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LFMD:Segment
PART
I
ITEM
1. BUSINESS
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.
Since
inception, we have helped approximately 680,000 customers and patients, providing them greater access to high-quality, convenient, and
affordable care in all 50 states. Our telehealth revenue increased 21% for the year ended December 31, 2022 as compared to the year ended
December 31, 2021. Total revenue from recurring subscriptions is approximately 90%. In addition to our telehealth business, we own 73.64%
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 47% year-over-year revenue growth, with recurring revenue of 98%.
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 United States (“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 more than 680,000 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 390,000 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 260,000 customers and patients since inception with a 4.9-star Trustpilot
rating. |
|
|
|
|
○ |
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 85.6%. 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%.
WorkSimpli
was ranked in the top 7,840 websites globally, with more than 40 million registrants. Since its launch, WorkSimpli has converted or edited
over 258 terabytes of documents for customers from the legal, financial, real-estate and academic sectors. WorkSimpli had over 167,000
active subscriptions as of December 31, 2022.
Customers
Our
customer base includes men and women seeking virtual primary care and virtual medical treatment for hair loss, men’s sexual health
issues, dermatology, and allergy and asthma. No single customer accounted for more than 10% of net sales for the years ended December
31, 2022 and 2021.
Our
Growth Strategy
We
have achieved rapid growth since our transformation into a healthcare focused company in 2018, with a compounded annual growth rate in
revenue of nearly 112% since 2019 and growth of 28% in 2022 as compared to 2021. We believe this validates our significant long-term
investments in developing our human capital, technology, brand-awareness, omni-channel marketing, and operations infrastructure. We will
continue to make wise investments in differentiated telehealth service offerings and in initiatives that will enhance the experience
our patients have with our platform.
As a
result of this focused investment in the customer experience, including allocation of additional resources and expertise, we expect customer
repurchase rates and overall customer retention to strengthen. While we are proud of our accomplishments to date, we believe the most
exciting opportunities for our growth story are ahead of us, and we intend to focus in the following areas to help us achieve this growth.
There
remains a large underserved market within primary care, hair loss, erectile dysfunction, men’s and women’s health,
dermatology, as well as allergies and asthma into which we intend to continue to aggressively scale in 2023 and beyond. We plan to
continue to build a robust operational infrastructure to enable us to not only provide better patient care but also drive better
unit economics for our business.
Competition
The markets we sell into are large and highly competitive. Numerous online
brands compete with us for customers throughout the U.S. and internationally in virtual primary care, men’s and women’s health,
dermatology, and allergy. We also compete with traditional mass merchandisers, drug store chains, and independent pharmacies. Key to retaining
and growing our position in the market is taking a patient-centric approach to telehealth, with a strong emphasis on the quality-of-care
we deliver to our patients. Our human capital and know-how, proprietary technology platform, and unique product offerings represent meaningful
strengths that we believe will enable us to maintain and grow our market-leading position in the U.S.
Our
key competitive strengths include:
High-Quality
Care
Our telehealth platform is designed to give patients more control over
their healthcare spending, greater convenience in how and when they pursue or receive care, and better outcomes as hurdles to healthcare
services are removed for the care or medications they need. We are committed to delivering exceptional care that is convenient and affordable.
This is achieved through our provider network, including affiliated, full-time doctors and nurse practitioners, in addition to a dedicated
patient care center launched in November 2020 and staffed by LifeMD employees. The patient care center includes approximately 114 employees
and is led by an experienced operations and customer experience team. We believe the hands-on capabilities of the patient care center,
supported by our technology platform, will continue to drive high levels of patient satisfaction like we see today.
Technology
Platform
Our telehealth technology platform is continually optimized as we scale,
and this flexible infrastructure can be repurposed for any variety of existing or future telehealth offerings. Further, this platform
allows for rapid development and scale of new telehealth offerings as we identify attractive opportunities. Additional key capabilities
of this platform include proprietary staffing algorithms for case-load balancing, full CRM functionality, integration with an affiliated
50 state physician network, national third-party pharmacy network, fully integrated EMR system, synchronous and asynchronous communications,
and more.
