| Basis of Presentation and Summary of Significant Accounting Policies | NOTE 2 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for
interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they
do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”)
for complete audited financial statements. The accompanying unaudited financial information should be read in conjunction with the audited
consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2020, included in our 2020 Annual
Report on Form 10-K filed with the SEC. The information furnished in this report reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations
and cash flows for each period presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative
of the results for the year ending December 31, 2021 or for any future period. Principles of Consolidation The Company evaluates the need
to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”). The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly owned subsidiary, CLPR and its majority owned subsidiary, LegalSimpli.
The non-controlling interest in LegalSimpli represents the 49% equity interest held by other members of the subsidiary as of December
31, 2020. During the three months ended March 31, 2021, the Company purchased an additional 36% of LegalSimpli for a total equity interest
of approximately 85% (see Note 5). All significant intercompany transactions
and balances have been eliminated in consolidation. Variable Interest Entities The Company follows ASC 810-10-15
guidance with respect to accounting for variable interest entities (each, a “VIE”). These entities do not have sufficient
equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors
lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will
absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership,
or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary
beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides
it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and
losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic
performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could
potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary
beneficiary of a VIE due to changes in facts and circumstances. In accordance with ASC 810-10-25-37
and as amended by ASU 2009-17, the Company determines whether any legal entity in which the Company becomes involved is a VIE and subject
to consolidation. The Company conducts an assessment on an ongoing basis for each VIE including (1) the power to direct activities of
the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or right to receive
benefits from the VIE that could potentially be significant to the VIE. As a result, the Company determined that three (3) entities were
VIEs and subject to consolidation.
1. Conversion Labs Media, LLC (“CVLB Media”), a Puerto Rico limited liability company,
2. Conversion Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company (dissolved in 2020), and
3. Conversion Labs Asia Limited, a Hong Kong company (“Conversion Labs Asia”). CVLB Media, CVLB Rx and Conversion
Labs Asia are all considered immaterial as of March 31, 2021 and December 31, 2020. CVLB Rx had no activity and was dissolved during the
year ended December 31, 2020. Use of Estimates The Company prepares its unaudited
condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates
required to be made by management include the determination of reserves for accounts receivable, returns and allowances, the valuation
of inventory and stockholders’ equity-based transactions. Actual results could differ from those estimates. The continuing impact on business
activity brought about by the Coronavirus pandemic (“COVID-19”) continues to evolve, globally in macro terms, and in micro
terms, as such affects the Company. As a result, many of our estimates and assumptions for the period ended March 31, 2021 were subject
to an increased level of judgment and may carry a higher degree of variability and volatility. In future periods, subsequent to March
31, 2021, when additional information becomes available, which may differ from our current assumptions, may subject our estimates to material
change in future periods. Reclassifications Certain reclassifications have
been made to conform the prior year’s data to the current presentation. These reclassifications have no effect on previously reported
operating loss, stockholders’ deficit or cash flows. Given the increase in the Company’s software business and to conform
the Company’s presentation of operating results to industry standards, the Company has changed their categories for reporting operations,
as result the Company has made reclassifications to the prior year presentation in order to conform it to the current periods’ presentation.
The reclassification includes $421,998 of merchant processing fees reclassified from cost of revenues to general and administrative expenses
for the three months ended March 31, 2020. Revenue Recognition The Company records revenue under
the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:
1. Identify the contract
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue For the Company’s product-based
contracts with customers, the Company has determined that there is one performance obligation, which is the delivery of the product; this
performance obligation is transferred at a discrete point in time. The Company generally records sales of finished products once the customer
places and pays for the order, with the product being simultaneously shipped by a third-party fulfillment service provider; in limited
cases, title does not pass until the product reaches the customer’s delivery site, in these limited cases, recognition of revenue
should be deferred until that time, however the Company does not have a process to properly record the recognition of revenue if orders
are not immediately shipped, and deems the impact to be immaterial. In all cases, delivery is considered to have occurred when title and
risk of loss have transferred to the customer, which is usually commensurate upon shipment of the product. In the case of its product-based
contracts, the Company provides a subscription sensitive service based on the recurring shipment of products and records the related revenue
under the subscription agreements subsequent to receiving the monthly product order, recording the revenue at the time it fulfills the
shipment obligation to the customer. For its product-based contracts
with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer rebates and other adjustments
for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The Company’s discounts and
customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales for such discounts and customer
rebates. The Company estimates customer returns and allowances based on information derived from historical transaction detail, and accounts
