Conversion Labs, Inc. — Q1 2020 Form 10-Q
Business context and period. The filing is for the three months ended March 31, 2020. The issuer named in the filing is Conversion Labs, Inc.; the supplied company metadata says LifeMD, Inc., but this filing text does not identify LifeMD as the issuer. Conversion Labs describes a direct-to-consumer healthcare business spanning OTC products, telehealth brands including Rex MD, and PDFSimpli subscription software.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $4.30 million | $2.70 million | Up 59.5%; software revenue rose to $1.35 million from $277,000, and product revenue rose to $2.96 million from $2.42 million. |
| Gross profit / margin | $2.55 million / 59% | $1.99 million / about 74% | Gross profit increased, but reported margin declined as revenue mix shifted and processing costs varied. |
| Operating expenses | $4.29 million | $2.55 million | Up about 68%, led by selling and marketing and general and administrative costs. |
| Operating loss | $(1.74) million | $(563,000) | Loss widened. |
| Net loss | $(2.53) million | $(734,000) | Includes $793,000 of net interest expense, versus $170,000. |
| Operating cash flow | $661,000 provided | $546,000 provided | Positive despite the net loss; working-capital movements and noncash items contributed. |
| Cash at quarter-end | $358,000 | $242,000 | Down from $1.11 million at December 31, 2019. |
| Working capital | $(3.07) million | — | Current liabilities were $4.64 million versus current assets of $1.57 million. |
At March 31, 2020, total liabilities were $6.00 million and stockholders’ deficit was $3.71 million. Current notes payable, net, were $600,000; this included C6 revenue-purchase financing with a gross balance payable of $858,000. The company reported an accumulated deficit of approximately $20.2 million.
Material changes and unusual items
- Revenue growth was substantially supported by LegalSimpli software and the launch and growth of Rex MD. Management reported quarter-over-quarter website traffic growth of 371% for Rex MD and 91% for Shapiro MD, and subscription-customer growth of 1,380% and 96%, respectively.
- In February, the company repaid approximately $1.29 million of 2019 convertible notes and repaid approximately $224,000 owed under an older note. Acceleration of related debt discounts added $500,000 to interest expense.
- The company obtained $750,000 from C6 against future receipts and made $1.64 million of note repayments. Financing cash flow was a net outflow of $942,000.
- Two Q1 stock purchase agreements covered 5.25 million shares for $840,000; the shares had not been issued by quarter-end and were recorded in a $1.16 million liability to issue common stock. The company also reported a liability to issue 7.27 million shares under multiple arrangements.
- Gross inventory fell to $584,000 from $950,000; the inventory reserve increased to $39,000, primarily due to weak marketability of Scarology products.
Outlook, risks, and controls
- Going concern: Management said the company needs higher sales and/or additional capital to meet projected 2020 operating and capital needs. It concluded that substantial doubt exists about the company’s ability to continue as a going concern; the statements include no adjustments for the outcome of that uncertainty.
- COVID-19: Management said there had been no material negative business impact through the filing date, cited relatively minor supply and delivery impacts, and reported strong post-quarter e-commerce and telehealth activity. It also cautioned that the pandemic’s duration and effects remain uncertain. These are management statements, not a quantified forecast.
- Revenue recognition and reporting: The filing says the company lacked a process to properly account for certain product orders when shipment is delayed and could not adequately track Shapiro MD trial sales and related inventory effects. These limitations may affect revenue and returns estimates.
- Internal controls: Management concluded disclosure controls were ineffective, citing material weaknesses including inadequate segregation of duties, insufficient accounting policies, weak IT access controls, and a lack of formal related-party approval and whistleblower policies. No material control changes were reported during the quarter.
- Other risks: The company depended on two finished-goods manufacturers and disclosed related-party arrangements for office space and fulfillment. Management did not identify legal proceedings it believed would materially harm its financial condition.
- Post-quarter events: April and May stock offerings raised approximately $1.25 million in gross proceeds. Alpha and Brio also exercised warrants for shares in May. These transactions occurred after March 31 and add to potential dilution. No specific financial guidance was provided.
Important facts for investors to verify
- Confirm the issuer identity: this document is filed by Conversion Labs, Inc., although the request metadata names LifeMD, Inc.
- Assess the company’s near-term funding needs, access to financing, and ability to address the disclosed going-concern uncertainty.
- Reconcile share issuance obligations, the $1.16 million balance-sheet liability, post-quarter share offerings, and warrant exercises to fully assess dilution.
- Review the revenue-recognition limitations, trial-offer accounting, and effectiveness of remediation for the reported control weaknesses.
- Check the cash-flow comparison: the cash-flow statement reports positive operating cash flow of $546,000 for Q1 2019, while the MD&A narrative describes that prior-period amount as cash used.