UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Commission
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LIFEMD, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
LIFEMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Product deposit | ||||||||
| Inventory, net | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Non-current Assets | ||||||||
| Equipment, net | - | |||||||
| Right of use asset, net | ||||||||
| Capitalized software, net | ||||||||
| Intangible assets, net | ||||||||
| Total Non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Notes payable, net | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Long-term debt, net | - | |||||||
| Lease liability | ||||||||
| Contingent consideration on purchase of WorkSimpli | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Mezzanine Equity | ||||||||
| Preferred Stock, $ par value; shares authorized Series B Preferred
Stock, $ par value; shares authorized, and shares issued and outstanding, liquidation value approximately,
$ | ||||||||
| Stockholders’ Deficit | ||||||||
| Series A Preferred Stock, $ par value; shares authorized, shares issued and outstanding as of September 30, 2021 and December 31, 2020 | - | - | ||||||
| Common stock, $ par value; shares authorized, and shares issued, and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, and shares, at cost | ( | ) | ( | ) | ||||
| Total LifeMD, Inc. Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Telehealth revenue, net | $ | $ | $ | $ | ||||||||||||
| WorkSimpli revenue, net | ||||||||||||||||
| Total revenues, net | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of telehealth revenue | ||||||||||||||||
| Cost of WorkSimpli revenue | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Expenses | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Customer service expenses | ||||||||||||||||
| Development costs | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision (benefit) | - | - | - | - | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to LifeMD, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed distribution to holders of common and Series B Preferred stock | - | ( | ) | - | ( | ) | ||||||||||
| Net loss attributable to LifeMD, Inc. common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic loss per share attributable to LifeMD, Inc. from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted loss per share attributable to LifeMD, Inc. from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
| LifeMD, Inc. | ||||||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Noncontrolling | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Stock | Total | Interest | Total | |||||||||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Stock compensation | - | |||||||||||||||||||||||||||||||
| Cashless exercise of warrants | ( |
) | ||||||||||||||||||||||||||||||
| Deemed dividend from down-round provision in common stock shares yet to be issued | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Deemed dividend from warrant price adjustments | - | ( |
) | |||||||||||||||||||||||||||||
| Distributions to non-controlling interest | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
Balance, March 31, 2020 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Stock compensation | - | |||||||||||||||||||||||||||||||
| Cashless exercise of warrants | ( |
) | ||||||||||||||||||||||||||||||
| Purchase of common stock | ||||||||||||||||||||||||||||||||
| Shares issued for share liability | ||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | - | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Deemed distribution from down-round provision in common stock shares yet to be issued | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
Balance, June 30, 2020 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock compensation | - | |||||||||||||||||||||||||||||||
| Sale of warrants | - | |||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Cashless exercise of stock options | ( |
) | - | |||||||||||||||||||||||||||||
| Shares issued for share liability (proceeds received for prior period) | - | |||||||||||||||||||||||||||||||
| Deemed dividend from warrant price adjustments | - | ( |
) | - | ||||||||||||||||||||||||||||
| Deemed dividend from warrants issued and BCF with Series B Preferred Stock | - | ( |
) | |||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
Balance, September 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
| LifeMD, Inc. | ||||||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Noncontrolling | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Stock | Total | Interest | Total | |||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Sale of stock in private placement, net | ||||||||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Purchase of additional membership interest of WorkSimpli | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Adjustment of noncontrolling Interest for additional investment | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||
| Warrants issued for debt instruments | - | |||||||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||
| Sale of common stock under ATM | ||||||||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2021 | 26,862,975 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of capitalized software | ||||||||
| Amortization of intangibles | ||||||||
| Write-down of inventory | - | |||||||
| Depreciation of fixed assets | - | |||||||
| Acceleration of debt discount | - | |||||||
| Bad debt expense | - | |||||||
| Sales return and allowances | - | |||||||
| Inventory reserves | - | |||||||
| Gain on forgiveness of debt | ( | ) | - | |||||
| Operating lease payments | ||||||||
| Liability to issue shares for services | - | |||||||
| Stock issued for services | - | |||||||
| Stock compensation expense | ||||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Product deposit | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Change in operating lease liability | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for capitalized software costs | ( | ) | ( | ) | ||||
| Purchase of equipment | ( | ) | - | |||||
| Purchase of intangible assets | ( | ) | - | |||||
| Payment to seller for contingent consideration | - | ( | ) | |||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash proceeds from private placement offering, net | - | |||||||
| Cash proceeds from Series B Preferred Stock | - | |||||||
| Proceeds from convertible notes payable | - | |||||||
| Proceeds from issuance of debt instruments | - | |||||||
| Cash proceeds from sale of common stock under ATM | ||||||||
| Cash proceeds from exercise of warrants | ||||||||
| Cash proceeds from exercise of options | ||||||||
| Cash proceeds from sale of warrants | - | |||||||
| Purchase of membership interest of WorkSimpli | ( | ) | - | |||||
| Distributions to non-controlling interest | ( | ) | ( | ) | ||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Debt issuance costs | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Cash paid for interest | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Cashless exercise of options | $ | $ | ||||||
| Cashless exercise of warrants | $ | $ | ||||||
| Principal of Paycheck Protection Program loans forgiven | $ | $ | ||||||
| Additional purchase of membership interest in WorkSimpli issued in performance options | $ | $ | ||||||
| Deemed dividend from warrant price adjustments | $ | $ | ||||||
| Deemed distribution from warrants issued with Series B Preferred Stock | $ | $ | ||||||
| Warrants issued for debt instruments | $ | $ | ||||||
| Stock yet to be issued for capitalized costs | $ | $ | ||||||
| Deemed distribution from down-round provision on unissued shares | $ | $ | ||||||
| Liability to issue common stock | $ | $ | ||||||
| Debt issuance costs for liability to issue shares | $ | $ | ||||||
| Conversion of convertible notes payable and interest for Series B Preferred Stock | $ | $ | ||||||
| Stock issued for capitalized costs | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
LIFEMD, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Corporate History
LifeMD, Inc. was formed in the State of Delaware on May 24, 1994, under its prior name, Immudyne, Inc. The Company changed its name to Conversion Labs, Inc. on June 22, 2018 and then subsequently, on February 22, 2021, changed its name to LifeMD, Inc. Effective February 22, 2021, the trading symbol for the Company’s common stock, par value $ per share on The Nasdaq Stock Market LLC changed from “CVLB” to “LFMD”.
On
April 1, 2016, the original operating agreement of Immudyne PR LLC (“Immudyne PR”), a joint venture to market the Company’s
skincare products, was amended and restated and the Company increased its ownership and voting interest in Immudyne PR to
In
June 2018, the Company closed the strategic acquisition of
Nature of Business
The Company is a direct-to-patient telehealth technology company that provides a smarter, cost-effective and convenient way for a provider’s patients to access healthcare. The Company believes that the traditional model of visiting a doctor’s office, receiving a physical prescription, visiting a local pharmacy, and returning to see a doctor for follow up care or prescription refills is inefficient, costly to patients, and discourages many patients from seeking much needed medical care. The U.S. healthcare system is undergoing a paradigm shift, thanks to new technologies and the emergence of direct-to-patient healthcare. Direct-to-patient telehealth technology companies, like the Company, connect consumers to licensed healthcare professionals for care across numerous indications, including concierge care, men’s sexual health and dermatology, among others.
The Company’s telehealth platform helps patients access their licensed providers for diagnoses, virtual care, and prescription medications, often delivered on a recurring basis. In addition to its telehealth prescription offerings, the Company sells over-the-counter products. All products are available on a subscription or membership basis, where a patient can subscribe to receive regular shipments of prescribed medications or products. This creates convenience and often discounted pricing opportunities for patients and recurring revenue streams for the Company.
The Company believes that brand innovation, customer acquisition and service excellence form the heart of its business. As is exemplified with its first brand, Shapiro MD, it has built a full line of proprietary over-the-counter (“OTC”) products for male and female hair loss, FDA approved OTC minoxidil, an FDA-cleared medical device, and now a personalized telehealth platform offering that gives consumers access to virtual medical treatment from their providers and, when appropriate, a full line of oral and topical prescription medications for hair loss. The Company’s men’s brand, Rex MD, currently offers access to provider-based treatment for erectile dysfunction, as well as treatment for other common men’s health issues including premature ejaculation and hair loss. In the first quarter of 2021, the Company launched its newest brand, Nava MD, a tele-dermatology and skincare brand for women. The Company has built a platform that allows it to efficiently launch telehealth and wellness product lines wherever it determines there is a market need.
Business and Subsidiary History
In June 2018, Conversion Labs closed the strategic acquisition of 51% of WorkSimpli, which operates a software as a service (SaaS) application for converting, editing, signing and sharing PDF documents called PDFSimpli. In addition to WorkSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company. The Company subsequently increased its ownership stake in WorkSimpli to its current 85.6%.
| 8 |
In early 2019, the Company had launched a service-based business under the name Conversion Labs Media LLC (“CVLB Media”), a Puerto Rico limited liability company, which was to be used to run e-commerce marketing campaigns for other online businesses. However, this business initiative was terminated in early 2019 in order to focus on its core business as well as the expansion of our telehealth opportunities. In June 2019, a strategic joint venture with GoGoMeds.com (“GoGoMeds”) was formed in order to help facilitate the launch of our telehealth business. GoGoMeds is a nationwide pharmacy licensed to dispense prescription medications directly to consumers in all 50 states and the District of Columbia. However, on August 7, 2020, the Company terminated its Strategic Partnership Agreement with GoGoMeds. The joint venture with GoGoMeds had not initiated activities, and its termination did not have an impact on the Company’s operations.
Conversion Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company, and Conversion Labs Asia Limited (“Conversion Labs Asia”), a Hong Kong company, had no activity during both the nine months ended September 30, 2021 and the year ended December 31, 2020. CVLB Rx was dissolved during the year ended December 31, 2020.
Unless otherwise indicated, the terms “LifeMD,” “Company,” “we,” “us,” and “our” refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), our wholly subsidiary LifeMD PR, LLC (formerly Immudyne PR LLC, and “Conversion Labs PR”), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”), LifeMD Southern Patient Medical Care (“LifeMD PC”), the Company’s professional physician corporation and our majority-owned subsidiary, WorkSimpli. The Company facilitates the delivery of telehealth services to LifeMD PC’s patients via the upcoming LifeMD primary care platform and holds a variable interest in LifeMD PC. Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Partnerships
On July 14, 2021, the Company entered into an agreement to engage Axle Health Inc. (“Axle Health”) to assist the Company in establishing a platform to enable patients of the Company’s medical practice clients (“MP Clients”) to schedule certain nursing services, including blood draws, injections, and other basic healthcare services, and to furnish operational support services to medical practices using the platform. In connection therewith, Axle Health granted the Company a revocable, nontransferable, non-exclusive right and license, with the right to grant sublicenses, to install and use the software and other technology relating to the platform developed, owned, or with the right to grant sublicenses to install and use the software and/or other technology developed, owned, or licensed by Axle Health, including the platform, to facilitate the scheduling and provision of certain nursing services to patients of MP Clients.
