Conversion Labs, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, compared with 2018. This is an annual filing, not a standalone fourth-quarter report. The filing names Conversion Labs, Inc.; it does not identify the registrant as LifeMD, Inc.
Business context
Conversion Labs described itself as a direct-to-consumer healthcare and telemedicine company, with consumer health brands including Shapiro MD, iNR Wellness MD and Rex MD, and PDFSimpli software through its 51%-owned LegalSimpli subsidiary. In 2019 it formed a majority-owned prescription-drug venture with GoGoMeds and acquired the remaining interest in Conversion Labs PR. The company discontinued its Conversion Labs Media service business during 2019.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $12.47 million | $8.32 million |
| Gross profit / margin | $9.20 million / 73.8% | $6.33 million / 76.0% |
| Operating loss | $2.89 million | $2.06 million |
| Net loss | $3.53 million | $1.36 million |
| Net loss attributable to Conversion Labs | $3.14 million | $1.24 million |
| Operating cash flow | $251,408 provided | $905,519 used |
- Revenue grew 49.8%. Product revenue was $9.92 million; software revenue increased to $2.54 million from $278,000, largely reflecting LegalSimpli growth and a full year of its results.
- Selling and marketing expense rose to $8.17 million from $5.08 million. Total operating expenses increased 44%, outpacing gross-profit growth; gross margin declined about 2.2 percentage points.
- Interest expense was $761,150, versus $354,388 in 2018. The 2018 net loss included $925,738 from discontinued operations, including the gain on sale of the legacy business.
- At year-end, cash was $1.11 million, current assets $2.75 million and current liabilities $3.98 million, leaving negative working capital of $1.23 million. Total liabilities were $4.58 million and stockholders’ deficit was $1.13 million.
- Net notes payable were $814,734, presented as current. The company reported $1.29 million principal of August 2019 convertible notes, with a stated maturity of August 2020, plus an outstanding matured 2018 note balance of $187,308. Debt discounts and issuance costs reduced the carrying value.
- Cash increased by $926,531. Financing activities provided $775,123, including convertible-note proceeds; investing activities used $100,000. Operating cash flow benefited substantially from a $2.18 million increase in accounts payable and accrued expenses.
Changes, outlook and risks
- Management said 2020 operations would require higher sales and/or additional financing. It considered equity issuance, other securities or debt financing, but gave no quantified revenue, earnings or cash-flow guidance and offered no assurance that funding would be available on acceptable terms.
- The auditor and management reported substantial doubt about the company’s ability to continue as a going concern. The company had an accumulated deficit of approximately $16.8 million and said its available cash and projected 2020 needs required revenue growth or new capital.
- Key risks include cash shortfalls and financing dependence; heavy reliance on paid digital marketing and third-party platforms; competition; telemedicine, prescribing and corporate-practice-of-medicine regulation; privacy and cybersecurity; product claims and liability; and reliance on third-party manufacturers and fulfillment providers.
- Internal control over financial reporting was assessed as ineffective due to material weaknesses, including inadequate segregation of duties, limited accounting policies and procedures, insufficient IT access controls, and lack of a functioning audit committee. Management outlined remediation plans; auditor attestation of internal controls was not provided.
- The filing disclosed a revenue-recognition process limitation: the company said it lacked a process to properly record certain product orders when shipment was delayed, and could not yet estimate the accounting impact of new Shapiro MD trial offers. Product discounts, returns and rebates were approximately $1.29 million in 2019.
- Related-party arrangements included CEO-linked office rent and fulfillment services. Fulfillment services through a business owned by a person related to the CEO totaled approximately $1.09 million in 2019, versus $97,477 in 2018; the filing also reports $374,000 of credit-card processing services associated with JLS Ventures.
- Subsequent events included authorization of 13% cumulative preferred stock, with none outstanding as of March 30, 2020, and February 2020 repayments to two noteholders accompanied by warrant repricing and increased warrant share counts.
Most important facts for investors to verify
- Near-term liquidity, debt maturities and the company’s ability to raise capital; verify the effect of the February 2020 note repayments on cash and remaining debt.
- Whether operating cash generation is sustainable: the 2019 cash-flow statement shows $251,408 provided, while the MD&A prose cites approximately $244,983; confirm the correct figure and reconciliation.
- Revenue quality and accounting controls, especially delayed shipments, trial offers, returns and the significant increase in discounts and allowances.
- Potential dilution: the filing reports 44.0 million options and warrants excluded from diluted loss per share as anti-dilutive, alongside convertible debt and warrant amendments.
- Governance and related-party oversight, including material weaknesses, no audit committee at the reporting date, and significant related-party fulfillment and rent arrangements.