Intellectual
Property
We
regard our trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property
as important to our success, and we rely on trademark and copyright law, trade-secret protection and confidentiality, patents, and/or
license agreements with our employees, customers, partners and others to protect our proprietary rights. We have licensed in the past,
and expect that we may license in the future, certain proprietary rights, technologies or copyrighted materials from third-parties, and
we rely on those third-parties to defend their proprietary rights, copyrights, and technologies.
From time-to-time, we register our principal brand names in the U.S. and
certain foreign countries. Our material trademarks include ShapiroMD Hair Growth Experts® and Cleared®.
Trademark applications have been filed and are being prosecuted for RexMD, LifeMD and NavaMD. The steps we take to protect our proprietary
rights in our brand names may not be adequate to prevent the misappropriation of our brand names in the U.S. or abroad. Existing trademark
laws afford only limited practical protection for our product lines. The laws and the level of enforcement of such laws in certain foreign
countries where we market our products often do not protect our proprietary rights in our products to the same extent as the laws of the
U.S.
We have
two U.S. patents relating to our Shapiro MD products’ method for treatment of hair loss with a combination of natural ingredients
with one granted on March 24, 2015 and the other on January 3, 2017. In order to protect the confidentiality of our intellectual property,
including trade secrets, know-how and other proprietary technical and business information, it is our policy to limit access to such
information to those who require access in order to perform their functions and to enter into agreements with employees, consultants,
and vendors to contractually protect such information.
Manufacturing
and Supply Chain
We
use third parties to manufacture and package our OTC products according to the formulas and packaging guidelines we dictate. In order
to minimize costs, we may elect to purchase raw or bulk materials directly from our suppliers and have them shipped to our manufacturers
so that we may incur only tableting, encapsulating, and/or packaging costs and avoid the additional costs associated with purchasing
the finished product.
Government
and Environmental Regulation
FDA
and Federal Trade Commission (“FTC”)
Our
business is heavily regulated by the FDA and the FTC. The FDA enforces the Federal Food, Drug and Cosmetic Act (the “FDCA”)
and Dietary Supplement Health and Education Act (“DSHEA”) as they pertain to foods, food ingredients, cosmetics and dietary
supplement production and marketing. Dietary supplements are regulated as a category of food, not as drugs. We are not required to obtain
FDA pre-market approval to sell our dietary supplement products in the U.S. under current laws. Our OTC hair loss products are
regulated as cosmetics under the FDCA.
The FDA imposes Good Manufacturing Practice (“GMP”) guidelines
to ensure that prescription drugs and dietary supplements are produced in a quality manner, do not contain contaminants or impurities,
and are accurately labeled. GMP guidelines include requirements for establishing quality control procedures, designing, and constructing
manufacturing plants, testing ingredients and finished products, record keeping, and handling of consumer product complaints. The FDA
has broad authority to enforce the provisions of federal law applicable to prescription drugs, dietary supplements and cosmetics, including
the power to monitor claims made in product labeling, to seize adulterated or misbranded products or unapproved new drugs, to request
product recall, and to issue warning letters. FDA also may refer cases to the Department of Justice to enjoin further manufacture or sale
of a product, to issue warning letters, and to institute criminal proceedings.
Advertising
and product claims regarding the efficacy of products are also regulated by the FTC. The FTC regulates the advertising of dietary supplements,
cosmetics and other health-related products to ensure that any advertising is truthful and not misleading, and that an advertiser maintains
adequate substantiation for all product claims. FTC-launched enforcement actions may result in consent decrees, cease and desist orders,
judicial injunctions and the payment of fines with respect to advertising claims that are found to be unsubstantiated.
Under
current U.S. regulations, our products must comply with certain labeling requirements enforced by the FDA and FTC, but otherwise generally
are not required to receive regulatory approval prior to introduction into the U.S. market. We believe we are in compliance with all
material government regulations applicable to our products.
In
addition to the foregoing, our operations and those of our partners are subject to federal, state and local government laws and regulations,
including those relating to the practice of medicine, telehealth and the prescribing of prescription medications. We believe we are in
substantial compliance with all material governmental regulations applicable to our operations.