On
August 4, 2021, the Company entered into a partnership agreement with Particle Health, a state-of-the-art, digital health company with
a HIPAA-compliant technology platform that converts electronic medical records data into a user-friendly Fast Healthcare Interoperability
Resource (“FHIR”) format.
On August 30, 2021, the Company signed a letter of intent with Prescryptive Health (“Prescryptive”), a healthcare technology company empowering consumers by improving the way healthcare is delivered. The partnership is expected to accelerate growth for both companies by combining LifeMD’s expanding direct-to-patient telehealth brands and upcoming LifeMD primary care platform with Prescryptive’s best-in-class digital pharmacy fulfillment and e-prescribing technology platform.
Reverse Stock Split
On
October 9, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Delaware
(the “Amendment”) in order to effectuate a
| 9 |
Liquidity
The Company has funded operations in the past through the sales of its products, issuance of common and preferred stock and through loans and advances. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes and obtaining funding from third-party sources or the issuance of additional shares of common stock.
On
February 11, 2021, the Company consummated the closing of a private placement offering (the “February 2021 Offering”), whereby
pursuant to the securities purchase agreement (the “February 2021 Purchase Agreement”) entered into by the Company and certain
accredited investors on February 11, 2021 the Investors purchased shares of the Company’s common stock par value $
per share at a purchase price of $ per share for aggregate gross proceeds of approximately $
On
June 1, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a financial institution
(the “Purchaser”), pursuant to which the Company sold and issued: (i) a senior secured redeemable debenture (the “Debenture”)
in the aggregate principal amount of $
On
June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, or “Securities Act”,
which was declared effective on June 22, 2021 (the “2021 Shelf”). Under the 2021 Shelf at the time of effectiveness, the
Company had the ability to raise up to $
In
September 2021, the Company entered into two underwriting agreements (the “Preferred Underwriting Agreement” and “the
Common Underwriting Agreement”) with B. Riley Securities, Inc. (“B.Riley”). Pursuant to the Preferred Underwriting
Agreement, the Company agreed to sell shares of its
The
Company will pay cumulative distributions on the Series A Preferred Stock, from the date of original issuance, in the amount of $
| 10 |
Liquidity Evaluation
As
of September 30, 2021, the Company has an accumulated deficit approximating $
The
Company has a current cash balance of approximately $
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete audited financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2020, included in our 2020 Annual Report on Form 10-K filed with the SEC. The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or for any future period.
Principles of Consolidation
The Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CLPR, its
majority owned subsidiary, WorkSimpli, in addition to LifeMD PC, the Company’s professional physician corporation. The non-controlling
interest in WorkSimpli represents the
All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of September 30, 2021 and December 31, 2020, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions, and at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.
| 11 |
Use of Estimates
The Company prepares its unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates required to be made by management include the determination of reserves for accounts receivable, returns and allowances, the valuation of inventory, stockholders’ equity-based transactions, estimates to cash flow projections and going concern assessment. Actual results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to conform the prior year’s data to the current presentation. These reclassifications have no
effect on previously reported operating loss, stockholders’ deficit or cash flows. Given the increase in the Company’s software
business and to appropriately conform the Company’s presentation of operating results to industry and accounting standards, the
Company has changed their categories for reporting operations. As a result, the Company has made reclassifications to the prior year
presentation in order to conform it to the current periods’ presentation. These reclassifications include: (1) $
Revenue Recognition
The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:
| 1. | Identify the contract |
| 2. | Identify performance obligations |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price |
| 5. | Recognize revenue |
For the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site, in these limited cases, recognition of revenue should be deferred until that time, however the Company does not have a process to properly record the recognition of revenue if orders are not immediately shipped, and deems the impact to be immaterial. In all cases, delivery is considered to have occurred when title and risk of loss have transferred to the customer, which is usually commensurate upon shipment of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order, recording the revenue at the time it fulfills the shipment obligation to the customer.
For
its product-based contracts with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer
rebates and other adjustments for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The
Company’s discounts and customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales
for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical
transaction detail, and accounts for such provisions, as contra revenue, during the same period in which the related revenues are earned.
The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to
record estimates for returns and allowances to be applied to the entire product-based portfolio population. Customer discounts, returns
and rebates on product revenues approximated $
| 12 |
The
Company, through its majority-owned subsidiary WorkSimpli, offers a subscription-based service providing a suite of software applications
to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any
type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with
customers, the Company offers an initial 14-day trial period which is billed at $, followed by a monthly subscription, or a yearly
subscription to the Company’s software suite dependent on the subscriber’s enrollment selection. The Company has estimated
that there is one product and one performance obligation that is delivered over time, as the Company allows the subscriber to access
the suite of services for the time period of the subscription purchased. The Company allows the customer to cancel at any point during
the billing cycle, in which case the customers subscription will not be renewed for the following month or year depending on the original
subscription. The Company records the revenue over the customers’ subscription period for monthly and yearly subscribers or at
the end of the initial 14-day service period for customers who purchased the initial subscription, as the circumstances dictate. The
Company offers a discount for the monthly or yearly subscriptions being purchased, which is deducted at the time of payment at the initiation
of the contract term, therefore the Contract price is fixed and determinable at the contract initiation. Monthly and annual subscriptions
for the service are recorded net of the Company’s known discount rates. As of September 30, 2021 and December 31, 2020, the Company
has accrued contract liabilities, as deferred revenue, of approximately $
For the three and nine months ended September 30, 2021 and 2020, the Company had the following disaggregated revenue:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2021 | % | 2020 | % | 2021 | % | 2020 | % | |||||||||||||||||||||||||
| Telehealth revenue | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| WorkSimpli revenue | % | % | % | % | ||||||||||||||||||||||||||||
| Total net revenue | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
Deferred Revenues
The Company records deferred revenues when cash payments are received or due in advance of its performance. The Company’s deferred revenues relate to payments received for the in-process monthly or yearly contracts with customers and a portion attributable to the yet to be recognized initial 14-day trial period collections.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Beginning of period | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Revenue recognized | ||||||||||||||||
| End of period | $ | $ | $ | $ | ||||||||||||
Accounts Receivable
Accounts
receivable principally consist of amounts due from third-party merchant processors, who process our subscription revenues; the merchant
accounts balance receivable represents the charges processed by the merchants that have not yet been deposited with the Company. The
unsettled merchant receivable amount normally represents processed sale transactions from the final one to three days of the month, with
collections being made by the Company within the first week of the following month. Management determines the need, if any, for an allowance
for future credits to be granted to customers, by regularly evaluating aggregate customer refund activity, coupled with the consideration
and current economic conditions in its evaluation of an allowance for future refunds and chargebacks. As of September 30, 2021 and December
31, 2020, the Company had an allowance for bad debt, attributable to the single agent relationship amounting to approximately $
Inventory
As of September 30, 2021 and December 31, 2020, inventory primarily consisted of finished goods related to the Company’s OTC products included in the telehealth revenue section of the table above. Inventory is maintained at the Company’s third-party warehouse location in Wyoming and at the Amazon fulfillment center. The Company also maintains inventory at a related-party warehouse in Pennsylvania.
| 13 |
Inventory
is valued at the lower of cost or net realizable value with cost determined on a first-in, first-out (“FIFO”) basis. Management
compares the cost of inventory with the net realizable value and an allowance is made for writing down inventory to net realizable, if
lower. The Company recorded an inventory reserve in the amount of $
As of September 30, 2021 and December 31, 2020, the Company’s inventory consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Finished goods - products | $ | |||||||
| Raw materials and packaging components | ||||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Total Inventory - net | $ | $ | ||||||
Product Deposit
Many
of our OTC product vendors require deposits when a purchase order is placed for goods or fulfillment services. These deposits typically
range from
Capitalized Software Costs
The
Company capitalizes certain internal payroll costs and third-party costs related to internally developed software and amortizes these
costs using the straight-line method over the estimated useful life of the software, generally three years. The Company does not sell
internally developed software other than through the use of subscription service. Certain development costs not meeting the criteria
for capitalization, in accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software,
are expensed as incurred. As of September 30, 2021 and December 31, 2020, the Company capitalized $
Intangible Assets
Intangible
assets are comprised of: (1) a customer relationship asset (with original cost of approximately $
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities (asset group). If the sum of the projected undiscounted cash flows (excluding interest charges) of an asset group is less than its carrying value and the fair value of an asset group is also less than its carrying value, the assets will be written down by the amount by which the carrying value of the asset group exceeded its fair value. However, the carrying amount of a finite-lived intangible asset can never be written down below its fair value. Any loss would be recognized in income from continuing operations in the period in which the determination is made.
| 14 |
Paycheck Protection Program
During
the year ended December 31, 2020, the Company received aggregate loan proceeds in the amount of approximately $
The
unforgiven portion of the PPP loan is payable over two years at an interest rate of
During
the nine months ended September 30, 2021, the Company had a total of $
Income Taxes
The Company files corporate federal, state and local tax returns. Conversion Labs PR and WorkSimpli file tax returns in Puerto Rico, both are limited liability companies and file separate tax returns with any tax liabilities or benefits passing through to its members.
The Company records current and deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating losses and management determines the necessity for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company’s tax returns for all years since December 31, 2017, remain open to audit by all related taxing authorities.
Stock-based Compensation
The Company follows the provisions of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally is recognized at fair value on the date of the grant and amortized over the respective vesting or service period. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of the Company’s common shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free interest rate approximates the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures, the Company has elected to account for forfeitures as they occur.
Many of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based compensation expense.
Basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each period presented. Convertible securities, warrants and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common stock equivalents are excluded from dilutive earnings per share when the effects would be antidilutive.
The Company follows the provisions of ASC 260, “Diluted Earnings per Share”. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive securities. The dilutive effect of call options, warrants and share-based payment awards is calculated using the “treasury stock method,” which assumes that the “proceeds” from the exercise of these instruments are used to purchase common shares at the average market price for the period. The dilutive effect of traditional convertible debt and preferred stock is calculated using the “if-converted method.” Under the if-converted method, securities are assumed to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation for the entire period being presented.
| 15 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Series B Preferred Stock | ||||||||||||||||
| Restricted Stock Units (RSUs) | ||||||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Potentially dilutive securities | ||||||||||||||||
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses and the face amount of notes payable approximate fair value for all periods presented.
Concentrations of Risk
The Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company, at times, maintains balances in various operating accounts in excess of federally insured limits.
