UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 001-39785
LIFEMD, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 76-0238453 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
236 Fifth Avenue, Suite 400 New York, New York | 10001 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(866) 351-5907
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of exchange on which registered | ||
| The Global Market | ||||
| The Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 7, 2023, there were shares of the registrant’s common stock outstanding.
LIFEMD, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
LIFEMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 15,288,330 | $ | 3,958,957 | ||||
| Accounts receivable, net | 4,418,582 | 2,834,750 | ||||||
| Product deposit | 84,768 | 127,265 | ||||||
| Inventory, net | 3,790,646 | 3,703,363 | ||||||
| Other current assets | 1,303,960 | 687,022 | ||||||
| Total Current Assets | 24,886,286 | 11,311,357 | ||||||
| Non-current Assets | ||||||||
| Equipment, net | 424,637 | 476,441 | ||||||
| Right of use asset | 799,104 | 1,206,009 | ||||||
| Capitalized software, net | 11,325,766 | 8,840,187 | ||||||
| Intangible assets, net | 3,255,231 | 3,831,859 | ||||||
| Total Non-current Assets | 15,804,738 | 14,354,496 | ||||||
| Total Assets | $ | 40,691,024 | $ | 25,665,853 | ||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 9,637,390 | $ | 10,106,793 | ||||
| Accrued expenses | 15,493,128 | 12,166,509 | ||||||
| Notes payable, net | 426,223 | 2,797,250 | ||||||
| Current operating lease liabilities | 725,832 | 756,093 | ||||||
| Deferred revenue | 6,239,354 | 5,547,506 | ||||||
| Total Current Liabilities | 32,521,927 | 31,374,151 | ||||||
| Long-term Liabilities | ||||||||
| Long-term debt, net | 18,827,283 | - | ||||||
| Noncurrent operating lease liabilities | 169,821 | 574,136 | ||||||
| Contingent consideration | 256,250 | 443,750 | ||||||
| Purchase price payable | - | 579,319 | ||||||
| Total Liabilities | 51,775,281 | 32,971,356 | ||||||
| Commitments and Contingencies (Note 10) | - | - | ||||||
| Mezzanine Equity | ||||||||
| Preferred Stock, $ par value; shares authorized Series B Preferred Stock, $ par value; shares authorized, and shares issued and outstanding, liquidation value approximately, $0 and $1,305 per share as of September 30, 2023 and December 31, 2022, respectively | - | 4,565,822 | ||||||
| Stockholders’ Deficit | ||||||||
| Series A Preferred Stock, $ par value; shares authorized, shares issued and outstanding, liquidation value approximately, $29.44 and $27.84 per share as of September 30, 2023 and December 31, 2022, respectively | 140 | 140 | ||||||
| Common stock, $ par value; shares authorized, and shares issued, and outstanding as of September 30, 2023 and December 31, 2022, respectively | 347,593 | 315,528 | ||||||
| Additional paid-in capital | 196,901,377 | 179,015,250 | ||||||
| Accumulated deficit | (209,756,573 | ) | (190,562,994 | ) | ||||
| Treasury stock, and shares, at cost, as of September 30, 2023 and December 31, 2022, respectively | (163,701 | ) | (163,701 | ) | ||||
| Total LifeMD, Inc. Stockholders’ Deficit | (12,671,164 | ) | (11,395,777 | ) | ||||
| Non-controlling interest | 1,586,907 | (475,548 | ) | |||||
| Total Stockholders’ Deficit | (11,084,257 | ) | (11,871,325 | ) | ||||
| Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 40,691,024 | $ | 25,665,853 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS OF OPERATIONS
(Unaudited)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Telehealth revenue, net | $ | 24,342,789 | $ | 21,365,178 | $ | 66,896,719 | $ | 66,231,202 | ||||||||
| WorkSimpli revenue, net | 14,271,122 | 10,047,291 | 40,790,439 | 24,682,602 | ||||||||||||
| Total revenues, net | 38,613,911 | 31,412,469 | 107,687,158 | 90,913,804 | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of telehealth revenue | 4,479,760 | 4,502,919 | 12,525,887 | 14,042,112 | ||||||||||||
| Cost of WorkSimpli revenue | 301,746 | 213,923 | 1,019,018 | 558,216 | ||||||||||||
| Total cost of revenues | 4,781,506 | 4,716,842 | 13,544,905 | 14,600,328 | ||||||||||||
| Gross profit | 33,832,405 | 26,695,627 | 94,142,253 | 76,313,476 | ||||||||||||
| Expenses | ||||||||||||||||
| Selling and marketing expenses | 19,776,797 | 17,200,859 | 56,062,345 | 60,928,649 | ||||||||||||
| General and administrative expenses | 13,398,387 | 12,385,030 | 36,120,723 | 37,757,710 | ||||||||||||
| Other operating expenses | 1,622,137 | 1,617,375 | 4,640,690 | 5,076,820 | ||||||||||||
| Customer service expenses | 2,106,252 | 1,488,428 | 5,573,734 | 3,428,098 | ||||||||||||
| Development costs | 1,498,213 | 821,636 | 4,062,498 | 1,951,039 | ||||||||||||
| Goodwill impairment charge | - | - | - | 2,735,000 | ||||||||||||
| Change in fair value of contingent consideration | - | 248,000 | - | (2,487,000 | ) | |||||||||||
| Total expenses | 38,401,786 | 33,761,328 | 106,459,990 | 109,390,316 | ||||||||||||
| Operating loss | (4,569,381 | ) | (7,065,701 | ) | (12,317,737 | ) | (33,076,840 | ) | ||||||||
| Interest expense, net | (713,766 | ) | (132,235 | ) | (1,973,901 | ) | (432,405 | ) | ||||||||
| (Loss) gain on debt extinguishment | - | - | (325,198 | ) | 63,400 | |||||||||||
| Net loss | (5,283,147 | ) | (7,197,936 | ) | (14,616,836 | ) | (33,445,845 | ) | ||||||||
| Net income attributable to non-controlling interest | 839,288 | 83,737 | 2,247,055 | 154,464 | ||||||||||||
| Net loss attributable to LifeMD, Inc. | (6,122,435 | ) | (7,281,673 | ) | (16,863,891 | ) | (33,600,309 | ) | ||||||||
| Preferred stock dividends | (776,563 | ) | (776,563 | ) | (2,329,688 | ) | (2,329,688 | ) | ||||||||
| Net loss attributable to LifeMD, Inc. common stockholders | $ | (6,898,998 | ) | $ | (8,058,236 | ) | $ | (19,193,579 | ) | $ | (35,929,997 | ) | ||||
| Basic loss per share attributable to LifeMD, Inc. common stockholders | $ | (0.20 | ) | $ | (0.26 | ) | $ | (0.58 | ) | $ | (1.17 | ) | ||||
| Diluted loss per share attributable to LifeMD, Inc. common stockholders | $ | (0.20 | ) | $ | (0.26 | ) | $ | (0.58 | ) | $ | (1.17 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 34,472,904 | 30,935,643 | 32,959,665 | 30,830,533 | ||||||||||||
| Diluted | 34,472,904 | 30,935,643 | 32,959,665 | 30,830,533 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | Interest | Total | |||||||||||||||||||||||||||||||
| LifeMD, Inc. | ||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Treasury | Non- controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | Interest | Total | |||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 1,400,000 | $ | 140 | 30,704,434 | $ | 307,045 | $ | 164,517,634 | $ | (141,921,085 | ) | $ | (163,701 | ) | $ | 22,740,033 | $ | (1,031,745 | ) | $ | 21,708,288 | |||||||||||||||||||
| Stock compensation expense | - | - | 147,500 | 1,475 | 4,471,306 | - | - | 4,472,781 | - | 4,472,781 | ||||||||||||||||||||||||||||||
| Cashless exercise of stock options | - | - | 25,535 | 255 | (255 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Exercise of warrants | - | - | 22,000 | 220 | 38,280 | - | - | 38,500 | - | 38,500 | ||||||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,563 | ) | - | (776,563 | ) | - | (776,563 | ) | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (13,299,675 | ) | - | (13,299,675 | ) | 24,726 | (13,274,949 | ) | |||||||||||||||||||||||||||
| Balance, March 31, 2022 | 1,400,000 | $ | 140 | 30,899,469 | $ | 308,995 | $ | 169,026,965 | $ | (155,997,323 | ) | $ | (163,701 | ) | $ | 13,175,076 | $ | (1,043,019 | ) | $ | 12,132,057 | |||||||||||||||||||
| Stock compensation expense | - | - | - | - | 4,041,006 | - | - | 4,041,006 | - | 4,041,006 | ||||||||||||||||||||||||||||||
| Exercise of stock options | - | - | 90,400 | 904 | 89,496 | - | - | 90,400 | - | 90,400 | ||||||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,562 | ) | - | (776,562 | ) | - | (776,562 | ) | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (13,018,962 | ) | - | (13,018,962 | ) | 46,001 | (12,972,961 | ) | |||||||||||||||||||||||||||
| Balance, June 30, 2022 | 1,400,000 | $ | 140 | 30,989,869 | $ | 309,899 | $ | 173,157,467 | $ | (169,792,847 | ) | $ | (163,701 | ) | $ | 3,510,958 | $ | (1,033,018 | ) | $ | 2,477,940 | |||||||||||||||||||
| Stock compensation expense | - | - | 63,750 | 637 | 3,335,576 | - | - | 3,336,213 | - | 3,336,213 | ||||||||||||||||||||||||||||||
| Stock issued for legal settlement | 400,000 | 4,000 | 812,000 | - | - | 816,000 | - | 816,000 | ||||||||||||||||||||||||||||||||
| Cashless exercise of stock options | - | - | 4,156 | 42 | (42 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,563 | ) | - | (776,563 | ) | - | (776,563 | ) | |||||||||||||||||||||||||||
| Adjustment of membership interest in WorkSimpli | - | - | - | - | (173,415 | ) | - | - | (173,415 | ) | 185,565 | 12,150 | ||||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (7,281,673 | ) | - | (7,281,673 | ) | 83,737 | (7,197,936 | ) | |||||||||||||||||||||||||||
| Balance, September 30, 2022 | 1,400,000 | $ | 140 | 31,457,775 | $ | 314,578 | $ | 177,131,586 | $ | (177,851,083 | ) | $ | (163,701 | ) | $ | (568,480 | ) | $ | (799,716 | ) | $ | (1,368,196 | ) | |||||||||||||||||
| LifeMD, Inc. | ||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Treasury | Non- controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | Interest | Total | |||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | 1,400,000 | $ | 140 | 31,552,775 | $ | 315,528 | $ | 179,015,250 | $ | (190,562,994 | ) | $ | (163,701 | ) | $ | (11,395,777 | ) | $ | (475,548 | ) | $ | (11,871,325 | ) | |||||||||||||||||
| Stock compensation expense | - | - | 149,375 | 1,494 | 2,662,020 | - | - | 2,663,514 | - | 2,663,514 | ||||||||||||||||||||||||||||||
| Stock issued for noncontingent consideration payment | - | - | 337,895 | 3,379 | 638,621 | - | - | 642,000 | - | 642,000 | ||||||||||||||||||||||||||||||
| Warrants issued with debt instrument | - | - | - | - | 1,088,343 | - | - | 1,088,343 | - | 1,088,343 | ||||||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,563 | ) | - | (776,563 | ) | - | (776,563 | ) | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Adjustment of membership interest in WorkSimpli | - | - | - | - | (220,582 | ) | - | - | (220,582 | ) | (85,932 | ) | (306,514 | ) | ||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (4,008,456 | ) | - | (4,008,456 | ) | 565,983 | (3,442,473 | ) | |||||||||||||||||||||||||||
| Balance, March 31, 2023 | 1,400,000 | $ | 140 | 32,040,045 | $ | 320,401 | $ | 183,183,652 | $ | (195,348,013 | ) | $ | (163,701 | ) | $ | (12,007,521 | ) | $ | (31,497 | ) | $ | (12,039,018 | ) | |||||||||||||||||
| Stock compensation expense | - | - | 53,000 | 530 | 2,861,439 | - | - | 2,861,969 | - | 2,861,969 | ||||||||||||||||||||||||||||||
| Stock issued for noncontingent consideration payment | - | - | 455,319 | 4,553 | 637,447 | - | - | 642,000 | - | 642,000 | ||||||||||||||||||||||||||||||
| Cashless exercise of stock options | - | - | 16,471 | 165 | (165 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,562 | ) | - | (776,562 | ) | - | (776,562 | ) | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Adjustment of membership interest in WorkSimpli | - | - | - | - | (8,443 | ) | - | - | (8,443 | ) | 9,332 | 889 | ||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (6,733,000 | ) | - | (6,733,000 | ) | 841,784 | (5,891,216 | ) | |||||||||||||||||||||||||||
| Balance, June 30, 2023 | 1,400,000 | $ | 140 | 32,564,835 | $ | 325,649 | $ | 186,673,930 | $ | (202,857,575 | ) | $ | (163,701 | ) | $ | (16,021,557 | ) | $ | 783,619 | $ | (15,237,938 | ) | ||||||||||||||||||
| Balance | 1,400,000 | $ | 140 | 32,564,835 | $ | 325,649 | $ | 186,673,930 | $ | (202,857,575 | ) | $ | (163,701 | ) | $ | (16,021,557 | ) | $ | 783,619 | $ | (15,237,938 | ) | ||||||||||||||||||
| Stock compensation expense | - | - | 137,500 | 1,375 | 3,316,878 | - | - | 3,318,253 | - | 3,318,253 | ||||||||||||||||||||||||||||||
| Stock issued for noncontingent consideration payment | - | - | 158,129 | 1,581 | 640,419 | - | - | 642,000 | - | 642,000 | ||||||||||||||||||||||||||||||
| Stock issued for legal settlement | - | - | 100,000 | 1,000 | 531,000 | - | - | 532,000 | - | 532,000 | ||||||||||||||||||||||||||||||
| Cashless exercise of stock options | - | - | 57,901 | 579 | (579 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Sale of common stock under ATM, net | - | - | 180,021 | 1,800 | 897,767 | - | - | 899,567 | - | 899,567 | ||||||||||||||||||||||||||||||
| Series B Preferred Stock conversion | - | - | 1,560,864 | 15,609 | 5,057,205 | - | - | 5,072,814 | - | 5,072,814 | ||||||||||||||||||||||||||||||
| Warrants issued for debt instruments fair value adjustment | - | - | - | - | (215,243 | ) | - | - | (215,243 | ) | - | (215,243 | ) | |||||||||||||||||||||||||||
| Series A Preferred Stock dividend | - | - | - | - | - | (776,563 | ) | - | (776,563 | ) | - | (776,563 | ) | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | - | - | - | - | - | - | - | - | (36,000 | ) | (36,000 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | (6,122,435 | ) | - | (6,122,435 | ) | 839,288 | (5,283,147 | ) | |||||||||||||||||||||||||||
| Balance, September 30, 2023 | 1,400,000 | $ | 140 | 34,759,250 | $ | 347,593 | $ | 196,901,377 | $ | (209,756,573 | ) | $ | (163,701 | ) | $ | (12,671,164 | ) | $ | 1,586,907 | $ | (11,084,257 | ) | ||||||||||||||||||
| Balance | 1,400,000 | $ | 140 | 34,759,250 | $ | 347,593 | $ | 196,901,377 | $ | (209,756,573 | ) | $ | (163,701 | ) | $ | (12,671,164 | ) | $ | 1,586,907 | $ | (11,084,257 | ) | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
LIFEMD, INC.