Data
Privacy and Security Laws
The
data we collect and process is an integral part of our products and services, allowing us to ensure our prices are accurate and relevant,
and reach and advertise to consumers with savings information. We collect and may use personal information to help run our business (including
for analytical and marketing purposes) and to communicate and otherwise reach our consumers. In some instances, we may use third party
service providers to assist us in the above.
We
endeavor to treat our consumers’ data with respect and maintain consumer trust. We provide consumers options designed to allow
them to control the use and disclosure of their data, such as allowing consumers to opt out of any marketing requests, opt out of the
use of marketing cookies, pixels and technologies on our platform, and request deletion of their data.
Since
we receive, use, transmit, disclose and store personally identifiable information, including health-related information, we are subject
to numerous state and federal laws and regulations that address privacy, data protection and the collection, storing, sharing, use, transfer,
disclosure and protection of certain types of data. Such regulations include the CAN-SPAM Act, the Telephone Consumer Protection Act
of 1991, the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended
by the Health Information Technology for Economic and Clinical Health Act, (“HITECH”), and their implementing regulations,
which we collectively refer to as HIPAA, Section 5(a) of the Federal Trade Commission Act, and the California Consumer Privacy Act (“CCPA”).
The CCPA, which went into effect on January 1, 2020, requires, among other things, covered companies to provide new disclosures to California
consumers and afford such consumers new abilities to opt-out of certain sales of personal information. Similar legislation has been proposed
or adopted in other states. Aspects of the CCPA and these other state laws and regulations, as well as their enforcement, remain unclear,
and we may be required to modify our practices in an effort to comply with them. Additionally, a new privacy law, the California Privacy
Rights Act (“CPRA”), was passed on November 3, 2020 and became effective on January 1, 2023, with a look-back to January
2022. The CPRA significantly modifies the CCPA, potentially resulting in further uncertainty.
Additionally,
the FTC, and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards
for the online collection, use, dissemination and security of health-related and other personal information. Courts may also adopt the
standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer
protection laws require us to publish statements that describe how we handle personal information and choices individuals may have about
the way we handle their personal information. If such information that we publish is considered untrue, we may be subject to government
claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Furthermore, according to
the FTC violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information
secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the FTC Act.
In
addition, HIPAA, which we believe does not currently apply to most of our business as currently operated, imposes on entities within
its jurisdiction, among other things, certain standards relating to the privacy, security, transmission and breach reporting of individually
identifiable health information. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected
health information, a complaint about privacy practices or an audit by U.S. Department of Health and Human Services (“HHS”),
may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations
if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.
Healthcare
Fraud and Abuse Laws
Although
the consumers who use our offerings do so outside of any medication or other health benefits covered under their health insurance, including
any commercial or government healthcare program, we may nonetheless be subject to a number of federal and state healthcare regulatory
laws that restrict business practices in the healthcare industry. These laws include, but are not limited to, federal and state anti-kickback,
false claims, and other healthcare fraud and abuse laws.
The
U.S. federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying,
soliciting, receiving or providing any remuneration, directly or indirectly, overtly or covertly, to induce or in return for purchasing,
leasing, ordering, or arranging for or recommending the purchase, lease, or order of any good, facility, item or service reimbursable,
in whole or in part, under Medicare, Medicaid or other federal healthcare programs. A person or entity does not need to have actual knowledge
of the statute or specific intent to violate it in order to have committed a violation. The majority of states also have anti-kickback
laws, which establish similar prohibitions, and in some cases may apply to items or services reimbursed by any third-party payor, including
commercial insurers and self-pay patients.
The
federal false claims laws, including the civil False Claims Act, prohibit, among other things, any person or entity from knowingly presenting,
or causing to be presented, a false, fictitious, or fraudulent claim for payment to, or approval by, the federal government, knowingly
making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government,
or knowingly making a false statement to avoid, decrease, or conceal an obligation to pay money to the U.S. federal government. A claim
includes “any request or demand” for money or property presented to the U.S. government. Actions under the civil False Claims
Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Moreover, a
claim including items or services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal civil False Claims Act.