We
are dependent on certain third-party manufacturers and pharmacies, although we believe that other contract manufacturers or third-party
pharmacies could be quickly secured if any of our current manufacturers or pharmacies cease to perform adequately. As of September 30,
2021 and December 31, 2020, we utilized two (2) suppliers for fulfillment services, two (2) suppliers for manufacturing finished goods,
one (1) supplier for packaging and bottles and one (1) supplier for labeling. For the three and nine months ended September 30, 2021
and 2020, we purchased
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”)”, which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year, or January 1, 2021, should the Company elect to early adopt. This standard was adopted on January 1, 2021 and did not have a material impact on the Company’s financial position, results of operations or cash flows.
Other Recent Accounting Pronouncements
All other accounting standards updates that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
| 16 |
NOTE 3 – INTANGIBLE ASSETS
As of September 30, 2021 and December 31, 2020, the Company has the following amounts related to intangible assets:
| Intangible Assets as at: | ||||||||||||
| September 30, | December 31, | Amortizable | ||||||||||
| 2021 | 2020 | Life | ||||||||||
| Amortizable Intangible Assets | ||||||||||||
| Customer relationship asset | $ | $ | ||||||||||
| Purchased licenses | ||||||||||||
| Website domain name | ||||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||||
| Total net amortizable intangible assets | $ | $ | ||||||||||
The
aggregate amortization expense of the Company’s intangible assets for the nine months ended September 30, 2021 and 2020 was $
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of September 30, 2021 and December 31, 2020, the Company has the following amounts related to accounts payable and accrued expenses:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued selling and marketing expenses | ||||||||
| Accrued legal and professional fees | - | |||||||
| Accrued interest payable | - | |||||||
| Sales tax payable | ||||||||
| Other accrued expenses | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
NOTE 5 – NOTES PAYABLE
PPP Loan and Forgiveness
In
June 2020, the Company and its subsidiaries received three loans in the aggregate amount of approximately $
Bank Loan
In
December 2020, the Company received proceeds of $
Merchant Funding Agreement
On
March 17, 2021, the Company entered into a Merchant Funding Agreement with MO Technologies USA, LLC (“MO Tech”), which provides
cash advances to the Company based on the Company’s accounts receivable for a total cash advance of $
| 17 |
On
June 23, 2021, the Company entered into a Merchant Funding Agreement with MO Tech, which provides cash advances to the Company based
on the Company’s accounts receivable for a total cash advance of $
Total
interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $
NOTE 6 – LONG-TERM DEBT
Securities Purchase Agreement
As
noted above, on June 1, 2021, the Company entered into the Purchase Agreement with the Purchaser, pursuant to which the Company sold
and issued: (i) the Debenture in the aggregate principal amount of $
Total
interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $
NOTE 7 – STOCKHOLDERS’ EQUITY
The
Company has authorized the issuance of up to shares of common stock, $ par value, and shares of preferred stock,
$ par value, of which shares are designated as Series B Convertible Preferred Stock, are designated as Series A
Preferred Stock and
On
October 9, 2020, the Company effectuated a
On
June 8, 2021, the Company filed the 2021 Shelf.
Options and Warrants
During
the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock related to cashless exercise
of options. During the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock related
to the exercise of options for gross proceeds of $
| 18 |
During
the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock related to the exercise of
warrants for gross proceeds of $
Membership Interest Purchase Agreement
On
July 31, 2019 the Company entered into a certain membership interest purchase agreement (the “MIPA”) by and between the Company,
Conversion Labs PR, a majority owned subsidiary, Taggart International Trust, an entity controlled by the Company’s Chief Executive
Officer, Mr. Justin Schreiber, and American Nutra Tech LLC, a company controlled by its Chief Technology and Operating Officer, Mr. Stefan
Galluppi (Mr. Schreiber, Taggart International Trust, Mr. Galluppi and American Nutra Tech LLC each a “Related Party” and
collectively, the “Related Parties”). Pursuant to the MIPA, the Company purchased
As consideration for the Company’s purchase of the Remaining Interests from the Related Parties, Mr. Schreiber and Mr. Galluppi agreed to cancel all potential issuances of restricted stock and or options related to their employment with the Company, in exchange for the immediate issuance of shares of the Company’s restricted common stock to each of Mr. Schreiber and Mr. Galluppi (the “Initial Issuances”) (equal to shares in the aggregate). Mr. Schreiber and Mr. Galluppi were also entitled to additional issuances pursuant to certain milestones as follows: (i) shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi ( shares in the aggregate) on the business day following a consecutive ninety (90) day period, during which the Company’s Common Stock shall have traded at an average price per share equal to or higher than $ (the “First Milestone”), and (ii) an additional shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi ( shares in the aggregate) following a consecutive ninety (90) day period during which the Common Stock shall have traded at an average price per share equal to or higher than $ (the “Second Milestone” and, together with the First Milestones, the “Milestones”). Having achieved the Milestones, the Company, on December 9, 2020, issued an aggregate of shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (the “Milestone Shares”) ( shares in the aggregate). The Milestone Shares are subject to the previously disclosed 180-day Lock-Up Agreement each of Mr. Schreiber and Mr. Galluppi signed on November 3, 2020.
The
Company recorded an aggregate expense of $
Common Stock
Common Stock Transactions During the Nine Months Ended September 30, 2021:
On
February 11, 2021, the Company consummated the closing of the February 2021 Offering, whereby pursuant to the February 2021 Purchase
Agreement entered into by the Company and certain accredited investors on February 11, 2021 the investors purchased shares of
the Company’s common stock par value $ per share at a purchase price of $ per share for aggregate gross proceeds of approximately
$
The
Purchase Price was funded on the closing date and resulted in net proceeds to the Company of approximately $
During the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock for services expensed in prior periods.
During
the nine months ended September 30, 2021, the Company sold shares of common stock under the ATM Sales
Agreement for net proceeds of $
Noncontrolling Interest
For
the three months ended September 30, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $
| 19 |
WorkSimpli Software Restructuring Transaction
Effective
January 22, 2021 (the “WSS Effective Date”), the Company consummated a transaction to restructure the ownership of WorkSimpli,
(the “WSS Restructuring”). To effect the WSS Restructuring the Company’s wholly-owned subsidiary Conversion Labs PR,
entered into a series of membership interest exchange agreements, pursuant to which, Conversion Labs PR exchanged that certain promissory
note, dated May 8, 2019 with an outstanding balance of $
Concurrently,
in furtherance of the WSS Restructuring, Conversion Labs PR entered into two Membership Interest Purchase Agreements (the “Founding
Members MIPAs”) with two founding members of WSS (the “Founding Members”) whereby Conversion Labs PR purchased from
the Founding Members an aggregate of membership interests of WSS for an aggregate purchase price of $
In
furtherance of the WSS Restructuring, Conversion Labs PR entered into a Membership Interest Purchase Agreement with WSS, (the “CVLB
PR MIPA”), pursuant to which Conversion Labs PR purchased membership interests of WSS for an aggregate purchase price of
$
Following the consummation of the WSS Restructuring, Conversion Labs PR increased its ownership of WSS from 51% to approximately 85.58% on a fully diluted basis. WSS entered into an amendment to its operating agreement (the “WSS Operating Agreement Amendment”) to reflect the change in ownership.
The first two tranches of performance options granted to Sean Fitzpatrick and Varun Pathak vested immediately after the consummation of the restructuring transaction and therefore have been recorded as part of the acquisition through equity. The third tranche is not deemed probable and therefore has not been recognized to date.
Stock Options
2020 Equity Incentive Plan (the “2020 Plan”)
On January 8, 2021, the Company approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). Approval of the 2020 Plan was included as Proposal 1 in the Company’s definitive proxy statement for its Special Meeting of Shareholders filed with the Securities and Exchange Commission on December 7, 2020. The 2020 Plan is administered by the Compensation Committee and initially provided for the issuance of up to shares of Common Stock. The number of shares of Common Stock available for issuance under the Plan automatically increases by shares of Common Stock on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2021. As of January 1, 2021, the 2020 Plan provided for the issuance of up to shares of Common Stock. Awards under the 2020 Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights, restricted stock, and restricted stock units. The 2020 Plan will be administered by the Compensation Committee of the Company’s board of directors (the “Board”).
| 20 |
On June 24, 2021, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020 Plan to increase the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by shares. As of September 30, 2021, total authorization under the 2020 Plan was shares. Additionally, authorization under the 2020 Plan will automatically increase on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2021 and ending on (and including) January 1, 2030, in an amount equal to shares.
The forms of award agreements to be used in connection with awards made under the 2020 Plan to the Company’s executive officers and non-employee directors are:
| ● | Form of Non-Qualified Option Agreement (Non-Employee Director Awards) |
| ● | Form of Non-Qualified Option Agreement (Employee Awards); and |
| ● | Form of Restricted Stock Award Agreement. |
Previously, the Company had granted service-based stock options and performance-based stock options separate from this plan.
On
January 20, 2020, the Company approved the transition of its Chief Acquisition Officer, to the role of President of WorkSimpli (“President”).
In connection with this change in role, the Company amended that certain services agreement entered into on July 23, 2018, by and between
the Company and its President, to (i) decrease the number of options to purchase the Company’s common stock previously granted
from options to options, of which are fully vested as of the effective date and (ii) amend the vesting schedule
for the remaining
During the nine months ended September 30, 2021, the Company issued an aggregate of stock options to employees and advisory board members. These stock options have a contractual term of and vest in increments which fully vest the options over a two-to-three-year period, dependent on the specific agreements’ terms.
| Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||||
| Balance, December 31, 2020 | $ | – | years | $ | ||||||||||||
| Granted | – | years | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled/Forfeited/Expired | ( | ) | years | |||||||||||||
| Balance at September 30, 2021 | $ | – | years | $ | ||||||||||||
| Exercisable at December 31, 2020 | $ | – | years | $ | ||||||||||||
| Exercisable at September 30, 2021 | $ | – | years | $ | ||||||||||||
The
total fair value of the options granted was approximately $, which was determined by the Black-Scholes Pricing Model with the
following assumptions: dividend yield of %, expected term of years, volatility of % – %, and risk-free rate of
%–%. Total compensation expense under the 2020 Plan options above was approximately $ and $ for the three months
ended September 30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $
| Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||||
| Balance, December 31, 2020 | $ | - | years | $ | ||||||||||||
| Granted | – | years | ||||||||||||||
| Exercised | ( | ) | – | years | ||||||||||||
| Cancelled/Forfeited/Expired | ( | ) | – | years | ||||||||||||
| Balance at September 30, 2021 | $ | – | years | $ | ||||||||||||
| Exercisable December 31, 2020 | $ | – | years | $ | ||||||||||||
| Exercisable at September 30, 2021 | $ | – | years | $ | ||||||||||||
| 21 |
The
total fair value of the options granted was approximately $, which was determined by the Black-Scholes Pricing Model with the
following assumptions: dividend yield of %, expected term of – years, volatility of % – %, and risk-free
rate of %–%. Total compensation expense under the above service-based option plan was approximately $ and $
for the three months ended September 30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $
| Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||||
| Balance at December 31, 2020 | $ | – | years | $ | ||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | years | |||||||||||||
| Cancelled/Expired | ( | ) | – | years | ||||||||||||
| Balance at September 30, 2021 | $ | – | years | $ | ||||||||||||
| Exercisable December 31, 2020 | $ | years | $ | |||||||||||||
| Exercisable at September 30, 2021 | $ | – | years | $ | ||||||||||||
Total compensation expense under the above performance-based option plan was approximately $ for both the three and nine months ended September 30, 2021. compensation expense was recognized on the performance-based option plan above for the three and nine months ended September 30, 2020 as the performance terms had not been met or were not probable.
