     
  our ability to quickly and effectively respond to new technological developments;
     
  our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and
     
  other risks, including those described in the “Risk Factors” discussion of this prospectus.

 

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We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this prospectus are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of common stock by the Selling Stockholders. All of the net proceeds from the sale of our common stock will go to the Selling Stockholders as described below in the sections entitled “Selling Stockholders” and “Plan of Distribution”. We have agreed to bear the expenses relating to the registration of the common stock for the Selling Stockholders.

 

DETERMINATION OF OFFERING PRICE

 

The selling stockholder will offer common stock at the prevailing market prices or privately negotiated prices. The offering price of our common stock does not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value. Our common stock may not trade at the market prices in excess of the offering prices for common stock in any public market will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity.

 

SELLING STOCKHOLDERS

 

This prospectus relates to the possible resale by the Selling Stockholders of the shares of Common Stock that have been issued to the Selling Stockholders in the Offering pursuant to the Purchase Agreement, as well as the PA Warrants issued in connection with the Purchase Agreement. We are filing the registration statement of which this prospectus forms a part pursuant to the provisions of the Registration Rights Agreement, which we entered into with the Selling Stockholders on October 30, 2020 concurrently with our execution of the Purchase Agreement, in which we agreed to provide certain registration rights with respect to sales by the Selling Stockholders of the shares of Common Stock and PA Warrants that have been issued to the Selling Stockholders under the Purchase Agreement.

 

On November 3, 2020, the Company consummated an initial closing of a private placement offering, whereby pursuant to the Purchase Agreement entered into by the Company and the Investors the Company sold to such Investors an aggregate of 3,044,529 shares of Common Stock, for an aggregate purchase price of $14,461,512.75. Pursuant to the 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.

 

On November 19, 2020, the Company consummated the second closing of a private placement offering, whereby pursuant to Purchase Agreement entered into by the Company and an Investors, the Company sold to the Investor 323,892 shares of Common Stock, for a purchase price of $1,538,487. The purchase price was funded on November 19, 2020 and resulted in net proceeds to the Company of approximately $1.4 million. The aggregate net proceeds to the Company from the Offering was $16,000,000.

 

BTIG, LLC acted as exclusive Placement Agent for the Offering and received cash compensation equal to 6% of the Purchase Price and the PA Warrants to purchase 101,053 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 may be exercised on a “cashless” basis and will expire on November 3, 2025 and November 19, 2025.

 

The Registration Rights Agreement requires the Company to use its reasonable best efforts to register the resale of the Shares by the Investors and the shares of Common Stock underlying the PA Warrants by the Placement Agent in a registration statement on Form S-1 to be filed with the SEC, under the Securities Act, within 15 business days from the Closing Date, and to use its reasonable best efforts to have such registration statement declared effective by the SEC as soon as practicable, but not later than 60 days from the Closing Date (or 120 days from the Closing Date in the event that such registration statement is subject to a full review by the SEC).

 

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Further, in connection with the Purchase Agreement, the Company’s officers and directors have entered into Lock-Up Agreements, pursuant to which the Company’s officers and directors have agreed, for a period of 180 days from the Closing Date, not to sell or transfer any shares of the Company’s common stock or common stock equivalents held by each respective officer or director of the Company.

 

The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the Selling Stockholders. The second column lists the number of shares of common stock beneficially owned by each Selling Stockholder, based on its ownership of the shares of common stock and warrants, as of the date hereof, assuming exercise of the PA Warrants held by the Selling Stockholders on such date, without regard to any limitations on conversions or exercises. The third column lists the shares of common stock being offered by this prospectus by the Selling Stockholders.

 

In accordance with the terms of the Registration Rights Agreement, this prospectus generally covers the resale of the sum of (i) the Shares of Common Stock issued to the Selling Stockholders in the Offering and (ii) the maximum number of shares of common stock issuable upon exercise of the PA Warrants, determined as if the outstanding PA Warrants were exercised in full as of the trading day immediately preceding the date this registration statement was initially filed with the SEC, each as of the trading day immediately preceding the applicable date of determination and all subject to adjustment as provided in the Registration Rights Agreement, without regard to any limitations on the exercise of the PA Warrants. The fourth column assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this prospectus.

 

Under the terms of the PA Warrants, a Selling Stockholder may not exercise the PA Warrants to the extent such exercise or conversion would cause such Selling Stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the PA Warrants which have not been exercised. The number of shares in the second column does not reflect this limitation. The Selling Stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”

 

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Name of Selling Stockholder  Shares of Common Stock
Beneficially
Owned Prior to
Offering
   Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus   Shares of Common Stock
Beneficially
Owned After
Offering (1)
 