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| 2023 | 2022 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (14,616,836 | ) | $ | (33,445,845 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Amortization of debt discount | 233,495 | - | ||||||
| Amortization of capitalized software | 3,787,716 | 1,746,899 | ||||||
| Amortization of intangibles | 725,496 | 666,782 | ||||||
| Accretion of consideration payable | 148,481 | 172,741 | ||||||
| Depreciation of fixed assets | 146,286 | 117,008 | ||||||
| Loss (gain) on debt extinguishment | 325,198 | (63,400 | ) | |||||
| Change in fair value of contingent consideration | - | (2,487,000 | ) | |||||
| Goodwill impairment charge | - | 2,735,000 | ||||||
| Operating lease payments | 562,073 | 463,198 | ||||||
| Stock issued for legal settlement | 532,000 | 816,000 | ||||||
| Stock compensation expense | 8,843,736 | 11,850,000 | ||||||
| Changes in Assets and Liabilities | ||||||||
| Accounts receivable | (1,583,832 | ) | (1,558,063 | ) | ||||
| Product deposit | 42,497 | 95,505 | ||||||
| Inventory | (87,283 | ) | (2,052,363 | ) | ||||
| Other current assets | (616,938 | ) | (21,386 | ) | ||||
| Change in operating lease liability | (589,744 | ) | (378,095 | ) | ||||
| Deferred revenue | 691,848 | 853,272 | ||||||
| Accounts payable | (469,403 | ) | 1,827,103 | |||||
| Accrued expenses | 5,611,131 | (2,303,466 | ) | |||||
| Other operating activity | (579,319 | ) | - | |||||
| Net cash provided by (used in) operating activities | 3,106,602 | (20,966,110 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for capitalized software costs | (6,273,295 | ) | (6,742,946 | ) | ||||
| Purchase of equipment | (94,482 | ) | (378,877 | ) | ||||
| Purchase of intangible assets | (148,868 | ) | (4,000,500 | ) | ||||
| Acquisition of business, net of cash acquired | - | (1,012,395 | ) | |||||
| Net cash used in investing activities | (6,516,645 | ) | (12,134,718 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from long-term debt, net | 19,466,887 | - | ||||||
| Proceeds from notes payable | 2,347,691 | - | ||||||
| Repayment of notes payable, net of prepayment penalty | (5,043,916 | ) | - | |||||
| Cash proceeds from exercise of options | - | 90,400 | ||||||
| Cash proceeds from exercise of warrants | - | 38,500 | ||||||
| Sale of common stock under ATM, net | 899,567 | - | ||||||
| Preferred stock dividends | (2,329,688 | ) | (2,329,688 | ) | ||||
| Contingent consideration payment for ResumeBuild acquisition | (187,500 | ) | (93,750 | ) | ||||
| Net payments for membership interest in WorkSimpli | (305,625 | ) | 12,150 | |||||
| Distributions to non-controlling interest | (108,000 | ) | (108,000 | ) | ||||
| Net cash provided by (used in) financing activities | 14,739,416 | (2,390,388 | ) | |||||
| Net increase (decrease) in cash | 11,329,373 | (35,491,216 | ) | |||||
| Cash at beginning of period | 3,958,957 | 41,328,039 | ||||||
| Cash at end of period | $ | 15,288,330 | $ | 5,836,823 | ||||
| Cash paid for interest | ||||||||
| Cash paid during the period for interest | $ | 1,485,242 | $ | - | ||||
| Non-cash investing and financing activities | ||||||||
| Warrants issued for debt instruments | $ | 873,100 | $ | - | ||||
| Cashless exercise of options | $ | 744 | $ | 297 | ||||
| Consideration payable for Cleared acquisition | $ | - | $ | 8,079,367 | ||||
| Consideration payable for ResumeBuild acquisition | $ | - | $ | 500,000 | ||||
| Stock issued for noncontingent consideration payment | $ | 1,926,000 | $ | - | ||||
| Series B Preferred Stock conversion | $ | 5,072,814 | $ | - | ||||
| Principal of Paycheck Protection Program loans forgiven | $ | - | $ | 63,400 | ||||
| Right of use asset | $ | 155,168 | $ | - | ||||
| Right of use lease liability | $ | 155,168 | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
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, it 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 78.2%. Concurrent with the name change of the parent company to Conversion Labs, Inc., Immudyne PR was renamed to Conversion Labs PR LLC (“Conversion Labs PR”). On April 25, 2019, the operating agreement of Conversion Labs PR was amended and restated in its entirety to increase the Company’s ownership and voting interest in Conversion Labs PR to 100%. On February 22, 2021, concurrent with the name of the parent company to LifeMD, Inc., Conversion Labs PR was renamed to LifeMD PR, LLC.
In June 2018, the Company closed the strategic acquisition of 51% of LegalSimpli Software, LLC, which operates a software as a service application for converting, editing, signing, and sharing PDF documents called PDFSimpli. In addition to LegalSimpli Software, LLC’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company. On July 15, 2021, LegalSimpli Software, LLC, changed its name to WorkSimpli Software LLC, (“WorkSimpli”). Effective January 22, 2021, the Company consummated a transaction to restructure the ownership of WorkSimpli (the “WSS Restructuring”) concurrently increased its ownership interest in WorkSimpli to 85.58%. Effective September 30, 2022, two option agreements were exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.64%. Effective December 15, 2022, LifeMD PR, LLC merged into WorkSimpli, with WorkSimpli being the surviving entity.
Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli and, as a result, the Company’s ownership interest in WorkSimpli increased to 74.06%. Effective June 30, 2023, an option agreement was exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.32%. See Note 8 for additional information.
On January 18, 2022, the Company acquired Cleared Technologies, PBC, a Delaware public benefit corporation (“Cleared”), a nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology (See Note 3).
Nature of Business
The Company is a direct-to-patient telehealth company providing patients a high-quality, cost-effective, and convenient way of accessing comprehensive, virtual healthcare. The Company believes the traditional model of visiting a doctor’s office, traveling to a local pharmacy, and returning for follow up care or prescription refills is complex, inefficient, and costly, and discourages many individuals from seeking much needed medical care. The Company is positioned to elevate the healthcare experience through telehealth with our proprietary technology platform, affiliated provider network, broad treatment capabilities, and unique ability to nurture patient relationships. Direct-to-patient telehealth technology companies, like the Company, connect consumers to affiliated, licensed, healthcare professionals for care across numerous indications, including urgent and primary care, men’s and women’s health, and dermatology, chronic care management and more.
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 (“OTC”) 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.
With its first brand, ShapiroMD, the Company has built a full line of proprietary OTC products for male and female hair loss—including Food and Drug Administration (“FDA”) approved OTC minoxidil and 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, RexMD, 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 NavaMD, 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.
| 7 |
Business and Subsidiary History
In early 2019, the Company launched a service-based business under the name Conversion Labs Media LLC (“CVLB Media”), a Puerto Rico limited liability company. However, this business initiative was terminated in early 2019. In May 2019, Conversion Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company, signed a strategic partnership agreement with Specialty Medical Drugstore, Inc. (doing business as “GoGoMeds”). However, since its inception, CVLB Rx did not conduct any business and CVLB Rx was dissolved on August 7, 2020. Additionally, Conversion Labs Asia Limited (“Conversion Labs Asia”), a Hong Kong company, had no activity during the three and nine months ended September 30, 2023 and 2022.
On January 18, 2022, the Company acquired Cleared, a nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology. Under the terms of the agreement, the Company acquired all outstanding shares of Cleared at closing in exchange for a $460 thousand upfront cash payment, and two non-contingent milestone payments for a total of $3.46 million ($1.73 million each on or before the first and second anniversaries of the closing date). The Company purchased a convertible note from a strategic pharmaceutical investor for $507 thousand which was converted upon closing of the Cleared acquisition. The Company also agreed to a performance-based earnout based on Cleared’s future net sales, payable in cash or shares at the Company’s discretion. On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things: (i) reduce the total purchase price by $250 thousand to a total of $3.67 million; (ii) change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024; (iii) removing all “earn-out” payments payable by the Company to the sellers; and (iv) remove certain representations and warranties of the Company and sellers in connection with the transaction (See Note 3). On February 6, 2023, the Company issued shares of common stock related to the first of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On April 17, 2023, the Company issued shares of common stock related to the second of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On July 17, 2023, the Company issued shares of common stock related to the third of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
In February 2022, WorkSimpli closed on an Asset Purchase Agreement (the “ResumeBuild APA”) with East Fusion FZCO, a Dubai, UAE corporation (the “Seller”), whereby WorkSimpli acquired substantially all of the assets associated with the Seller’s business, offering subscription-based resume building software through software as a service online platforms (the “Acquisition”). WorkSimpli paid $4.0 million to the Seller upon closing. The Seller is also entitled to a minimum of $500 thousand to be paid out in quarterly payments equal to the greater of 15% of net profits (as defined in the ResumeBuild APA) or approximately $63 thousand, for a two-year period ending on the two-year anniversary of the closing of the Acquisition. As of September 30, 2023, WorkSimpli has paid the Seller approximately $344 thousand in accordance with the ResumeBuild APA. WorkSimpli borrowed the purchase price from the Company pursuant to a promissory note with the obligation secured by an equity purchase guarantee agreement and a stock option pledge agreement from Fitzpatrick Consulting, LLC and its sole member Sean Fitzpatrick, who is Co-Founder and President of WorkSimpli (See Note 3).
Unless otherwise indicated, the terms “LifeMD,” “Company,” “we,” “us,” and “our” refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), Cleared, a Delaware public benefit corporation and our majority-owned subsidiary, WorkSimpli. The affiliated network of medical Professional Corporations and medical Professional Associations administratively led by LifeMD Southern Patient Medical Care, P.C., (“LifeMD PC”) is the Company’s affiliated, variable interest entity in which we hold a controlling financial interest. Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Liquidity & Going Concern Evaluation
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.
| 8 |
On March 21, 2023, the Company entered into and closed on a loan and security agreement (the “Credit Agreement”), and a supplement to the Credit Agreement (the “Supplement”), with Avenue Venture Opportunities Fund II, L.P. and Avenue Venture Opportunities Fund, L.P. (collectively, “Avenue”). The Credit Agreement provides for a convertible senior secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1) $15 million in term loans funded at closing, (2) $5 million of additional committed term loans which the Company received on September 26, 2023 under the First Amendment to the Credit Agreement (the “Avenue First Amendment”) and (3) $20 million of additional uncommitted term loans, collectively referred to as the “Avenue Facility”. The Avenue Facility matures on October 1, 2026. The Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments (the “Warrants”). In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49. Proceeds from the Avenue Facility were used to repay the Company’s outstanding notes payable balances with CRG Financial and are expected to be used for general corporate purposes. The Company is subject to certain affirmative and negative covenants under the Avenue Facility, including the requirement, beginning on the closing date, to maintain at least $5 million of unrestricted cash to be tested at the end of each month, and beginning on the period ended September 30, 2023, and at the end of each quarter thereafter, a trailing six-month cash flow, subject to certain adjustments as provided by the Credit Agreement, of at least $2 million.
As of September 30, 2023, the Company has an accumulated deficit approximating $209.8 million and has experienced significant losses from its operations. To date, the Company has been funding operations primarily through the sales of its products, sale of equity in private placements and securities purchased by a financial institution. There can be no assurances that we will be successful in increasing revenues, improving operational efficiencies or that financing will be available or, if available, that such financing will be available under favorable terms.
The Company has a current cash balance of approximately $12.9 million as of the filing date. The Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment, which included the available financing and consideration of positive and negative evidence impacting management’s forecasts, market, and industry factors. The Company’s continuance as a going concern is highly dependent on its future profitability and on the on-going support of its stockholders, affiliates, and creditors. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has begun to implement strategies to strengthen revenues and improve operational efficiencies across the business and is significantly curtailing expenses, however, these strategies do not mitigate the substantial doubt about the Company’s ability to continue as a going concern.
Additionally, on June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act, which was declared effective on June 22, 2021 (the “2021 Shelf”). Under the 2021 Shelf at the time of effectiveness, the Company originally had the ability to raise up to $ million by selling common stock, preferred stock, debt securities, warrants, and units. In conjunction with the 2021 Shelf, the Company also entered into an At Market Issuance Sales Agreement (the “ATM Sales Agreement”) with B. Riley Securities, Inc. and Cantor Fitzgerald & Co. relating to the sale of its common stock. In accordance with the terms of the ATM Sales Agreement, the Company may, but is not obligated to, offer and sell, from time to time, shares of common stock, through or to the Agents, acting as agent or principal. Sales of common stock, if any, will be made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act. On March 22, 2023, the date the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6 of Form S-3 (i.e., the “baby shelf limitations”). As a result of the baby shelf limitations, the Company was only able to offer and sell shares of common stock having an aggregate offering price of up to $18.435 million pursuant to the ATM Sales Agreement, and it filed a prospectus supplement with the SEC to that effect on March 27, 2023. In June 2023, the Company’s public float increased above $75.0 million. As a result, the Company is no longer subject to the baby shelf limitations. The Company filed another prospectus supplement with the SEC to that effect on June 29, 2023. As of September 30, 2023, the Company has $58.6 million available under the ATM Sales Agreement.
Management believes that the overall market value of the telehealth industry is positive and that it will continue to drive interest in the Company.
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 accounting principles generally accepted in the United States (“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, 2022, included in our 2022 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, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or for any future period.
| 9 |
Principles of Consolidation
The Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standards Codification (“ASC”) 810, Consolidation.
The consolidated financial statements include the accounts of the Company, Cleared, its majority owned subsidiary, WorkSimpli, and LifeMD PC, the Company’s affiliated, variable interest entity in which we hold a controlling financial interest. During the year ended December 31, 2021, the Company purchased an additional 34.6% of WorkSimpli for a total equity interest of approximately 85.58% as of December 31, 2021. Effective September 30, 2022, two option agreements were exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.64%. Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli and, as a result, the Company’s ownership interest in WorkSimpli increased to 74.06%. Effective June 30, 2023, an option agreement was exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.32%. See Note 8 for additional information.
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, 2023 and December 31, 2022, 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. These balances could be impacted if one or more of the financial institutions in which we deposit monies fails or is subject to other adverse conditions in the financial or credit markets. We have never experienced any losses related to these balances.
Variable Interest Entities
In accordance with ASC 810, Consolidation, the Company determines whether any legal entity in which the Company becomes involved is a variable interest entity (a “VIE”) and subject to consolidation. This determination is based on whether an entity has sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest and whether the interest will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE.
The Company determined that the LifeMD PC entity, the Company’s affiliated network of medical Professional Corporations and medical Professional Associations administratively led by LifeMD Southern Patient Medical Care, P.C., is a VIE and subject to consolidation. LifeMD PC and the Company do not have any stockholders in common. LifeMD PC is owned by licensed physicians, and the Company maintains a managed service agreement with LifeMD PC whereby we provide all non-clinical services to LifeMD PC. The Company determined that it is the primary beneficiary of LifeMD PC and must consolidate, as we have both the power to direct the activities of LifeMD PC that most significantly impact the economic performance of the entity and we have the obligation to absorb the losses. As a result, the Company presents the financial position, results of operations, and cash flows of LifeMD PC as part of the consolidated financial statements of the Company. There is no non-controlling interest upon consolidation of LifeMD PC.
Total revenue for LifeMD PC was approximately $1.9 million and $124 thousand for the three months ended September 30, 2023 and 2022, respectively, and $2.7 million and $124 thousand for the nine months ended September 30, 2023 and 2022, respectively. Total net income for LifeMD PC was approximately $440 thousand for the three months ended September 30, 2023 and net loss for LifeMD PC was approximately $1.0 million for the three months ended September 30, 2022. Total net loss for LifeMD PC was approximately $1.1 million and $3.9 million for the nine months ended September 30, 2023 and 2022, respectively.