Restricted Stock Units (RSU)
The following is a summary of outstanding RSU activity under our 2020 Plan during the nine months ended September 30, 2021:
| RSUs Outstanding Number of Shares | ||||
| Balance at December 31, 2020 | ||||
| Granted | ||||
| Vested | ( | ) | ||
| Cancelled/Forfeited/Expired | ||||
| Balance at September 30, 2021 | ||||
The
total fair value of the RSUs granted was approximately $
The
Company granted RSUs outside of the 2020 Plan during the nine months ended September 30, 2021. The total fair value of these
RSUs was approximately $
| 22 |
Warrants
The following is a summary of outstanding and exercisable warrants activity during the nine months ended September 30, 2021:
| Warrants Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||
| Balance at December 31, 2020 | $ – | years | $ | |||||||||||
| Granted | years | |||||||||||||
| Exercised/Expired | ( | ) | – | years | ||||||||||
| Balance at September 30, 2021 | $ – | years | $ | |||||||||||
| Exercisable December 31, 2020 | $ – | years | $ | |||||||||||
| Exercisable September 30, 2021 | $ – | years | $ | |||||||||||
Total compensation expense on the above warrants for services was approximately $ and $ the three months ended September 30, 2021 and 2020, respectively, and $ and $ for the nine months ended September 30, 2021 and 2020, respectively.
Stock-based Compensation
The total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock options, warrants and RSUs amounted to approximately $ and $ for the three months ended September 30, 2021 and 2020, respectively, and approximately $ and $ for the nine months ended September 30, 2021 and 2020, respectively. Such amounts are included in general and administrative expenses in the consolidated statement of operations.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Royalty Agreements
During
2016, Conversion Labs PR entered into a sole and exclusive license, royalty and advisory agreement with Pilaris Laboratories, LLC (“Pilaris”)
relating to Pilaris’ PilarisMax shampoo formulation and conditioner. The term of the agreement will be the life of the US Patent
held by Pilaris,
During
2018, the Company entered into a license agreement (the “Alphabet Agreement”) with M.ALPHABET, LLC (“Alphabet”),
pursuant to which Alphabet agreed to license its PURPUREX business which consists of methods and compositions developed by Alphabet for
the treatment of purpura, bruising, post-procedural bruising and traumatic bruising (the “Product Line”). Pursuant to the
license granted under the Alphabet Agreement, Conversion Labs PR obtains an exclusive license to incorporate (i) any intellectual property
rights related to the Product Line and (ii) all designs, drawings, formulas, chemical compositions and specifications used or useable
in the Product Line into one or more products manufactured, sold, and/or distributed by Alphabet for the treatment of purpura, bruising,
post-procedural bruising and traumatic bruising and for all other fields of use or purposes (the “Licensed Product(s)”),
and to make, have made, advertise, promote, market, sell, import, export, use, offer to sell and distribute the Licensed Product(s) throughout
the world with the exception of China, Hong Kong, Japan, and Australia (the “License”).
Upon
execution of the Alphabet Agreement, Alphabet was granted a -year stock option to purchase shares of the Company’s common
stock at an exercise price of $. Further, if Licensed Products have gross receipts of $
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Purchase Commitments
Many
of the Company’s vendors require product deposits when a purchase order is placed for goods or fulfillment services related to
inventory requirements. The Company’s history of product deposits with its inventory vendors creates an implicit purchase commitment
equaling the total expected product acceptance cost in excess of the product deposit. As of September 30, 2021 and December 31, 2020,
the Company approximates its implicit purchase commitments to be $
Legal Matters
In the normal course of business operations, the Company may become involved in various legal matters. As of September 30, 2021, other than as set forth below, the Company’s management does not believe that there are any potentially material pending legal proceedings.
On April 16, 2021, a purported securities class action lawsuit, captioned David L. Owens, Sr. v. LifeMD, Inc. et al., Case No. 21-cv-03384, was filed in the United States District Court for the Southern District of New York against the Company, Justin Schreiber (LifeMD’s Chairman of the Board and Chief Executive Officer), Juan Pinero Dagnery (LifeMD’s former Chief Financial Officer), and Marc Benathen (LifeMD’s current Chief Financial Officer) (the “Owens, Sr. Lawsuit”). The Owens, Sr. Complaint alleges, among other things, that the defendants made false or misleading statements about, and allegedly failed to disclose material adverse facts concerning, the Company’s business, operations, and prospects, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Complaint does not quantify damages but seeks to recover damages on behalf of investors who purchased or otherwise acquired LifeMD’s common stock between January 19, 2021 and April 13, 2021. On May 18, 2021, the class action lawsuit filed against the Company was voluntarily dismissed.
Similarly, on May 5, 2021, a second purported securities class action lawsuit, captioned Cho v. LifeMD, Inc. et al., Case No. 21-cv-04004, was filed in the United States District Court for the Southern District of New York against the same aforementioned parties (the “Cho Lawsuit”). The Cho Complaint makes the same claims as found in the Owens, Sr. Lawsuit, and, similarly, does not quantify damages and seeks to recover damages on behalf of investors who purchased or otherwise acquired LifeMD’s common stock during the same, aforementioned time period between January 19, 2021 and April 13, 2021. On May 19, 2021, the class action lawsuit filed against the Company was voluntarily dismissed.
On June 7, 2021, a purported Americans with Disabilities class action lawsuit, captioned Sosa v. LifeMD, Inc. et al., Case No. 21-cv-05032, was filed in the United States District Court for the Southern District of New York. The Sosa Complaint alleges, inter alia, that the defendants’ www.rexmd.com has barriers making it inaccessible to the visually impaired needing the assistance of screen-reading software, and therefore, allegedly violates: (i) the Americans with Disabilities Act, 42 U.S.C. § 12181 et seq.; (ii) the New York State Human Rights Law (NYSHRL), N.Y. Exec. Law §§ 292 and 296; and (iii) the New York City Human Rights Law (NYCHRL), §§ 8-102 and 8-107. The Complaint does not quantify damages but seeks to recover compensatory damages, civil penalties, and attorneys’ fees and costs under the NYSHRL and NYCHRL, as well as punitive damages under the NYCHRL. The Complaint also seeks preliminary and permanent injunctive relief. On September 20, 2021, the class action lawsuit filed against the Company was voluntarily dismissed.
NOTE 9 – RELATED PARTY TRANSACTIONS
Chief Executive Officer
Conversion
Labs PR utilizes office space in Puerto Rico, which is subleased from the President and CEO, and incurs expense of approximately $
Conversion
Labs PR utilizes BV Global Fulfillment, owned by a related person of the Company’s CEO to warehouse a portion of the Company’s
finished goods inventory and for fulfillment services. The Company pays a monthly fee of $
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Consulting Agreement with Chief Operating Officer
On
November 27, 2020, the Company entered into a consulting
agreement (the “Consulting Agreement”) with JDM Investments, LLC (“JDM”), an entity solely owned by our COO,
whereby JDM will provide consulting services in support of the Company’s day-to-day call center operations. The Consulting Agreement
is for a term of thirty-six months and is renewable for additional twelve-month periods upon the mutual agreement of the Company and
JDM. As compensation for the services, JDM will receive a monthly fee of $
On
June 15, 2021, the Company and Brad Roberts, our COO, restructured Mr. Roberts’s compensation arrangements. The Company and JDM
mutually terminated Mr. Roberts’s Consulting Agreement and Mr. Roberts waived all consulting fees due for the remainder of the
term of the Consulting Agreement. In place of the Consulting Agreement, Mr. Roberts and the Company amended his Amended and Restated
Employment Agreement dated December 21, 2020 (the “Amendment”) to increase his base salary to $
Appointment of Chief Financial Officer
On February 4, 2021, the Board appointed Mr. Marc Benathen as the Company’s Chief Financial Officer. In connection with the Appointment, Mr. Benathen entered into an Employment Agreement with the Company. To induce Mr. Benathen to enter into the Employment Agreement, Mr. Benathen was granted a signing bonus of RSUs. These RSUs vest in accordance with the following: (i) of the RSUs vesting on (ii) RSUs on (iii) RSUs on and (iv) RSUs on . In addition to the RSUs, Mr. Benathen received stock options to purchase up to shares of the Company’s common stock. The stock options shall vest in equal monthly tranches, based on the passage of time, over the . On March 18, 2021, we issued common shares under this Employment Agreement.
Appointment of President
On June 10, 2021, the Board appointed Mr. Alex Mironov as the Company’s President. In connection with the appointment, Mr. Mironov entered into an Employment Agreement with the Company. To induce Mr. Mironov to enter into the Employment Agreement, Mr. Mironov was granted an equity award with a grant date of June 10, 2021 outside of the Company’s 2020 Equity and Incentive Plan. Mironov received options to purchase an aggregate of shares of LifeMD, Inc. common stock. The options have an exercise price of $, which is equal to the closing price of LifeMD. Inc. common stock on June 10, 2021. The options have a -year term. Additionally, Mr. Mironov received a performance-based grant of up to restricted shares of LifeMD, Inc. common stock, subject to, the employee’s sourcing, and material contribution to the consummation of pharmaceutical deals, as set forth in more detail in the employment agreement.
Board of Director Appointment
On September 8, 2021, the Company appointed Naveen Bhatia as a member of the Board. In connection with the appointment to the Board, the Company and Mr. Bhatia entered into a director agreement (the “Director Agreement”), whereby, as compensation for his services as a member of the Board, Mr. Bhatia shall receive a one-time grant of eight thousand () restricted stock units of the Company, vesting quarterly beginning on September 30, 2021, pursuant to the Company’s Employee Stock Option Plan. The Company and Mr. Bhatia also entered into a consulting agreement (the “Bhatia Consulting Agreement”), whereby Mr. Bhatia will assist the Company with its capital markets strategy, business development initiatives and growth strategy for a term of one year. Pursuant to the Bhatia Consulting Agreement, Mr. Bhatia will receive a stock option to purchase shares of the Company’s common stock, par value $per share, with an exercise price of $per share.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q. Certain statements made in this discussion are “forward-looking statements” within the meaning of 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not have a duty to update any of the forward-looking statements to conform these statements to actual results.
