LifeMD(LFMD) - 2019 Q4 - Annual Report

PART I Business The company operates as a direct-to-consumer telemedicine provider with a portfolio of wellness and software brands - The company is a direct response healthcare company focusing on telemedicine to provide consumers with OTC products and prescription medications[21] - In June 2018, the company acquired a 51% stake in LegalSimpli Software, LLC, a SaaS application for PDF document management, adding search engine optimization and marketing expertise[17] - A joint venture was formed in June 2019 with GoGoMeds.com through the subsidiary Conversion Labs Rx, LLC, enabling the online sale and shipment of prescription drugs across all 50 states[19] Brand Portfolio Overview | Brand | Market Segment | Description | | :--- | :--- | :--- | | Shapiro MD | Hair Loss | Offers OTC and prescription products for male and female hair loss. Received FDA 510(k) clearance for a Laser Hair Restoration Device in March 2020 | | iNR Wellness MD | Immune Health | A supplement for immune and gut support | | RexMD | Men's Health | A telemedicine brand offering treatment plans for erectile dysfunction, with plans to expand into other men's health areas | | SOSRx | Disaster Preparedness | A new telemedicine brand (launched Q1 2020) offering prescription medications and emergency supplies for disaster situations | | PDFSimpli | Software | A majority-owned SaaS product for converting, editing, and signing PDF documents, with over 39,000 active subscriptions as of March 1, 2020 | - The company's growth strategy focuses on increasing brand awareness via telehealth, expanding into traditional marketing channels and international markets, investing in new products and services, and driving operational excellence through price optimization and supply chain investments[45][47][50] - As of December 31, 2019, the company had 26 full-time employees across offices in California and Puerto Rico[69][70] Risk Factors The company faces significant going concern risks, along with operational, regulatory, and financial vulnerabilities - The independent auditor's report includes a going concern warning, citing substantial doubt about the company's ability to continue due to its history of generating losses and not yet achieving positive cash flows[72][73] - The business is heavily reliant on the expertise and continued services of its President and CEO, Justin Schreiber, the loss of whom could adversely affect business objectives[77] - Significant regulatory risks exist, including compliance with laws governing telehealth, the corporate practice of medicine, and federal/state privacy regulations like HIPAA, which carry substantial penalties for violations[86][87][114] - The company's direct-to-consumer business is highly dependent on the effectiveness and cost of marketing through third-party platforms like Google and Facebook[130][139] - The company's common stock may be subject to "penny stock" rules, which could adversely affect market price and liquidity by increasing transaction costs and deterring broker-dealers[144][146] Unresolved Staff Comments The company reports no unresolved staff comments - Not Applicable[147] Properties The company leases office spaces in California and Puerto Rico and utilizes a virtual executive office in New York Leased Properties | Location | Type | Lease Term | Details | | :--- | :--- | :--- | :--- | | New York, NY | Principal Executive Office | Month-to-month | Virtual office with conference space access | | Huntington Beach, CA | Office Space | 36-month lease (ending Feb 2021) | 1,239 sq. ft. office for marketing staff | | Puerto Rico | Office Space | Month-to-month | Approx. 1,000 sq. ft. office | Legal Proceedings The company reports no material legal proceedings that would adversely affect its business - The company reports no material legal proceedings[151] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[152] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the OTCQB market, and no cash dividends are anticipated - The company's common stock is quoted on the OTC Markets-OTCQB under the symbol "CVLB"[154] - As of March 30, 2020, the company had 54,142,940 shares of common stock issued and outstanding[154] - The company has never paid cash dividends on its common stock and does not anticipate doing so in the foreseeable future[159] Selected Financial Data This section is not applicable as the company is a smaller reporting company - Not applicable[163] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 49.8% in 2019, but operating and net losses widened due to increased marketing expenses Financial Performance Comparison (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenues, net | $12,468,578 | $8,324,129 | +49.8% | | Product revenues, net | $9,919,506 | $8,044,416 | +23.3% | | Software revenues, net | $2,539,129 | $277,713 | +814.3% | | Gross Profit | $9,197,982 | $6,327,907 | +45.3% | | Gross Margin | 73.8% | 76.0% | -2.2 p.p. | | Total Operating Expenses | $12,087,590 | $8,384,047 | +44.2% | | Loss from Operations | ($2,889,608) | ($2,056,140) | +40.5% | | Net Loss | ($3,528,258) | ($1,360,090) | +159.4% | | Net Loss Attributable to Conversion Labs, Inc. | ($3,137,203) | ($1,240,828) | +152.8% | - The significant increase in revenue was primarily due to a full year of software revenues from the LegalSimpli acquisition, which accounted for 20% of total revenues in 2019 compared to 3% in 2018[176] - Operating expenses rose by $3.8 million (45%), largely due to a $3.1 million increase in selling and marketing expenses to drive revenue growth[179] Working Capital and Cash Flow Summary | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Working Capital | ($1,228,340) | $412,673 | | Net cash provided by (used in) operating activities | $251,408 | ($905,519) | | Net cash provided by financing