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 and stockholders’ equity-based transactions and the capitalization and impairment of capitalized software and impairment of other long-lived assets. Actual results could differ from those estimates.
| 10 |
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. The Company has changed their categories for reporting operations and, as a result, the Company has made reclassifications to the prior year presentation in order to conform it to the current periods’ presentation. The reclassifications include $92 thousand and $272 thousand of lease expenses reclassified from general and administrative expenses to other operating expenses for the three and nine months ended September 30, 2022, respectively.
Revenue Recognition
The Company records revenue under the adoption of ASC 606, Revenue from Contracts with Customers, 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 all cases, delivery is considered to have occurred when the customer obtains control, which is usually commensurate upon shipment of the product. In the case where delivery is not commensurate upon shipment of the product, recognition of revenue is deferred until that time. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products. The Company 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 telehealth revenues approximated $696 thousand and $1.1 million during the three months ended September 30, 2023 and 2022, respectively. Customer discounts, returns and rebates on telehealth revenues approximated $1.5 million and $4.2 million during the nine months ended September 30, 2023 and 2022, respectively.
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 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 customer’s 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. Customer discounts and allowances on WorkSimpli revenues approximated $865 thousand and $710 thousand during the three months ended September 30, 2023 and 2022, respectively. Customer discounts and allowances on WorkSimpli revenues approximated $2.6 million and $1.7 million during the nine months ended September 30, 2023 and 2022, respectively.
| 11 |
For the three and nine months ended September 30, 2023 and 2022, the Company had the following disaggregated revenue:
SCHEDULE OF DISAGGREGATED REVENUE
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2023 | % | 2022 | % | 2023 | % | 2022 | % | |||||||||||||||||||||||||
| Telehealth revenue | $ | 24,342,789 | 63 | % | $ | 21,365,178 | 68 | % | $ | 66,896,719 | 62 | % | $ | 66,231,202 | 73 | % | ||||||||||||||||
| WorkSimpli revenue | 14,271,122 | 37 | % | 10,047,291 | 32 | % | 40,790,439 | 38 | % | 24,682,602 | 27 | % | ||||||||||||||||||||
| Total net revenue | $ | 38,613,911 | 100 | % | $ | 31,412,469 | 100 | % | $ | 107,687,158 | 100 | % | $ | 90,913,804 | 100 | % | ||||||||||||||||
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 the following: (1) obligations for products which the customer has not yet obtained control due to delivery not commensurate upon shipment of the product, (2) obligations on WorkSimpli in-process monthly or yearly contracts with customers and (3) a portion attributable to the yet to be recognized WorkSimpli initial 14-day trial period collections.
SCHEDULE OF CONTRACT WITH CUSTOMER LIABILITY
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Beginning of period | $ | 5,668,210 | $ | 1,992,502 | $ | 5,547,506 | $ | 1,499,880 | ||||||||
| Additions | 14,767,411 | 9,346,553 | 42,325,069 | 23,567,740 | ||||||||||||
| Revenue recognized | (14,196,267 | ) | (8,985,903 | ) | (41,633,221 | ) | (22,714,468 | ) | ||||||||
| End of period | $ | 6,239,354 | $ | 2,353,152 | $ | 6,239,354 | $ | 2,353,152 | ||||||||
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are included in right-of-use assets, net on the unaudited condensed consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current operating lease liabilities and noncurrent operating lease liabilities, respectively, on the unaudited condensed consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded in the balance sheet.
Accounts Receivable, net
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, 2023 and December 31, 2022, the reserve for sales returns and allowances was approximately $570 thousand and $815 thousand, respectively. For all periods presented, as noted above, the sales returns and allowances were recorded in accrued expenses on the unaudited condensed consolidated balance sheets.
Inventory
As of September 30, 2023 and December 31, 2022, inventory primarily consisted of finished goods, raw materials and packaging 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 various Amazon fulfillment centers. The Company also maintains inventory at a company owned warehouse in Pennsylvania.
Inventory is valued at the lower of cost or net realizable value with cost determined on an average cost 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. As of September 30, 2023 and December 31, 2022, the Company recorded an inventory reserve of approximately $99 thousand and $161 thousand, respectively.
| 12 |
As of September 30, 2023 and December 31, 2022, the Company’s inventory consisted of the following:
SUMMARY OF INVENTORY
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Finished goods - products | $ | 2,428,471 | $ | 2,587,370 | ||||
| Raw materials and packaging components | 1,461,576 | 1,276,891 | ||||||
| Inventory reserve | (99,401 | ) | (160,898 | ) | ||||
| Total Inventory - net | $ | 3,790,646 | $ | 3,703,363 | ||||
Product Deposit
Many of our vendors require deposits when a purchase order is placed for goods or fulfillment services. These deposits typically range from 10% to 33% of the total purchased amount. Our vendors include a credit memo within their final invoice, recognizing the deposit amount previously paid. As of September 30, 2023 and December 31, 2022, the Company has approximately $85 thousand and $127 thousand, respectively, of product deposits with multiple vendors for the purchase of raw materials or finished goods. 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, 2023, the Company approximates its implicit purchase commitments to be $596 thousand, of which the vast majority are with two vendors that manufacture the Company’s finished goods inventory for its RexMD product line.
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 ASC 350-40, Internal-Use Software, are expensed as incurred. As of September 30, 2023 and December 31, 2022, the Company capitalized a net amount of $11.3 million and $8.8 million, respectively, related to internally developed software costs which are amortized over the useful life and included in development costs on our statement of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently, if events or changes in circumstances indicate that the asset may be impaired. Goodwill in the amount of $8.0 million was recognized in conjunction with the Cleared acquisition. The Company recorded an $8.0 million goodwill impairment charge and an $827 thousand intangible asset impairment charge during the year ended December 31, 2022 related to a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections (see Note 3).
Other intangible assets are comprised of: (1) the ResumeBuild brand, (2) a customer relationship asset, (3) the Cleared trade name, (4) Cleared developed technology, (5) a purchased license and (6) two purchased domain names. During the year ended December 31, 2022, the Company recorded an $827 thousand impairment loss related to a decline in the estimated fair value of the Cleared customer relationship intangible asset with an original cost of $919 thousand and accumulated amortization of $92 thousand. Other 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.
Impairment of Long-Lived Assets
Long-lived assets include equipment and capitalized software. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, an impairment is recognized as the amount by which the carrying amount of the assets exceeds the estimated fair values of the assets. As of September 30, 2023 and December 31, 2022, the Company determined that no events or changes in circumstances existed that would indicate any impairment of its long-lived assets.
Income Taxes
The Company files corporate federal, state and local tax returns. WorkSimpli files a tax return in Puerto Rico; WorkSimpli is a limited liability company and files 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 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, 2019, 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 (“EPS”) is based on the weighted average number of shares outstanding during each period presented. Shares of unissued vested restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are included in our calculation of basic weighted average shares outstanding. 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.
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Series B Preferred Stock | - | 1,369,581 | 995,994 | 1,334,421 | ||||||||||||
| RSUs and RSAs | 2,954,750 | 1,830,750 | 2,545,875 | 1,563,000 | ||||||||||||
| Stock options | 2,616,722 | 4,007,698 | 3,316,909 | 4,214,609 | ||||||||||||
| Warrants | 4,827,380 | 3,859,638 | 4,827,380 | 3,859,638 | ||||||||||||
| Convertible long-term debt | 1,342,282 | - | 1,342,282 | - | ||||||||||||
| Potentially dilutive securities | 11,741,134 | 11,067,667 | 13,028,440 | 10,971,668 | ||||||||||||
Segment Data
Our portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands within our segments complement one another and position us well for future growth. Segment operating results are reviewed by the chief operating decision maker to make determinations about resources to be allocated and to assess performance. Other factors, including type of business, revenue recognition and operating results are reviewed in determining the Company’s operating segments.
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Fair Value of Financial Instruments
The fair value of a financial instrument is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities subject to ongoing fair value measurement are categorized and disclosed into one of the three categories depending on observable or unobservable inputs employed in the measurement. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities, are as follows:
| 1. | Level 1: Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. | |
| 2. | Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. | |
| 3. | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
The carrying value of the Company’s financial instruments, including cash, accounts receivable, accounts payable, accrued expenses, the face amount of notes payable and convertible long-term debt 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, 2023, we utilized three suppliers for fulfillment services, six suppliers for manufacturing finished goods, six suppliers for packaging, bottling, and labeling, and four suppliers for prescription medications. As of December 31, 2022, we utilized four suppliers for fulfillment services, six suppliers for manufacturing finished goods, five suppliers for packaging, bottling, and labeling, and three suppliers for prescription medications.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize the current expected credit loss (“CECL”) impairment model to estimate its lifetime “expected credit loss” and record an allowance that is deducted from the amortized cost basis of the financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. The Company adopted ASU 2016-13 as of January 1, 2023. The adoption did not have a material impact on the Company’s financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805); Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This new guidance affects all entities that enter into a business combination within the scope of ASC 805-10. Under this new guidance, the acquirer should determine what contract assets and/or liabilities it would have recorded under ASC 606, Revenue from Contracts with Customers, as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquirer. Under current U.S. GAAP, contract assets and contract liabilities acquired in a business combination are recorded by the acquirer at fair value. The Company adopted ASU 2021-08 as of January 1, 2023. The adoption did not have a material impact on the Company’s financial statements.
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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.
NOTE 3 – ACQUISITIONS
On January 18, 2022, the Company completed the acquisition of Cleared. The acquisition adds to the Company’s growing portfolio of telehealth capabilities. The Company accounted for the transaction using the acquisition method in accordance with ASC 805, Business Combinations, with the purchase price being allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Fair values were determined using income approaches. The results of Cleared are included within the consolidated financial statements commencing on the acquisition date.
The purchase price was approximately $9.1 million, including cash paid upfront of approximately $1.0 million and payable in the future of approximately $3.0 million, and contingent consideration of $5.1 million. The purchase agreement included up to $72.8 million of potential earn-out payable in cash or stock upon achievement of revenue targets, which was originally recognized as contingent consideration. The Company, with the assistance of a third-party valuation expert, estimated the fair value of the acquired tangible and identifiable intangible assets using significant estimates such as revenue projections. The fair value of the identified intangible assets was based primarily on significant unobservable inputs and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement. The fair value of the trade name and developed technology were determined using the relief-from-royalty method under the income approach. The royalty rates used to determine the fair value of the trade name and developed technology were 0.10% and 1.0%, respectively. The fair value of the customer relationships was determined using the multi-period excess earnings method which involves forecasting the net earnings expected to be generated. The customer attrition rate used to determine the fair value of the customer relationships was 10.0%. The discount rate used to determine the fair value of the trade name, developed technology and customer relationships was 70.5%.
The following table summarizes the acquisition date fair values of assets acquired and liabilities assumed:
SCHEDULE OF FAIR VALUE OF ASSETS AND LIABILITIES
| Purchase price, net of cash acquired | $ | 9,091,762 | ||
| Less: | ||||
| Customer relationship intangible asset | 918,812 | |||
| Trade name intangible asset | 133,339 | |||
| Developed technology intangible asset | 12,920 | |||
| Inventory | 7,168 | |||
| Fixed assets | 37,888 | |||
| Deferred taxes | 354,000 | |||
| Accounts payable and other current liabilities | (408,030 | ) | ||
| Goodwill | $ | 8,035,665 |
The purchase price and purchase price allocation for Cleared was finalized as of September 30, 2022 with no significant changes to preliminary amounts. Based on the final purchase price allocation, the aggregate goodwill recognized was $8.0 million, which is not expected to be deductible for income tax purposes. The amount allocated to goodwill and intangible assets reflected the benefits the Company expected to realize from the growth of the acquisition’s operations.
On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things: (i) reduce the total purchase price by $250 thousand to a total of $3.67 million; (ii) change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024; (iii) remove all “earn-out” payments payable by the Company to the sellers; and (iv) removing certain representations and warranties of the Company and sellers in connection with the transaction. On February 6, 2023, the Company issued shares of common stock related to the first of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On April 17, 2023, the Company issued shares of common stock related to the second of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On July 17, 2023, the Company issued shares of common stock related to the third of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
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During the year ended December 31, 2022, the Company recorded a decrease of $5.1 million to the Cleared contingent consideration as a result of the remeasurement of the fair value. The decline in the estimated fair value of the Cleared contingent consideration is a result of a decline in the Cleared financial projections and the removal of all earn-out payments payable by the Company from the terms of the First Amendment. During the year ended December 31, 2022, the Company also recorded an $8.0 million goodwill impairment charge and an $827 thousand intangible asset impairment charge based on the decline in the Cleared financial projections (See Note 4).
The pro forma financial information, assuming the acquisition had taken place on January 1, 2022, as well as the revenue and earnings generated during the period after the acquisition date, were not material for separate disclosure and, accordingly, have not been presented.
In February 2022, WorkSimpli closed on the ResumeBuild APA to purchase the related intangible assets associated with the ResumeBuild brand, a subscription-based resume building software. The acquisition further adds to the capabilities of the WorkSimpli software as a service application. The purchase price was $4.5 million, including cash paid upfront of $4.0 million and contingent consideration of $500 thousand. In accordance with ASC 805, Business Combinations, the Company accounted for the ResumeBuild APA as an acquisition of assets as substantially all the fair value of the gross assets acquired is concentrated in a group of similar assets. The Company has elected to group the complementary intangible assets acquired as a single brand intangible asset. Additionally, the Seller is entitled to quarterly payments equal to the greater of 15% of net profits (as defined in the ResumeBuild APA) or approximately $63 thousand, for a two-year period ending on the two-year anniversary of the closing of the Acquisition. As of September 30, 2023, WorkSimpli has paid the Seller approximately $344 thousand in accordance with the ResumeBuild APA. The Company estimated the fair value of the contingent consideration using the income approach and will remeasure the fair value quarterly with changes accounted for through earnings.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill balance related to the Cleared acquisition was $0 as of both September 30, 2023 and December 31, 2022. During the year ended December 31, 2022, the Company recorded an $8.0 million goodwill impairment charge related to a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections.
As of September 30, 2023 and December 31, 2022, the Company has the following amounts related to amortizable intangible assets:
SCHEDULE OF GOODWILL AND INTANGIBLE ASSETS
| September 30, | December 31, | Amortizable | ||||||||
| 2023 | 2022 | Life | ||||||||
| Amortizable Intangible Assets: | ||||||||||
| ResumeBuild brand | $ | 4,500,000 | $ | 4,500,000 | 5 years | |||||
| Customer relationship asset | 1,006,840 | 1,006,840 | 3 years | |||||||
| Cleared trade name | 133,339 | 133,339 | 5 years | |||||||
| Cleared developed technology | 12,920 | 12,920 | 1 year | |||||||
| Purchased licenses | 200,000 | 200,000 | 10 years | |||||||
| Website domain names | 171,599 | 22,731 | 3 years | |||||||
| Amortizable intangible assets | 171,599 | 22,731 | 3 years | |||||||
| Less: accumulated amortization | (2,769,467 | ) | �� | (2,043,971 | ) | |||||
| Total net amortizable intangible assets | $ | 3,255,231 | $ | 3,831,859 | ||||||
During the year ended December 31, 2022, the Company recorded an $827 thousand impairment charge related to a decline in the estimated fair value of the Cleared customer relationship intangible asset with an original cost of $919 thousand and accumulated amortization of $92 thousand. The aggregate amortization expense of the Company’s intangible assets for the three months ended September 30, 2023 and 2022 was $246 thousand and $326 thousand, respectively. The aggregate amortization expense of the Company’s intangible assets for the nine months ended September 30, 2023 and 2022 was $726 thousand and $667 thousand, respectively. Total amortization expense for the remainder of 2023 is approximately $246 thousand, 2024 through 2025 is approximately $980 thousand per year, 2026 is approximately $940 thousand and 2027 is approximately $113 thousand.