Oasis Capital, LLC (2)(3)   52,632    52,632    0 
AJD Holdings, LLC (2)(4)   52,632    52,632    0 
Bowdy Gardner (2)   31,579    31,579    0 
Brad Roberts (2)   52,632    52,632    0 
Dunlap Capital Partners, LP (2)(5)   135,000    135,000    0 
Paradigm Opportunities SPV 1 LP (2)(6)   594,892    594,892    0 
Dune Road LLC (2)(7)   47,368    47,368    0 
Erik W Thoresen (2)   21,053    21,053    0 
Ian Lopatin (2)   22,737    22,737    0 
Manchester Explorer, L.P. (2)(8)   421,053    421,053    0 
JEB Partners, L.P. (2)(8)   105,263    105,263    0 
James Besser (2)   157,895    157,895    0 
James DeYoung, Jr (2)   8,421    8,421    0 
Goudy Park Capital LP (2)(9)   452,632    452,632    0 
Limelight LP (2)(9)   38,947    38,947    0 
John Hill (2)   10,526    10,526    0 
Meredith Ashley (2)   10,527    10,527    0 
James and Lidia Resnick (2)   31,579    31,579    0 
Karl Ward Brewer (2)   100,000    100,000    0 
Lucas Ventures, LLC (2)(10)   122,105    42,105    * 
LGH Investments Inc (2)(10)   42,105    42,105    0 
G2 Investment Partners LP (2)(11)   44,853    44,853    0 
G2 Investment Partners QP LP (2)(11)   140,131    140,131    0 
G2 Long Only Fund QP LP (2)(11)   15,016    15,016    0 
Farid Shidfar (2)   52,632    52,632    0 
Waterfield Holdings LLC (2)(12)   52,632    52,632    0 
BEMAP Master Fund Ltd (2)(13)   173,165    173,165    0 
Monashee Solitario Fund (2)(13)   105,761    105,761    0 
Monashee Pure Alpha Fund (2)(13)   95,866    95,866    0 
Bespoke Alpha Mac MIM LP (2)(13)   26,689    26,689    0 
SFL SPV LLC (2)(13)   19,572    19,572    0 
Sean M. Garber (2)   146,056    21,053    * 
Tim Macready (2)   246,055    42,105    * 
Waikit Lau (2)   42,105    42,105    0 
Alpha Capital Anstalt (2)(14)   105,263    105,263    0 
BTIG, LLC (15)(16)   65,684    65,684    0 
Keith Stone (17)   27,869    27,869    0 
Udit Nagar (18)   2.500    2.500    0 
Steve Ortiz (19)   2.500    2.500    0 
Kathleen Carney (20)   2,500    2,500    0 
    3,878,427    3,469,474    408,953 

 

* less than 1%

 

(1) Assumes that the Selling Stockholder sells all of its shares being offered pursuant to this prospectus.
   
(2) The shares of Common Stock to be offered were issued to the Selling Stockholder pursuant to the Offering.
   
(3) Adam Long holds voting and dipositive power over these shares.
   
(4) Alex Dunn holds voting and dispositive power over these shares.
   
(5) Chris Jarrous holds voting and dispositive power over these shares.
   
(6) Corey Deutsch holds voting and dispositive power over these shares.
   
(7) Joseph D. Mark holds voting and dispositive power over these shares.
   
(8) James Besser holds voting and dispositive power over these shares.
   
(9) James W. DeYoung, Jr holds voting and dispositive power over these shares.
   
(10) Lucas Hoppel holds voting and dispositive power over these shares.
   
(11) Josh Goldberg holds voting and dispositive power over these shares.
   
(12) J. Randall Waterfield holds voting and dispositive power over these shares.
   
(13) Jeff Muller holds voting and dispositive power over these shares.
   
(14) Nicola Feuerstein holds voting and dispositive power over these shares.

 

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(15) Representing 59,368 shares of Common Stock issuable upon the exercise of PA Warrants.
   
(16)

The business address of BTIG, LLC is 600 Montgomery Street, 6th Floor, San Francisco, CA 94111. Condor Trading LP is the managing member of BTIG, LLC. Scott Kovalik is the CEO of BTIG, LLC, and is Co-CEO of Condor Trading LP and has voting control and investment discretion over securities beneficially owned directly by BTIG, LLC and indirectly by Condor Trading LP. BTIG, LLC is a member of the Financial Industry Regulatory Authority, or FINRA, and Mr. Kovalik is an associated person of a FINRA member. The foregoing should not be construed in and of itself as an admission by Mr. Kovalik as to beneficial ownership of the securities beneficially owned directly by BTIG, LLC and indirectly by Condor Trading LP.

   
(17) Representing 24,468 shares of Common Stock issuable upon the exercise of PA Warrants.
   
(18) Representing 2,500 shares of Common Stock issuable upon the exercise of PA Warrants.
   
(19) Representing 2,500 shares of Common Stock issuable upon the exercise of PA Warrants.
   
(20) Representing 2,500 shares of Common Stock issuable upon the exercise of PA Warrants.

 

PLAN OF DISTRIBUTION

 

We are registering the shares of common stock previously issued to permit the resale of these shares of common stock by the holders of the common stock from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The selling stockholders may sell all or a portion of the shares of common stock held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:

 

  on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
     
  in the over-the-counter market;
     
  in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
     
  through the writing or settlement of options, whether such options are listed on an options exchange or otherwise;
     
  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  short sales made after the date the Registration Statement is declared effective by the SEC;
     
  agreements between broker-dealers and the selling securityholders to sell a specified number of such shares at a stipulated price per share;
     
  a combination of any such methods of sale; and
     
  any other method permitted pursuant to applicable law.

 

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The selling stockholders may also sell shares of common stock under Rule 144 promulgated under the Securities Act of 1933, as amended, if available, rather than under this prospectus. In addition, the selling stockholders may transfer the shares of common stock by other means not described in this prospectus. If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

 

The selling stockholders may pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

To the extent required by the Securities Act and the rules and regulations thereunder, the selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

 

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

 

There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

 

The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

 

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We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $63,238.55 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act in accordance with the registration rights agreements or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreements or we may be entitled to contribution.

 

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Our common stock is qualified for quotation on the Nasdaq under the symbol “CVLB”.

 

Authorized Capital

 

We are authorized to issue an aggregate number of 100,000,000 shares of common stock, $0.01 par value per share and 5,000,000 shares of blank check preferred stock. As of December 28, 2020, we had 23,180,831 shares of Common Stock issued and outstanding. Each holder of common stock shall be entitled to one vote for each share held.

 

The holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the net assets of the Company shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interest.

 

For all undesignated preferred stock, the Board is authorized to determine the number of series into which such undesignated shares may be divided, the number of shares within each series, and the designations, rights and preferences associated with such shares.

 

Approximate Number of Equity Security Holders

 

As of December 28, 2020, there were 372 holders of record of our common stock, and the last reported sale price of our common stock on Nasdaq on December 28, 2020 was $7.27. A significant number of shares of our common stock are held in either nominee name or street name brokerage accounts, and consequently, we are unable to determine the total number of beneficial owners of our stock.