In
addition, the civil monetary penalties statute, subject to certain exceptions, prohibits, among other things, the offer or transfer of
remuneration, including waivers of copayments and deductible amounts (or any part thereof), to a Medicare or state healthcare program
beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider,
practitioner, or supplier of services reimbursable by Medicare or a state healthcare program.
The
federal Health Insurance Portability and Accountability Act of 1996 created additional federal criminal statutes that prohibit, among
other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including
private third party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a
criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or
making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the
statute or specific intent to violate it in order to have committed a violation.
Violations
of fraud and abuse laws, including federal and state anti-kickback and false claims laws, may be punishable by criminal and civil sanctions,
including fines and civil monetary penalties, the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid),
disgorgement and corporate integrity agreements, which impose, among other things, rigorous operational and monitoring requirements on
companies. Similar sanctions and penalties, as well as imprisonment, also can be imposed upon executive officers and employees of such
companies.
State
Licensing Requirements
Certain
states have enacted laws regulating companies that offer and market discount medical plans, including prescription drug plans, subscription
membership programs, or discount cards, such as our prescription offering. These state laws are intended to protect consumers from fraudulent,
unfair, or deceptive marketing, sales and enrollment practices by such plans. It is possible that other states may enact new requirements
or interpret existing requirements to include our programs. Failure to obtain the required licenses, certifications or registrations
to offer and market these subscription discount programs may result in civil penalties, receipt of cease-and-desist orders, or a restructuring
of our operations.
State
Corporate Practice of Medicine and Fee Splitting Laws
With
respect to our telehealth platform, we contract with our physician-owned professional corporation, LifeMD PC, to deliver our telehealth
offerings to its patients in the U.S. We entered into a management services agreement with LifeMD PC pursuant to which we provide
them with billing, scheduling and a wide range of other services, and they pay us for those services. In addition, our platform enables
consumers to opt in to use our prescription offering and/or fill their prescriptions through a third-party mail-order pharmacy. These
relationships are subject to various state laws, which are intended to prevent unlicensed persons from interfering with or influencing
the physician’s professional judgment and prohibiting the sharing of professional services income with non-professional or business
interests. These laws vary from state to state and are subject to broad interpretation and enforcement by state regulators. A determination
of non-compliance could lead to adverse judicial or administrative action against us and/or our providers, civil or criminal penalties,
receipt of cease-and-desist orders from state regulators, loss of provider licenses, or a restructuring of our arrangements with our
affiliated professional entities.
Human
Capital
As
of December 31, 2022, we employed 220 employees, of which 199 were full-time, 4 were part-time, and 17 were temporary employees. Of our
total employees, 114 were based at our patient care center in Greenville, SC. We use the services of consultants and third-party service
providers, where needed. None of our employees are represented by a union or covered by a collective bargaining agreement. We have not
experienced any work stoppages, and we consider our relationship with our employees to be good.
We
expect headcount to continue to grow in the future, especially as we continue to focus on recruiting employees in technical functions,
in various functions related to our operations as a publicly traded company, and to support our continued growth. We pride ourselves
on hiring people who not only have the skills required to perform their respective roles, but also share in the Company’s mission.
To
attract and retain key personnel, we use various measures, including an equity incentive program for key executive officers and other
employees. We also provide comprehensive benefits, including health insurance for employees and dependents, 401(k) match for employees
and unlimited paid time off for exempt employees. In managing our business, we strive to develop and implement policies and programs
that support our business goals, maintain competitiveness, promote shared fiscal responsibility among the Company and our employees,
strategically align talent within our organization and reward performance, while also managing the costs of such policies and programs.
Our employees are supported with training to ensure compliance with our policies. We adhere to our business code of conduct, which sets
forth a commitment to our stakeholders, including our employees, to operate with integrity and mutual respect.
Corporate
History
LifeMD,
Inc. was 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 19, 2021, we changed our name to LifeMD, Inc. Further, in connection with changing
our name, we changed our trading symbol to LFMD.
Available
Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments to these reports
that we file with or furnish to the SEC at their website, www.sec.gov, are also available free of charge at our website, https://ir.lifemd.com/,
as soon as reasonably practicable after we electronically file these reports with, or furnish these reports to the SEC. The content of
this website is not part of this Annual Report.