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
The forward-looking statements made in this report are based only on events, or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. These risks include, by way of example and without limitation:
| ● | changes in the market acceptance of our products; |
| ● | increased levels of competition; |
| ● | changes in political, economic or regulatory conditions generally and in the markets in which we operate; |
| ● | our ability to successfully commercialize our products on a large enough scale to generate profitable operations; |
| ● | our ability to maintain and develop relationships with customers and suppliers; |
| ● | our ability to quickly and effectively respond to new technological developments; |
| ● | our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on our proprietary rights; |
| ● | our ability to successfully integrate acquired businesses or new brands; |
| ● | the impact of competitive products and pricing; |
| ● | supply constraints or difficulties; |
| ● | general economic and business conditions; |
| ● | business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as COVID-19); |
| ● | our ability to continue as a going concern; |
| ● | our need to raise additional funds in the future; |
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| ● | our ability to successfully recruit and retain qualified personnel; |
| ● | our ability to successfully implement our business plan; |
| ● | our ability to successfully acquire, develop or commercialize new products and equipment; |
| ● | being able to scale our telehealth platform built to improve the experience and medical care provided to patients across the country; |
| ● | intellectual property claims brought by third parties; and |
| ● | the impact of any industry regulation. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”). We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), our wholly-owned subsidiary LifeMD PR, LLC (formerly Immudyne PR LLC, and Conversion Labs PR), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”) and our majority-owned subsidiary LegalSimpli Software, LLC, a Puerto Rico limited liability company. On July 15, 2021, LegalSimpli Software, LLC, changed its name to WorkSimpli Software, LLC (“WorkSimpli”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Corporate History
We were formed in the State of Delaware on May 24, 1994, under our prior name, Immudyne, Inc. We changed our name to Conversion Labs, Inc. on June 22, 2018 and then subsequently, on February 22, 2021, we changed our name to LifeMD, Inc. Further, in connection with our name change, we changed our trading symbol to LFMD. In June 2018, the Company closed the strategic acquisition of 51% of WorkSimpli, a company that provides a software as a service (SaaS) for converting, editing, signing and sharing PDF documents called PDFSimpli. Effective January 22, 2021, we consummated a transaction to restructure the ownership of WorkSimpli through a series of agreements as further described below.
Business Overview and Strategy
We are a direct-to-patient telehealth technology company that provides a smarter, cost-effective and convenient way for a provider’s patients to access healthcare. We believe the traditional model of visiting a doctor’s office, visiting a local pharmacy, and returning to see a doctor for follow up care or prescription refills is inefficient, costly to patients, and discourages many patients from seeking much needed medical care. The U.S. healthcare system is undergoing a paradigm shift, thanks to new technologies and the emergence of direct-to-patient telehealth. Direct-to-patient telehealth companies, like LifeMD, Inc., connect consumers digitally to licensed healthcare professionals for care across various needs, such as virtual primary care, men’s sexual health, dermatology, and others.
Our telemedicine platform provides patients access to licensed providers for diagnoses, virtual care, and prescription medications, often delivered on a recurring basis. In addition to our telemedicine technology offerings, we sell nutritional supplements and other over-the-counter products. Many of our products are available on a subscription basis, where patients can subscribe to receive regular shipments of prescribed medications or products. This creates convenience and often discounted pricing opportunities for patients and recurring revenue streams for us. Our customer acquisition strategy combines strategic brand-building media placements, influencer partnerships, and direct response advertising methods across highly scalable marketing channels (i.e. national TV, streaming TV, streaming audio, YouTube, podcasts, Out of Home, print, magazines, online search, social media, and digital).
Since inception, we have helped more than 420,000 customers and patients, providing them greater access to high-quality, convenient, and affordable care in all 50 states. Our telehealth revenue increased 135% for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Total revenue from recurring subscriptions is approximately 90%. In addition to our telehealth business, we own 85.6% of WorkSimpli, which operates PDFSimpli, a rapidly growing SaaS platform for converting, signing, editing and sharing PDF documents. This business has also seen 331% year over year revenue growth, with recurring revenue of 98%.
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Many people can relate to the hassle and inconvenience of seeking medical care. We believe that telehealth platforms like ours will fundamentally shift how a provider’s patients perceive and access healthcare in the United States, by necessity and by preference. With the average wait time to see a physician in the United States now greater than 29 days and the United States projected significant shortfall of licensed physicians by 2030, we believe the U.S. healthcare infrastructure must change to accommodate patients. Timely and convenient access to healthcare and prescription medications is a critical factor in improving quality of care and patient outcomes. Our mission is to radically change healthcare with our portfolio of direct-to-patient telehealth technology brands that encompass on-demand medical treatment, online pharmacy and over-the-counter products. We want our brands to be top-of-mind for consumers considering telehealth.
In the United States, healthcare spending is currently $4.0 trillion and is expected to grow to $6.2 trillion by 2028, according to the Centers for Medicare and Medicaid Services. Physician services and prescription medications account for approximately 30% of healthcare spending, or over $1 trillion annually, and we believe that we have the infrastructure, medical expertise, and technical know-how to shift a substantial portion of this market to an online, virtual format. Our telemedicine platforms are fast and convenient, and we believe the adoption of our services has increased rapidly because of these features, including lower out-of-pocket costs for a provider’s patients and the satisfaction of a simple healthcare process. We believe the opportunities are immense and that we are well positioned to capitalize on these large-scale economic shifts in healthcare.
We believe that brand innovation, customer acquisition and service excellence form the heart of our business. As is exemplified with our first brand, Shapiro MD, we have built a full line of proprietary over-the-counter (“OTC”) products for male and female hair loss, FDA approved OTC minoxidil, an FDA-cleared medical device, and now a telehealth platform offering that gives consumers access to virtual medical treatment from their providers and, when appropriate, a full line of oral and topical prescription medications for hair loss. Our men’s brand, RexMD, currently offers access to provider-based treatment through telehealth for men’s health conditions, currently providing prescription medications and OTC products for chronic conditions such as sexual health and hair loss. Rex MD has recently expanded its services to provide access to primary care and will soon offer treatments for additional chronic indications present in men’s health. We have built a platform that allows us to efficiently launch telehealth brands and offerings wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands.
In addition to our telehealth business, we own 85.6% of WorkSimpli, which operates PDFSimpli, a rapidly growing SaaS platform for converting, signing, editing and sharing PDF documents.
Our Brand Portfolio
We have built a strategic portfolio of wholly-owned telemedicine platform brands that address large unmet needs in men’s health, hair loss and dermatology. LifeMD is also preparing to offer administrative support to various professional entities that will provide a direct concierge medicine offering to patients under the LifeMD brand. We continue to scale our offerings in a calculated manner, ensuring that each brand or indication we launch will enhance current and future patients’ experiences with our platform.
Our process across each brand and condition we treat is to guide the provider’s patient through a medical intake process and product selection, after which a licensed U.S. physician within our contracted network conducts a virtual consultation and, if appropriate, prescribes necessary prescription medications and/or recommends over-the-counter products. Prescription medications and over-the-counter products are filled by pharmacy fulfillment partners and shipped directly to the patient. The number of patients and customers we serve across the nation continues to increase at a robust pace, with more than 420,000 individuals having purchased our products and services to date.
Hair Loss: ShapiroMD
Launched in 2017, ShapiroMD offers access to virtual medical treatment, prescription medications, patented doctor formulated over-the-counter products, and an FDA approved medical device for male and female hair loss through our telemedicine platform. ShapiroMD has emerged as a leading destination for hair loss treatment across the United States and has served more than 200,000 customers and patients since inception with a 4.9 star Trustpilot rating. In Q1 2021, ShapiroMD greatly enhanced its offerings for female hair loss treatment with the addition of topical compounded medications to its product portfolio.
Men’s Health: RexMD
Launched in 2019, RexMD is a men’s telehealth platform brand offering access to virtual medical treatment for a variety of men’s health needs. After treatment from a licensed physician, if appropriate, we dispense and ship prescription medications and over-the-counter products directly to a provider’s patients. Since RexMD’s initial launch in the erectile dysfunction treatment market, it has expanded into additional indications, including but not limited to, premature ejaculation and hair loss. Our vision for RexMD is to become a leading telehealth destination for men.
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Dermatology: NavaMD
Launched in the first quarter of 2021, Nava MD is a female-oriented tele-dermatology brand that offers access to virtual medical treatment from dermatologists and other providers, and, if appropriate, prescription oral and compounded topical medications to treat dermatological conditions such as anti-aging and acne. In addition to the brand’s telehealth offerings, NavaMD’s proprietary products leverage intellectual property and proprietary formulations licensed from Restorsea, a leading medical grade skincare technology platform.
Restorsea’s clinically proven skincare technology platform is the result of more than $50 million invested in R&D and intellectual property development, and Restorsea has received 35 patents along with broad industry and academic acclaim, with its breakthrough clinical results having been published in the peer-reviewed Journal of Drugs in Dermatology and Journal of Clinical and Aesthetic Dermatology. Nava MD is one of the first direct-to-patient brands to offer this advanced skincare technology. Nava MD offers access to tele-dermatology services to a provider’s patients in all 50 states.
Immune Health: iNR Wellness MD
Launched in 2018, iNR Wellness MD is a supplement for immune and digestive support. The iNR Wellness product line is a daily nutritional supplement that contains yeast, oat, and mushroom beta glucans.
Majority Owned Subsidiary: WorkSimpli
WorkSimpli operates PDFSimpli, an online software-as-a-service (SAAS) platform that allows users to create, edit, convert, sign and share PDF documents. WorkSimpli was acquired through the purchase of 51% of the membership interests of WorkSimpli Software, LLC, a Puerto Rico limited liability company, which operates a marketing-driven software solutions business. In addition to WorkSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company. On January 22, 2021, the Company consummated a transaction and increased its ownership of WorkSimpli to 85.6%.
As of September 30, 2021, WorkSimpli was ranked in the top 4,232 websites globally, in which it was also ranked in the top 563 for specific countries with more than 14 million registrants globally. Since its launch, WorkSimpli has converted or edited over 11 terabytes of documents for customers from the legal, financial, real-estate and academic sectors. WorkSimpli had over 139,200 active subscriptions as of September 30, 2021.