 

Dividend Policy

 

We have not paid and do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. We currently expect to retain all future earnings for use in the operation and expansion of our business. The declaration and payment of any cash dividends in the future will be determined by our Board of Directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition and contractual restrictions, if any.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition for the years ended December 31, 2019 and 2018 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”

 

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Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying condensed financial statements and provides additional information on Conversion Labs, Inc.’s (“Conversion Labs” or the “Company’) business, current developments, financial condition, cash flows and results of operations.

 

The terms “Company,” “we,” “us,” and “our” refer to Conversion Labs, Inc. (formerly known as Immudyne, Inc.), our wholly subsidiary Conversion Labs PR, LLC (formerly Immudyne PR LLC, now “Conversion Labs PR”), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”) and our majority-owned subsidiaries LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LegalSimpli”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

Corporate History

 

Conversion Labs, Inc., was formed in the State of Delaware on May 24, 1994, under our prior name, Immudyne, Inc. We changed our name to Conversion Labs, Inc. on June 22, 2018. Further, in connection with changing its name, the Company changed its trading symbol to CVLB. On April 1, 2016, our majority-owned subsidiary, Immudyne PR LLC (“Immudyne PR”), which was initially formed for the purpose of a joint venture with the original owners of one of our skincare products, amended and restated its operating agreement whereby we increased our ownership and voting interest in Immudyne PR to 78.2%. Concurrent with the name change of the parent company to Conversion Labs, Inc. completed in 2018, 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 after acquiring the remaining minority interest in the Conversion Labs PR, which is now a wholly-owned subsidiary of the Company.

 

In June 2018, Conversion Labs closed the strategic acquisition of 51% of LegalSimpli Software, LLC (“LegalSimpli”), a software as a service (SaaS) application for converting, editing, signing and sharing PDF documents. In addition to LegalSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company.

 

In early 2019, we also launched a service-based business under the name Conversion Labs Media LLC, which was to be used to run e-commerce marketing campaigns for other online businesses. However, this business was discontinued in 2019 in order to focus on our core business as well the expansion of our telehealth opportunities.

 

Business Overview

 

The Company is a direct response healthcare company that provides a convenient, cost-effective and smarter way for consumers to access high quality Over The Counter (OTC) products and prescription medications. The U.S. healthcare system is undergoing a paradigm shift largely due to new technologies and the emergence of direct-to-consumer healthcare. We believe the traditional model of visiting a doctor’s office, receiving a physical prescription, visiting a neighborhood 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. Direct-to-consumer telemedicine companies, like our Company, offer patients immediate and virtual treatment from licensed physicians, and the home delivery of prescription medications, devices and diagnostics bundled with over-the counter wellness products.

 

We have built a platform that allows us to efficiently launch telehealth and wellness product lines wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands.

 

Telemedicine Platform

 

Beginning in 2019, we have made significant investments in our telemedicine technology platform which is the backbone of our physician network, pharmacy provider, CRM system, and third-party advertising platforms. This platform facilitates patient consultations, virtual prescriptions, fulfillment, and follow-up consultations.

 

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Telehealth Brands

 

Our telehealth brands have been built with one singular focus in mind: to become the leading provider of quality healthcare in a virtual setting. To this end, we work with our physicians, our advisors, and our patients to ensure that we can provide the ultimate quality of care. We believe the long-term success of our telehealth business will be driven primarily by the outstanding care we provide in our services and product offerings. Our current brand portfolio is comprised of telehealth brands respectively targeting three market segments: hair loss, men’s health, and dermatology.

 

Majority Owned Subsidiary: PDFSimpli

 

PDFSimpli is a PDF conversion software product, which was acquired through the purchase of 51% of the membership interests of LegalSimpli a Puerto Rico limited liability company, which operates a marketing-driven software solutions business. PDFSimpli enables users to convert, edit and sign PDF documents. Since its launch, PDFSimpli has converted or edited over 5 terabytes of documents for customers from the legal, financial, real-estate and academic sectors.

 

Impact of COVID-19 Pandemic

 

We are closely monitoring how the spread of the COVID-19 pandemic caused by the novel coronavirus is affecting our employees, customers and business operations. We have developed preparedness plans to help safeguard the safety of our employees and customers, while safely continuing business operations.

 

Due to the global spread of the outbreak, the severity of the pandemic in New York, California, and Puerto Rico where we have corporate offices, and in line with guidance from public health officials, we have temporarily restricted access to our offices and implemented a mandatory remote work policy during this period. Our offices will remain closed until we are able to safely and responsibly re-open them in accordance with governmental and public health guidance, as well as health and safety policies tailored to our operations.

 

As a result of the early measures we took in response to the COVID-19 pandemic to protect our employees and business operations, our business has not been materially negatively impacted during these extraordinary times. We have experienced relatively minor impacts on our inventory availability and delivery capacity since the outbreak, none of which has materially impacted our ability to service our customers. We have taken measures to bolster key aspects of our supply chain to support our continued growth. We continue to work with our existing manufacturing, logistics and other supply chain partners to build key processes to ensure our ability to service our customers.

 

We are also carefully monitoring shifting consumer behavior from brick and mortar retail and physical healthcare offices to our online platform. We have observed continued strength in our e-commerce sales since the end of the quarter ended September 30, 2020, due in part to changing consumer behavior during the COVID-19 pandemic and widespread awareness and acceptance of telemedicine. Telemedicine businesses, such as ours, have benefitted from increased coverage and visibility due to quarantine measures and policies adopted widely across the country. We believe the increased awareness of telehealth is reflected in the rapid growth we are seeing across our telehealth brands.