for such provisions, as contra revenue, during the same period in which the related revenues are earned. The Company has determined that
the population of its product-based contracts with customers are homogenous, supporting the ability to record estimates for returns and
allowances to be applied to the entire product-based portfolio population. Customer discounts, returns and rebates on product revenues
approximated $1,222,000 and $314,000, respectively, during the three months ended March 31, 2021 and 2020. 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 March 31, 2021 and December 31, 2020, the Company has accrued contract liabilities, as deferred revenue, of approximately $1.339.000
and $917,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers and a portion attributable
to the yet to be recognized initial 14-day trial period collections. Customer discounts and allowances on software revenues approximated
$554,000 and $163,000, respectively, during the three months ended March 31, 2021 and 2020. For the three months ended March
31, 2021 and 2020, the Company had the following disaggregated revenue:
Three Months Ended March 31,
2021 % 2020 %
Product revenues by Brand for Conversion Labs PR:
Shapiro MD $ 3,383,783 19 % $ 2,337,108 54 %
Rex MD 9,840,553 54 % 492,773 11 %
iNR Wellness 23,905 - % 69,928 2 %
Purpurex 35,074 - % 53,522 1 %
Scarology - - % 2,470 - %
Total product revenue for Conversion Labs PR $ 13,283,315 73 % $ 2,955,801 69 %
Software revenue for LegalSimpli 4,914,797 27 % 1,349,011 31 %
Total net revenue $ 18,198,112 100 % $ 4,304,812 100 % Accounts Receivable Accounts receivable principally
consist of amounts due from third-party merchant processors, who process our subscription revenues; the merchant accounts balance receivable
represents the charges processed by the merchants that have not yet been deposited with the Company. The unsettled merchant receivable
amount normally represents processed sale transactions from the final one to three days of the month, with collections being made by the
Company within the first week of the following month. Management determines the need, if any, for an allowance for future credits to be
granted to customers, by regularly evaluating aggregate customer refund activity, coupled with the consideration and current economic
conditions in its evaluation of an allowance for future refunds and chargebacks. As of March 31, 2021 and December 31, 2020, the Company
had an allowance for bad debt, attributable to the single agent relationship amounting to approximately $133,000 and $133,000, respectively.
As of March 31, 2021 and December 31, 2020, the reserve for sales returns and allowances was approximately $356,000 and $349,000,
respectively. For all periods presented, as noted above, the sales returns and allowances were recorded as contra assets in arriving at
presented accounts receivable, net. Inventory As of March 31, 2021 and December
31, 2020, inventory primarily consisted of finished goods related to the Company’s brands included in the product revenue section
of the table above. Inventory is maintained at the Company’s third-party warehouse location in Wyoming and at the Amazon fulfillment
center. The Company also maintains inventory at a related-party warehouse in Pennsylvania. Inventory is valued at the lower
of cost or net realizable value with cost determined on a first-in, first-out (“FIFO”) basis. Management compares the cost
of inventory with the net realizable value and an allowance is made for writing down inventory to net realizable, if lower. As of March
31, 2021 and December 31, 2020, the Company recorded an inventory reserve in the amount of $57,481 and $57,481, respectively. As of March 31, 2021 and December
31, 2020, the Company’s inventory consisted of the following:
March 31, December 31,
2021 2020
Finished Goods - Products $ 1,616,268 1,172,624
Raw materials and packaging components 115,594 149,115
Inventory reserve (57,481 ) (57,481 )
Total Inventory - net $ 1,674,381 $ 1,264,258 Product Deposit Many of our vendors require deposits
when a purchase order is placed for goods or fulfillment services. These deposits typically range from 10% to 33% of the total purchased
amount. Our vendors include a credit memo within their final invoice, recognizing the deposit amount previously paid. As of March 31,
2021 and December 31, 2020, the Company has approximately $1,300,243 and $816,765, respectively, of product deposits with multiple vendors
for the purchase of raw materials or finished goods. The Company’s history of product deposits with its inventory vendors, creates
an implicit purchase commitment equaling the total expected product acceptance cost in excess of the product deposit. As of March 31,
2021 and December 31, 2020, the Company approximates its implicit purchase commitments to be $2.6 million and $1.6 million, respectively.
As of March 31, 2021 and December 31, 2020, the vast majority of these product deposits are with one vendor that manufacturers
the Company’s finished goods inventory for its Shapiro hair care product line. Capitalized Software Costs
The Company
capitalizes certain internal payroll costs and third-party costs related to internally developed software and amortizes these costs using
the straight-line method over the estimated useful life of the software, generally three years. The Company does not sell internally developed
software other than through the use of subscription service. Certain development costs not meeting the criteria for capitalization, in
accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software Intangible Assets Intangible assets are comprised
of a customer relationship asset (with original cost of approximately $1,007,000) and a purchased license (with a cost of $200,000) with
an estimated useful life of three and ten years, respectively. Intangible assets are amortized over their estimated lives using the straight-line
method. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life
of the asset. Impairment of Long-Lived Assets Long-lived assets are evaluated
for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other
assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities
(asset group). If the sum of the projected undiscounted cash flows (excluding interest charges) of an asset group is less than its carrying
value and the fair value of an asset group is also less than its carrying value, the assets will be written down by the amount by which
the carrying value of the asset group exceeded its fair value. However, the carrying amount of a finite-lived intangible asset can never
be written down below its fair value. Any loss would be recognized in income from continuing operations in the period in which the determination
is made. Paycheck Protection Program During the year ended December
31, 2020, the Company received aggregate loan proceeds in the amount of approximately $249,000 under the Paycheck Protection Program (“PPP”).
