Business context and reporting period
This is Conversion Labs, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The filing describes a direct-to-consumer healthcare business selling branded products and telehealth offerings, alongside LegalSimpli’s PDF software subscriptions. The request identifies LifeMD, Inc., but the filing names Conversion Labs, Inc.; verify the issuer identity and any subsequent name change.
Financial performance
| Metric | Three months ended September 30, 2020 | Prior-year quarter | Nine months ended September 30, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $11.01 million | $3.13 million | $24.40 million | $8.52 million |
| Gross profit / margin | $8.27 million / 75% | $2.45 million / 78% | $17.72 million / 73% | $6.51 million / 76% |
| Operating loss | $20.53 million | $0.97 million | $25.49 million | $2.37 million |
| Net loss attributable to Conversion Labs | $20.62 million | $0.94 million | $26.40 million | $2.43 million |
| Loss per share attributable to common stockholders | $1.65 | $0.09 | $2.47 | $0.25 |
- Quarterly revenue increased 252%; product sales were $9.43 million and software revenue $1.57 million. Nine-month revenue increased 186%, with product revenue of $20.26 million and software revenue of $4.14 million.
- Quarterly selling and marketing expense was $10.53 million and general and administrative expense $17.59 million. The latter included about $16.3 million of stock-based compensation in the quarter, principally tied to a performance-based share award.
- For the nine months, operating cash flow was negative $5.60 million; investing cash flow was negative $0.73 million and financing cash flow positive $6.14 million. Cash declined $0.19 million to $0.92 million.
- At September 30, current assets were $4.65 million and current liabilities $9.44 million, a working-capital deficit of $4.78 million. Total liabilities were $13.39 million versus assets of $5.43 million; stockholders’ deficit was $7.96 million. Current notes payable, net, were $1.75 million.
Changes, outlook and material items
- Management attributed revenue growth to online demand, marketing expansion and COVID-19-related shifts toward e-commerce and telemedicine. It reported some supply-chain cost pressure; gross margin declined three percentage points in both the quarter and year-to-date comparison.
- The company reported an accumulated deficit of $47.9 million and stated it expected to need an additional $7.2 million over the next 12 months. Management concluded substantial doubt existed about the company’s ability to continue as a going concern.
- After quarter-end, a November 3, 2020 private placement generated approximately $13.2 million in net proceeds. Management said funds would support customer acquisition and general corporate purposes. The filing does not provide formal quantified revenue or earnings guidance; management expressed expectations for continued growth, including into 2021.
- In August, the company issued $3.5 million of Series B preferred units, partly funded by conversion of a $607,500 note. The preferred stock carries a 13% cumulative dividend and redemption features; the balance-sheet put liability was $3.54 million at quarter-end. Conversion, redemption and dividend provisions may affect liquidity and dilution.
- A September consulting-agreement amendment with a company director’s entity provided for up to 2 million shares upon revenue milestones. The company recognized $15.9 million of stock compensation expense; 800,000 shares were issued in October. The filing also reports related-party rent and fulfillment arrangements.
- COVID-19 had not materially harmed operations through the filing date, according to management, but worsening outbreaks, supplier disruption and uncertain consumer and economic conditions could adversely affect results. The company depended on two finished-goods manufacturers and disclosed approximately $2.2 million of implicit purchase commitments.
- Management said disclosure controls were ineffective, citing material weaknesses including inadequate segregation of duties, insufficient written accounting procedures, limited board/audit oversight and inadequate IT access controls. The company also effected a 1-for-5 reverse stock split in October.
Important facts for investors to verify
- Confirm the issuer’s identity and the relationship between the filing’s Conversion Labs name and the LifeMD name in the request.
- Assess cash runway and whether the $13.2 million post-quarter financing addresses the stated $7.2 million funding need and going-concern uncertainty.
- Review the drivers, valuation and dilution effects of the $15.9 million stock-compensation charge, the 2 million-share consulting award, preferred-stock terms and outstanding warrants/options.
- Monitor whether rapid sales growth can produce sustainable margins and operating cash flow, given higher marketing spending and supply costs.
- Check the remediation of disclosed material weaknesses, the status of vendor commitments and the potential for COVID-19 or supplier disruptions.