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NOTE 5 – ACCRUED EXPENSES
As of September 30, 2023 and December 31, 2022, the Company has the following amounts related to accrued expenses:
SCHEDULE OF ACCRUED EXPENSES
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued selling and marketing expenses | $ | 6,872,464 | $ | 3,508,883 | ||||
| Sales tax payable | 2,501,035 | 2,501,035 | ||||||
| Purchase price payable | 1,264,301 | 2,463,002 | ||||||
| Accrued dividends payable | 776,563 | 776,563 | ||||||
| Accrued compensation | 2,074,074 | 576,027 | ||||||
| Accrued interest | - | 448,718 | ||||||
| Other accrued expenses | 2,004,691 | 1,892,281 | ||||||
| Total accrued expenses | $ | 15,493,128 | $ | 12,166,509 | ||||
NOTE 6 – NOTES PAYABLE
Working Capital Loans
In October 2022, the Company received proceeds of $976 thousand under a 12-month working capital loan with Amazon. The terms of the loan include interest in the amount of $62 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $111 thousand and $976 thousand, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
In November 2022, the Company received proceeds of $1.9 million under two 10-month working capital loans with Balanced Management. The terms of the loans include loan origination fees in the amount of $60 thousand and total interest of $840 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $0 and $1.821 million, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
During the nine months ended September 30, 2023, the Company received proceeds of $2 million under a $2.5 million loan facility with CRG Financial, maturing on December 15, 2023. The loan facility includes interest of 12%. The Company repaid the $2 million outstanding loan balance on March 21, 2023 with the proceeds received from the Avenue Facility and recorded a $325 thousand loss on debt extinguishment related to the repayment of the CRG Financial loan due to a prepayment penalty and various fees. As of both September 30, 2023 and December 31, 2022, the outstanding balance was $0 related to the CRG Financial loan.
During the nine months ended September 30, 2023, the Company financed a $348 thousand prepaid insurance policy under a 10-month financing agreement with Arthur J. Gallagher Risk Management Services, LLC. The terms of the agreement include finance fees in the amount of $13 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $315 thousand and $0, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
Total interest expense on notes payable amounted to $216 thousand and $0 for the three months ended September 30, 2023 and 2022, respectively. Total interest expense on notes payable amounted to $250 thousand and $0 for the nine months ended September 30, 2023 and 2022, respectively.
NOTE 7 – LONG-TERM DEBT
Avenue Capital Credit Facility
As noted in Note 1 above, on March 21, 2023, the Company entered into and closed on a Credit Agreement, and a Supplement to the Credit Agreement with Avenue. The Credit Agreement provides for a convertible senior secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1) $15 million in term loans funded at closing, (2) $5 million of additional committed term loans received on September 26, 2023 in conjunction with the Avenue First Amendment and (3) $20 million of additional uncommitted term loans, collectively referred to as the “Avenue Facility”. The Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments. The Warrants have a term of five years. The relative fair value of the Warrants issued to Avenue upon closing was $873 thousand. In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49. The relative fair value was recorded to debt discount and is included as a reduction to long-term debt on the unaudited condensed consolidated balance sheet as of September 30, 2023. The Company incurred other fees associated with the Avenue Facility including: (1) a $300 thousand financing fee, (2) a $200 thousand upfront commitment fee of 1% of the total $20 million in committed capital and (3) $27 thousand in legal fees. The total debt discount recorded of $1.4 million will be amortized over a forty-two-month period. Total amortization of debt discount was $80 thousand and $234 thousand for the three and nine months ended September 30, 2023, respectively. The Company received gross proceeds of $15.0 million at closing (net proceeds of $12.3 million after repayment of the $2 million outstanding CRG loan balance and various fees).
As noted in Note 1 above, the Company entered into the Avenue First Amendment to the Credit Agreement whereby the Company received an additional $5 million in committed term loans on September 26, 2023. The Company received gross and net proceeds of $5.0 million.
The Avenue Facility matures on October 1, 2026 and interest is based on the greater of: (1) the Prime Rate (as defined in the Supplement) plus 4.75% and (2) 12.5%. At September 30, 2023, the interest rate was 13.25%. Payments are interest only until November 2024. Proceeds from the Avenue Facility were used to repay the Company’s outstanding notes payable balances with CRG Financial and are expected to be utilized for general corporate purposes.
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The Company is subject to certain affirmative and negative covenants under the Avenue Facility, including the requirement, beginning on the closing date, to maintain at least $5 million of unrestricted cash to be tested at the end of each month, and beginning on the period ended September 30, 2023, and at the end of each quarter thereafter, a trailing six-month cash flow, subject to certain adjustments as provided by the Credit Agreement, of at least $2 million. As of the date of filing, there is $20 million outstanding under the Avenue Facility and the Company is in compliance with the Avenue Facility terms.
Total interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $594 thousand and $0 for the three months ended September 30, 2023 and 2022, respectively. Total interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $1.3 million and $0 for the nine months ended September 30, 2023 and 2022, respectively.
NOTE 8 – 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 Preferred Stock, are designated as Series A Preferred Stock and 3,385,000 shares of preferred stock remain undesignated.
On June 8, 2021, the Company filed the 2021 Shelf. Under the 2021 Shelf at the time of effectiveness, the Company originally had the ability to raise up to $ million by selling common stock, preferred stock, debt securities, warrants and units. In conjunction with the 2021 Shelf, the Company also entered into the ATM Sales Agreement whereby the Company may offer and sell, from time to time, shares of common stock. On March 22, 2023, the date the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6 of Form S-3 (i.e., the “baby shelf limitations”). As a result of the baby shelf limitations, the Company may only offer and sell shares of common stock having an aggregate offering price of up to $18.435 million pursuant to the ATM Sales Agreement, and it filed a prospectus supplement with the SEC to that effect on March 27, 2023. In June 2023, the Company’s public float increased above $75.0 million. As a result, the Company is no longer subject to the baby shelf limitations. The Company filed another prospectus supplement with the SEC to that effect on June 29, 2023. As of September 30, 2023, the Company has $58.6 million available under the ATM Sales Agreement.
Options
During the nine months ended September 30, 2023, the Company issued an aggregate of shares of common stock related to the cashless exercise of options.
Common Stock
Common Stock Transactions During the Nine Months Ended September 30, 2023
During the nine months ended September 30, 2023, the Company issued an aggregate of shares of common stock for service, including vested restricted stock units.
On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024. On February 6, 2023, the Company issued shares of common stock related to the first of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On April 17, 2023, the Company issued shares of common stock related to the second of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On July 17, 2023, the Company issued shares of common stock related to the third of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
During the nine months ended September 30, 2023, the Company sold shares of common stock under the ATM Sales Agreement and net proceeds received were $900 thousand.
During the nine months ended September 30, 2023, the Company issued shares of common stock related to the settlement of the Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, and the Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, matters. The shares issued were valued based on the closing price of the Company’s stock, or $, on the date of settlement, July 10, 2023.
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On July 10, 2023, and August 14, 2023, PA001 Holdings, LLC, the holder of the Company’s Series B Preferred Stock, elected to convert and shares, respectively, of the Company’s Series B Preferred Stock, at a price of $ per share of Series B Preferred Stock, pursuant to the terms of the Securities Purchase Agreement dated August 28, 2020. The conversion was calculated based on the original issuance price of the Series B Preferred Stock plus all accrued dividends to date. The conversion resulted in and shares of the Company’s common stock issued to PA001 Holdings, on July 12, 2023 and August 15, 2023, respectively.
On March 21, 2023, in connection with the Company’s closing of a Credit Agreement with Avenue, the Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments. In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49.
Noncontrolling Interest
Net income attributed to the non-controlling interest amounted to $839 thousand and $84 thousand for the three months ended September 30, 2023 and 2022, respectively. During both the three months ended September 30, 2023 and 2022, the Company paid distributions to non-controlling shareholders of $36 thousand. Net income attributed to the non-controlling interest amounted to $2.2 million and $155 thousand for the nine months ended September 30, 2023 and 2022, respectively. During both the nine months ended September 30, 2023 and 2022, the Company paid distributions to non-controlling shareholders of $108 thousand.
WorkSimpli Software Restructuring Transaction
Effective January 22, 2021 (the “WSS Effective Date”), the Company consummated the WSS Restructuring, which is described in Note 1. 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 $376 thousand (the “CVLBPR Note”), issued by WSS in favor of Conversion Labs PR, for newly issued membership interests of WSS (the “Exchange”). Upon consummation of the Exchange the CVLBPR Note was extinguished.
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 $225,000, paid in December 2020.
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 $300 thousand. . Payment for the first tranche of $100 thousand was made upon execution of the CVLB PR MIPA in January 2021. Payments for the second and third tranches were made on the 60-day anniversary and the 120-day anniversary of the WSS Effective Date.
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.
.
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On September 30, 2022, Sean Fitzpatrick and Varun Pathak exercised their options to purchase and membership interest units, respectively, of WorkSimpli for an exercise price of $1.00 per membership interest unit under the Option Agreements. Following the exercise of the Option Agreements, Conversion Labs PR decreased its ownership interest in WorkSimpli from 85.58% to 73.64%. Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli. Following the retirement, Conversion Labs PR’s ownership interest in WorkSimpli increased to 74.06%. On June 30, 2023, Lisa Bowlin, WorkSimpli’s Chief Operating Officer, exercised her option agreement (the “Bowlin Option Agreement”) to purchase membership interest units of WorkSimpli for an exercise price of $1.00 per membership interest unit. Following the exercise of the Bowlin Option Agreement, Conversion Labs PR decreased its ownership interest in WorkSimpli from 74.06% to 73.32%.
On June 30, 2023, WorkSimpli declared a cash dividend in the amount of $22.40 per membership interest unit to all unit holders of record as of June 30, 2023 and was paid on July 3, 2023. On July 31, 2023, WorkSimpli declared a cash dividend in the amount of $11.20 per membership interest unit to all unit holders of record as of July 28, 2023 and was paid on August 1, 2023. On August 31, 2023, WorkSimpli declared a cash dividend in the amount of $16.80 per membership interest unit to all unit holders of record as of August 30, 2023 and was paid on September 1, 2023. On September 30, 2023, WorkSimpli declared a cash dividend in the amount of $14.00 per membership interest unit to all unit holders of record as of September 30, 2023 and was paid on October 5, 2023. The total dividends declared to noncontrolling interest holders was $1.0 million and $1.5 million for the three and nine months ended September 30, 2023, respectively, and is included in the Company’s results of operations for the three and nine months ended September 30, 2023.
Dividends
The Company pays cumulative dividends on its Series A Preferred Stock, in the amount of $ per share each year, which is equivalent to 8.875% of the $25.00 liquidation preference per share. Dividends on the Series A Preferred Stock are payable quarterly in arrears, on or about the 15th day of January, April, July, and October of each year. Dividends declared and paid on the Series A Preferred Stock during the nine months ended September 30, 2023 are as follows: (1) quarterly dividend declared on March 28, 2023 to holders of record as of April 7, 2023 and was paid on April 17, 2023, (2) quarterly dividend declared on June 27, 2023 to holders of record as of July 7, 2023 and was paid on July 17, 2023 and (3) quarterly dividend declared on September 26, 2023 to holders of record as of October 6, 2023 and was paid on October 16, 2023. The dividends are included in the Company’s results of operations for the three and nine months ended September 30, 2023.
Stock Options
On January 8, 2021, the Company approved the Company’s 2020 Equity and 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 of the Board of Directors (the “Board”) 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 2020 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 and ending on (and including) January 1, 2030. 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.
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.
On June 16, 2022, 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, 2023, the 2020 Plan, as amended, provided for the issuance of up to shares of Common Stock. Remaining authorization under the 2020 Plan, as amended, was shares as of September 30, 2023.
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 the 2020 Plan.
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During the nine months ended September 30, 2023, the Company issued an aggregate of 234,500 stock options to employees under the 2020 Plan and the prior plan. These stock options have a contractual term of 4 to 6.5 years and vest in increments which fully vest the options over a two to three-year period, dependent on the specific agreements’ terms.
SCHEDULE OF OPTION ACTIVITY
Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||
| Balance, December 31, 2022 | 1,784,587 | $ | – | years | $ | 9.54 | ||||||||
| Granted | 94,500 | – | years | 3.30 | ||||||||||
| Cancelled/Forfeited/Expired | (1,006,698 | ) | – | 10.01 | ||||||||||
| Balance at September 30, 2023 | 872,389 | $ | – | years | $ | 8.32 | ||||||||
| Exercisable at December 31, 2022 | 1,185,153 | $ | – | years | $ | 9.62 | ||||||||
| Exercisable at September 30, 2023 | 677,625 | $ | – | years | $ | 8.58 | ||||||||
The total fair value of the options granted was $ thousand, 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 $ million and $ million for the three months ended September 30, 2023 and 2022, respectively, with unamortized expense remaining of $2.1 million as of September 30, 2023. Total compensation expense under the 2020 Plan options above was $ million and $ million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, aggregate intrinsic value of vested service-based options outstanding was $ thousand.
SCHEDULE OF OPTION ACTIVITY
Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||
| Balance, December 31, 2022 | 1,439,333 | $ | – | years | $ | 6.11 | ||||||||
| Granted | 140,000 | – | years | 1.71 | ||||||||||
| Exercised | (120,000 | ) | – | years | 1.33 | |||||||||
| Cancelled/Forfeited/Expired | (200,000 | ) | 14.04 | |||||||||||
| Balance at September 30, 2023 | 1,259,333 | $ | – | years | $ | 4.82 | ||||||||
| Exercisable December 31, 2022 | 1,158,764 | $ | – | years | $ | 5.25 | ||||||||
| Exercisable at September 30, 2023 | 1,198,208 | $ | – | years | $ | 4.65 | ||||||||
The total fair value of the options granted was $thousand, 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 $ thousand and $thousand for the three months ended September 30, 2023 and 2022, respectively, with unamortized expense remaining of $525 thousand as of September 30, 2023. Total compensation expense under the above service-based option plan was $ million and $million for the nine months ended September 30, 2023 and 2022, respectively. Of the total service-based options exercised during the nine months ended September 30, 2023, options were exercised on a cashless basis, which resulted in shares issued. As of September 30, 2023, aggregate intrinsic value of vested service-based options outstanding was $million.
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SCHEDULE OF OPTION ACTIVITY
Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||
| Balance at December 31, 2022 | 535,000 | $ | – | years | $ | 1.60 | ||||||||
| Cancelled/Forfeited/Expired | (50,000 | ) | 2.00 | |||||||||||
| Balance at September 30, 2023 | 485,000 | $ | – | years | $ | 1.56 | ||||||||
| Exercisable December 31, 2022 | 470,000 | $ | – | years | $ | 1.61 | ||||||||
| Exercisable at September 30, 2023 | 420,000 | $ | – | years | $ | 1.56 | ||||||||
compensation expense was recognized on the performance-based options above for the three and nine months ended September 30, 2023, as the performance terms have not been met or are not probable. Total compensation expense under the above performance-based options was $ thousand and $ thousand for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, aggregate intrinsic value of vested performance options outstanding was $ million.