Any
of these reports or documents may also be obtained by writing to: Investor Relations; c/o LifeMD, Inc., 236 Fifth Avenue, Suite 400,
New York, NY 10001.
ITEM
1A. RISK FACTORS
An
investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together
with the other information contained in this report, before making a decision to invest in our securities. If any of the following events
occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price
of our securities could decline, and you could lose all or part of your investment.
Risks
Related to our Business and Industry
We
have generated net losses, we anticipate increasing expenses in the future, we have not yet achieved profitability, and we may not be
able to achieve or maintain profitability.
We
have incurred net losses on an annual basis since our inception. We incurred net losses of $45.0 million and $61.3 million in the years
ended December 31, 2022 and 2021, respectively. We had total stockholders’ deficit of approximately $11.9 million as of December
31, 2022. We expect our costs will increase substantially in the foreseeable future and we expect our losses will continue as we expect
to invest significant additional funds towards growing our platform, growing our provider network, enhancing our pharmacy fulfillment
system, and operating as a public company and as we continue to invest in increasing our customer base, hiring additional employees,
and developing new products and technological capabilities to enhance our customers’ experience on our platform. These efforts
may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these
higher expenses. To date, we have financed our operations principally from the sale of our equity, revenue from our platform, and the
incurrence of indebtedness.
Our
cash flows from operations were negative for the years ended December 31, 2022 and 2021. We may not generate positive cash flows from
operations or achieve profitability in any given period, and our limited operating history may make it difficult to evaluate our current
business and our future prospects. We cannot assure you that we will be able to achieve profitability, on either a quarterly or annual
basis, or that profitability, if achieved, will be sustained. Our ability to meet our long-term business objectives likely will be dependent
upon establishing increased cash flow from operations or securing other sources of financing. If our losses continue, however, our liquidity
may be severely impaired, our stock price may fall, and our stockholders may lose all or a significant portion of their investment.
We
have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing
and highly regulated industries, including increasing expenses as we continue to grow our business. If we are not able to achieve or
maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at
all and/or which would be dilutive to our stockholders. If we are unable to successfully address these risks and challenges as we encounter
them, our business, results of operations, and financial condition would be adversely affected.
Our
limited operating history and evolving business make it difficult to evaluate our current business and future prospects and increases
the risk of your investment.
Our
limited operating history and evolving business make it difficult to evaluate our current business and future prospects and plan for
our future growth. We began offering direct to consumer products and services in 2016. Since that time, our business has expanded and
we have increased the ways that we can address customer needs. We have encountered and will continue to encounter significant risks and
uncertainties frequently experienced by new and growing companies in rapidly changing and heavily regulated industries, such as attracting
new customers and healthcare providers (sometimes referred to herein as “providers”), to our platform, retaining our customers
and encouraging them to utilize new offerings we make available, increasing the number of conditions that can be treated by providers
through our platform, competition from other companies, whether online healthcare providers or traditional healthcare providers, hiring,
integrating, training and retaining skilled personnel, verifying the identity of customers and credentials of providers serving our customers,
developing new solutions, determining prices for our solutions, unforeseen expenses, challenges in forecasting accuracy, and new or adverse
regulatory developments affecting the use of telehealth, pharmaceutical products, or other aspects of the healthcare industry. If our
assumptions regarding these and other similar risks and uncertainties that relate to our business, which we use to plan our business,
are incorrect or change as we gain more experience operating our platform or expand into the treatment of new conditions, or if we do
not address these challenges successfully, our operating and financial results could differ materially from our expectations and our
business could suffer. Similar risks apply to our subsidiary cloud-based software as a service business that is exposed to many of the
risks typically experienced by a new and growing company including ability to attract new customers, entrance of competitors, and other
risk factors.
The
telehealth market is immature and volatile, and if it does not develop, if it develops more slowly than we expect, if it encounters negative
publicity, or if our solution does not drive customer engagement, the growth of our business will be harmed.