 

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Results of Operations

 

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

 

Revenue

 

Our financial results for the three months ended September 30, 2020 are summarized as follows in comparison to the three months ended September 30, 2019:

 

   September 30, 2020   September 30, 2019 
   $   % of Sales   $   % of Sales 
Product revenues, net   9,433,136    86%   2,461,765    79%
Software revenues, net   1,567,627    14%   664,962    21%
Service revenues, net   5,000    0%   -    0%
Total revenues, net  $11,005,763    100%  $3,126,727    100%
                     
Cost of product revenue   2,338,831    21%   612,072    20%
Cost of software revenue   396,105    4%   68,009    2%
Total cost of revenue   2,734,936    25%   680,081    22%
                     
Gross profit  $8,270,827    75%  $2,446,646    78%
                     
Selling & marketing expenses   10,528,833    96%   2,073,016    66%
General and administrative expenses   17,589,366    160%   929,471    30%
Operating expenses   336,001    3%   216,065    7%
Customer service expenses   230,788    2%   140,579    5%
Development costs   118,346    1%   61,221    2%
Total expenses  $28,803,334    262%  $3,420,352    109%
                     
Loss from operations  $(20,532,507)   (187)%  $(973,706)   (31)%
Other income (expenses)   (291,096)   (3)%   (130,936)   (4)%
Loss from operations before provision for income taxes  $(20,823,603)   (189)%  $(1,104,642)   (35)%
Income taxes   -    0%   -    0%
Net loss attributable to noncontrolling interests  $(201,233)   (2)%  $(160,838)   (5)%
Net loss attributable to Conversion Labs, Inc.  $(20,622,370)   (43)%  $(943,804)   (30)%

 

Revenues for the three months ended September 30, 2020 were approximately $11 million, an increase of 252% compared to approximately $3.1 million for the three months ended September 30, 2019. The increase in revenues was attributable to both the increase in product revenue of 283% and an increase in software revenue of 136%. Product revenue accounts for 86% of total revenue and has increased in the three months ended September 30, 2020 due to an increase in online sales demand, with the majority of this increase attributable to the nationwide lockdown resulting from COVID-19 driving increased consumer online purchases. Software revenue accounts for 14% of total revenue and has steadily increased quarter over quarter due to a combination of higher demand, increased market awareness, continued marketing campaign expansion, as well as the effects of the nationwide lockdown resulting from COVID-19.

 

Total cost of revenues consist of the cost of (1) product revenues, which primarily include product material costs and fulfillment costs directly attributable to the production of our products held for sale and (2) the cost of software revenue consisting primarily of credit card processing fees and information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 302% to approximately $2.7 million for the three months ended September 30, 2020 compared to approximately $0.7 million for the three months ended September 30, 2019. The combined cost of revenue increase was due to increased product costs related to our improved product sale volumes, and the related increases in merchant and other processing fees incurred due to our combined higher sales volumes when compared to the prior year’s three month period September 30, 2019.

 

Gross profit increased by approximately 238% to approximately $8.3 million for the three months ended September 30, 2020 compared to approximately $2.4 million for the three months ended September 30, 2019, as a result of increased combined sales, partially offset by a percentage increases in our costs to produce those revenues, principally attributable to increased product costs. Product costs increased to 30% of associated product revenues experienced during the three months ended September 30, 2020, from 25% of associated product revenues during the three month period ended September 30, 2019. Total gross profit as a percentage of total revenues was 75% for the three months ended September 30, 2020 compared to 78% for the three months ended September 30, 2019. The absolute decrease in total gross margin of 3% (relative decrease of 4%) was primarily due to increased product costs set forth immediately above resulting from the impact of COVID-19 related disruptions to our product supply chain causing increased costs to procure our production inputs.

 

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Operating Expenses

 

   Three Months Ended September 30, 
   2020   2019 
Selling & marketing expenses  $10,528,833   $2,073,016 
General and administrative expenses   17,589,366    929,471 
Operating expenses   336,001    216,065 
Customer service expenses   230,788    140,579 
Development costs   118,346    61,221 
Total operating expenses  $28,803,334   $3,420,352 

 

Operating expenses for the three months ended September 30, 2020 were approximately $28.8 million, as compared to approximately $3.4 million for the three months ended September 30, 2019. This represents an increase of approximately 742%, or $25.4 million. The increase is primarily attributable to the following:

 

(i) Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the three months ended September 30, 2020, the Company had an increase of approximately $8.5 million in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current quarter’s sales growth, and is expected to maintain sustained revenue growth throughout the remaining balance of the year ending December 31, 2020, and beyond, based on the Company’s recurring revenue subscription based sales model.
   
(ii) General and administrative expenses: During the three month period ended September 30, 2020, stock based compensation was $16,331,558, (1) with the majority related to a restricted share issuance liability attributable to the attainment of a performance threshold in the period, (2) coupled with the issuance expense associated with the probability of future performance threshold attainment. This category also consists of payroll expenses for executive management, amortization expense and legal and professional fees. During the three months ended September 30, 2020, the Company had an increase of approximately $16.7 million in general and administrative expenses, primarily related to the increase in stock-based compensation costs referenced above, and other increases in infrastructure expenses incurred to support the sales volume increases.
   
(iii) Other operating expenses: This mainly consists of general office supplies, rent, insurance, bank charges and IT service costs for our online products. During the three months ended September 30, 2020, the Company had an increase of approximately $120,000, primarily related to the general cost environment necessary to support the Company’s sales growth, coupled with a bad debt charge of $58,000 recognized on the settlement of a sales commission receivable write-off which became uncollectible during the three months ended September 30, 2020.
   
(iv) Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in Puerto Rico. During the three months ended September 30, 2020, the Company had an increase of approximately $90,000, primarily related to increases in headcount in the Company’s customer service department.
   
(v) Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the three months ended September 30, 2020, the Company had an increase of approximately $57,000, primarily resulting from technology platform improvements for LegalSimpli and amortization expenses at CLPR.

