Business context and reporting period
This is Conversion Labs, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing describes a direct-to-consumer healthcare and telehealth business, alongside PDFSimpli software. The request metadata names LifeMD, Inc., but the filing itself identifies Conversion Labs, Inc. as the registrant.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $9.09 million | $2.70 million | $13.39 million | $5.40 million |
| Gross profit / margin | $6.90 million / 76% | $2.04 million / 76% | $9.44 million / 71% | $4.06 million / 75% |
| Operating loss | $3.22 million | $0.83 million | $4.96 million | $1.40 million |
| Net loss attributable to Conversion Labs | $3.38 million | $0.82 million | $5.77 million | $1.48 million |
| Operating cash flow | Not separately presented in the provided text | Not separately presented in the provided text | $(1.10) million | $0.64 million |
At June 30, 2020, cash was $336,151, current assets were $2.19 million, current liabilities were $7.16 million, and working capital was approximately negative $4.97 million. Total liabilities were $7.90 million, and stockholders’ deficit was $4.88 million. Current notes payable, net, were $1.07 million. Cash fell by approximately $770,000 over the six months. Investing cash outflow was $677,161 and financing cash inflow was $1.00 million.
Material changes versus the prior comparable period
- Q2 revenue rose 236.9% year over year; product revenue increased 241.0% and software revenue increased 212.4%. For the first half, revenue grew 148.2%, led by product growth of 128.9% and software growth of 284.6%.
- First-half gross margin declined to 71% from 75%, which management attributed to higher cost of sales from using additional suppliers to meet demand. Q2 gross margin remained 76%.
- Operating expenses rose to $10.12 million in Q2 from $2.88 million, mainly due to higher sales and marketing spending and general and administrative costs. First-half operating expenses were $14.40 million versus $5.46 million.
- First-half interest expense increased to $1.02 million from $300,020, including accelerated amortization of debt discounts associated with repayment of prior notes.
- Cash used in operations changed from $640,182 provided in the first half of 2019 to $1.10 million used in the first half of 2020. Accounts payable and accrued expenses increased substantially, which management linked partly to extending vendor payment terms.
Outlook, risks, contingencies, and unusual items
- Going concern: Management estimated an additional $4.0 million would be needed over the next 12 months and stated that the funding uncertainty raises substantial doubt about the company’s ability to continue as a going concern. Funding may depend on sales growth, equity issuance, or debt financing.
- COVID-19 and demand: Management reported no material negative business impact to date, but said online sales and telehealth demand had strengthened. It cited continued uncertainty around the pandemic and its effects.
- Financing and dilution: The company issued $1.0 million of May 2020 convertible notes bearing 12% interest, due six months after issuance, and received approximately $242,000 in PPP loans that may be forgivable subject to requirements. In July, it received $600,000 under a secured convertible note bearing 1.25% monthly interest, with maturity in January 2021. The filing also describes extensive warrant exercises, anti-dilution adjustments, and share issuance liabilities.
- Operational and reporting risks: The company relies on a limited number of manufacturers and service providers; it reported buying all finished goods from two manufacturers. A material weakness in internal control over financial reporting was disclosed, including inadequate segregation of duties, limited written accounting procedures, and weaknesses in board oversight and related-party transaction controls.
- Revenue recognition: The filing states the company lacked a process to properly defer revenue in certain cases when orders were not immediately shipped. Returns and allowances reserves were approximately $351,000 at June 30, compared with $82,000 at year-end 2019.
- Related parties and contingencies: A CEO-affiliated entity provides office space, and a related-party fulfillment provider warehouses and ships products; the company owed that provider $161,823 at quarter-end. Management said it knew of no legal matters expected to have a material adverse effect. No financial guidance was provided.
Most important facts for investors to verify
- Confirm the registrant and reporting entity: this filing is for Conversion Labs, Inc., despite the LifeMD name in the request metadata.
- Assess the $4.0 million estimated 12-month funding need, going-concern warning, and financing obtained after quarter-end, including its security, conversion terms, and repayment obligations.
- Reconcile cash-flow disclosures: the financial statements report $1.10 million of operating cash used for the first half, while parts of MD&A describe operating cash flow inconsistently.
- Review the extent and terms of share and warrant dilution, including outstanding options and warrants and liabilities for shares not yet issued.
- Evaluate the disclosed material weaknesses, revenue cut-off process, supplier concentration, and related-party arrangements.