The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to
qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued
interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees
or reduces salaries during the eight-week period. The unforgiven portion of the
PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends
to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will
meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause the Company to be
ineligible for forgiveness of the loan, in whole or in part. During the three months ended
March 31, 2021, the Company had a total of $184,914 of its PPP loans forgiven by the SBA (see Note 4). As of March 31, 2021 and December
31, 2020, the PPP loan balance was $74,269 and $259,183, respectively, and is reflected on the Company’s consolidated balance sheet
as current liabilities, within notes payable, net. Income Taxes The Company files corporate federal,
state and local tax returns. Conversion Labs PR and LegalSimpli file tax returns in Puerto Rico, both are limited liability companies
and file separate tax returns with any tax liabilities or benefits passing through to its members. The Company records current and
deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.”
This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities
and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the
differences are expected to reverse. The Company establishes a valuation allowance, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated
by a history of net operating losses and management determines the necessity for a valuation allowance. ASC 740 also provides a recognition
threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return.
Using this guidance, a company may recognize the tax benefit from an uncertain tax position in its financial statements only if it is
more likely-than-not (i.e., a likelihood of more than 50%) that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The Company’s tax returns for all years since December 31, 2017, remain open to audit
by all related taxing authorities. Stock-based Compensation The Company follows the provisions
of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally is recognized at fair value on the date
of the grant and amortized over the respective vesting or service period. The fair value of options at the date of grant is estimated
using the Black-Scholes option pricing model. The expected option life is derived from assumed exercise rates based upon historical exercise
patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon
historical volatility of the Company’s common shares using weekly price observations over an observation period that approximates
the expected life of the options. The risk-free interest rate approximates the U.S. Treasury yield curve rate in effect at the time of
grant for periods similar to the expected option life. Due to limited history of forfeitures, the Company has elected to account for forfeitures
as they occur. Many of the assumptions require
significant judgment and any changes could have a material impact in the determination of stock-based compensation expense. Earnings (Loss) Per Share Basic earnings (loss)
per common share is based on the weighted average number of shares outstanding during each period presented. Convertible securities, warrants
and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common stock equivalents are
excluded from dilutive earnings per share when the effects would be antidilutive. The Company follows the
provisions of ASC 260, “Diluted Earnings per Share”. In computing diluted EPS, basic EPS is adjusted for the assumed issuance
of all potentially dilutive securities. The dilutive effect of call options, warrants and share-based payment awards is calculated using
the “treasury stock method,” which assumes that the “proceeds” from the exercise of these instruments are used
to purchase common shares at the average market price for the period. The dilutive effect of traditional convertible debt and preferred
stock is calculated using the “if-converted method.” Under the if-converted method, securities are assumed to be converted
at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation for the
entire period being presented. The following table summarizes
the number of shares of common stock issuable pursuant to our convertible securities that were excluded from the diluted per share calculation
because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average
market price of the common shares:
Three Months Ended
Three Months Ended
March 31, March 31,
2021 2020
Series B Preferred Stock 1,076,923 -
Restricted Stock Units (RSUs) 47,500 -
Stock options 4,395,000 3,869,000
Warrants 3,550,471 2,926,636
Potentially dilutive securities 9,069,894 6,795,636 Fair Value of Financial Instruments The carrying value of the Company’s
financial instruments, including cash, accounts receivable, accounts payable and accrued expenses and the face amount of notes payable
approximate fair value for all periods presented. Concentrations of Risk The Company grants credit in the
normal course of business to its customers. The Company periodically performs credit analysis and monitors the financial condition of
its customers to reduce credit risk. The Company monitors its positions
with, and the credit quality of, the financial institutions with which it invests. The Company, at times, maintains balances in various
operating accounts in excess of federally insured limits. We are dependent on certain third-party
manufacturers, although we believe that other contract manufacturers could be quickly secured if any of our current manufacturers cease
to perform adequately. As of March 31, 2021 and December 31, 2020, we utilized two (2) suppliers for fulfillment services, two (2) suppliers
for manufacturing finished goods, one (1) supplier for packaging and bottles and one (1) supplier for labeling. For the three months ended
March 31, 2021 and 2020, we purchased 100% of our finished goods from two (2) manufacturers. Recently Adopted Accounting
Pronouncements In August
2020, the FASB issued ASU 2020-06, “ Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity's Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity's
Own Equity Other Recent Accounting Pronouncements All other accounting standards
updates that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption. |