With
respect to our telehealth services, the telehealth market is relatively new and unproven, and it is uncertain whether it will achieve
and sustain high levels of demand, consumer acceptance and market adoption. The outbreak of the COVID-19 pandemic has increased utilization
of telehealth services, but it is uncertain whether such increase in demand will continue. Our success will depend to a substantial extent
on the willingness of our customers to use, and to increase the frequency and extent of their utilization of, our telehealth platform,
as well as on our ability to continue to grow our existing business and expand into new indications. Negative publicity concerning our
platform or brands, or the telehealth market as a whole, could limit market acceptance of our offerings. If our customers do not perceive
the benefits of our telehealth products and services, or if our products do not drive customer retention, then our market may not develop,
or it may develop more slowly than we expect. Similarly, individual and healthcare industry concerns, negative publicity regarding patient
confidentiality and privacy in the context of telehealth, and resistance from third party payors could limit market acceptance of our
healthcare services. If any of these events occurs, it could have a material adverse effect on our business, financial condition, and
results of operations.
If
we are unable to expand the scope of our offerings, including the number and type of products and services that we offer, the number
and quality of healthcare providers serving our customers, and the number and types of conditions capable of being treated through our
platform, our business, financial condition, and results of operations may be materially and adversely affected.
We
provide customers with access to non-prescription products, telehealth-based medical consultations with providers, and applicable pharmaceutical
products prescribed by the providers for specific medical conditions. In order for our business to continue growing and expanding, we
need to continue expanding the scope of products and services we offer our customers, including telehealth consultations and prescription
and non-prescription medication for additional conditions. The introduction of new products, services, or technologies by market participants,
including us, can quickly make existing products and services offered by us obsolete and unmarketable. Additionally, changes in laws
and regulations (or enforcement thereof) could impact the usefulness of our platform and could necessitate changes or modifications to
our platform or offerings to accommodate such changes. We invest substantial resources in researching and developing new offerings and
enhancing our solutions by incorporating additional features, improving functionality, and adding other improvements to meet our customers’
evolving demands. The success of any enhancements or improvements to our services or any new offerings depends on a number of factors,
including timely completion, competitive pricing, adequate quality testing, integration with new and existing technologies, and overall
market acceptance. We may not succeed in developing, marketing, and delivering on a timely and cost-effective basis enhancements or improvements
to our services or any new offerings that respond to continued changes in market demands or new customer requirements, and any enhancements
or improvements to our services or any new offerings may not achieve market acceptance. Since developing enhancements to our services
and the launch of new offerings can be complex, the timetable for the release of new offerings and enhancements to our existing services
is difficult to predict, and we may not launch new offerings and updates as rapidly as our current or prospective customers require or
expect. Any new offerings or service enhancements that we develop may not be introduced in a timely or cost-effective manner, may contain
errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. Moreover, even if we introduce
new offerings, we may experience a decline in revenue of our existing offerings that is not offset by revenue from the new offerings.
In addition, we may lose existing customers who choose a competitor’s products and services. This could result in a temporary or
permanent revenue shortfall and adversely affect our business.
If
we are unable to successfully market to new customers and retain existing customers, or if evolving privacy, healthcare, or other laws
prevent or limit our marketing activities, our business, financial condition, and results of operations could be harmed.
We
generate revenue from our platform by selling non-prescription health and personal care products directly to consumers and offering consumers
access to telehealth consultations with providers and certain prescription medications that may be prescribed by the providers in connection
with the telehealth consultations. Unless we are able to acquire new customers, and retain existing customers, our business, financial
condition, and results of operations may be harmed.
In
order to acquire new customers and patients, and to incentivize existing customers and patients to purchase more of our offerings, we
use social media platforms, search engine marketing, emails, text messages, our Patient Care Center, influencers, and many other online
and offline marketing strategies to reach new customers and patients. State and federal laws and regulations governing the privacy and
security of personal information, including healthcare data, are evolving rapidly and could impact our ability to identify and market
to potential and existing customers. Similarly, certain federal and state laws regulate, and in some cases limit, the use of discounts,
promotions, and other marketing strategies in the healthcare industry. If federal, state, or local laws governing our marketing activities
become more restrictive or are interpreted by governmental authorities to prohibit or limit these activities, our ability to attract
new customers and retain customers would be affected and our business could be materially harmed. In addition, any failure, or perceived
failure, by us, to comply with any federal, state, or local laws or regulations governing our marketing activities could adversely affect
our reputation, brand, and business, and may result in claims, proceedings, or actions against us by governmental entities, consumers,
suppliers, or others, or other liabilities or may require us to change our operations and/or cease using certain marketing strategies.
