STOCKHOLDERS’ EQUITY

3 Months Ended

Mar. 31, 2023

Equity [Abstract]

STOCKHOLDERS’ EQUITY

NOTE 8 – STOCKHOLDERS’ EQUITY

The Company has authorized the issuance of up to 100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.0001 par value, of which 5,000 shares are designated as Series B Convertible Preferred Stock, 1,610,000 are designated as Series A Preferred Stock and 3,385,000 shares of preferred stock remain undesignated.

On June 8, 2021, the Company filed the 2021 Shelf. Under the 2021 Shelf at the time of effectiveness, the Company originally had the ability to raise up to $150 million by selling common stock, preferred stock, debt securities, warrants and units. In conjunction with the 2021 Shelf, the Company also entered into the ATM Sales Agreement whereby the Company may offer and sell, from time to time, shares of common stock. On March 22, 2023, the date the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6 of Form S-3 (i.e., the “baby shelf limitations”). As a result of the baby shelf limitations, the Company may only offer and sell shares of common stock having an aggregate offering price of up to $18.435 million pursuant to the ATM Sales Agreement, and it filed a prospectus supplement with the SEC to that effect on March 27, 2023. In the event that the Company’s public float increases above $75.0 million, the Company will no longer be subject to the baby shelf limitations, in which case the Company will file another prospectus supplement with the SEC prior to making sales pursuant to the ATM Sales Agreement in excess of $18.435 million. As of March 31, 2023, the Company has $18.435 million available under the ATM Sales Agreement.

Common Stock

Common Stock Transactions During the Three Months Ended March 31, 2023

During the three months ended March 31, 2023, the Company issued an aggregate of 149,375 shares of common stock for service, including vested restricted stock units.

On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024. On February 6, 2023, the Company issued 337,895 shares of common stock related to the first of five quarterly installment payments due to the sellers of Cleared under the First Amendment.

On March 21, 2023, in connection with the Company’s closing of a Credit Agreement with Avenue, the Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments. In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49.

Noncontrolling Interest

Net income attributed to the non-controlling interest amounted to $566 thousand and $25 thousand for the three months ended March 31, 2023 and 2022, respectively. During both the three months ended March 31, 2023 and 2022, the Company paid distributions to non-controlling shareholders of $36 thousand.

WorkSimpli Software Restructuring Transaction

Effective January 22, 2021 (the “WSS Effective Date”), the Company consummated the WSS Restructuring, which is described in Note 1. To effect the WSS Restructuring the Company’s wholly-owned subsidiary Conversion Labs PR, entered into a series of membership interest exchange agreements, pursuant to which, Conversion Labs PR exchanged that certain promissory note, dated May 8, 2019 with an outstanding balance of $376 thousand (the “CVLBPR Note”), issued by WSS in favor of Conversion Labs PR, for 37,531 newly issued membership interests of WSS (the “Exchange”). Upon consummation of the Exchange the CVLBPR Note was extinguished.

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

In furtherance of the WSS Restructuring, Conversion Labs PR entered into a Membership Interest Purchase Agreement with WSS, (the “CVLB PR MIPA”), pursuant to which Conversion Labs PR purchased 12,000 membership interests of WSS for an aggregate purchase price of $300 thousand. The CVLB PR MIPA provides that the transaction may be completed in three (3) tranches with a purchase price of $100 thousand per tranche to be made at the sole discretion of Conversion Labs PR. Payment for the first tranche of $100 thousand was made upon execution of the CVLB PR MIPA in January 2021. Payments for the second and third tranches were made on the 60-day anniversary and the 120-day anniversary of the WSS Effective Date.

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

Concurrently with the WSS Restructuring, Conversion Labs PR entered into option agreements with Sean Fitzpatrick (the “Fitzpatrick Option Agreement”) and Varun Pathak (the “Pathak Option Agreement” together with Fitzpatrick Option Agreement the “Option Agreements”), pursuant to which Conversion Labs PR granted options to purchase membership interest units of WSS. Upon vesting, the Fitzpatrick Options and the Pathak Options provide for the potential re-purchase of up to an additional 13.25% of WSS by Fitzpatrick and Pathak in the aggregate with Conversion Labs PR ownership ratably reduced to approximately 72.98%.

The Fitzpatrick Option Agreement grants Sean Fitzpatrick the option to purchase 10,300 membership interest units of WSS for an exercise price of $1.00 per membership interest unit. The Fitzpatrick Options vest in accordance with the following (i) 3,434 membership interests upon WSS achieving $2.5 million of gross sales in any fiscal quarter (ii) 3,434 membership interests upon WSS achieving $4.0 million of gross sales in any fiscal quarter, and (iii) 3,434 membership interests upon WSS achieving $8.0 million of gross sales with a ten percent (10%) net profit margin in any fiscal quarter.

The Pathak Option Agreement grants Varun Pathak the option to purchase 2,100 membership interest units of WSS for an exercise price of $1.00 per membership interest unit. The Pathak Options vest in accordance with the following (i) 700 membership interests upon WSS achieving $2.5 million of gross sales in any fiscal quarter (ii) 700 membership interests upon WSS achieving $4.0 million of gross sales in any fiscal quarter, and (iii) 700 membership interests upon WSS achieving $8.0 million of gross sales with a ten percent (10%) net profit margin in any fiscal quarter.

On September 30, 2022, Sean Fitzpatrick and Varun Pathak exercised their options to purchase 10,300 and 2,100 membership interest units, respectively, of WorkSimpli for an exercise price of $1.00 per membership interest unit under the Option Agreements. Following the exercise of the Option Agreements, Conversion Labs PR decreased its ownership interest in WorkSimpli from 85.58% to 73.64%. Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli. Following the retirement, Conversion Labs PR’s ownership interest in WorkSimpli increased to 74.06%.

Stock Options

On January 8, 2021, the Company approved the Company’s 2020 Equity and Incentive Plan (the “2020 Plan”). Approval of the 2020 Plan was included as Proposal 1 in the Company’s definitive proxy statement for its Special Meeting of Shareholders filed with the Securities and Exchange Commission on December 7, 2020. The 2020 Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) and initially provided for the issuance of up to 1,500,000 shares of Common Stock. The number of shares of Common Stock available for issuance under the 2020 Plan automatically increases by 150,000 shares of Common Stock on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2021 and ending on (and including) January 1, 2030. Awards under the 2020 Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights, restricted stock, and restricted stock units.

On June 24, 2021, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020 Plan to increase the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by 1,500,000 shares.

On June 16, 2022, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020 Plan to increase the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by 1,500,000 shares. As of March 31, 2023, the 2020 Plan, as amended, provided for the issuance of up to 4,950,000 shares of Common Stock. Remaining authorization under the 2020 Plan, as amended, was 1,573,830 shares as of March 31, 2023.

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

● Form of Non-Qualified Option Agreement (Non-Employee Director Awards)

● Form of Non-Qualified Option Agreement (Employee Awards); and

● Form of Restricted Stock Award Agreement.

Previously, the Company had granted service-based stock options and performance-based stock options separate from the 2020 Plan.

During the three months ended March 31, 2023, the Company issued an aggregate of 180,500 stock options to employees under the 2020 Plan and the prior plan. These stock options have a contractual term of 4 to 6.5 years and vest in increments which fully vest the options over a two to three-year period, dependent on the specific agreements’ terms.

The following is a summary of outstanding options activity under our 2020 Plan for the three months ended March 31, 2023:

	Options Outstanding Number of Shares			Exercise Price per Share		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per Share
Balance, December 31, 2022		1,784,587		$	2.30 – 21.02	6.95 years	$	9.54
Granted		40,500			1.84 – 1.89	4.86 years		1.89
Cancelled/Forfeited/Expired		(69,167	)		2.30 – 7.50	4.62 years		3.75
Balance at March 31, 2023		1,755,920		$	1.84 – 21.02	6.76 years	$	9.59
Exercisable at December 31, 2022		1,185,153		$	2.30 – 21.02	7.64 years	$	9.62
Exercisable at March 31, 2023		1,331,051		$	1.84 – 21.02	7.37 years	$	9.58

The total fair value of the options granted was $76 thousand, which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, expected term of 4 years, volatility of 123.7% – 123.8% and risk-free rate of 3.58% – 3.87%. Total compensation expense under the 2020 Plan options above was $1.2 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively, with unamortized expense remaining of $4.4 million as of March 31, 2023.

The following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the three months ended March 31, 2023:

	Options Outstanding Number of Shares		Exercise Price per Share		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per Share
Balance, December 31, 2022		1,439,333	$	1.00 – 19.61	5.63 years	$	6.11
Granted		140,000		1.00 – 2.00	2.69 years		1.71
Balance at March 31, 2023		1,579,333	$	1.00 – 19.61	5.15 years	$	5.72
Exercisable December 31, 2022		1,158,764	$	1.00 – 19.61	5.63 years	$	5.25
Exercisable at March 31, 2023		1,363,264	$	1.00 – 19.61	5.13 years	$	5.05

The total fair value of the options granted was $142 thousand, which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, expected term of 6.5 years, volatility of 187.76% – 195.58% and risk-free rate of 1.21% – 2.26%. Total compensation expense under the above service-based option plan was $643 thousand and $550 thousand for the three months ended March 31, 2023 and 2022, respectively, with unamortized expense remaining of $2.1 million as of March 31, 2023.

The following is a summary of outstanding performance-based options activity (separate from the 2020 Plan) for the three months ended March 31, 2023:

	Options Outstanding Number of Shares		Exercise Price per Share		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per Share
Balance at December 31, 2022		535,000	$	1.25 – 2.50	4.59 years	$	1.60
Granted		-
Balance at March 31, 2023		535,000	$	1.25 – 2.50	4.34 years	$	1.60
Exercisable December 31, 2022		470,000	$	1.50 – 2.50	4.58 years	$	1.61
Exercisable at March 31, 2023		470,000	$	1.50 – 2.50	4.34 years	$	1.61

No compensation expense was recognized on the performance-based options above for the three months ended March 31, 2023, as the performance terms have not been met or are not probable. Total compensation expense under the above performance-based options was $106 thousand for the three months ended March 31, 2022.

Restricted Stock Units (RSUs)

The following is a summary of outstanding RSU activity under our 2020 Plan for the three months ended March 31, 2023:

	RSU Outstanding Number of Shares
Balance at December 31, 2022		1,028,250
Granted		412,000
Vested		(120,375	)
Cancelled/Forfeited		(75,000	)
Balance at March 31, 2023		1,244,875

The total fair value of the 412,000 RSUs granted was $809 thousand which was determined using the fair value of the quoted market price on the date of grant. Total compensation expense under the 2020 Plan RSUs above was $543 thousand and $976 thousand for the three months ended March 31, 2023 and 2022, respectively, with unamortized expense remaining of $4.0 million as of March 31, 2023. During the three months ended March 31 2023, 120,375 RSUs vested, of which 49,375 RSUs were issued.

The following is a summary of outstanding RSU activity (outside of our 2020 Plan) for the three months ended March 31, 2023:

	RSU Outstanding Number of Shares
Balance at December 31, 2022		715,000
Granted		50,000
Vested		(115,000	)
Balance at March 31, 2023		650,000

The total fair value of the 50,000 RSUs granted was $73 thousand which was determined using the fair value of the quoted market price on the date of grant. Total compensation expense for RSUs outside of the 2020 Plan was $305 thousand and $591 thousand for the three months ended March 31, 2023 and 2022, respectively, with unamortized expense remaining of $4.9 million as of March 31, 2023. During the three months ended March 31, 2023, 115,000 RSUs vested, of which 100,000 RSUs were issued.

Warrants

The following is a summary of outstanding and exercisable warrants activity during the three months ended March 31, 2023:

	Warrants Outstanding Number of Shares		Exercise Price per Share		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per Share
Balance at December 31, 2022		3,859,638	$	1.40 – 12.00	5.85 years	$	5.59
Granted		967,742		1.24	4.97 years		1.24
Balance at March 31, 2023		4,827,380	$	1.24 – 12.00	4.71 years	$	4.74
Exercisable December 31, 2022		3,836,993	$	1.40 – 12.00	4.88 years	$	5.63
Exercisable March 31, 2023		4,804,735	$	1.24 – 12.00	4.71 years	$	4.74

The total fair value of the warrants granted was $1.1 million, which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, expected term of 4 years, volatility of 122.6% and risk-free rate of 3.73%. Total compensation expense on the above warrants was $12 thousand and $605 thousand for the three months ended March 31, 2023 and 2022, respectively, with unamortized expense remaining of $6 thousand as of March 31, 2023.

Stock-based Compensation

The total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock options, warrants and RSUs amounted to $2.7 million and $4.5 million for the three months ended March 31, 2023 and 2022, respectively. Such amounts are included in general and administrative expenses in the unaudited condensed consolidated statement of operations. Unamortized expense remaining related to service-based stock options, performance-based stock options, warrants and RSUs was $15.4 million as of March 31, 2023, which is expected to be recognized through 2026.