Business context and reporting period
This is Conversion Labs, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019—not a filing under the name Lifemd, Inc. The company describes an online direct-response marketing business, including Shapiro MD hair-care products, iNR Wellness MD supplements, Scarology, and PDF Simpli software. It acquired a 51% interest in LegalSimpli in 2018.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $2.699 million | $1.606 million |
| Gross profit / margin | $2.021 million / 75% | $1.251 million / 78% |
| Operating expenses | $2.584 million | $1.530 million |
| Operating loss | $563,369 | $279,314 |
| Net income (loss) | $(733,563) | $639,974 |
| Net income (loss) attributable to Conversion Labs | $(663,747) | $627,277 |
| Basic and diluted continuing-operations loss per share | $(0.02) | $(0.01) |
Sales increased about 68%, which management attributed mainly to LegalSimpli and greater investment in Shapiro MD. Marketing expense rose to $1.692 million from $897,164; management cited increased marketing as a principal driver of the higher operating loss. The prior-year net income included $925,738 of income from discontinued operations, including a gain on the sale of the legacy business; therefore, the headline year-over-year earnings comparison is not like-for-like.
Cash flow, liquidity, and debt
- The cash-flow statement reports $546,464 of cash provided by operations, $500,000 used in investing activities for LegalSimpli-related contingent consideration, and $15,702 provided by financing activities. Operating cash flow included a $747,429 increase in accounts payable and accrued expenses and noncash stock compensation and debt-discount amortization.
- The balance sheet reports cash of $242,259 at March 31, 2019, versus $180,093 at year-end. Current assets were $1.671 million and current liabilities $2.274 million, giving reported working capital of negative $602,886. Total liabilities were $2.404 million; total equity was $222,477.
- Notes payable, net, was $429,012. This included a $215,280 convertible-note balance, net of discount, with a May 28, 2019 maturity and 12% annual interest; a $200,000 net balance on a note repaid April 1, 2019; and a $100,000 related-party note. The filing also describes a short-term $100,000 note issued and repaid during the quarter.
- Management states that substantial doubt exists about the company’s ability to continue as a going concern. It says funding depends on higher sales and/or additional capital, and warns that financing may not be available on acceptable terms. The filing’s statements about cash sufficiency through year-end are management estimates, not a guarantee.
Material developments, outlook, and risks
Management expected PDF Simpli to continue growing and achieve profitability in 2019, and anticipated completion of e-commerce infrastructure in Asia in the first half of 2019. The company also launched a third-party e-commerce marketing-services business in early 2019. These are forward-looking expectations; the filing provides no quantified revenue or earnings guidance.
The CFO resigned effective March 31, 2019, and the controller became CFO. The company reported material weaknesses in financial reporting controls, including inadequate segregation of duties, insufficient written accounting policies, and weaknesses in board oversight and system access. Management described remediation efforts, including seeking independent directors and engaging consultants.
Other risks include the need to fund operations, dependence on online advertising and suppliers, competition, product commercialization and integration of acquired businesses, regulatory constraints on product claims, and potential dilution from future equity financing. The company reported no litigation it believed would have a material adverse effect. Related-party arrangements include office space subleased from the CEO and fulfillment services from a business owned by his father.
Important facts for investors to verify
- Reconcile cash: the balance sheet reports $242,259 at quarter-end, while the cash-flow statement reports $333,620; the MD&A’s stated $62,166 cash increase aligns with the balance-sheet amount, not the cash-flow statement’s reported increase.
- Reconcile liquidity disclosures: the MD&A reports working capital of negative $602,886 in its table but later refers to an approximately $668,000 deficit; it also states a current ratio of 0.69, while the balance-sheet figures imply a different ratio.
- Assess the going-concern funding plan, near-term note maturities and repayment, and the company’s reliance on sales growth or further financing.
- Evaluate whether increased marketing spend can improve sales and margins, given the quarter’s lower gross margin and larger operating loss.
- Review the control weaknesses, remediation progress, related-party transactions, and potential dilution from shares, options, and warrants.