Changes
to social networking or advertising platforms’ terms of use, terms of service, or traffic algorithms that limit promotional communications,
impose restrictions that would limit our ability or our customers’ ability to send communications through their platforms, disruptions,
or downtime experienced by these platforms or reductions in the use of or engagement with social networking or advertising platforms
by customers and potential customers could also harm our business. As laws and regulations rapidly evolve to govern the use of these
channels, the failure by us, our employees, or third parties acting at our direction to abide by applicable laws and regulations in the
use of these channels could adversely affect our reputation or subject us to fines or other penalties. In addition, our employees or
third parties acting at our direction may knowingly or inadvertently make use of social media in ways that could lead to the loss or
infringement of intellectual property, as well as the public disclosure of proprietary, confidential or sensitive personal information
of our business, employees, consumers, or others. Any such inappropriate use of social media, emails and text messages could also cause
reputational damage and adversely affect our business.
Our
revenue growth depends on consumers’ willingness to adopt our products, and the failure of our offerings to achieve and maintain
market acceptance could result in us achieving revenue below our expectations, which could cause our business, financial condition, and
results of operation to be materially and adversely affected.
Our
growth is highly dependent upon the adoption by consumers of our products, and we are subject to a risk of any reduced demand for our
products. If the market for our products does not gain broad market acceptance or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be harmed.
Our
current business strategy is highly dependent on our platform and offerings achieving and maintaining market acceptance. Market acceptance
and adoption of our model and the products and services we make available depend on educating potential customers who may find our services
and these products and services useful, as well as potential partners, suppliers, and providers, as to the distinct features, ease-of-use,
positive lifestyle impact, cost savings, and other perceived benefits of our offerings as compared to those of competitors. If we are
not successful in demonstrating to existing and potential customers the benefits of our services, our revenue may decline or we may fail
to increase our revenue in line with our forecasts.
Our
business model and the services and products we make available may be perceived by potential customers, providers, suppliers, and partners
to be less trustworthy or effective than traditional medical care or competitive telehealth options, and people may be unwilling to change
their current health regimens or adopt our offerings. Consumers who have healthcare insurance coverage may not wish to use the platform
to access healthcare services or products for which insurance reimbursement is not available. Moreover, we believe that providers can
be slow to change their treatment practices or approaches because of perceived liability risks or distrust of departures from traditional
practice. Accordingly, we may face resistance to our offerings from brick-and-mortar providers until there is overwhelming evidence to
convince them to alter their current approach.
The
market for our model and services is new, rapidly evolving, and increasingly competitive, as the healthcare industry in the U.S.
is undergoing significant structural change and consolidation, which makes it difficult to forecast demand for our solutions.
Negative
publicity concerning telehealth generally, our offerings, customer success on our platform, or our market as a whole could limit market
acceptance of our business model and services. If our customers do not perceive the benefits of our offerings, or if our offerings do
not drive customer use and enrollment, then our market and our customer base may not continue to develop, or they may develop more slowly
than we expect. Our success depends in part on the willingness of providers and healthcare organizations to partner with us, increase
their use of telehealth, and our ability to demonstrate the value of our technology to providers, as well as our existing and potential
customers. If providers, healthcare organizations or regulators work in opposition to us or if we are unable to reduce healthcare costs
or drive positive health outcomes for our customers, then the market for our services may not continue to develop, or it might develop
more slowly than we expect. Similarly, negative publicity regarding customer confidentiality and privacy in the context of telehealth
could limit market acceptance of our business model and services. Additionally, the majority of our revenue is driven by products and
services offered through our platform on a subscription basis, and the adoption of subscription business models is still relatively new,
especially in the healthcare industry. If customers do not shift to subscription business models and subscription health management tools
do not achieve widespread adoption, or if there is a reduction in demand for subscription products and services or subscription health
management tools, our business, financial condition, and results of operations could be adversely affected.