RSUs and RSAs
SCHEDULE OF RESTRICTED STOCK UNIT ACTIVITY
RSU Outstanding Number of Shares | ||||
| Balance at December 31, 2022 | 1,028,250 | |||
| Granted | 3,082,750 | |||
| Vested | (474,625 | ) | ||
| Cancelled/Forfeited | (730,000 | ) | ||
| Balance at September 30, 2023 | 2,906,375 | |||
The total fair value of the RSUs and RSAs granted was $10.5 million which was determined using the fair value of the quoted market price on the date of grant. Total compensation expense under the 2020 Plan RSUs and RSAs above was $ million and $ thousand for the three months ended September 30, 2023 and 2022, respectively, with unamortized expense remaining of $5.7 million as of September 30, 2023. Total compensation expense under the 2020 Plan RSUs and RSAs above was $ million and $ million for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, RSUs and RSAs vested, of which RSUs and RSAs were issued. During the nine months ended September 30, 2023, RSUs and service-based stock options were cancelled and replaced with RSAs for four executives and two employees. Incremental compensation cost resulting from the modifications was immaterial to the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023.
SCHEDULE OF RESTRICTED STOCK UNIT ACTIVITY
RSU Outstanding Number of Shares | ||||
| Balance at December 31, 2022 | 715,000 | |||
| Granted | 725,000 | |||
| Vested | (327,500 | ) | ||
| Cancelled/Forfeited | (500,000 | ) | ||
| Balance at September 30, 2023 | 612,500 | |||
The total fair value of the RSUs and RSAs granted was $2.0 million which was determined using the fair value of the quoted market price on the date of grant. Total compensation expense for RSUs and RSAs outside of the 2020 Plan was $ thousand and $ thousand for the three months ended September 30, 2023 and 2022, respectively, with unamortized expense remaining of $1.3 million as of September 30, 2023. Total compensation expense for RSUs and RSAs outside of the 2020 Plan was $ thousand and $ million for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, RSUs and RSAs vested, of which RSUs and RSAs were issued. During the nine months ended September 30, 2023, RSUs were cancelled and replaced with RSAs for one executive. Incremental compensation cost resulting from the modification was immaterial to the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023.
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Warrants
The following is a summary of outstanding and exercisable warrants activity during the nine months ended September 30, 2023:
SCHEDULE OF WARRANT OUTSTANDING AND EXERCISABLE
Warrants Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | |||||||||||||
| Balance at December 31, 2022 | 3,859,638 | $ – | years | $ | 5.59 | |||||||||||
| Granted | 967,742 | years | 1.24 | |||||||||||||
| Balance at September 30, 2023 | 4,827,380 | $ – | years | $ | 4.74 | |||||||||||
| Exercisable December 31, 2022 | 3,836,993 | $– | years | $ | 5.63 | |||||||||||
| Exercisable September 30, 2023 | 4,827,380 | $ – | years | $ | 4.73 | |||||||||||
The total fair value of the warrants granted during the nine months ended September 30, 2023, was $895 thousand, 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 %. No stock-based compensation expense on the warrants granted during the nine months ended September 30, 2023 was recorded as the warrants are amortized through debt discount (see Note 7).
Total compensation expense for warrants granted prior to the nine months ended September 30, 2023 was $ and $ thousand for the three months ended September 30, 2023 and 2022, respectively, with no unamortized expense remaining as of September 30, 2023. Total compensation expense for warrants granted prior to the nine months ended September 30, 2023 was $ thousand and $million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, aggregate intrinsic value of vested warrants outstanding was $10.2 million.
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, RSUs and RSAs amounted to $million for both the three months ended September 30, 2023 and 2022. The total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock options, warrants RSUs and RSAs amounted to $million and $million for the nine months ended September 30, 2023 and 2022, respectively. Such amounts are included in general and administrative expenses in the unaudited condensed consolidated statement of operations. Unamortized expense remaining related to service-based stock options, performance-based stock options, warrants, RSUs and RSAs was $9.6 million as of September 30, 2023, which is expected to be recognized through 2026.
NOTE 9 – LEASES
The Company leases office space domestically under operating leases. The Company’s headquarters are located in New York, New York for which the lease expires in 2025. We operate a marketing and sales center in Huntington Beach, California for which the lease expires in 2024, a patient care center in Greenville, South Carolina for which the lease expires in 2024 and a warehouse and fulfillment center in Columbia, Pennsylvania for which the lease expires in 2024. WorkSimpli leases two office spaces in Puerto Rico for which the leases expire in 2024.
The following is a summary of the Company’s operating right-of-use assets and operating lease liabilities as of September 30, 2023:
SCHEDULE OF OPERATING RIGHT OF USE OF ASSETS
| Operating right-of-use assets | $ | 799,104 | ||
| Operating lease liabilities - current | $ | 725,832 | ||
| Operating lease liabilities - noncurrent | $ | 169,821 |
Total accumulated amortization of the Company’s operating right-of-use assets was $1.9 million as of September 30, 2023.
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The table below reconciles the undiscounted future minimum lease payments under the above noted operating leases to the total operating lease liabilities recognized on the unaudited condensed consolidated balance sheet as of September 30, 2023:
SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITIES
| Fiscal year 2023 | $ | 256,581 | ||
| Fiscal year 2024 | 604,987 | |||
| Fiscal year 2025 | 68,850 | |||
| Less: imputed interest | (34,765 | ) | ||
| Present value of operating lease liabilities | $ | 895,653 |
Operating lease expenses were $214 thousand and $200 thousand for the three months ended September 30, 2023 and 2022, respectively, and $643 thousand and $603 thousand for the nine months ended September 30, 2023 and 2022, respectively, and were included in other operating expenses in our unaudited condensed consolidated statement of operations.
Supplemental cash flow information related to operating lease liabilities consisted of the following:
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE LIABILITIES
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for operating lease liabilities | $ | 665,129 | $ | 517,871 | ||||
Supplemental balance sheet information related to operating lease liabilities consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Weighted average remaining lease term in years | 2.13 | 2.82 | ||||||
| Weighted average discount rate | 7.15 | % | 7.15 | % | ||||
We have elected to apply the short-term lease exception to the warehouse space we lease in Lancaster, Pennsylvania. This lease has a term of 12 months and is not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. Straight-line lease payments are $3 thousand per month. Additionally, Conversion Labs PR utilizes office space in Puerto Rico on a month-to-month basis incurring rental expense of approximately $3 thousand per month.
NOTE 10 - 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, ten years. As consideration for granting Conversion Labs PR this license, Pilaris will receive on quarterly basis, 10% of the net income collected by the licensed products based on the following formula: Net Income = total income – cost of goods sold – advertising and operating expenses directly related to the marketing of the licensed products. As of September 30, 2023 and December 31, 2022, $0 and approximately $138 thousand, respectively, were included in accrued expenses in regard to this agreement.
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”). The Company shall pay Alphabet a royalty equal to 13% of Gross Receipts (as defined in the Agreement) realized from the sales of Licensed Products. No amounts were earned or owed as of September 30, 2023.
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 $7.5 million in any calendar year, the Company will grant Alphabet an option to purchase shares of the Company’s common stock at an exercise price of $; (ii) if Licensed Products have gross receipts of $10.0 million in any calendar year, the Company will grant Alphabet an additional option to purchase shares of the Company’s common stock at an exercise price of $and (iii) if Licensed Products have gross receipts of $20.0 million in any calendar year, the Company will grant Alphabet an option to purchase shares of the Company’s common stock at an exercise price of $. The likelihood of meeting these performance goals for the licensed products are remote and, therefore, the Company has not recognized any compensation.
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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, 2023, the Company approximates its implicit purchase commitments to be $596 thousand.
Legal Matters
In the normal course of business operations, the Company may become involved in various legal matters. As of September 30, 2023, other than as set forth below, the Company’s management does not believe that there are any potential legal matters that could have a material effect on the Company’s consolidated financial position.
On December 10, 2021, a purported breach of contract, breach of duty of good faith and fair dealing, unjust enrichment, quantum meruit, and fraud lawsuit, captioned Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, was filed in the United States District Court for the Southern District of New York against the Company. The Harborside Complaint alleges, among other things, that the Company breached a Consulting Services Agreement dated as of June 5, 2019, and Harborside was entitled to million shares (i.e., shares post 5-for-1 reverse stock split) in the Company if the Conversion Labs Rx business achieved a topline revenue of $10 million and an additional million shares (i.e., shares post 5-for-1 reverse stock split) for each additional $5 million in topline revenue up to a maximum of 5 million shares (i.e., shares post 5-for-1 reverse stock split). The Complaint further alleges that the Company fraudulently induced Harborside to give up its ownership interest in Conversion Labs Rx and that it was a breach of the duty of good faith and fair dealing and fraudulent for the Company to have dissolved Conversion Labs Rx. Consequently, alleges Harborside, the Company was unjustly enriched, and Harborside is entitled to recover from the Company for quantum meruit. The Harborside Complaint implies between $5.0 million and $33.0 million in alleged damages related to failure to award the aforementioned stock but only specifically states that “Harborside has incurred damages in excess of $75 thousand, with the exact amount to be determined with specificity at trial” for each of the 5 counts. On February 11, 2022, the Company filed a Motion to Dismiss the Harborside Complaint, which Harborside opposed. The Company replied on April 4, 2022 and was awaiting a decision from the Court on whether the case will be fully or partially dismissed. In the meantime, the parties agreed to mediate both cases (Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, and Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, noted below) together. On September 22, 2022, as a result of mediation, the parties reached a settlement to resolve the matters in these cases. The Company issued shares of common stock during the year ended December 31, 2022 and additional shares of common stock on July 10, 2023 related to this settlement. The costs of this settlement are reflected in the Company’s financial results.
On December 10, 2021, a purported breach of contract, unjust enrichment, quantum meruit, and account stated lawsuit, captioned Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, was filed in the United States District Court for the Southern District of New York against the Company. The GoGoMeds Complaint alleges, among other things, that Conversion Labs Rx breached a Strategic Partnership Agreement (dated May 27, 2019) (the “SPA”) by the Company not paying two invoices (#3269 and 3270) totaling $274 thousand, and, therefore, “LifeMD has been unjustly enriched in an amount in excess of $274 thousand, with the exact amount to be determined with specificity at trial.” Further, GoGoMeds alleges that “to the extent that the SPA is inapplicable, GoGoMeds is entitled to recover from LifeMD from quantum meruit” because “GoGoMeds conferred a benefit on LifeMD by fulfilling over 17,000 prescriptions and over the counter drug orders for LifeMD’s clients.” On February 11, 2022, the Company filed its Answer and Counterclaim to the GoGoMeds Complaint, pleading the affirmative defenses that the claims are barred, in whole or in part: (i) because they fail to state claims upon which relief can be granted; (ii) by breach of contract by plaintiff; (iii) by offset, recoupment, and/or unjust enrichment to plaintiff; (iv) by accord and satisfaction; (v) for failure of condition precedent; (vi) because adequate remedies at law exist; (vii) by failure to mitigate; (viii) by the doctrine of unclean hands; and (ix) by consent ratification, waiver, excuse, and/or estoppel, (x) as well as that attorney fees and costs, as well as special, indirect, incidental, and/or consequential damages are not recoverable. Further, the Company counterclaimed against GoGoMeds for: (a) breach of contract for failing to: (i) provide adequate customer service and related pharmacy services; (ii) charge LifeMD actual costs for prescription and over the counter drugs (including shipping), as was contractually required; and (iii) provide regular reports and allow audits for review to establish adequate service and accurate costs; (b) trade secret misappropriation of the LifeMD Information, Data, and Materials, as defined therein; (c) unjust enrichment of GoGoMeds through its retention of such LifeMD Information, Data, and Materials, and for the benefit of the creation of the GoGoCare telehealth company; (d) conversion by GoGoMeds by exercising unauthorized dominion and control over the LifeMD Information, Data, and Materials; (e) detinue; and (f) an accounting. GoGoMeds’ responded to the counterclaims on March 4, 2022 and the parties had commenced fact discovery. In the meantime, the parties agreed to mediate both cases (Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, and Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599) together. The court granted a 60-day stay in the Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, and the parties were amenable in the Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, to the court foregoing any decision on our motion to dismiss until after mediation. On September 22, 2022, as a result of mediation, the parties reached a settlement to resolve the matters in these cases. As noted above, the Company issued shares of common stock during the year ended December 31, 2022 and additional shares of common stock on July 10, 2023 related to this settlement. The shares issued were valued based on the closing price of the Company’s stock, or $5.32, on the date of settlement, July 10, 2023. The costs of this settlement are reflected in the Company’s financial results.
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On February 28, 2022, a purported breach of contract lawsuit (with six counts of alleged breach, and indemnity reliance concerning reasonable costs and expenses), captioned William Blair LLC v. LifeMD, Inc., Case No. 2022L001978, was filed in the Circuit Court of Cook County, Illinois County Department, Law Division against the Company (the “Blair Complaint”). The Blair Complaint alleges, among other things, that LifeMD breached an engagement letter agreement entered into on January 7, 2021 with Blair that concerned potential debt financing. In particular, Blair alleges that the Company breached its obligations by, inter alia: (i) failing to advise Blair of, and ultimately completing, a debt financing transaction with a different investment banking firm on or about June 3, 2021; (ii) reproducing several pages from a Confidential Information Brochure used in the Company’s debt financing transaction with a different investment banking firm; (iii) failing to provide Blair with a right of first refusal to be its joint active bookrunning manager for a common stock sales agreement that it executed on or about June 3, 2021, through a different investment banking firm; (iv) failing to provide Blair with a right of first refusal to be its joint active bookrunning manager for a common stock sales agreement that it executed on or about September 28, 2021, through a different investment banking firm (despite the Company having formally terminated the engagement letter with Blair on or about July 16, 2021); (v) failing to provide Blair with a right of first refusal to be its joint active bookrunning manager for a preferred stock offering that it executed on or about September 28, 2021, through two different investment banking firms as bookrunning co-managers (despite the Company having formally terminated the engagement letter with Blair on or about July 16, 2021); and (vi) purchasing a convertible note from a pharmaceutical investor in connection with its acquisition of all outstanding shares of allergy telehealth platform, Cleared. The Blair Complaint seeks damages adequate to compensate Blair for the aforementioned alleged breaches (i.e., which implicitly meets or exceeds the purported $1.0 million minimum fee in the engagement letter), as well as reasonable costs and expenses incurred in this action. On May 22, 2022, the Company filed its answer, affirmative defenses, and counterclaim, denying the alleged breaches of its obligations under the engagement letter agreement. Further, the Company asserted the following affirmative defenses: (1) failure to state a claim on which relief can be granted; (2) laches; (3) breach of the engagement letter agreement; (4) unclean hands; (5) failure to mitigate; (6) the doctrines of waiver, accord, and satisfaction, and res judicata; (7) estoppel; and (8) repudiation/anticipatory breach. The Company also counterclaimed for a declaratory judgment that: (i) Plaintiff breached, repudiated and/or anticipatorily breached the engagement letter agreement; (ii) as a result, the Company was not bound by the terms of the engagement letter agreement from that time forward; (iii) Plaintiff is not owed any amounts under the engagement letter agreement; and (iv) and an award to the Company of any further relief that the Court deems just and proper.
The Court conducted virtual case management conferences on June 30, 2022 and August 3, 2022, and fact discovery (i.e., written discovery requests and responses) commenced thereafter. On August 29, 2022, the plaintiff subpoenaed B. Riley Financial, Inc. for documents. The Court subsequently held several case management and status conferences, beginning in October 2022 and continuing through March 2023. On April 5, 2023, the court granted the plaintiff’s motion to compel certain discovery and ordered the Company to conduct certain additional searches for documents and to produce responsive documents by April 26, 2023, which the Company did in compliance with the order. A further case management conference was held on May 17, 2023. In June 2023, the parties attended a mediation resulting in a settlement that fully resolved the matters in this case. The costs of this settlement are reflected in the Company’s financial results.
