Conversion Labs, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; comparative results cover the three and nine months ended September 30, 2017. The supplied filing identifies the registrant as Conversion Labs, Inc., not LifeMD, Inc.; confirm the issuer and filing match the intended company.
Business context
Conversion Labs was an internet-based direct-response marketer. Its commercial-stage products included Shapiro MD hair-care products, iNR Wellness MD supplements, and PDF Simpli software. In 2018 it sold its legacy yeast beta-glucan business and acquired 51% of LegalSimpli Software, LLC.
Financial performance
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Net sales | $2.495 million* | $6.140 million | $2.052 million; $3.584 million |
| Gross profit | $2.056 million | $4.810 million | $1.516 million; $2.515 million |
| Gross margin | 82% | 78% | 74%; 70% |
| Operating loss | $439,000 | $1.315 million | $274,000; $874,000 |
| Loss from continuing operations | $586,000 | $1.521 million | $652,000; $1.028 million |
| Net loss | $586,000 | $595,000 | $652,000; $1.028 million |
*The statements of operations report quarterly sales of $2,495,424, while MD&A reports $2,494,424. The nine-month 2018 net loss includes $926,000 of income from discontinued operations, including a $745,000 gain on the legacy-business sale. Loss attributable to Conversion Labs was $549,000 for the quarter and $529,000 for nine months.
Quarterly sales rose about 22%; nine-month sales increased about 71%. Management attributed growth primarily to greater investment in Shapiro MD. Gross margin improved, which management attributed partly to vendor volume pricing. Operating expenses rose about 39% for the quarter and 81% year to date, driven largely by higher marketing expense; nine-month marketing costs increased approximately $2.4 million.
Cash flow, liquidity and debt
- Cash was $407,000 at September 30, 2018, versus $141,000 at December 31, 2017. Working capital was $864,000 and the current ratio was 2.23.
- For the nine months, operating cash flow was negative $489,000, investing cash flow was positive $241,000, and financing cash flow was positive $514,000. Cash increased $266,000.
- The balance sheet lists no current notes payable or convertible notes payable at September 30. Separately, the filing describes $550,000 of 12% convertible notes issued in May, due May 28, 2019, with a $0.23 initial conversion price subject to adjustment and warrants for 2,391,305 shares. Holders converted approximately $311,000 of notes during the quarter. The balance-sheet presentation and remaining note balance are not clearly reconciled in the supplied text.
- On October 31, 2018, the company entered into a $200,000 loan due April 1, 2019, with a $30,000 one-time fee.
Material changes, outlook and risks
- The company sold its legacy business for stated total consideration of $1.0 million, including cash, cancelled shares, and waiver of a severance claim; it reported a $745,000 gain.
- It acquired 51% of LegalSimpli for an initial $150,000. Up to $200,000 of further payments were originally linked to revenue and margin milestones; the filing says the agreement was modified so payments would be made regardless of whether milestones were achieved.
- Management and the auditor-related disclosures identify substantial doubt about the company’s ability to continue as a going concern. The company had an accumulated deficit of approximately $11.1 million and negative operating cash flow. Management said it needed higher sales and/or additional capital, while also stating that available capital at the then-current burn rate was expected to fund operations through year-end 2018. Future financing was not assured and could dilute shareholders.
- No quantified revenue or earnings guidance is provided. Management described plans to grow online sales and invest in marketing, inventory, and product opportunities.
- Key risks include execution and integration of acquisitions, marketing effectiveness and profitability, access to capital, competition, supply constraints, intellectual-property and regulatory issues, and concentration among payment processors. Three processors represented 56%, 22%, and 20% of accounts receivable.
- Disclosure controls were deemed ineffective as of September 30 due to material weaknesses, including inadequate written accounting procedures, insufficient financial-reporting resources, no formal audit committee financial expert, and no entity-level risk assessment. Management said it intended to address weaknesses as resources permitted.
- Related-party matters include office space leased from the CEO and fulfillment services provided by an entity owned by the CEO’s father. Subsequent to quarter-end, the company also amended certain warrants, recognizing approximately $128,000 of additional stock-based compensation.
Important facts for investors to verify
- Confirm that this Conversion Labs filing is the intended filing for LifeMD and establish the relevant corporate-name or successor relationship.
- Reconcile quarterly sales ($2,495,424 in the statements versus $2,494,424 in MD&A), and confirm the period labels and reported comparisons.
- Review the stated quarterly gross-profit and nine-month continuing-loss figures against MD&A: portions of its narrative give conflicting figures, including an apparent $15 million loss typo.
- Confirm the remaining convertible-note principal, accounting presentation, conversion-price adjustment provisions, and dilution from outstanding warrants and options.
- Assess cash runway and financing needs, including the post-quarter $200,000 loan and its $30,000 fee, and verify the LegalSimpli payment obligation after the agreement modification.
- Track progress in remediating material weaknesses and evaluate related-party arrangements and payment-processor exposure.