Lifemd, Inc. annual report, FY2018

Business context and reporting period

This is Conversion Labs, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 29, 2019. It is an annual report, not a standalone fourth-quarter report. The filing identifies the registrant as Conversion Labs, Inc.; this differs from the request metadata naming LifeMD, Inc.

The company shifted to online direct-response marketing after selling its legacy yeast beta-glucan manufacturing business in early 2018. Its brands and products included Shapiro MD hair products, iNR Wellness MD supplements, PDF Simpli software (51% acquired in 2018), and Scarology. The filing attributes approximately 97.8% of Conversion Labs PR sales to Shapiro MD.

Financial performance and position

Sales rose 126%, which management primarily attributed to Shapiro MD and online marketing. Gross margin improved by four percentage points, reflecting a sales mix shift toward higher-margin hair products and software. Operating expenses increased 116%, led by marketing expense, which grew from $1.641 million to $5.080 million. Despite sales growth, operating loss widened and the company remained loss-making.

Cash provided by investing activities was $141 thousand, including $390 thousand of proceeds from the legacy-business sale, offset by acquisition and intangible-asset purchases. Financing activities provided $803 thousand, including proceeds from notes and convertible notes, partly offset by repayments. Working capital was $413 thousand, down from $623 thousand. At year-end, current assets were $1.605 million and current liabilities $1.192 million. Total liabilities were $1.796 million, including $247 thousand of current notes payable and $600 thousand of long-term contingent consideration related to LegalSimpli. Accumulated deficit was approximately $12.1 million.

Material changes, outlook, and risks

• The company sold its legacy manufacturing business to an entity formed by its former CEO. The amended consideration included 2 million company shares, $390 thousand cash, and waiver of a $150 thousand severance claim; the filing reports a $744,752 gain on sale. Discontinued operations contributed $925,739 of income in 2018, including that gain.
• LegalSimpli was acquired for 51% ownership. The purchase accounting included $1.007 million of customer-relationship intangible assets and $600 thousand of contingent consideration. Management expected PDF Simpli to achieve profitability in 2019; this is a stated expectation, not a reported result.
• Management said 2019 operating and capital needs would require increased sales and/or additional financing. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. The company reported negative operating cash flow and a $12.1 million accumulated deficit.
• Debt included $215 thousand net carrying value of convertible notes due May 2019, bearing 12% annual interest, and notes with stated maturities in March and April 2019. The filing also disclosed a related-party note and available borrowing capacity. Verify whether these obligations were repaid, extended, or converted after year-end.
• Internal control over financial reporting was deemed ineffective due to material weaknesses, including inadequate segregation of duties, lack of a functioning audit committee, insufficient written accounting procedures, and weaknesses in system access and disaster recovery. Management described remediation efforts, but the auditor did not attest to internal-control effectiveness.
• Revenue controls warrant attention: the company disclosed it lacked a process to properly recognize certain product orders not shipped immediately and had not adequately implemented reporting for new Shapiro MD trial offers and related inventory impacts. Customer discounts, returns, and rebates were approximately $552 thousand in 2018, versus $300 thousand in 2017.
• Key risks include dependence on paid digital marketing and a concentrated product mix, competition from larger companies, supplier reliance, product-claim regulation by FDA and FTC, financing needs, potential dilution, and dependence on key executives. The filing also disclosed related-party transactions, including CEO-linked services, office arrangements, and fulfillment services.
• Management described plans to build e-commerce infrastructure in Asia, with anticipated completion in the first half of 2019, and launched a third-party marketing-services business in early 2019. No quantified revenue or earnings guidance was provided.

Investor facts to verify

1. Confirm the registrant and security being analyzed: this filing is for Conversion Labs, Inc. (CVLB), not a company identified in the metadata as LifeMD, Inc.
2. Review subsequent filings for actual 2019 cash needs, financing raised, debt maturities and repayment, and progress toward profitability.
3. Assess whether operating cash burn, low year-end cash, and the going-concern warning were resolved.
4. Check remediation of material weaknesses and whether trial-offer, shipment-timing, returns, and inventory accounting controls were improved.
5. Evaluate revenue concentration in Shapiro MD, marketing costs and customer-acquisition economics, and whether PDF Simpli achieved the stated profitability objective.