 

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Other Expense

 

   Three Months Ended September 30, 
   2020   2019 
Interest expense  $291,096   $130,936 
Total  $291,096   $130,936 

 

Other expense for the three months ended September 30, 2020 increased by approximately $160,000 compared to the three months ended September 30, 2019. The increase in other expense, interest expense, is primarily attributable to increased debt.

 

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

 

Revenue

 

Our financial results for the nine months ended September 30, 2020 are summarized as follows in comparison to the nine months ended September 30, 2019:

 

   September 30, 2020   September 30, 2019 
   $  

% of

Sales

   $  

% of

Sales

 
Product revenues, net   20,258,750    83%   7,309,524    86%
Software revenues, net   4,136,608    17%   1,214,600    14%
Service revenues, net   5,000    0%   -    0%
Total revenues, net  $24,400,358    100%  $8,524,124    100%
                     
Cost of product revenue   5,800,992    24%   1,811,939    21%
Cost of software revenue   883,791    4%   201,326    2%
Total cost of revenue   6,684,783    28%   2,013,265    23%
                     
Gross profit  $17,715,575    73%  $6,510,859    76%
                     
Selling & marketing expenses   21,669,046    89%   5,580,276    65%
General and administrative expenses   20,096,893    82%   2,034,067    24%
Operating expenses   663,752    3%   700,225    8%
Customer service expenses   488,455    2%   408,795    5%
Development costs   288,813    1%   157,736    2%
Total expenses  $43,206,959    177%  $8,881,099    104%
                     
Loss from operations  $(25,491,384)   -126%  $(2,370,240)   -32%
Interest expense, net   (1,313,010)   -6%   (430,956)   -6%
Loss from operations before provision for income taxes  $(26,804,394)   -132%  $(2,801,196)   -38%
Income taxes   -    0%   -    0%
Net loss attributable to noncontrolling interests  $(408,180)   2%  $(375,540)   8.7%
Net loss attributable to Conversion Labs, Inc.  $(26,396,214)   -130%  $(2,425,656)   332.7%

 

Revenues for the nine months ended September 30, 2020 were approximately $24.4 million, an increase of 186% compared to approximately $8.5 million for the nine months ended September 30, 2019. The increase in revenues was attributable to both the increase in product revenue of 177% and an increase in software revenue of 241%. Product revenue accounts for 83% of total revenue and has increased in the nine months ended September 30, 2020 due to an increase in online sales demand, with the majority of this increase attributable to the nationwide lockdown resulting from COVID-19 driving increased consumer online purchases. Software revenue accounts for 17% of total revenue and has steadily increased year over year due to a combination of higher demand, increased market awareness, continued marketing campaign expansion, as well as the effects of the nationwide lockdown resulting from COVID-19.

 

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Total cost of revenues consist of the cost of (1) product revenues, which primarily include product material costs and fulfillment costs directly attributable to the production of our products held for sale and (2) the cost of software revenue consisting primarily of credit card processing fees and information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 232% to approximately $6.7 million for the nine months ended September 30, 2020 compared to approximately $2 million for the nine months ended September 30, 2019. The combined cost of increase was due to increased product costs related to our improved product sale volumes, and the related increases in merchant and other processing fees incurred due to our combined higher sales volumes when compared to the prior year’s nine month period September 30, 2019.

 

Gross profit increased by approximately 172% to approximately $17.7 million for the nine months ended September 30,2020 compared to approximately $6.5 million for the nine months ended September 30, 2019, as a result of increased combined sales, partially offset by a percentage increases in our costs to produce those revenues, principally attributable to increased product costs. Product costs increased to 31% of associated product revenues experienced during the nine months ended September 30, 2020, from 25% of associated product revenues during the nine month period ended September 30, 2019. Gross profit as a percentage of revenues was 73% for the nine months ended September 30, 2020 compared to 76% for the nine months ended September 30, 2019. The absolute decrease of 3.8% (relative decrease of 4.9%) in gross profit was principally attributable to higher product costs incurred during the nine months ended September 30, 2020, resulting from the use of new suppliers, at slightly higher costs, resulting from the impact of COVID-19 related disruptions to our product supply chain, causing increased costs to procure our production inputs. The new suppliers were also required to supplement our increased production needs to meet our increased product demand.

 

Operating Expenses

 

   Nine Months Ended September 30, 
   2020   2019 
Selling and marketing expenses  $21,669,046   $5,580,276 
General and administrative expenses   20,096,893    2,034,067 
Operating expenses   663,752    700,225 
Customer service expenses   488,455    408,795 
Development costs   288,813    157,736 
Total operating expenses  $43,206,959   $8,881,099 

 

Operating expenses for the nine months ended September 30, 2020 were approximately $43.2 million, as compared to approximately $8.9 million for the nine months ended September 30, 2019. This represents an increase of 387%, or $34.3 million. The increase is primarily attributable to:

 

(i) Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the nine months ended September 30,2020, the Company had an increase of approximately $16.1 million, or 288% in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current nine months ended September 30, 2020 sales growth reported above, and is expected to maintain sustained revenue growth throughout the remaining balance of the year ending December 31, 2020, and beyond in Fiscal 2021, based on the Company’s recurring revenue subscription based sales model.
   
(ii) General and administrative expenses: During the nine month period ended September 30, 2020, stock based compensation was $16.9 million, (1) with the majority related to a restricted share issuance liability attributable to the attainment of a performance threshold in the period (specifically in the three months ended September 30, 2020), (2) coupled with the issuance expense associated with the probability of future performance threshold attainment. This category also consists of payroll expenses for executive management, amortization expense and legal and professional fees. During the nine months ended September 30, 2020, the Company has had an increase of approximately $18.1 million in general and administrative expenses, primarily related to the increase in stock-based compensation costs referenced above, and other increases in infrastructure expenses incurred to support the sales volume increases.