NOTE 11 – RELATED PARTY TRANSACTIONS
Working Capital Loan
During the nine months ended September 30, 2023, the Company received proceeds of $2 million under a $2.5 million loan facility with CRG Financial, maturing on December 15, 2023. The loan facility includes interest of 12%. The Company repaid the $2 million outstanding loan balance on March 21, 2023 with the proceeds received from the Avenue Facility and recorded a $325 thousand loss on debt extinguishment related to the repayment of the CRG Financial loan (see Note 6). As of both September 30, 2023 and December 31, 2022, the outstanding balance was $0 related to the CRG Financial loan. Mr. Bhatia, a member of the Board of the Company, also serves on the Board of Directors of CRG Financial.
WorkSimpli Software
During the nine months ended September 30, 2023 and 2022, WorkSimpli utilized CloudBoson Technologies Pvt. Ltd. (“CloudBoson”), formerly LegalSubmit Pvt. Ltd., a company owned by WorkSimpli’s Chief Software Engineer, to provide software development services. WorkSimpli paid CloudBoson a total of $611 thousand and $403 thousand during the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $1.1 million during the nine months ended September 30, 2023 and 2022, respectively, for these services. WorkSimpli owed CloudBoson $208 thousand as of September 30, 2023. There were no amounts owed to CloudBoson as of December 31, 2022.
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NOTE 12 – SEGMENT DATA
Our portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands within our segments complement one another and position us well for future growth. Relevant segment data for the three and nine months ended September 30, 2023 and 2022 is as follows:
SCHEDULE OF RELEVANT SEGMENT DATA
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Telehealth | ||||||||||||||||
| Revenue | $ | 24,342,789 | $ | 21,365,178 | $ | 66,896,719 | $ | 66,231,202 | ||||||||
| Gross margin | 81.6 | % | 78.9 | % | 81.3 | % | 78.8 | % | ||||||||
| Operating loss | $ | (7,716,355 | ) | $ | (7,671,742 | ) | $ | (20,859,582 | ) | $ | (34,181,305 | ) | ||||
| WorkSimpli | ||||||||||||||||
| Revenue | $ | 14,271,122 | $ | 10,047,291 | $ | 40,790,439 | $ | 24,682,602 | ||||||||
| Gross margin | 97.9 | % | 97.9 | % | 97.5 | % | 97.7 | % | ||||||||
| Operating income | $ | 3,146,974 | $ | 606,041 | $ | 8,541,845 | $ | 1,104,465 | ||||||||
| Consolidated | ||||||||||||||||
| Revenue | $ | 38,613,911 | $ | 31,412,469 | $ | 107,687,158 | $ | 90,913,804 | ||||||||
| Gross margin | 87.6 | % | 85.0 | % | 87.4 | % | 83.9 | % | ||||||||
| Operating loss | $ | (4,569,381 | ) | $ | (7,065,701 | ) | $ | (12,317,737 | ) | $ | (33,076,840 | ) | ||||
Relevant segment data as of September 30, 2023 and December 31, 2022 is as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Total Assets | ||||||||
| Telehealth | $ | 30,616,898 | $ | 18,163,464 | ||||
| WorkSimpli | 10,074,126 | 7,502,389 | ||||||
| Consolidated | $ | 40,691,024 | $ | 25,665,853 | ||||
NOTE 13 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these unaudited condensed consolidated financial statements were issued and has identified the following:
Stock Issued for Service
In October 2023, the Company issued shares of common stock related to vested RSUs and RSAs with a total fair value of $1.1 million.
ATM Sales Agreement
In October and November 2023, the Company sold shares of common stock under the ATM Sales Agreement and net proceeds received were $5.3 million.
Stock Issued for Noncontingent Consideration Payment
On October 17, 2023, the Company issued shares of common stock related to the fourth of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
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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 intend 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 (“U.S. 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.
Risk factors 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 respond to new technological developments quickly and effectively; |
| ● | 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, including inflation, slower growth or recession; |
| ● | business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as COVID-19); |
| ● | current and potential material weaknesses in our internal control over financial reporting; |
| ● | our ability to continue as a going concern; |
| ● | our need to raise additional funds in the future; |
| ● | 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. |
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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.
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. 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.
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.), Cleared Technologies PBC, a Delaware public benefit corporation (“Cleared”) and our majority-owned subsidiary WorkSimpli Software, LLC (formerly known as LegalSimpli Software, LLC), a Puerto Rico limited liability company (“WorkSimpli”). The affiliated network of medical Professional Corporations and medical Professional Associations administratively led by LifeMD Southern Patient Medical Care, P.C., (“LifeMD PC”) is the Company’s variable interest entity in which we hold a controlling financial interest. Unless otherwise specified, all dollar amounts are expressed in United States (“U.S.”) 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 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 and concurrently increased our ownership stake in WorkSimpli to 85.58%. Effective September 30, 2022, two option agreements were exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.64%. Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli and, as a result, the Company’s ownership interest in WorkSimpli increased to 74.06%. Effective June 30, 2023, an option agreement was exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.32%. On January 18, 2022, the Company acquired Cleared, a nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology.
Business Overview
We are a direct-to-patient telehealth company providing patients a high-quality, cost-effective, and convenient way of accessing comprehensive, virtual healthcare. We believe the traditional model of visiting a doctor’s office, traveling to a local pharmacy, and returning for follow up care or prescription refills is complex, inefficient, and costly, and discourages many individuals from seeking much needed medical care. LifeMD is positioned to elevate the healthcare experience through telehealth with our proprietary technology platform, affiliated provider network, broad treatment capabilities, and unique ability to nurture patient relationships.
The LifeMD telehealth platform seamlessly integrates a clinician-centric electronic medical record (“EMR”) system, proprietary algorithms for case-load balancing and scheduling, customer relationship management (“CRM”) functionality, remote and in-home lab testing, and digital prescription capabilities, patient-provider audio/video interfacing, cloud pharmacy fulfillment, and more. Our proprietary technology platform, combined with our 50-state affiliated provider network, enables the management of virtual treatment offerings and complex patient journeys for hundreds of conditions spanning men’s and women’s health, dermatology, urgent, and primary care, chronic care management and more. Our telehealth offerings in general seek to connect patients to licensed providers for diagnoses, virtual care, and prescription medications when appropriate. We also offer over-the-counter (“OTC”) products that are complementary to the conditions we treat. Our virtual primary care services are primarily offered on a subscription basis.
Our mission is to empower people to live healthier lives by increasing access to high quality and affordable virtual and in-home healthcare. We believe our success has and will continue to be attributable to an amazing patient experience, retaining the highest-quality providers in the industry, and our end-to-end technology platform. We plan to build a diverse portfolio of differentiated telehealth service offerings that meet the needs of a growing and diversified patient base.
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Since inception, we have helped approximately 803,000 customers and patients, providing them greater access to high-quality, convenient, and affordable care in all 50 states. Total revenue from recurring subscriptions is approximately 93%. In addition to our telehealth business, we own 73.32% of WorkSimpli, which operates PDFSimpli, a rapidly growing software as a service platform for converting, signing, editing, and sharing PDF documents. This business has seen 65% year-over-year revenue growth, with recurring revenue of 100%, due to a combination of higher demand, increased market awareness, enhanced digital capabilities, continued marketing campaign expansion and the addition of the ResumeBuild brand in the first quarter of 2022.
Our Platform and Business Strategy
We are a patient-centric telehealth company dedicated to delivering seamless end-to-end virtual healthcare to consumers. Our mission is facilitated by our robust technology platform that is purpose-built to seamlessly connect the touchpoints involved in delivering complex care, including scheduling for a national provider network, EMR capabilities, secure synchronous and asynchronous communication, digital prescriptions, cloud pharmacy, and more. Our platform enables us to deliver modern personalized health experiences and offerings through our websites and mobile applications, spanning customer discovery, purchase, and connection with licensed providers, to pharmacy and OTC order fulfillment, through ongoing care. We believe that our seamless approach significantly reduces the complication, cost and time burden of healthcare, incentivizing consumers to stick with our brands.
Our proprietary platform also facilitates and accelerates the development and launch of novel offerings throughout clinical protocol establishment, marketing, and fulfillment. Our offerings are sold to consumers on a subscription basis thus creating convenience and discounted pricing opportunities for patients and recurring revenue streams for the Company. Our offerings range from prescription medication fulfilled on a recurring basis, to complementary OTC products, to ongoing care from a team of medical providers. In general, our offerings seek to serve a patient from beginning to end, starting from brand or offering discovery to the medical intake and product selection process, after which a licensed U.S. physician conducts a virtual consultation and determines a treatment plan. As appropriate, prescription medications and OTC products are filled by pharmacy fulfillment partners, and if preferred, shipped directly to the patient. The number of patients and customers we serve across the nation continues to increase at a robust pace, with approximately 803,000 individuals having purchased our products and services to date.
Serving as a robust CRM system, and with built in analytics and integrations with best-in-class performance marketing platforms, our platform also enhances our ability to effectively and efficiently acquire new patients and customers and drive brand visibility through strategic 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).
We leverage our telehealth technology platform and services across the three core areas described below:
Direct-to-Consumer Virtual Primary Care
In the first quarter of 2022, we launched our flagship virtual primary care offering under the LifeMD brand, LifeMD PC. This offering provides patients in all 50 states with 24/7 access to an affiliated high-quality provider for their primary care, urgent care, and chronic care needs. LifeMD’s virtual primary care offering is a mobile-first full-service destination that provides seamless access to high-quality clinical care including virtual consultations and treatment, prescription medications, diagnostics, and imaging, wellness coaching and more. This offering is also supported by robust partnerships that provide our patients benefits such as substantial discounts on lab work and a prescription discount card that can be presented at over 60,000 pharmacies to save up to 92% on their prescription medication.
Direct-to-Patient Telehealth
We also leverage our telehealth platform’s provider network, cloud pharmacy, and EMR capabilities across our direct-to-patient telehealth brands. Our telehealth brands RexMD, ShapiroMD, NavaMD, and Cleared address largely unaddressed or underserved needs and are leading destinations in their respective treatment verticals of men’s health, hair loss, dermatology, and immunology.
| ○ | RexMD is a men’s telehealth platform brand that offers access to virtual medical treatment for a variety of men’s health needs. After treatment from an affiliated licensed physician, if appropriate, one of our partner pharmacies will dispense and ship prescription medications and OTC products directly to the customer. Since RexMD’s initial launch in the erectile dysfunction treatment market, it has expanded into additional indications, including but not limited to, premature ejaculation, testosterone, and hair loss. RexMD is a leading men’s telehealth platform across the U.S. and has served more than 474,000 customers and patients since inception with a 4.6-star Trustpilot rating. | |
| ○ | ShapiroMD offers access to virtual medical treatment, prescription medications, patented doctor formulated OTC products, topical compounded medications, and Food and Drug Administration (“FDA”) approved medical devices treating male and female hair loss through our telehealth platform. ShapiroMD has emerged as a leading destination for hair loss treatment across the U.S. and has served more than 265,000 customers and patients since inception with a 4.9-star Trustpilot rating. |
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| ○ | NavaMD 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 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. | |
| ○ | Cleared is a telehealth brand that provides personalized treatments for allergy, asthma, and immunology. Offerings include in-home tests for both environmental and food allergies, prescriptions for allergies and asthma, and FDA-approved immunotherapies for treating chronic allergies. Cleared leverages a network of affiliated medical professionals and providers in all 50 states, various pharmaceutical partners, and treatments and tests that cost up to 50 percent less than the brand-name competition. The offerings include free consultations, prescription medication, complementary OTC products, and ongoing care from U.S.-licensed allergists and nurses. |
Enterprise Telehealth Offerings
Organizations commercializing healthcare products face a challenging commercial landscape. Increased competition, shrinking market sizes and challenges reaching patients via the traditional brick and mortar doctor are forcing pharmaceutical, medical device and diagnostic companies to rethink their commercial strategies and focus more on digital patient awareness and engagement initiatives. Spending on digital solutions to facilitate greater access to their end markets accounts for one-third of their collective $30 billion commercial spend in the U.S. We believe LifeMD’s unique telehealth technology platform and virtual clinical expertise is well-positioned to address the unmet needs of healthcare product companies as they relate to digital patient awareness, access to care, adherence and compliance.
Majority Owned Subsidiary: WorkSimpli
WorkSimpli operates PDFSimpli, an online software as a service 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 85.58%. Effective September 30, 2022, two option agreements were exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.64%. Effective March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli and, as a result, the Company’s ownership interest in WorkSimpli increased to 74.06%. Effective June 30, 2023, an option agreement was exercised which further restructured the ownership of WorkSimpli. As a result, the Company’s ownership interest in WorkSimpli decreased to 73.32%.
Significant Developments During the Three Months Ended September 30, 2023
Amendment to Cleared Stock Purchase Agreement
On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things: (i) reduce the total purchase price by $250 thousand to a total of $3.67 million; (ii) change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024; (iii) remove all “earn-out” payments payable by the Company to the sellers; and (iv) removing certain representations and warranties of the Company and sellers in connection with the transaction. On February 6, 2023, the Company issued 337,895 shares of common stock related to the first of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On April 17, 2023, the Company issued 455,319 shares of common stock related to the second of five quarterly installment payments due to the sellers of Cleared under the First Amendment. On July 17, 2023, the Company issued 158,129 shares of common stock related to the third of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
First Amendment to Avenue Credit Agreement
On March 21, 2023, the Company entered into and closed on a loan and security agreement (the “Credit Agreement”), and a supplement to the Credit Agreement (the “Supplement”), with Avenue Venture Opportunities Fund II, L.P. and Avenue Venture Opportunities Fund, L.P. (collectively, “Avenue”). On September 26, 2023, the Company entered into the First Amendment to the Credit Agreement (the “Avenue First Amendment”) whereby the Company received an additional $5 million in committed term loans. The Company received gross and net proceeds of $5.0 million on September 26, 2023.
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The Credit Agreement provides for a convertible senior secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1) $15 million in term loans funded at closing, (2) $5 million of additional committed term loans which the Company received on September 26, 2023 under the Avenue First Amendment and (3) $20 million of additional uncommitted term loans, collectively referred to as the “Avenue Facility”. The Avenue Facility matures on October 1, 2026. The Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments (the “Warrants”). In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49. Proceeds from the Avenue Facility were used to repay the Company’s outstanding notes payable balances with CRG Financial and are expected to be used for general corporate purposes. The Company is subject to certain affirmative and negative covenants under the Avenue Facility, including the requirement, beginning on the closing date, to maintain at least $5 million of unrestricted cash to be tested at the end of each month, and beginning on the period ended September 30, 2023, and at the end of each quarter thereafter, a trailing six-month cash flow, subject to certain adjustments as provided by the Credit Agreement, of at least $2 million. As of the date of filing, there is $20 million outstanding under the Avenue Facility and the Company is in compliance with the Avenue Facility terms.
Series B Preferred Stock Conversion
On July 10, 2023 and August 14, 2023, PA001 Holdings, LLC (“PA001 Holdings”), the holder of the Company’s Series B Preferred Stock, elected to convert 2,275 and 1,225 shares, respectively, of the Company’s Series B Preferred Stock, at a price of $3.25 per share of Series B Preferred Stock, pursuant to the terms of the Securities Purchase Agreement dated August 28, 2020. The conversion was calculated based on the original issuance price of the Series B Preferred Stock plus all accrued dividends to date. The conversion resulted in 1,010,170 and 550,694 shares of the Company’s common stock issued to PA001 Holdings, on July 12, 2023 and August 15, 2023, respectively. In connection with the Securities Purchase Agreement, the Company and PA001 Holdings entered into a Registration Rights Agreement pursuant to which the Company agreed to register the shares of the Company’s common stock underlying the Series B Preferred Stock in the following circumstances: (i) demand registration rights, providing that PA001 Holdings may demand that the Company file registration statements, at any time, and (ii) piggyback registration rights, providing that PA001 Holdings be given notice of any proposed registration of securities by the Company, and requiring that the Company register all or any portion of the registrable securities that PA001 Holdings requests to be registered, in each case, subject to the terms and conditions of the registration rights agreement.