activities | $775,123 | $802,787 | - Management states that based on the company's cash balance and projected needs, it will need to increase sales revenue and/or raise additional capital, which raises substantial doubt about its ability to continue as a going concern[189] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company is a smaller reporting company - Not applicable[204] Financial Statements and Supplementary Data This section presents the consolidated financial statements, which include a going concern warning from the auditor - The report from the independent registered public accounting firm, BF Borgers CPA PC, explicitly states that the company's significant operating losses raise substantial doubt about its ability to continue as a going concern[317] Key Balance Sheet Items (as of Dec 31) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Cash | $1,106,624 | $180,093 | | Total Current Assets | $2,747,102 | $1,605,070 | | Total Assets | $3,446,179 | $2,616,135 | | Total Current Liabilities | $3,975,442 | $1,192,397 | | Total Liabilities | $4,575,420 | $1,796,397 | | Total Stockholders' (Deficit) | ($1,129,241) | $819,738 | - In 2018, the company sold its legacy beta glucan business for $1,000,000, resulting in a gain on sale of $744,752, which is reported under discontinued operations[364][367] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants - None[206] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control - Management concluded that the company's disclosure controls and procedures were not effective as of the end of the period[208] - Material weaknesses identified include: lack of a functioning audit committee, inadequate segregation of duties, insufficient written policies and procedures for accounting and financial reporting, and inadequate IT security[213] - Management has a plan to remediate the material weaknesses, which includes continuing to search for qualified independent directors and redesigning control procedures[213] Other Information The company reports no other information - None[217] PART III Directors, Executive Officers and Corporate Governance The company lacks formal board committees and a Code of Ethics, with key governance functions handled by the full board - The board of directors consists of eight members, with Justin Schreiber serving as Chairman, President, and CEO[220][221] - The company has not established an audit, compensation, or nominating and corporate governance committee, with these functions handled by the full board of directors[239] - The board has determined that directors Bruzzese, DiTrolio, Walters, Velge, and Strawn are independent[238] - The company does not currently have a Code of Ethics but plans to adopt one in the near future[236] Executive Compensation Executive compensation is heavily weighted towards stock awards, with minimal cash salaries for top executives 2019 Summary Compensation for Named Executive Officers | Name and Principal Position | Salary ($) | Stock Awards ($) | Option Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Justin Schreiber (President, CEO) | - | 824,000 | - | 52,000 | 876,000 | | Stefan Galluppi (COO, CTO) | 111,000 | 450,000 | - | - | 561,000 | | Juan Manuel Piñerio Dagnery (CFO) | 84,000 | - | 73,415 | - | 157,415 | | Sean Fitzpatrick (President of LegalSimpli) | 119,265 | - | 571,875 | - | 691,140 | - CEO Justin Schreiber's compensation for his role is primarily through restricted stock awards rather than cash salary, with "All Other Compensation" of $52,000 representing rent payments from the company for office space[249][256] - Independent directors received no compensation for their services during the fiscal year ended December 31, 2019[268] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Company insiders and management collectively hold a significant portion of the common stock, with the CEO being the largest shareholder Security Ownership of Major Holders (as of March 25, 2020) | Beneficial Owner | Beneficial Ownership | Percent | | :--- | :--- | :--- | | Justin Schreiber (CEO) | 9,539,099 | 17.62% | | Mark McLaughlin (Former CEO) | 4,299,960 | 7.94% | | Stefan Galluppi (COO) | 3,650,000 | 6.74% | | Directors & Executive Officers as a Group (9 persons) | 18,517,108 | 34.20% | - Ownership percentages are based on 54,142,940 shares of common stock outstanding as of the determination date[271] Certain Relationships and Related Transactions, and Director Independence The company engages in multiple related-party transactions, primarily involving entities controlled by the CEO - The company's subsidiary, CVLB PR, subleases office space in Puerto Rico from CEO Justin Schreiber, paying $52,000 in rent for 2019[288][286] - The company uses BV Global Fulfillment, owned by a relative of the CEO, for warehousing and fulfillment services, with payments amounting to $1,085,114 in 2019[293][286] - JLS Ventures, LLC, an entity controlled by CEO Justin Schreiber, has service agreements with the company for which it receives compensation in the form of common stock[289][290] Principal Accountant Fees and Services Total fees billed by the independent auditor, BF Borgers CPA PC, were consistent in 2019 and 2018 Accountant Fees (BF Borgers CPA PC) | Service | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $92,000 | $87,000 | | Tax Fees | $1,400 | $1,400 | | All Other Fees | - | $5,400 | | Total Fees | $93,400 | $93,800 | - All services provided by the independent registered public accounting firm were pre-approved by the board of directors[296] PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the report, including corporate documents and material contracts - The exhibits include the company's Certificate of Incorporation, Bylaws, forms of convertible notes and warrants, various employment and consulting agreements, and CEO/CFO certifications[300]