 

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(iii) Other operating expenses: This consists of rent, insurance, royalty expense, bank charges and IT services for our online products. During the nine months ended September 30, 2020, the Company had a decrease of approximately $36,000, primarily related to increases in the general cost environment necessary to support the Company’s sales growth, coupled with a bad debt charge of $58,000 recognized on the settlement of a sales commission receivable write-off which became uncollectible during the nine months ended September 30, 2020, offset by decreases in royalty payouts and a decrease in an IT service subscription that was terminated in early 2020.
   
(iv) Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in Puerto Rico. During the nine months ended September 30, 2020, the Company had an increase of approximately $80,000, primarily related to increases in headcount in the Company’s customer service department.
   
(v) Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the nine months ended September 30, 2020, the Company had an increase of approximately $131,000, primarily resulting from technology platform improvements for LegalSimpli and amortization expenses at CLPR.

 

   Nine Months Ended September 30, 
   2020   2019 
Interest expense  $1,313,010   $430,956 
Total  $1,313,010   $430,956 

 

Other expense for the nine months ended September 30, 2020 increased by $882,054 compared to the nine months ended September 30, 2019. The increase in other expense, interest expense, is primarily attributable to increased debt.

 

Working Capital

 

   September 30, 2020   December 31, 2019 
Current assets  $4,652,990   $2,747,102 
Current liabilities   9,435,904    3,975,442 
Working capital  $(4,782,914)  $(1,228,340)

 

Working capital (deficit) had a negative turn of approximately $3.6 million during the nine months ended September 30, 2020. Contributing to this decline in working capital included current assets increasing by approximately $1.9 million for the nine months ended September 30,2020. This increase in current assets is attributable to a decrease in cash and cash equivalents of approximately $190,000, being offset by increases in accounts receivable (approximately $317,000), and inventory and product deposits (combined at approximately $1.9 million). Current liabilities increased by $5.5 million which was primarily attributable to an increase in accounts payable and accrued liabilities as a result of the Company extending payables and credit terms with vendors during the nine months ended September 30, 2020.

 

Liquidity and Capital Resources

 

   Nine Months Ended 
   September 30, 2020   September30, 2019 
Net loss  $(26,804,394)  $(2,801,196)
Net cash (used in) provided by operating activities   (5,595,382)   92,496 
Net cash used in investing activities   (730,856)   (500,000)
Net cash provided by financing activities   6,135,981    1,008,303 
Net (decrease) increase in cash  $(189,987)  $600,799 

 

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Since inception, the Company has funded operations through the collections from revenues provided by the sales of its products, issuances of common and preferred stock equivalents, receipt of loans and advances from officers and directors and the issuance of convertible notes to third-party investors.

 

Net cash used in operating activities was approximately $5.6 million for the nine months ended September 30, 2020, as compared with net cash provided by operating activities of approximately $92,000 for the nine months ended September 30, 2019, the significant factors contributing to the cash used in operations were the nine month, September 30, 2020 loss of approximately $26.8 million (inclusive of $16.9 million in stock based compensation charges), principally offset by the Company’s increase in accounts payable of approximately $4.2 million.

 

Net cash used in investing activities for the nine months ended September 30, 2020 was approximately $731,000, as compared with net cash used in investing activities of $500,000 for the nine months ended September 30, 2019. Net cash used in investing activities was primarily due to continued payments on the Company’s purchase of LegalSimpli of $400,000 and the cash paid for capitalized software costs of approximately $331,000.

 

Net cash provided by financing activities for the nine months ended September 30, 2020 was $6,135,981, as compared with net cash provided by financing activities of $1,008,303 for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, financing activities consisted of proceeds from notes payable of $2,350,000, proceeds of $2,892,500 from the issuance of mezzanine equity, and cash receipts for share issuances of $2,088,349, cash proceeds from the sales of warrants of $622,763 and proceeds from the exercise of stock options of $300,400, which were offset by the repayment of notes payable of approximately $2,500,000, distributions of noncontrolling interests of $121,223 and payment for debt issuance costs of $15,000.

 

Liquidity and Capital Resources Outlook

 

The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes and the continued financial support from officers and directors, obtaining funding from third-party sources or the issuance of additional shares of common stock. See Subsequent Event Note 9 for a further discussion of a private placement offering, which closed on November 3, 2020, yielding approximately $13.2 million in net proceeds to the Company after deduction of placement fees and other offering expenses. The Company intends to use the net proceeds for customer acquisition, as well as for general corporate purposes.

 

Going Concern Evaluation

 

The accompanying unaudited financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2020, the Company has an accumulated deficit approximating $47.9 million and has experienced significant losses from its operations.

 

Based on the Company’s cash balance as of September 30, 2020, and projected cash needs, management estimates that it will need an additional $7.2 million through the next 12 months. The Company has also closed a private placement offering, discussed in “Liquidity” above, and further in Note 9, “Subsequent Events”. Although management has been successful to date in raising necessary funding, there can be no assurance that sales revenue will substantially increase or that any required future financing can be successfully completed on a timely basis, or on terms acceptable to the Company. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

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Revenue Recognition

 

The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:

 

1. Identify the contract
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue

 

For the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site, in these limited cases, recognition of revenue should be deferred until that time, however the Company does not have a process to properly record the recognition of revenue if orders are not immediately shipped, and deems the impact to be immaterial. In all cases, delivery is considered to have occurred when title and risk of loss have transferred to the customer, which is usually commensurate upon shipment of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order, recording the revenue at the time it fulfills the shipment obligation to the customer.

 

For its product-based contracts with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer rebates and other adjustments for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The Company’s discounts and customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical transaction detail, and accounts for such provisions, as contra revenue, during the same period in which the related revenues are earned. The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to record estimates for returns and allowances to be applied to the entire product-based portfolio population.