Significant Developments During the Three Months Ended September 30, 2021
Partnerships
On July 13, 2021, the Company, on behalf of its customers, entered into an agreement to engage Quest Diagnostics Incorporated (“Quest Diagnostics”) as the Company’s laboratory services provider to perform certain clinical laboratory diagnostic services based on orders submitted to Quest Diagnostics by licensed health care providers who are under contract with the Company and are authorized under U.S. federal or state law to order laboratory tests. Patients of LifeMD Inc.’s affiliated providers gain access to laboratory tests which can be completed in their home or office or at any one of Quest Diagnostics’ 2,000 facilities.
On July 14, 2021, the Company entered into an agreement to engage Axle Health Inc. (“Axle Health”) to assist the Company in establishing a platform to enable patients of the Company’s medical practice clients (“MP Clients”) to schedule certain nursing services, including blood draws, injections, and other basic healthcare services, and to furnish operational support services to medical practices using the platform. In connection therewith, Axle Health granted the Company a revocable, nontransferable, non-exclusive right and license, with the right to grant sublicenses, to install and use the software and other technology relating to the platform developed, owned, or with the right to grant sublicenses to install and use the software and/or other technology developed, owned, or licensed by Axle Health, including the platform, to facilitate the scheduling and provision of certain nursing services to patients of MP Clients.
On August 4, 2021, the Company entered into a partnership agreement with Particle Health, a digital health company with a HIPAA-compliant technology platform that converts electronic medical records data into a user-friendly Fast Healthcare Interoperability Resource (“FHIR”) format. Particle Health offers healthcare companies secure access to vital medical data. With Particle Health’s platform, and patient consent, licensed medical providers on the upcoming LifeMD primary care platform gain access to comprehensive patient health records, therefore enabling personalized care through a deeper understanding of their patients’ medical histories.
On August 30, 2021, the Company entered into a strategic partnership with Prescryptive Health (“Prescryptive”), a healthcare technology company empowering consumers by improving the way healthcare is delivered. The partnership is expected to accelerate growth for both companies by combining LifeMD’s expanding direct-to-patient telehealth brands and upcoming primary care platform with Prescryptive’s best-in-class digital pharmacy fulfillment and e-prescribing technology platform.
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Supply Chain
The continuing impact on business activity brought about by COVID-19 continues to evolve, globally in macro terms, and in micro terms, as such affects the Company. Among other things, our supply chain is subject to the effects of COVID-19, as well as to natural disasters and other events beyond our control, such as raw material, component and labor shortages, global and regional shipping and logistics constraints, work stoppages, power outages and the physical effects of climate change, including changes in weather patterns. In addition, human rights concerns, including forced labor and human trafficking, in foreign countries and associated governmental responses have the potential to disrupt our supply chain and our operations could be adversely impacted. Although we do not believe that raw materials used in the products we sell are sourced from regions with forced labor concerns, any delays or other supply chain disruption resulting from these concerns, associated governmental responses, or a desire to source products, components or materials from other manufacturers or regions could result in shipping delays, cancellations, penalty payments, or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, cash flows, and financial condition.
In connection with these potential impacts on our supply chain, we are, as a general matter, seeing a trend of increases in (i) pricing on air and ocean freight, as well as for component and product parts, and (ii) the overall time to receive shipments. If these trends continue, many of our estimates and assumptions for the period ended September 30, 2021 may be subject to a material change in future periods.
COVID-19 Vaccine Mandate
We are making preparations to comply with a rule issued by the Occupational Safety and Health Administration (“OSHA”) to ensure that our employees are fully vaccinated against COVID-19 by January 4th or that they test negative for COVID-19 at least once per week. Employees must receive time off to get vaccinated and sick leave to recover from any side effects. Any unvaccinated employees must wear face coverings while at work. We are in the process of assessing the financial and staffing impact of these requirements.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020
Revenue
Our financial results for the three months ended September 30, 2021 are summarized as follows in comparison to the three months ended September 30, 2020.
| September 30, 2021 | September 30, 2020 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Telehealth revenue, net | $ | 18,540,897 | 74.32 | % | $ | 9,438,136 | 85.76 | % | ||||||||
| WorkSimpli revenue, net | 6,406,302 | 25.68 | % | 1,567,627 | 14.24 | % | ||||||||||
| Total revenues, net | 24,947,199 | 100 | % | 11,005,763 | 100 | % | ||||||||||
| Cost of telehealth revenue | 4,969,306 | 19.92 | % | 1,601,920 | 14.56 | % | ||||||||||
| Cost of WorkSimpli revenue | 127,181 | 0.51 | % | 73,662 | 0.66 | % | ||||||||||
| Total cost of revenue | 5,096,487 | 20.43 | % | 1,675,582 | 15.22 | % | ||||||||||
| Gross profit | 19,850,712 | 79.57 | % | 9,330,181 | 84.78 | % | ||||||||||
| Selling and marketing expenses | 20,293,935 | 81.35 | % | 10,528,833 | 95.67 | % | ||||||||||
| General and administrative expenses | 10,695,663 | 42.87 | % | 18,441,756 | 167.56 | % | ||||||||||
| Other operating expenses | 815,378 | 3.27 | % | 542,965 | 4.93 | % | ||||||||||
| Customer service expenses | 505,880 | 2.03 | % | 230,788 | 2.10 | % | ||||||||||
| Development costs | 131,160 | 0.52 | % | 118,346 | 1.08 | % | ||||||||||
| Total expenses | 32,442,016 | 130.04 | % | 29,862,688 | 271.34 | % | ||||||||||
| Operating loss | (12,591,304 | ) | (50.47 | )% | (20,532,507 | ) | (186.56 | )% | ||||||||
| Other income (expense), net | (1,824,777 | ) | (7.32 | )% | (291,096 | ) | (2.65 | )% | ||||||||
| Net loss before provision for income taxes | (14,416,081 | ) | (57.79 | )% | (20,823,603 | ) | (189.21 | )% | ||||||||
| Provision for income taxes | — | — | % | — | — | % | ||||||||||
| Net loss attributable to noncontrolling interests | (62,706 | ) | 0.25 | % | (201,233 | ) | 1.83 | % | ||||||||
| Net loss attributable to LifeMD, Inc. | $ | (14,353,375 | ) | (57.54 | )% | $ | (20,622,370 | ) | (187.38 | )% | ||||||
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Revenues for the three months ended September 30, 2021 were approximately $24.9 million, an increase of 127% compared to approximately $11.0 million for the three months ended September 30, 2020. The increase in revenues was attributable to both the increase in telehealth revenue of 97% and an increase in revenue for WorkSimpli of 309%. Telehealth revenue accounts for 74% of total revenue and has increased in the three months ended September 30, 2021 due to an increase in online sales demand, with the majority of the growth of our telehealth brands, RexMD and ShapiroMD. Revenue for WorkSimpli accounts for 26% of total revenue and has steadily increased due to a combination of higher demand, increased market awareness, enhanced digital capabilities and continued marketing campaign expansion.
Total cost of revenues consists of the cost of (1) telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, MD consult fees and shipping costs directly attributable to our prescription and OTC products and (2) the cost of WorkSimpli revenue consisting primarily of information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 204% to approximately $5.1 million for the three months ended September 30, 2021 compared to approximately $1.7 million for the three months ended September 30, 2020. The combined cost of revenue increase was due to increased costs related to our increased sale volumes when compared to the prior period ended September 30, 2020.
Gross profit increased by approximately 113% to approximately $19.9 million for the three months ended September 30, 2021 compared to approximately $9.3 million for the three months ended September 30, 2020, as a result of increased combined sales. Telehealth costs increased to 27% of associated telehealth revenues during the three months ended September 30, 2021, from 17% of associated telehealth revenues during the three months ended September 30, 2020. WorkSimpli costs decreased to 2% of associated WorkSimpli revenues during the three months ended September 30, 2021, from 5% of associated WorkSimpli revenues during the three months ended September 30, 2020. WorkSimpli revenues as a percentage of total revenues increased to 26% during the three months ended September 30, 2021, from 14% during the three months ended September 30, 2020. Gross profit as a percentage of revenues was 80% for the three months ended September 30, 2021 as compared to 85% for the three months ended September 30, 2020 primarily due to product sales mix and one-time costs associated with the non-cash write-off of legacy product deposits.
Operating Expenses
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Selling and marketing expenses | $ | 20,293,935 | $ | 10,528,833 | ||||
| General and administrative expenses | 10,695,663 | 18,441,756 | ||||||
| Other operating expenses | 815,378 | 542,965 | ||||||
| Customer service expenses | 505,880 | 230,788 | ||||||
| Development costs | 131,160 | 118,346 | ||||||
| Total expenses | $ | 32,442,016 | $ | 29,862,688 | ||||
Operating expenses for the three months ended September 30, 2021 were approximately $32.4 million, as compared to approximately $29.9 million for the three months ended September 30, 2020. This represents an increase of 9%, or $2.6 million. The increase is primarily attributable to:
| (i) | Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the three months ended September 30, 2021, the Company had an increase of approximately $9.8 million, or 93% in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current period’s sales growth reported. This ramp up is expected to both increase and maintain sustained revenue growth in future years, based on the Company’s recurring revenue subscription-based sales model. Selling and marketing expenses as a percentage of revenue was 81.4% for the three months ended September 30, 2021, as compared to 95.7% for the three months ended September 30, 2020. This represents a decrease of 14.3%. |
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| (ii) | General and administrative expenses: During the three months ended September 30, 2021, stock-based compensation expense was $3.1 million, with the majority related to stock compensation expense attributable to service-based stock options, as compared to stock-based compensation expense of $16.4 million for the three months ended September 30, 2020. This category also consists of merchant processing fees, payroll expenses for executive management, amortization expense and legal and professional fees. During the three months ended September 30, 2021, the Company had a decrease of approximately $7.8 million in general and administrative expenses, primarily related to the decrease in stock-based compensation costs referenced above partially offset by an increase in legal and professional fees and other increases in infrastructure expenses incurred to support the sales volume increases. |
| (iii) | Other operating expenses: This consists of rent, insurance, royalty expense, bank charges and IT services. During the three months ended September 30, 2021, the Company had an increase of approximately $272 thousand, or 50%, primarily related to increases in the general cost environment necessary to support the Company’s sales growth. |
| (iv) | Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in South Carolina and Puerto Rico. During the three months ended September 30, 2021, the Company had an increase of approximately $275 thousand, primarily related to increases in headcount in the Company’s customer service department. |
| (v) | Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the three months ended September 30, 2021, the Company had an increase of approximately $13 thousand, primarily resulting from technology platform improvements and amortization expense. |
Other (Expenses) / Income
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Interest (expense), net | $ | (1,824,777 | ) | $ | (291,096 | ) | ||
| Gain on debt forgiveness | — | — | ||||||
| Total | $ | (1,824,777 | ) | $ | (291,096 | ) | ||
Other expense, which consists of interest expense increased by approximately $1.5 million due to interest expense and amortization of debt discount recorded related to the June 1, 2021 Purchase Agreement for the three months ended September 30, 2021.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
Revenue
Our financial results for the nine months ended September 30, 2021 are summarized as follows in comparison to the nine months ended September 30, 2020.