Results of Operations
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
Our financial results for the three months ended September 30, 2023 are summarized as follows in comparison to the three months ended September 30, 2022:
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| % of | % of | |||||||||||||||
| $ | Sales | $ | Sales | |||||||||||||
| Telehealth revenue, net | $ | 24,342,789 | 63.04 | % | $ | 21,365,178 | 68.01 | % | ||||||||
| WorkSimpli revenue, net | 14,271,122 | 36.96 | % | 10,047,291 | 31.99 | % | ||||||||||
| Total revenue, net | 38,613,911 | 100 | % | 31,412,469 | 100 | % | ||||||||||
| Cost of telehealth revenue | 4,479,760 | 11.60 | % | 4,502,919 | 14.34 | % | ||||||||||
| Cost of WorkSimpli revenue | 301,746 | 0.78 | % | 213,923 | 0.68 | % | ||||||||||
| Total cost of revenue | 4,781,506 | 12.38 | % | 4,716,842 | 15.02 | % | ||||||||||
| Gross profit | 33,832,405 | 87.62 | % | 26,695,627 | 84.98 | % | ||||||||||
| Selling and marketing expenses | 19,776,797 | 51.22 | % | 17,200,859 | 54.75 | % | ||||||||||
| General and administrative expenses | 13,398,387 | 34.70 | % | 12,385,030 | 39.42 | % | ||||||||||
| Other operating expenses | 1,622,137 | 4.20 | % | 1,617,375 | 5.15 | % | ||||||||||
| Customer service expenses | 2,106,252 | 5.45 | % | 1,488,428 | 4.74 | % | ||||||||||
| Development costs | 1,498,213 | 3.88 | % | 821,636 | 2.62 | % | ||||||||||
| Change in fair value of contingent consideration | - | - | % | 248,000 | 0.79 | % | ||||||||||
| Total expenses | 38,401,786 | 99.45 | % | 33,761,328 | 107.47 | % | ||||||||||
| Operating loss | (4,569,381 | ) | (11.83 | )% | (7,065,701 | ) | (22.49 | )% | ||||||||
| Interest expense, net | (713,766 | ) | (1.85 | )% | (132,235 | ) | (0.42 | )% | ||||||||
| Net loss | (5,283,147 | ) | (13.68 | )% | (7,197,936 | ) | (22.91 | )% | ||||||||
| Net income attributable to non-controlling interest | 839,288 | 2.18 | % | 83,737 | 0.27 | % | ||||||||||
| Net loss attributable to LifeMD, Inc. | (6,122,435 | ) | (15.86 | )% | (7,281,673 | ) | (23.18 | )% | ||||||||
| Preferred stock dividends | (776,563 | ) | (2.01 | )% | (776,563 | ) | (2.47 | )% | ||||||||
| Net loss attributable to common shareholders | $ | (6,898,998 | ) | (17.87 | )% | $ | (8,058,236 | ) | (25.65 | )% | ||||||
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Total revenue, net. Revenues for the three months ended September 30, 2023 were approximately $38.6 million, an increase of 23% compared to approximately $31.4 million for the three months ended September 30, 2022. The increase in revenues was attributable to an increase in WorkSimpli revenue of 42% and an increase in telehealth revenue of 14%. Telehealth revenue accounts for 63% of total revenue and has increased during the three months ended September 30, 2023 due to an increase in online sales demand and a decrease in product refunds and rebates. WorkSimpli revenue accounts for 37% of total revenue and has steadily increased year over year due to a combination of higher demand, increased market awareness, enhanced digital capabilities, continued marketing campaign expansion and the addition of the ResumeBuild brand in the first quarter of 2022.
Total cost of revenue. Total cost of revenue consists of (1) the cost of telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, physician 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 1% to approximately $4.8 million for the three months ended September 30, 2023 compared to approximately $4.7 million for the three months ended September 30, 2022. The combined cost of revenue increase was due to increased WorkSimpli costs during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022, partially offset by decreased telehealth costs during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022. Telehealth costs decreased to 18% of associated telehealth revenues experienced during the three months ended September 30, 2023, from 21% of associated telehealth revenues during the three months ended September 30, 2022 primarily due to improved pricing. WorkSimpli costs were 2% of associated WorkSimpli revenues for both the three months ended September 30, 2023 and 2022.
Gross profit. Gross profit increased by approximately 27% to approximately $33.8 million for the three months ended September 30, 2023 compared to approximately $26.7 million for the three months ended September 30, 2022, as a result of increased combined sales. Gross profit as a percentage of revenues was 88% for the three months ended September 30, 2023 as compared to 85% for the three months ended September 30, 2022. Gross profit as a percentage of revenues for telehealth was 82% for the three months ended September 30, 2023 compared to 79% for the three months ended September 30, 2022, and for WorkSimpli was 98% for both the three months ended September 30, 2023 and 2022. The increase in sales volume for telehealth and WorkSimpli and improved pricing for telehealth have contributed to the increase in gross profit.
Total expenses. Operating expenses for the three months ended September 30, 2023 were approximately $38.4 million, as compared to approximately $33.8 million for the three months ended September 30, 2022. This represents an increase of 14%, or $4.6 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, 2023, the Company had an increase of approximately $2.6 million, or 15% in selling and marketing costs as a result of additional sales and marketing initiatives to drive the current period’s sales growth reported. |
| (ii) | General and administrative expenses: This mainly consists of stock-based compensation expense, merchant processing fees, payroll expenses for corporate employees, taxes and licenses, amortization expense and legal and professional fees. During the three months ended September 30, 2023, the Company had an increase of approximately $1.0 million in general and administrative expenses, primarily related to an increase due to WorkSimpli dividends paid during the nine months ended September 30, 2023. Stock-based compensation was $3.3 million during both the three months ended September 30, 2023 and 2022, with the majority related to stock compensation expense attributable to service-based stock options and restricted stock units. |
| (iii) | Other operating expenses: This consists of rent and lease expense, insurance, office supplies and software subscriptions, royalty expense and bank charges. During the three months ended September 30, 2023, the Company had an increase of approximately $5 thousand, or 0.3%. |
| (iv) | Customer service expenses: This consists of rent, insurance, 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, 2023, the Company had an increase of approximately $618 thousand, or 42%, 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, 2023, the Company had an increase of approximately $677 thousand, or 82%, primarily resulting from technology platform improvements and amortization expense. |
These increases in operating expenses were partially offset by a decrease in the following:
| (i) | Change in fair value of contingent consideration: During the three months ended September 30, 2022, the Company recorded an increase of $248 thousand to the Cleared contingent consideration as a result of the remeasurement of the fair value. |
Interest expense, net. Interest expense, net consists of interest expense related to the Avenue Facility, notes payable and the Series B Preferred Stock for the three months ended September 30, 2023 and interest accrued on the Series B Preferred Stock for the three months ended September 30, 2022. Interest expense increased by approximately $582 thousand during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
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Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
Our financial results for the nine months ended September 30, 2023 are summarized as follows in comparison to the nine months ended September 30, 2022:
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| % of | % of | |||||||||||||||
| $ | Sales | $ | Sales | |||||||||||||
| Telehealth revenue, net | $ | 66,896,719 | 62.12 | % | $ | 66,231,202 | 72.85 | % | ||||||||
| WorkSimpli revenue, net | 40,790,439 | 37.88 | % | 24,682,602 | 27.15 | % | ||||||||||
| Total revenue, net | 107,687,158 | 100 | % | 90,913,804 | 100 | % | ||||||||||
| Cost of telehealth revenue | 12,525,887 | 11.63 | % | 14,042,112 | 15.45 | % | ||||||||||
| Cost of WorkSimpli revenue | 1,019,018 | 0.95 | % | 558,216 | 0.61 | % | ||||||||||
| Total cost of revenue | 13,544,905 | 12.58 | % | 14,600,328 | 16.06 | % | ||||||||||
| Gross profit | 94,142,253 | 87.42 | % | 76,313,476 | 83.94 | % | ||||||||||
| Selling and marketing expenses | 56,062,345 | 52.06 | % | 60,928,649 | 67.02 | % | ||||||||||
| General and administrative expenses | 36,120,723 | 33.54 | % | 37,757,710 | 41.53 | % | ||||||||||
| Other operating expenses | 4,640,690 | 4.31 | % | 5,076,820 | 5.58 | % | ||||||||||
| Customer service expenses | 5,573,734 | 5.18 | % | 3,428,098 | 3.77 | % | ||||||||||
| Development costs | 4,062,498 | 3.77 | % | 1,951,039 | 2.15 | % | ||||||||||
| Goodwill impairment charge | - | - | % | 2,735,000 | 3.01 | % | ||||||||||
| Change in fair value of contingent consideration | - | - | % | (2,487,000 | ) | (2.74 | )% | |||||||||
| Total expenses | 106,459,990 | 98.86 | % | 109,390,316 | 120.32 | % | ||||||||||
| Operating loss | (12,317,737 | ) | (11.44 | )% | (33,076,840 | ) | (36.38 | )% | ||||||||
| Interest expense, net | (1,973,901 | ) | (1.83 | )% | (432,405 | ) | (0.48 | )% | ||||||||
| (Loss) gain on debt extinguishment | (325,198 | ) | (0.30 | )% | 63,400 | 0.07 | % | |||||||||
| Net loss | (14,616,836 | ) | (13.57 | )% | (33,445,845 | ) | (36.79 | )% | ||||||||
| Net income attributable to non-controlling interest | 2,247,055 | 2.09 | % | 154,464 | 0.17 | % | ||||||||||
| Net loss attributable to LifeMD, Inc. | (16,863,891 | ) | (15.66 | )% | (33,600,309 | ) | (36.96 | )% | ||||||||
| Preferred stock dividends | (2,329,688 | ) | (2.16 | )% | (2,329,688 | ) | (2.56 | )% | ||||||||
| Net loss attributable to common shareholders | $ | (19,193,579 | ) | (17.82 | )% | $ | (35,929,997 | ) | (39.52 | )% | ||||||
Total revenue, net. Revenues for the nine months ended September 30, 2023 were approximately $107.7 million, an increase of 18% compared to approximately $90.9 million for the nine months ended September 30, 2022. The increase in revenues was attributable to an increase in WorkSimpli revenue of 65% and an increase in telehealth revenue of 1%. Telehealth revenue accounts for 62% of total revenue and has increased during the nine months ended September 30, 2023 due to a decrease in product refunds partially offset by a decrease in online sales demand. WorkSimpli revenue accounts for 38% of total revenue and has steadily increased year over year due to a combination of higher demand, increased market awareness, enhanced digital capabilities, continued marketing campaign expansion and the addition of the ResumeBuild brand in the first quarter of 2022.
Total cost of revenue. Total cost of revenue consists of (1) the cost of telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, physician 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 decreased by approximately 7% to approximately $13.5 million for the nine months ended September 30, 2023 compared to approximately $14.6 million for the nine months ended September 30, 2022. The combined cost of revenue decrease was due to improved pricing and a decrease in telehealth sales volume partially offset by an increase in WorkSimpli sales volume during the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022. Telehealth costs decreased to 19% of associated telehealth revenues experienced during the nine months ended September 30, 2023, from 21% of associated telehealth revenues during the nine months ended September 30, 2022 primarily due to lower sales volume and improved pricing. WorkSimpli costs were 2% of associated WorkSimpli revenues for the nine months ended September 30, 2023 and 2022.
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Gross profit. Gross profit increased by approximately 23% to approximately $94.1 million for the nine months ended September 30, 2023 compared to approximately $76.3 million for the nine months ended September 30, 2022, as a result of increased combined sales. Gross profit as a percentage of revenues was 87% for the nine months ended September 30, 2023 as compared to 84% for the nine months ended September 30, 2022. Gross profit as a percentage of revenues for telehealth was 81% for the nine months ended September 30, 2023 compared to 79% for the nine months ended September 30, 2022, and for WorkSimpli was 98% for both the nine months ended September 30, 2023 and 2022. The increase in sales volume for WorkSimpli and improved pricing for Telehealth have contributed to the increase in gross profit.
Total expenses. Operating expenses for the nine months ended September 30, 2023 were approximately $106.4 million, as compared to approximately $109.4 million for the nine months ended September 30, 2022. This represents a decrease of 3%, or $3.0 million. The decrease 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, 2023, the Company had a decrease of approximately $4.9 million, or 8% in selling and marketing costs as a result of a Company-wide strategic reduction in costs and alignment of sales and marketing initiatives to drive the Company’s recurring revenue subscription-based sales model. |
| (ii) | General and administrative expenses: During the nine months ended September 30, 2023, stock-based compensation was $8.8 million, with the majority related to stock compensation expense attributable to service-based stock options and restricted stock units, as compared to stock-based compensation expense of $11.9 million for the nine months ended September 30, 2022. This category also consists of merchant processing fees, payroll expenses for corporate employees, taxes and licenses, amortization expense and legal and professional fees. During the nine months ended September 30, 2023, the Company had a decrease of approximately $1.6 million in general and administrative expenses, primarily related to the decrease in stock-based compensation costs referenced above and a Company-wide strategic reduction in costs partially offset by an increase due to WorkSimpli dividends paid during the nine months ended September 30, 2023. |
| (iii) | Other operating expenses: This consists of rent and lease expense, insurance, office supplies and software subscriptions, royalty expense and bank charges. During the nine months ended September 30, 2023, the Company had a decrease of approximately $436 thousand, or 9%, primarily related to decreases in office supplies and software subscriptions. |
| (iv) | Goodwill impairment charge: During the nine months ended September 30, 2022, the Company recorded a $2.7 million goodwill impairment charge related to a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections. |
These decreases in operating expenses were partially offset by increases in the following:
| (i) | Customer service expenses: This consists of rent, insurance, 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, 2023, the Company had an increase of approximately $2.1 million, or 63%, primarily related to increases in headcount in the Company’s customer service department. |
| (ii) | Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the nine months ended September 30, 2023, the Company had an increase of approximately $2.1 million, or 108%, primarily resulting from technology platform improvements and amortization expense. |
| (iii) | Change in fair value of contingent consideration: During the nine months ended September 30, 2022, the Company recorded a $2.5 million reduction to the Cleared contingent consideration as a result of the remeasurement of the fair value. |
Interest expense, net. Interest expense, net consists of interest expense related to the Avenue Facility, notes payable and the Series B Preferred Stock for the nine months ended September 30, 2023 and interest accrued on the Series B Preferred Stock for the nine months ended September 30, 2022. Interest expense increased by approximately $1.5 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
(Loss) gain on debt extinguishment. The Company recorded a $325 thousand loss on debt extinguishment related to the repayment of the CRG Financial loan during the nine months ended September 30, 2023 due to a prepayment penalty and various fees associated with the CRG Financial loan. The Company recorded a $63 thousand gain on debt forgiveness of Paycheck Protection Program (“PPP”) loans during the nine months ended September 30, 2022.
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Working Capital
| September 30, 2023 | December 31, 2022 | |||||||
| Current assets | $ | 24,886,286 | $ | 11,311,357 | ||||
| Current liabilities | 32,521,927 | 31,374,151 | ||||||
| Working capital | $ | (7,635,641 | ) | $ | (20,062,794 | ) | ||
Working capital increased by approximately $12.4 million during the nine months ended September 30, 2023. The increase in current assets is primarily attributable to an increase in cash of approximately $11.3 million as a result of the Avenue Facility, an increase in accounts receivable of $1.6 million and an increase in other current assets of $617 thousand. Current liabilities increased by $1.1 million, which was primarily attributable to an increase in accounts payable and accrued expenses of $2.9 million and an increase in deferred revenue of $692 thousand, partially offset by a decrease in notes payable of $2.4 million.
