Business context and reporting period
This is Conversion Labs, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019, filed August 14, 2019. The supplied metadata identifies LifeMD, Inc., but the filing is for Conversion Labs, Inc.; verify the issuer before relying on this summary. The company marketed Shapiro MD hair-care products, iNR Wellness MD supplements, Scarology scar-care products, and PDF Simpli software through online channels.
During the quarter, the company acquired the remaining 21.8% of Conversion Labs PR, bringing its ownership to 100%, and formed CVLB RX, in which it holds 51%. It also announced a telemedicine-focused partnership with GoGoMeds to market prescription products.
Financial performance and position
- Second-quarter revenue: $2.70 million, up 32% from $2.04 million in Q2 2018. Gross profit was $2.04 million, with gross margin of about 76%, compared with $1.50 million and about 74% a year earlier.
- Second-quarter expenses and earnings: Operating expenses rose 37% to $2.88 million, driven largely by higher marketing costs. Operating loss was $833,000 versus $597,000; interest expense was $130,000 versus $51,000. Consolidated net loss was $963,000 versus $649,000; loss attributable to Conversion Labs was $818,000 versus $607,000.
- First-half revenue: $5.40 million, up 48% from $3.64 million. Gross profit was $4.06 million versus $2.75 million; gross margin was about 75% versus 76%. Operating loss widened to $1.40 million from $877,000. Consolidated net loss was $1.70 million, compared with a $9,000 net loss in 2018; the prior period included $926,000 of income from discontinued operations, including a gain on sale. Parent-attributable loss was $1.48 million versus $21,000.
- Cash flow: The cash-flow statement reports $640,000 of cash provided by operating activities for the first half of 2019, versus $239,000 used in 2018. The 2019 inflow was substantially supported by a $1.11 million increase in accounts payable and accrued expenses, along with stock compensation and lower inventory. Investing used $500,000, principally for LegalSimpli-related payments; financing used $55,000. Cash increased $85,000 to $265,000.
- Liquidity and debt: At June 30, current assets were $1.33 million and current liabilities $2.35 million, producing a $1.02 million working-capital deficit and a 0.57 current ratio. Total liabilities were $3.63 million, and stockholders’ deficit was $1.43 million. Notes payable, net, were $270,000; the company disclosed that one convertible note was in technical default after its May 2019 maturity. Accounts payable and accrued expenses were $2.03 million.
Changes, outlook, and risks
- Management attributed sales growth principally to increased hair-care and skincare sales and expanded online sales channels. Marketing expense rose significantly, contributing to larger operating and net losses.
- Management said PDF Simpli was expected to achieve profitability in 2019 and described continued growth, international expansion, new products, and third-party marketing services as opportunities. The filing provides no quantified revenue or earnings guidance.
- The company stated it had sufficient capital at its current burn rate through the rest of 2019, but also said it would need higher sales and/or additional capital. Management and the auditor-related disclosures identify substantial doubt about the company’s ability to continue as a going concern; future financing is not assured and could dilute shareholders.
- The filing reports a $14.9 million accumulated deficit. It also describes processes that were not adequately implemented to account for trial-offer revenue and related inventory, and says the company could not yet estimate the historical effect. This creates a financial reporting and revenue-recognition risk.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to material weaknesses, including inadequate segregation of duties, insufficient accounting policies, weak IT access and recovery controls, and gaps in governance and related-party oversight. Management described remediation efforts.
- Related-party matters include the purchase of the remaining Conversion Labs PR interest from entities owned by the CEO and CTO, a CEO-owned entity’s stock compensation, office space subleased from the CEO, and fulfillment services provided by a company related to the CEO.
Important facts for investors to verify
- Confirm the issuer identity: this filing names Conversion Labs, Inc., not LifeMD, Inc.
- Review the technical default, maturity status, and repayment or waiver terms of the convertible note.
- Reconcile reported positive operating cash flow with management’s statements about negative operating cash flows and assess how much cash generation depends on unpaid liabilities.
- Verify the $1.15 million balance-sheet liability to issue shares against the disclosed agreement to issue 5 million shares valued at $900,000 for the remaining Conversion Labs PR interest.
- Assess progress on control remediation and the effect of the acknowledged trial-offer revenue and inventory accounting limitations.
- Evaluate near-term funding needs, related-party transactions, and whether growth and the stated PDF Simpli profitability expectation are being achieved.