 

The Company, through its majority-owned subsidiary LegalSimpli, offers a subscription based service providing a suite of software applications to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with customers, the Company offers an initial 14-day trial period which is billed at $1.95, followed by a monthly subscription, or a yearly subscription to the Company’s software suite dependent on the subscriber’s enrollment selection. The Company has estimated that there is one product and one performance obligation that is delivered over time, as the Company allows the subscriber to access the suite of services for the time period of the subscription purchased. The Company allows the customer to cancel at any point during the billing cycle, in which case the customers subscription will not be renewed for the following month or year depending on the original subscription. The Company records the revenue over the customers subscription period for monthly and yearly subscribers or at the end of the initial 14 day service period for customers who purchased the initial subscription, as the circumstances dictate. The Company offers a discount for the monthly or yearly subscriptions being purchased, which is deducted at the time of payment at the initiation of the contract term, therefore the Contract price is fixed and determinable at the contract initiation. Monthly and annual subscriptions for the service are recorded net of the Company’s known discount rates. As of September 30, 2020 and December 31, 2019, the Company has accrued contract liabilities, as deferred revenue, of approximately $413,000 and $110,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers and a portion attributable to the yet to be recognized initial 14-day trial period collections.

 

Customer discounts, returns and rebates on product revenues during the nine months ended September 30, 2020 and 2019 approximated $2.2 million and $1 million, respectively. Customer discounts and allowances on software revenues during the nine months ended September 30, 2020 and 2019 approximated $545,000 and $241,000, respectively.

 

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Capitalized Software Costs

 

The Company capitalizes certain internal payroll costs and third-party costs related to internally developed software and amortizes these costs using the straight-line method over the estimated useful life of the software, generally three years. The Company does not sell internally developed software other than through the use of subscription service. Certain development costs not meeting the criteria for capitalization, in accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software, are expensed as incurred. As of September 30, 2020 and 2019, the Company capitalized $334,585 and $0 related to internally developed software costs which is included in development costs on our statement of operations. As of September 30, 2020, these costs include $40,000 in capitalized stock based compensation for a third-party service provider. During the nine months ending September 30, 2020 and 2019, the Company amortized $28,278 and $0 of capitalized software costs, respectively.

 

Intangible Assets

 

Intangible assets are comprised of a customer relationship asset and purchased license with an estimated useful life of three years and indefinite lived, respectively. 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.

 

Income Taxes

 

The Company files corporate federal and state tax returns. Conversion Labs PR and LegalSimpli file tax returns in Puerto Rico, both are limited liability companies and file separate tax returns with any tax liabilities or benefits passing through to its members.

 

The Company records current and deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating losses and management determines the necessity for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company’s tax returns for all years since December 31, 2016, 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 stock shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free rate approximates the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures, the estimated forfeiture rate included in the option valuation was zero.

 

Many of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based compensation expense.

 

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Recently Issued Accounting Standards

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features” (“ASU 2017-11”). Equity-linked instruments, such as warrants, and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share (“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This standard was adopted on January 1, 2020 and did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

Application of New or Revised Accounting Standards—Not Yet Adopted

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”)”, which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year, or January 1, 2021, should the Company elect to early adopt. The Company is currently evaluating the impact the adoption of ASU 2020-06 could have on the Company’s financial statements and disclosures.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

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Results of Operations

 

Comparison of the year ended December 31, 2019 to the year ended December 31, 2018

 

Our financial results for the year ended December 31, 2019 are summarized as follows in comparison to the year ended December 31, 2018:

 

   Year Ended December 31, 
   2019   2018 
   $   % of Sales   $   % of Sales 
Product revenues, net  $9,919,506    80%  $8,044,416    97%
Software revenues, net   2,539,129    20%   277,713    3%
Service revenues, net   9,943    0%   2,000    0%
Total revenues, net   12,468,578    100%   8,324,129    100%
                     
Cost of product revenue   2,643,281    21%   1,974,781    24%
Cost of software revenue   627,315    5%   21,441    0%
Total cost of revenue   3,270,596    26%   1,996,222    24%
                     
Gross profit   9,197,982    74%   6,327,907    76%
                     
Total operating expenses   12,087,590    98%   8,384,047    101%
                     
Loss from operations   (2,889,608)   -    (2,056,140)   - 
                     
Other income (expenses)   (761,150)   (8)%   (354,388)   (4)%
                     
Income from continuing operations before provision for income taxes   (3,650,758)   (38)%   (2,410,528)   (30)%
Income tax provision (benefit)   (122,500)   (1)%   (124,700)   (2)%
Discontinued operations   -    -%   925,738    12%
Net Income (loss)  $(3,528,258)   -   $(1,360,090)   - 
Net income (loss) attributable to   (391,055)   (4)%   (119,262)   (1)%
                     
Net income (loss) attributable to Conversion Labs, Inc.  $(3,137,203)   (32)%  $(1,240,828)   (15)%

 

Overall revenues for the year ended December 31, 2019 were approximately $12.5 million, an increase of 49.8% from approximately $8.3 million during 2018. Our increase in revenues was primarily attributable to the increase in software revenues which accounts for approximately 20% of revenues; which increased as a result of successful online marketing efforts and a full year of revenue from the LegalSimpli acquisition.

 

Cost of product revenues consists primarily of product material costs and fulfillment costs directly attributable to the production of our products. Cost of software revenue consist primarily of credit card processing fees and information technology fees related to our online platform. Total cost of revenue increased by approximately 64% to approximately $3.3 million in 2019 compared to approximately $2.0 million in 2018. The increase in our cost of revenues was due to our increased revenues and related increase in merchant and other processing fees incurred to generate revenues from our products segment, and increased margins on revenues of LegalSimpli software subscriptions.