Liquidity and Capital Resources
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash provided by (used in) operating activities | $ | 3,106,602 | $ | (20,966,110 | ) | |||
| Net cash used in investing activities | (6,516,645 | ) | (12,134,718 | ) | ||||
| Net cash provided by (used in) financing activities | 14,739,416 | (2,390,388 | ) | |||||
| Net increase (decrease) in cash | 11,329,373 | (35,491,216 | ) | |||||
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. Rising interest rates and inflation may increase the cost of capital and make it more difficult for us to access capital markets.
Net cash provided by operating activities increased by $24.1 million to $3.1 million for the nine months ended September 30, 2023, as compared with net cash used in operating activities of approximately $21.0 million for the nine months ended September 30, 2022. The increase in net cash provided by operating activities was primarily related to the decrease in the Company’s net loss of $18.8 million to $14.6 million for the nine months ended September 30, 2023, as compared with $33.4 million for the nine months ended September 30, 2022. Other significant factors contributing to net cash provided by operating activities during the nine months ended September 30, 2023, include $8.8 million in non-cash stock-based compensation charges, $5.4 million in non-cash depreciation and amortization, a net increase in accounts payable, accrued expenses and other operating activities of $4.6 million, a $325 thousand loss on debt extinguishment and an increase in deferred revenue of $692 thousand. Net cash used in operating activities for the nine months ended September 30, 2022, was driven primarily by the net loss of approximately $33.4 million (inclusive of $11.9 million in non-cash, stock-based compensation charges), an increase in inventory of $2.1 million due to timing of purchases, an increase in accounts receivable of $1.6 million and reduction in accrued expenses of $2.3 million excluding the $1.6 million accrual for the first noncontingent milestone payment related to the Cleared acquisition due on the first anniversary of the acquisition. These decreases were partially offset by an increase in accounts payable of $1.8 million as a result of the Company extending payables and credit terms with vendors.
Net cash used in investing activities for the nine months ended September 30, 2023 was approximately $6.5 million, as compared with approximately $12.1 million for the nine months ended September 30, 2022. Net cash used in investing activities for the nine months ended September 30, 2023, was due to cash paid for capitalized software costs of approximately $6.3 million, cash paid for the purchase of intangible assets of approximately $149 thousand and cash paid for the purchase of equipment of approximately $94 thousand. Net cash used in investing activities for the nine months ended September 30, 2022, was due to cash paid for capitalized software costs of approximately $6.7 million, cash paid for the purchase of the ResumeBuild brand of approximately $4.0 million, cash paid for the Cleared acquisition of approximately $1.0 million and cash paid for the purchase of equipment of $379 thousand.
Net cash provided by financing activities for the nine months ended September 30, 2023 was approximately $14.7 million as compared with net cash used in financing activities of approximately $2.4 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, net cash provided by financing activities consisted of: (1) $19.5 million in net proceeds received from the Avenue Facility, (2) $2.3 million in proceeds received from notes payable and (3) $900 thousand in net proceeds received for the sale of common stock under the ATM Sales Agreement (as defined below). These factors contributing to net cash provided by financing activities were partially offset by repayments of notes payable of approximately $5.0 million net of a $325 thousand loss on debt extinguishment on the CRG Financial loan, preferred stock dividends of approximately $2.3 million, net payments made related to adjustments in the membership interest units of WorkSimpli of approximately $306 thousand, contingent consideration payments made related to the ResumeBuild brand acquisition of approximately $188 thousand and distributions to non-controlling interest of $108 thousand. Net cash used in financing activities for the nine months ended September 30, 2022, consisted of preferred stock dividends of $2.3 million, distributions to non-controlling interest of $108 thousand and contingent consideration payments made related to the ResumeBuild acquisition of $94 thousand, partially offset by proceeds from the exercise of options and warrants of $129 thousand and proceeds received from the sale of a portion of the Company’s membership interest in WorkSimpli of $12 thousand.
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Liquidity and Capital Resources Outlook
As of September 30, 2023, the Company has an accumulated deficit approximating $209.8 million and has experienced significant losses from its operations. To date, the Company has been funding operations primarily through the sales of its products, issuance of common and preferred stock and through loans and advances from officers and directors. Our primary short-term and long-term requirements for liquidity and capital are for customer acquisitions, funding business acquisitions and investments we may make from time to time, working capital including our noncancelable operating lease obligations, noncontingent consideration, capital expenditures and general corporate purposes. The Company has a current cash balance of approximately $12.9 million as of the filing date.
On March 21, 2023, the Company entered into and closed on a Credit Agreement, and a supplement to the Credit Agreement with Avenue. The Credit Agreement provides for a convertible senior secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1) $15 million in term loans funded at closing, (2) $5 million of additional committed term loans which the Company received on September 26, 2023 under the Avenue First Amendment and (3) $20 million of additional uncommitted term loans, collectively referred to as the “Avenue Facility”. The Avenue Facility matures on October 1, 2026. The Company issued Avenue warrants to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments. In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49. Proceeds from the Avenue Facility were used to repay the Company’s outstanding notes payable balances with CRG Financial and are expected to be used for general corporate purposes.
During the nine months ended September 30, 2023, the Company received proceeds of $2 million under a $2.5 million loan facility with CRG Financial, maturing on December 15, 2023. The loan facility includes interest of 12%. The Company repaid the $2 million outstanding loan balance on March 21, 2023 with the proceeds received from the Avenue Facility and recorded a $325 thousand loss on debt extinguishment due to a prepayment penalty and various fees associated with the CRG Financial loan. As of both September 30, 2023 and December 31, 2022, the outstanding balance was $0 related to the CRG Financial loan.
During the nine months ended September 30, 2023, the Company received proceeds of $348 thousand under a 10-month financing agreement with Arthur J. Gallagher Risk Management Services, LLC. The terms of the agreement include finance fees in the amount of $13 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $315 thousand and $0, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
In October 2022, the Company received proceeds of $976 thousand under a 12-month working capital loan with Amazon. The terms of the loan include interest in the amount of $62 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $111 thousand and $976 thousand, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
In November 2022, the Company received proceeds of $1.9 million under two 10-month working capital loans with Balanced Management. The terms of the loans include loan origination fees in the amount of $60 thousand and total interest of $840 thousand. As of September 30, 2023 and December 31, 2022, the outstanding balance was $0 and $1.821 million, respectively, and is included in notes payable, net, on the accompanying unaudited condensed consolidated balance sheet.
On June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act, which was declared effective on June 22, 2021 (the “2021 Shelf”). Under the 2021 Shelf at the time of effectiveness, the Company originally had the ability to raise up to $150 million by selling common stock, preferred stock, debt securities, warrants, and units. In conjunction with the 2021 Shelf, the Company also entered into an At Market Issuance Sales Agreement (the “ATM Sales Agreement”) with B. Riley Securities, Inc. and Cantor Fitzgerald & Co. relating to the sale of its common stock. In accordance with the terms of the ATM Sales Agreement, the Company may, but is not obligated to, offer and sell, from time to time, shares of common stock, through or to the Agents, acting as agent or principal. Sales of common stock, if any, will be made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act. On March 22, 2023, the date the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6 of Form S-3 (i.e., the “baby shelf limitations”). As a result of the baby shelf limitations, the Company was only able to offer and sell shares of common stock having an aggregate offering price of up to $18.435 million pursuant to the ATM Sales Agreement, and it filed a prospectus supplement with the SEC to that effect on March 27, 2023. In June 2023, the Company’s public float increased above $75.0 million. As a result, the Company is no longer subject to the baby shelf limitations. The Company filed another prospectus supplement with the SEC to that effect on June 29, 2023. As of September 30, 2023, the Company has $58.6 million available under the ATM Sales Agreement. In October and November 2023, the Company sold 829,886 shares of common stock under the ATM Sales Agreement and net proceeds received were $5.3 million.
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The Company’s continued operations are dependent upon obtaining an increase in its sales volumes which the Company has been successful in achieving to date. However, there can be no assurances that we will continue to be successful in increasing revenues, improving operational efficiencies or that financing will be available or, if available, that such financing will be available under favorable terms.
The Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment, which included the available financing and consideration of positive and negative evidence impacting management’s forecasts, market, and industry factors. The Company’s continuance as a going concern is highly dependent on its future profitability and on the on-going support of its stockholders, affiliates, and creditors. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company has begun to implement strategies to strengthen revenues and improve operational efficiencies across the business and is significantly curtailing expenses, however, these strategies do not mitigate the substantial doubt about the Company’s ability to continue as a going concern. Management believes that the overall market value of the telehealth industry is positive and that it will continue to drive interest in the Company.
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, Revenue from Contracts with Customers, 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 all cases, delivery is considered to have occurred when the customer obtains control, which is usually commensurate upon shipment of the product. In the case where delivery is not commensurate upon shipment of the product, recognition of revenue is deferred until that time. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring shipment of products. The Company 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 telehealth revenues approximated $696 thousand and $1.1 million during the three months ended September 30, 2023 and 2022, respectively. Customer discounts, returns and rebates on telehealth revenues approximated $1.5 million and $4.2 million during the nine months ended September 30, 2023 and 2022, respectively.
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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 customer’s 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. Customer discounts and allowances on WorkSimpli revenues approximated $865 thousand and $710 thousand during the three months ended September 30, 2023 and 2022, respectively. Customer discounts and allowances on WorkSimpli revenues approximated $2.6 million and $1.7 million during the nine months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023 and December 31, 2022, the Company has accrued contract liabilities, as deferred revenue, of approximately $6.2 million and $5.5 million, respectively, which represent the following: (1) obligations for products which the customer has not yet obtained control due to delivery not commensurate upon shipment of the product, (2) obligations on WorkSimpli in-process monthly or yearly contracts with customers and (3) a portion attributable to the yet to be recognized WorkSimpli initial 14-day trial period collections.
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 ASC 350-40, Internal-Use Software, are expensed as incurred. As of September 30, 2023 and December 31, 2022, the Company capitalized a net amount of $11.3 million and $8.8 million, respectively, related to internally developed software costs which are amortized over the useful life and included in development costs on our statement of operations. The increase in capitalized software costs of $2.5 million or 28%, is primarily attributable to costs incurred related to development efforts of our LifeMD PC platform.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently, if events or changes in circumstances indicate that the asset may be impaired. Goodwill in the amount of $8.0 million was recognized in conjunction with the Cleared acquisition. The Company recorded an $8.0 million goodwill impairment charge and an $827 thousand intangible asset impairment charge during the year ended December 31, 2022 related to a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections (see Note 3).
Other intangible assets are comprised of: (1) the ResumeBuild brand, (2) a customer relationship asset, (3) the Cleared trade name, (4) Cleared developed technology, (5) a purchased license and (6) two purchased domain names. During the year ended December 31, 2022, the Company recorded an $827 thousand impairment loss related to a decline in the estimated fair value of the Cleared customer relationship intangible asset with an original cost of $919 thousand and accumulated amortization of $92 thousand. Other 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.
Impairment of Long-Lived Assets
Long-lived assets include equipment and capitalized software. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, an impairment is recognized as the amount by which the carrying amount of the assets exceeds the estimated fair values of the assets. As of September 30, 2023 and December 31, 2022, the Company determined that no events or changes in circumstances existed that would indicate any impairment of its long-lived assets.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize the current expected credit loss (“CECL”) impairment model to estimate its lifetime “expected credit loss” and record an allowance that is deducted from the amortized cost basis of the financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. The Company adopted ASU 2016-13 as of January 1, 2023. The adoption did not have a material impact on the Company’s financial statements.
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In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805); Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This new guidance affects all entities that enter into a business combination within the scope of ASC 805-10. Under this new guidance, the acquirer should determine what contract assets and/or liabilities it would have recorded under ASC 606, Revenue from Contracts with Customers, as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquirer. Under current U.S. GAAP, contract assets and contract liabilities acquired in a business combination are recorded by the acquirer at fair value. The Company adopted ASU 2021-08 as of January 1, 2023. The adoption did not have a material impact on the Company’s financial statements.
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.
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 Securities Exchange Act of 1934, as amended (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) | inadequate controls related to revenue recognition; |
| (iii) | insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC Guidelines; and |
| (iv) | inadequate information technology general controls specifically related to security, segregation of duties, user access, restricted access and change management. |
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 Company has formally documented its procedures for many of the significant accounting and financial reporting processes, in addition to, identifying and remediating design deficiencies in its processes. The other remediation actions planned include:
| (i) | implementation of controls to ensure revenue is recognized upon shipment; |
| (ii) | further documentation and implementation of control procedures and the implementation of control monitoring; and |
| (iii) | identify and remedy gaps in our information technology general controls specifically related to the areas of security, segregation of duties, user access, restricted access and change management. |
Changes in Internal Control over Financial Reporting
As discussed above, we are implementing certain measures to remediate the material weaknesses identified in the design and operation of our internal control over financial reporting. Other than those measures, 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 three months ended September 30, 2023, that materially affected, our internal control over financial reporting as of that date.
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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 10, “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, 2022, as filed with the SEC on March 22, 2023, 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. 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, 2022. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks.
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, 2023 without registration under the Securities Act:
On July 10, 2023, July 14, 2023, August 7, 2023 and August 29, 2023, the Company issued 12,500, 25,000, 75,000 and 25,000 shares, respectively, of common stock for services, including vested restricted stock units, to employees and consultants.
On July 10, 2023, the Company issued 100,000 shares of common stock related to the settlement of the Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, and the Specialty Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, matters. The shares issued were valued based on the closing price of the Company’s stock, or $5.32, on the date of settlement, July 10, 2023.
On February 4, 2023, the Company entered into the First Amendment to the Stock Purchase Agreement (the “First Amendment”) between the Company and the sellers of Cleared. The First Amendment was amended to, among other things change the timing of the payment of the purchase price to $460 thousand paid at closing (which has already been paid by the Company), with the remaining amount to be paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024. On July 17, 2023, the Company issued 158,129 shares of common stock related to the third of five quarterly installment payments due to the sellers of Cleared under the First Amendment.
On July 10, 2023 and August 14, 2023, PA001 Holdings, the holder of the Company’s Series B Preferred Stock elected to convert 2,275 and 1,225 shares, respectively, of the Company’s Series B Preferred Stock at a price of $3.25 per share of Series B Preferred Stock, pursuant to the terms of the Securities Purchase Agreement dated August 28, 2020. The conversion was calculated based on the original issuance price of the Series B Preferred Stock plus all accrued dividends to date. The conversion resulted in 1,010,170 and 550,694 shares of the Company’s common stock issued to PA001 Holdings on July 12, 2023 and August 15, 2023, respectively. The Company issued the shares of common stock pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act because of the limited number of purchasers, size of the offering, manner of the offering and number of securities offered. In addition, PA001 Holdings had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since PA001 Holdings agreed to, and received, the securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.”
On September 28, 2023, the Company issued an aggregate of 57,901 shares of common stock related to the cashless exercise of options held by Kevin Veal, an employee of the Company, at an exercise price of $1.50 per share.
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 and Chairman of the Board of Directors | ||
| Date: | November 8, 2023 | |
| By: | /s/ Marc Benathen | |
| Marc Benathen | ||
| Chief Financial Officer | ||
| Date: | November 8, 2023 | |
| By: | /s/ Maria Stan | |
| Maria Stan | ||
| Principal Accounting Officer | ||
| Date: | November 8, 2023 |
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