| September 30, 2021 | September 30, 2020 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Telehealth revenues, net | $ | 47,623,822 | 72.75 | % | $ | 20,263,750 | 83.05 | % | ||||||||
| WorkSimpli revenues, net | 17,835,100 | 27.25 | % | 4,136,608 | 16.95 | % | ||||||||||
| Total revenues, net | 65,458,922 | 100 | % | 24,400,358 | 100 | % | ||||||||||
| Cost of telehealth revenue | 12,113,336 | 18.51 | % | 4,718,143 | 19.33 | % | ||||||||||
| Cost of WorkSimpli revenue | 314,428 | 0.48 | % | 204,241 | 0.84 | % | ||||||||||
| Total cost of revenue | 12,427,764 | 18.99 | % | 4,922,384 | 20.17 | % | ||||||||||
| Gross profit | 53,031,158 | 81.01 | % | 19,477,974 | 79.83 | % | ||||||||||
| Selling and marketing expenses | 61,372,815 | 93.76 | % | 21,669,046 | 88.81 | % | ||||||||||
| General and administrative expenses | 28,194,305 | 43.07 | % | 21,868,097 | 89.62 | % | ||||||||||
| Other operating expenses | 2,390,694 | 3.65 | % | 654,947 | 2.69 | % | ||||||||||
| Customer service expenses | 1,274,392 | 1.95 | % | 488,455 | 2.00 | % | ||||||||||
| Development costs | 435,356 | 0.66 | % | 288,813 | 1.18 | % | ||||||||||
| Total expenses | 93,667,562 | 143.09 | % | 44,969,358 | 184.30 | % | ||||||||||
| Operating loss | (40,636,404 | ) | (62.08 | )% | (25,491,384 | ) | (104.47 | )% | ||||||||
| Other income (expense), net | (2,681,236 | ) | (4.10 | )% | (1,313,010 | ) | (5.38 | )% | ||||||||
| Net loss before provision for income taxes | (43,317,640 | ) | (66.18 | )% | (26,804,394 | ) | (109.85 | )% | ||||||||
| Provision for income taxes | — | — | % | — | — | % | ||||||||||
| Net loss attributable to noncontrolling interests | (531,182 | ) | 0.82 | % | (408,180 | ) | 1.67 | % | ||||||||
| Net loss attributable to LifeMD, Inc. | $ | (42,786,458 | ) | (65.36 | )% | $ | (26,396,214 | ) | (108.18 | )% | ||||||
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Revenues for the nine months ended September 30, 2021 were approximately $65.5 million, an increase of 168% compared to approximately $24.4 million for the nine months ended September 30, 2020. The increase in revenues was attributable to both the increase in telehealth revenue of 135% and an increase in WorkSimpli revenue of 331%. Telehealth revenue accounts for 73% of total revenue and has increased in the nine months ended September 30, 2021 due to an increase in online sales demand, with the majority of the growth from our telehealth brands, RexMD and ShapiroMD. WorkSimpli revenue accounts for 27% of total revenue and has steadily increased quarter over quarter due to a combination of higher demand, increased market awareness, enhanced digital capabilities and continued marketing campaign expansion. While a portion of our growth could be attributable to the COVID-19 pandemic, management strongly believes our growth is primarily a result of the strength of our healthcare brands.
Total cost of revenues consists of the cost of (1) telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, MD consult fees and shipping costs directly attributable to our prescription and OTC products and (2) the cost of WorkSimpli revenue consisting primarily of information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 152% to approximately $12.4 million for the nine months ended September 30, 2021 compared to approximately $4.9 million for the nine months ended September 30, 2020. The combined cost of revenue increase was due to increased costs related to our increased sale volumes when compared to the prior period ended September 30, 2020.
Gross profit increased by approximately 172% to approximately $53.0 million for the nine months ended September 30, 2021 compared to approximately $19.5 million for the nine months ended September 30, 2020, as a result of increased combined sales. Telehealth costs increased to 25% of associated telehealth revenues during the nine months ended September 30, 2021, from 23% of associated telehealth revenues during the nine months ended September 30, 2020. WorkSimpli costs decreased to 2% of associated WorkSimpli revenues during the nine months ended September 30, 2021, from 5% of associated WorkSimpli revenues during the nine months ended September 30, 2020. WorkSimpli revenues as a percentage of total revenues increased to 27% during the nine months ended September 30, 2021, from 17% during the nine months ended September 30, 2020. Gross profit as a percentage of revenues was 81% for the nine months ended September 30, 2021 compared to 80% for the nine months ended September 30, 2020. The increase of 1% in gross profit was principally attributable to higher WorkSimpli revenues as a percentage of total revenues, partially offset by lower telehealth revenues as a percentage of total revenues.
Operating Expenses
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Selling and marketing expenses | $ | 61,372,815 | $ | 21,669,046 | ||||
| General and administrative expenses | 28,194,305 | 21,868,097 | ||||||
| Other operating expenses | 2,390,694 | 654,947 | ||||||
| Customer service expenses | 1,274,392 | 488,455 | ||||||
| Development costs | 435,356 | 288,813 | ||||||
| Total expenses | $ | 93,667,562 | $ | 44,969,358 | ||||
Operating expenses for the nine months ended September 30, 2021 were approximately $93.7 million, as compared to approximately $45.0 million for the nine months ended September 30, 2020. This represents an increase of 108%, or $48.7 million. The increase is primarily attributable to:
| (i) | Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the nine months ended September 30, 2021, the Company had an increase of approximately $39.7 million, or 183% in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current period’s sales growth reported. This ramp up is expected to both increase and maintain sustained revenue growth in future years, based on the Company’s recurring revenue subscription-based sales model. |
| (ii) | General and administrative expenses: During the nine months ended September 30, 2021, stock-based compensation was approximately $8.0 million, with the majority related to stock compensation expense attributable to service-based stock options, as compared to stock-based compensation expense of $16.9 million for the nine months ended September 30, 2020. This category also consists of merchant processing fees, payroll expenses for corporate employees, amortization expense and legal and professional fees. During the nine months ended September 30, 2021, the Company has had an increase of approximately $6.3 million in general and administrative expenses, primarily related to increases in legal and professional fees and other increases in infrastructure expenses incurred to support the sales volume increases partially offset by a decrease in stock-based compensation costs referenced above. |
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| (iii) | Other operating expenses: This consists of rent, insurance, royalty expense, bank charges and IT services for our online products. During the nine months ended September 30, 2021, the Company had an increase of approximately $1.7 million or 265%, primarily related to increases in the general costs necessary to support the Company’s sales growth. |
| (iv) | Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in South Carolina and Puerto Rico. During the nine months ended September 30, 2021, the Company had an increase of approximately $786 thousand, primarily related to increases in headcount in the Company’s customer service department. |
| (v) | Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the nine months ended September 30, 2021, the Company had an increase of approximately $147 thousand, primarily resulting from technology platform improvements and amortization expense. |
Other (Expenses) / Income
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Interest (expense), net | $ | (2,866,150 | ) | $ | (1,313,010 | ) | ||
| Gain on debt forgiveness | 184,914 | - | ||||||
| Total | $ | (2,681,236 | ) | $ | (1,313,010 | ) | ||
Other expense, which consists of interest expense, amortization of debt discount recorded related to the June 1, 2021 Purchase Agreement and gain on debt forgiveness of PPP loans increased by approximately $1.4 million and is included in other expense for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, the balance consisted of interest expense.
Working Capital
| September 30, 2021 | December 31, 2020 | |||||||
| Current assets | $ | 14,132,557 | $ | 12,063,395 | ||||
| Current liabilities | 19,877,258 | 13,490,096 | ||||||
| Working capital | $ | (5,744,701 | ) | $ | (1,426,701 | ) | ||
Working capital decreased by approximately $4.3 million during the period ended September 30, 2021. The increase in current assets is primarily attributable to an increase in accounts receivable of approximately $0.9 million, other current assets of $0.5 million, inventory and product deposits (combined increase of approximately $0.4 million) and an increase in cash of approximately $0.3 million. Current liabilities increased by $6.4 million, which was primarily attributable an increase in accounts payable and accrued liabilities of $6.6 million as a result of the Company extending payables and credit terms with vendors and an increase in deferred revenue of $0.5 million during the period ended September 30, 2021. These increases were partially offset by a decrease in notes payable, net of $0.7 million due to repayments exceeding proceeds received during the nine months ended September 30, 2021.
Liquidity and Capital Resources
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (43,317,640 | ) | $ | (26,804,394 | ) | ||
| Net cash used in operating activities | $ | (27,259,550 | ) | $ | (5,595,382 | ) | ||
| Net cash used in investing activities | $ | (1,823,843 | ) | $ | (730,586 | ) | ||
| Net cash provided by financing activities | $ | 29,351,291 | $ | 6,135,981 | ||||
| Net increase (decrease) in cash | $ | 267,898 | $ | (189,987 | ) | |||
Since inception, the Company has funded operations through the collections from revenues provided by the sales of its products, issuances of common and preferred stock, receipt of loans and advances from officers and directors and the issuance of convertible notes to third-party investors.
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Net cash used in operating activities was approximately $27.3 million for the nine months ended September 30, 2021, as compared with approximately $5.6 million for the nine months ended September 30, 2020. The significant factors contributing to the cash used in operations during the nine months ended September 30, 2021, include the net loss of approximately $43.3 million (inclusive of approximately $8.0 million in non-cash, stock-based compensation charges) further described above, partially offset by the Company’s increase in accounts payable and accrued expenses of approximately $6.9 million and amortization of debt discount of $2.1 million.
Net cash used in investing activities for the nine months ended September 30, 2021 was approximately $1.8 million, as compared with net cash used in investing activities of $731 thousand for the nine months ended September 30, 2020. Net cash used in investing activities was due to cash paid for capitalized software costs of approximately $1.7 million, the purchase of equipment of $70 thousand and the purchase of an intangible asset of $22 thousand.
Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $29.4 million as compared with approximately $6.1 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, financing activities consisted of: (1) net proceeds of $14.9 million from the private placement whereby investors purchased (a) a senior secured redeemable debenture in the aggregate principal amount of $15.0 million and (b) warrants to purchase up to an additional 1,500,000 shares of the Company’s common stock at an exercise price of $12.00 per share, pursuant to the June 1, 2021 Purchase Agreement, (2) net proceeds of $13.5 million from the private placement of 608,696 common shares, at a purchase price of $23.00 per share for aggregate gross proceeds of $14.0 million pursuant to the February 2021 Purchase Agreement, (3) net proceeds from the exercise of options and warrants during the period of approximately $1.3 million, (4) net proceeds from the sale of common stock under the ATM Sales Agreement of approximately $0.5 million, in connection with our filed shelf registration and launch of an at-the-market program on June 8, 2021, and (5) our entry into a merchant funding agreement pursuant to which we may obtain cash advances. Subsequent to the quarter ended September 30, 2021, we closed on the October 4, 2021 Common Stock and Preferred Stock Offerings whereby the Company received total net proceeds of $55.3 million. These increases in net cash from financing activities were partially offset by the repayment of notes payable and the purchase of the additional membership interest of WorkSimpli.
See Notes 1, 5 and 6 to our unaudited condensed consolidated financial statements included in this report for further discussion of certain of these financing activities.
Liquidity and Capital Resources Outlook
The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes which the Company has been successful in achieving to date. The Company intends to use the net proceeds of the financing activities described above for customer acquisition, as well as for working capital, general corporate purposes and to repay existing indebtedness. See Note 1 to our unaudited condensed consolidated financial statements included in this report for further liquidity evaluation.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our unaudited condensed consolidated financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.
Revenue Recognition
The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:
| 1. | Identify the contract |
| 2. | Identify performance obligations |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price |
| 5. | Recognize revenue |
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For the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site, in these limited cases, recognition of revenue should be deferred until that time; however, the Company does not have a process to properly record the recognition of revenue if orders are not immediately shipped, and deems the impact to be immaterial. In all cases, delivery is considered to have occurred when title and risk of loss have transferred to the customer, which is usually commensurate upon shipment of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order, recording the revenue at the time it fulfills the shipment obligation to the customer.
For its product-based contracts with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer rebates and other adjustments for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The Company’s discounts and customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical transaction detail, and accounts for such provisions, as contra revenue, during the same period in which the related revenues are earned. The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to record estimates for returns and allowances to be applied to the entire product-based portfolio population.
The Company, through its majority-owned subsidiary WorkSimpli, offers a subscription-based service providing a suite of software applications to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with customers, the Company offers an initial 14-day trial period which is billed at $1.95, followed by a monthly subscription, or a yearly subscription to the Company’s software suite dependent on the subscriber’s enrollment selection. The Company has estimated that there is one product and one performance obligation that is delivered over time, as the Company allows the subscriber to access the suite of services for the time period of the subscription purchased. The Company allows the customer to cancel at any point during the billing cycle, in which case the customer’s subscription will not be renewed for the following month or year depending on the original subscription. The Company records the revenue over the customers subscription period for monthly and yearly subscribers or at the end of the initial 14-day service period for customers who purchased the initial subscription, as the circumstances dictate. The Company offers a discount for the monthly or yearly subscriptions being purchased, which is deducted at the time of payment at the initiation of the contract term, therefore the Contract price is fixed and determinable at the contract initiation. Monthly and annual subscriptions for the service are recorded net of the Company’s known discount rates. As of September 30, 2021 and December 31, 2020, the Company has accrued contract liabilities, as deferred revenue, of approximately $1,436,000 and $917,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers.
Customer discounts and allowances on WorkSimpli revenues approximated $377,000 and $275,000 for the three months ended September 30, 2021 and 2020, respectively, and approximated $1,599,000 and $545,000 for the nine months ended September 30, 2021 and 2020, respectively.
Capitalized Software Costs
The Company capitalizes certain internal payroll costs and third-party costs related to internally developed software and amortizes these costs using the straight-line method over the estimated useful life of the software, generally three years. The Company does not sell internally developed software other than through the use of subscription service. Certain development costs not meeting the criteria for capitalization, in accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software, are expensed as incurred. As of September 30, 2021 and December 31, 2020, the Company capitalized $2,169,644 and $438,136, respectively, related to internally developed software costs which is amortized over the useful life and included in development costs on our statement of operations.
Intangible Assets
Intangible assets are comprised of: (1) a customer relationship asset (with original cost of approximately $1,007,000) with an estimated useful life of three years, (2) a purchased license (with original cost of $200,000) with an estimated useful life of ten years and (3) a purchased domain name (with an original cost of $22,231) with an estimated useful life of three years. Intangible assets are amortized over their estimated lives using the straight-line method. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.
Income Taxes
The Company files corporate federal and state tax returns. Conversion Labs PR and WorkSimpli file tax returns in Puerto Rico, both are limited liability companies and file separate tax returns with any tax liabilities or benefits passing through to its members.
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The Company records current and deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating losses and management determines the necessity for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company’s tax returns for all years since December 31, 2017 remain open to audit by all related taxing authorities.
Stock-based Compensation
The Company follows the provisions of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally is recognized at fair value on the date of the grant and amortized over the respective vesting or service period. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of the Company’s common stock shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free rate approximates the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures, the Company has elected to account for forfeitures as they occur.
Many of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based compensation expense.
Application of New or Revised Accounting Standards—Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”)”, which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year, or January 1, 2021, should the Company elect to early adopt. The Company is currently evaluating the impact the adoption of ASU 2020-06 could have on the Company’s financial statements and disclosures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.
The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses which are indicative of many small companies with small number of staff:
| (i) | inadequate segregation of duties consistent with control objectives; |
| (ii) | insufficient written policies and procedures for accounting and financial reporting with respects to the requirements and application of both U.S. GAAP and SEC Guidelines; |
| (iii) | inadequate security and restricted access to computer systems including a disaster recovery plan; |
| (iv) | lack of formal written policy for the approval, identification and authorization of related party transactions; and |
| (v) | no written whistleblower policy. |
Management’s Plan to Remediate the Material Weakness
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
| (i) | continue to search for and evaluate qualified independent outside directors; |
| (ii) | the recent addition of functioning audit committee; |
| (iii) | re-design of our accounting processes and control procedures; |
| (iv) | identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a publicly-traded company; |
| (v) | review and improve current accounting policies and procedures and develop a thorough document detailing said policies and procedures with respects to the requirements and application of both U.S. GAAP and SEC Guidelines; |
| (vi) | identify and remedy gaps in our security and restricted access policies to computer systems and implement a disaster recovery plan; and |
| (vii) | adoption of a formal written related party transaction policy and whistleblower policy. |
We are committed to maintaining a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Management’s report on internal control over financial reporting was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit a Smaller Reporting Company to provide only Management’s report in this interim report, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our operations, we become involved in ordinary routine litigation incidental to the business. Material proceedings are described under Note 8, “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
An investment in the Company’s common stock involves a number of very significant risks. You should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 30, 2021, in addition to other information contained in our reports and in this quarterly report in evaluating the Company and its business before purchasing shares of our common stock. Except as set forth below, there have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2020. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks. In addition:
We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.
As our business strategies develop, we must add additional managerial, operational, financial and other personnel. Future growth will impose significant added responsibilities on members of management, including:
| ● | identifying, recruiting, integrating, maintaining, and motivating additional personnel; |
| ● | managing our internal development efforts effectively, while complying with our contractual obligations to contractors and other third parties; and |
| ● | improving our operational, financial, and management controls, reporting systems, and procedures. |
Our future financial performance will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. This lack of long-term experience working together may adversely impact our senior management team’s ability to effectively manage our business and growth.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors, and consultants to provide certain services. There can be no assurance that the services of these independent organizations, advisors, and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, we may not be able to advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, if at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop our business initiatives and, accordingly, may not achieve our research, development, and commercialization goals.
While all filed securities class action lawsuits were voluntarily dismissed, there is potential to be subject to additional securities class action lawsuits, which could require significant management time and attention and significant legal expenses and could result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to securities class action lawsuits, which may require significant management time and attention and significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, there is the potential for additional future litigation, and we could be materially and adversely affected by such matters.
We have insurance policies related to the risks associated with our business, including directors’ and officers’ liability insurance policies. However, there is no assurance that our insurance coverage will be sufficient or that our insurance carriers will cover all claims in any future litigation. If we are not successful in our defense of potential claims asserted in any future litigation and those potential future claims are not covered by insurance or exceed our insurance coverage, we could have to pay damage awards, indemnify our officers from damage awards that could be entered against them and pay the costs and expenses incurred in defense of, or in any settlement of, such potential future claims.
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We may be subject to claims that we are engaged in the corporate practice of medicine or that our contractual arrangements with affiliated physician groups constitute unlawful fee splitting.
We have begun to contract with physician owned professional corporations or professional associations to facilitate the delivery of telehealth services to their patients. We enter into management services agreements with these physician owned professional corporations pursuant to which we provide them with a comprehensive set of non-clinical management and administrative services. The physician owned professional corporations are solely responsible for practicing medicine and all clinical decision-making. These professional corporations will pay us for our management services from the fees they will collect from patients and third-party payors. Our relationships with these physician owned professional corporations are subject to various state laws that prohibit fee splitting or the practice of medicine by lay entities or persons. Corporate practice of medicine laws and enforcement varies by state. In some states, decisions and activities such as contracting with third party payors, setting rates and the hiring and management of non-clinical personnel may implicate the restrictions on the corporate practice of medicine.
In addition, corporate practice of medicine restrictions are subject to broad powers of interpretation and enforcement by state regulators. Some of these requirements may apply to us even if we do not have a physical presence in a state, solely because we provide management services to a provider licensed in the state or facilitate the provision of telehealth to a resident of the state. State medical practice boards, other regulatory authorities, or other parties, including the physicians or other providers with whom we contract, may assert that, despite these arrangements, we are engaged in the corporate practice of medicine or that our contractual arrangements with affiliated physician groups constitute unlawful fee splitting. In this event, failure to comply could lead to adverse judicial or administrative action against us and/or our providers, civil or criminal penalties, receipt of cease-and-desist orders from state regulators, loss of provider licenses, the need to make changes to the terms of engagement with providers that interfere with our business and other materially adverse consequences.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following disclosures set forth certain information with respect to all securities sold by the Company during the three months ended September 30, 2021 without registration under the Securities Act:
On July 19, 2021, the Company issued an aggregate of 30,000 shares of common stock for approximately $220 thousand of services expensed in prior periods.
The above transactions did not involve any underwriters, underwriting discounts or commissions, or any public offering. The Company relied upon the exemption from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof and/or Regulation D promulgated by the SEC under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
# Indicates management contract or compensatory plan, contract or arrangement.
* Filed herewith.
**Furnished herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIFEMD, INC.
| By: | /s/ Justin Schreiber | |
| Justin Schreiber | ||
| Chief Executive Officer | ||
| Date: | November 10, 2021 | |
| By: | /s/ Marc Benathen | |
| Marc Benathen | ||
| Chief Financial Officer | ||
| Date: | November 10, 2021 | |
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