 

Gross profit increased by approximately 45% to approximately $9.2 million in 2019 compared to approximately $6.3 million in 2018 as a result of our decreased cost of sales. Gross profit as a percentage of revenues decreased to approximately 74% in 2019 from approximately 76% in 2018 due to the shift in the composition of our revenues between periods from primarily supplement products sold to higher margin shampoo and hair products, which products generally have higher margins and due to the acquisition of LegalSimpli which as a software product has higher margins than the physical product sales.

 

Operating Expenses

 

   Year Ended December 31, 
   2019   2018 
Selling & marketing expenses  $8,170,929   $5,079,091 
General and administrative expenses   2,398,751    2,288,580 
Other operating expenses   724,270    516,979 
Customer service expenses   570,763    378,856 
Development Costs   222,877    120,541 
Total  $12,087,590   $8,384,047 

 

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Operating expenses for the year ended December 31, 2019 were approximately $12.1 million, as compared to approximately $8.4 million for 2018, representing an increase of 45% or $3.8 million. The increase is primarily attributable to:

 

(i) Selling and marketing expenses mainly consist of online marketing and advertising expenses. During 2019, the Company had an increase of approximately $3.1 million in selling and marketing expenses was a result of additional marketing expenses to drive revenue growth during the year.
   
(ii) General and administrative expenses mainly consist of payroll expenses for executive management, stock-based compensation, intangible amortization and legal and professional fees. During 2019, the Company had an increase of approximately $110,000 in general and administrative expenses mainly related to an increase in the amortization expense for the Company’s customer relationship assets due to a full year of amortization from the purchase of LegalSimpli.
   
(iii) Other operating expenses consist of rent, insurance, bank charges, royalty expenses, IT services for our online products business and office supplies. During 2019, the Company had an increase of approximately $207,000 in mainly related to an increase in the Company’s insurance and rent expenses.
   
(iv) Customer service expenses consist of payroll and benefit expenses related to the Company’s customer service department located in Puerto Rico. During 2019, the Company had an increase of approximately $191,000 mainly related to an increase in headcount for the Company’s customer service and a full year of expenses for the purchase of LegalSimpli.
   
(v) Development costs mainly relate to third-party technology services for developing and maintaining our online platform for LegalSimpli. During 2019, the Company had an increase of approximately $102,000 mainly as a result of having a full year of expenses for the purchase of LegalSimpli.

 

Other income (expenses), net

 

   Year Ended December 31, 
   2019   2018 
Interest (expense)   (761,150)   (354,388)
Income from discontinued operations, including gain on sale, net of income taxes   -    925,739 
Total  $(761,150)  $571,351 

 

Other income (expenses), net for the year ended December 31, 2019, increased by approximately $406,000, compared to 2018. The increase in other income(expense) is primarily attributable to (i) an increase in the amortization of debt discount of $306,000 as compared to prior year and (ii) an increase in interest expense of approximately $80,660 as compared to the prior year.

 

Tax benefit for the year ended December 31, 2019, decreased by approximately $2,200, compared to the same period in 2018. The increase in tax expenses is mainly due to an overpayment and the benefit from an increase in net operating loss carryforwards.

 

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Working Capital

 

   December 31, 
   2019   2018 
Current assets  $2,747,102   $1,605,070 
Current liabilities   3,975,442    1,192,397 
Working capital  $(1,228,340)  $412,673 

 

Current assets increased by approximately $1.1 million, which was primarily attributable to an increase in cash and cash equivalents due to proceeds from convertible notes during the year ended December 31, 2019. Current liabilities increased by $2.8 million, which was primarily attributable to an increase in accounts payable and accrued liabilities as a result of the Company extending payables and credit terms with vendors during the year ended December 31, 2019.

 

Liquidity and Capital Resources

 

   Year Ended November 31, 
   2019   2018 
Net loss  $(3,528,258)  $(1,360,090)
           
Net cash provided by (used in) operating activities   251,408    (905,519)
Net cash (used in) provided by investing activities   (100,000)   141,445 
Net cash provided by financing activities   775,123    802,787 
Increase (decrease) in cash and cash equivalents  $926,531   $38,713 

 

Since inception, the Company has funded operations through the revenues of its products, issuance of common stock, through loans and advances from officers and directors and the issuance of convertible notes from third-party investors.

 

Net cash provided by operating activities was approximately $244,983 for the year ended December 31, 2019, as compared with net cash used in operating activities of approximately $905,519 for 2018.

 

Net cash used in investing activities for the fiscal year ended December 31, 2019 was $100,000, as compared with net cash provided by investing activities of $141,445 for 2018. Net cash used in investing activities was primarily due to continued payments on the Company’s purchase of LegalSimpli of $100,000 as compared to the prior year where the Company received $390,000 offset by the purchases of membership interest in LegalSimpli and purchases of intangible assets.

 

During the year ended December 31, 2019, our financing activities consisted of proceeds from convertible notes payable and common stock of $1.1 million and $350,000, respectively; which were offset by the repayment of notes payable of $295,000 and payment for debt issuance costs of $284,070.

 

Liquidity and Capital Resources Outlook

 

The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sales volume and the continued financial support from officers and directors, obtaining funding from third-party sources or the issuance of additional shares of common stock.

 

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2019, the Company has an accumulated deficit approximating $16.8 million and has experienced significant losses from continuing operations. Based on the Company’s cash balance as of December 31, 2019, and projected cash needs for 2020, management estimates that it will need to increase sales revenue and/or raise additional capital to cover operating and capital requirements for the 2020 year. Management will need to raise the additional needed funds through increased sales volume, issuing additional shares of common stock or other equity securities, or obtaining debt financing. Although management has been successful to date in raising necessary funding, there can be no assurance that sales revenue will substantially increase or that any required future financing can be successfully completed on a timely basis, or on terms acceptable to the Company. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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Critical Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements included elsewhere in this prospectus. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

Revenue Recognition

 

The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:

 

1. Identify the contract
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue