Filing Summary
Identity and period: The filing is Conversion Labs, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. It identifies the company as formerly Immudyne, Inc., renamed effective June 22, 2018. This differs from the request metadata naming LifeMD, Inc.; verify the issuer and filing identity.
Business Context
Conversion Labs described itself as an online direct-response marketing company selling products to consumers. Its commercial-stage offerings included a hair-care line, an immune-support supplement, and PDF-conversion software. In the first quarter of 2018, it sold its legacy yeast beta-glucan manufacturing business; in May, its subsidiary acquired 51% of LegalSimpli Software, LLC (LSS).
Financial Performance
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Net sales | $2.04 million | $3.64 million | $0.66 million and $0.83 million, respectively |
| Gross profit | $1.50 million | $2.75 million | $0.47 million and $0.55 million, respectively |
| Gross margin | 73.8% | 75.6% | 72.0% and 67.0%, respectively |
| Operating expenses | $2.10 million | $3.63 million | $0.86 million and $1.34 million, respectively |
| Operating loss | $597,493 | $876,807 | $380,302 and $782,095, respectively |
| Net income (loss) attributable to Conversion Labs | $(607,032) | $20,245 | $737,489 and $(307,316), respectively |
Quarterly sales growth was driven mainly by greater investment in marketing the hair-care products. Marketing expense rose to $1.27 million in Q2 from $289,070 a year earlier; total operating expenses increased 146%. The Q2 2017 result included a $922,022 gain from a change in fair value of derivative liability. Six-month 2018 earnings included a $744,752 gain on sale of the legacy business; continuing operations recorded a $934,335 loss.
Cash, Debt and Liquidity
- Cash was $691,169 at June 30, 2018, up from $141,379 at year-end 2017. Current assets were $1.47 million and current liabilities $511,469; reported working capital was $959,898 and the current ratio 2.88.
- For the six months, operating cash flow was $(228,176) including discontinued operations. Continuing operations alone used $368,664; investing activities provided $241,445, and financing activities provided $536,521. Cash increased by $549,790.
- The company raised $550,000 through convertible notes in May. The notes mature May 28, 2019, bear 12% annual interest compounded annually, and convert at $0.23 per share subject to adjustment. The company also issued warrants for up to 2,391,305 shares at $0.28. Balance-sheet convertible notes payable, net of discount, were $63,098; the notes’ face amount was $550,000.
- Management stated that more capital may be needed. The filing says financing could be unavailable or unfavorable and that equity financing could dilute shareholders; additional debt could increase debt-service obligations and impose restrictive covenants.
Changes, Outlook and Risks
- The legacy beta-glucan business sale generated a reported $744,752 gain; the amended purchase consideration was stated as $1 million, including $460,000 in cancelled shares, cash payments and waiver of a $150,000 severance claim. The filing reports the sale proceeds and transaction terms in separate sections; investors should reconcile them.
- The LSS acquisition cost $150,000 initially, with up to $200,000 additional consideration contingent on revenue and profit-margin milestones. The filing reports a June net loss for LSS of $48,613.
- Management said it intended to launch two additional products in 2018. It also reported a license for PURPUREX products, with a 13% royalty on gross receipts and scheduled $50,000 payments, subject to the agreement’s terms. No quantified company-wide revenue or earnings guidance was provided.
- The financial statements disclose substantial doubt about the company’s ability to continue as a going concern, citing an accumulated deficit of approximately $10.9 million, negative operating cash flows, and dependence on higher sales and/or additional financing.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses, including inadequate segregation of duties, insufficient accounting/reporting procedures, inadequate computer-system security and disaster recovery, and lack of a written whistleblower policy. Management described remediation plans but reported no material change in internal control during the first half.
- Related-party matters include office space subleased from the CEO, fulfillment services from a business owned by the CEO’s father, and CEO-controlled entities involved in credit-card processing and an off-balance-sheet arrangement involving Blockchain Industries shares. Management said it knew of no legal matters expected to have a material adverse effect.
Investor Verification Priorities
- Confirm issuer identity: the filing names Conversion Labs, Inc., while the request metadata names LifeMD, Inc.
- Reconcile the MD&A cash-flow narrative with the financial statements: the statement reports total operating cash used of $228,176, continuing-operations cash used of $368,664, and financing cash provided of $536,521; portions of the MD&A describe these figures inconsistently.
- Review the convertible-note conversion-price adjustment provisions, warrant dilution, maturity, and the company’s ability to meet 2018 funding needs.
- Assess the going-concern disclosure, negative cash generation, and progress in remediating ineffective disclosure controls.
- Verify the legacy-business sale consideration and gain, LSS milestone payments and performance, and the accounting and disclosure for related-party arrangements.