Competitive
platforms or other technological breakthroughs for the monitoring, treatment, or prevention of medical conditions may adversely affect
demand for our offerings.
Our
ability to achieve our strategic objectives will depend, among other things, on our ability to enable fast and efficient telehealth consultations,
maintain comprehensive and affordable offerings, and deliver an accessible and reliable platform that is more appealing and user-friendly
than available alternatives. Our competitors, as well as a number of other companies and providers, within and outside the healthcare
industry, are pursuing new devices, delivery technologies, sensing technologies, procedures, treatments, drugs, and other therapies for
the monitoring and treatment of medical conditions. Any technological breakthroughs in monitoring, treatment, or prevention of medical
conditions that we could not similarly leverage could reduce the potential market for our offerings, which could significantly reduce
our revenue and our potential to grow certain aspects of our business.
The
introduction by competitors of solutions or offerings that are or claim to be superior to our platform or offerings may create market
confusion, which may make it difficult for potential customers to differentiate between the benefits of our offerings and competitive
solutions. In addition, the entry of multiple new products may lead some of our competitors to employ pricing strategies that could adversely
affect the pricing of products and services we make available. If a competitor develops a product or business that competes with, or
is perceived to be superior to our offerings, or if a competitor employs strategies that place downward pressure on pricing within our
industry, our revenue may decline significantly or may not increase in line with our forecasts, either of which could adversely affect
our business, financial condition, and results of operations.
We
operate in highly competitive markets and face competition from large, well-established healthcare providers and more traditional retailers
and pharmaceutical providers with significant resources, and, as a result, we may not be able to compete effectively.
The
markets for healthcare are intensely competitive, subject to rapid change and significantly affected by new product and technological
introductions and other market activities of industry participants. We compete directly not only with other established telehealth providers
but also traditional healthcare providers, pharmacies, and large retailers that sell non-prescription products, including, for example,
nutritional supplements, vitamins, and hair care treatments. Our current competitors include traditional healthcare providers expanding
into the telehealth market, incumbent telehealth providers, as well as new entrants into our market that are focused on direct-to-consumer
healthcare. Our competitors include enterprise-focused companies who may enter the direct-to-consumer healthcare industry, as well as
direct-to-consumer healthcare providers. Many of our current and potential competitors may have greater name and brand recognition, longer
operating histories, significantly greater resources than we do, and may be able to offer products and services similar to those offered
on our platform at more attractive prices than we can. Further, our current or potential competitors may be acquired by third parties
with greater available resources, which has recently occurred in our industry. As a result, our competitors may be able to respond more
quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements and may have
the ability to initiate or withstand substantial price competition. In addition, our competitors have established, and may in the future
establish, cooperative relationships with vendors of complementary products, technologies, or services to increase the availability of
their solutions in the marketplace.
New
competitors or alliances may emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies,
greater marketing expertise, and greater financial resources, which could put us at a competitive disadvantage. For example, some state
and federal regulatory authorities lowered certain barriers to the practice of telehealth in order to make remote healthcare services
more accessible in response to the COVID-19 pandemic. Although it is unclear whether these regulatory changes will be permanent or that
they will have a long-term impact on the adoption of telehealth services by the general public or legislative and regulatory authorities,
these changes may result in greater competition for our business. The lower barriers to entry may allow various new competitors to enter
the market more quickly and cost effectively than before the COVID-19 pandemic. Additionally, we believe that the COVID-19 pandemic has
introduced many new users to telehealth and further reinforced its benefits to potential competitors. We believe this may drive additional
industry consolidation or collaboration involving competitors that may create competitors with greater resources and access to potential
customers. The COVID-19 pandemic may also cause various traditional healthcare providers to evaluate and eventually pursue telehealth
options that can be paired with their in-person capabilities. These industry changes could better position our competitors to serve certain
segments of our current or future markets, which could create additional price pressure. In light of these factors, even if our offerings
are more effective than those of our competitors, current or potential customers may accept competitive solutions in lieu of purchasing
from us. If we are unable to successfully compete with existing and potential competitors, our business, financial condition, and results
of operations could be adversely affected.
We
have experienced rapid growth in recent periods and expect to continue to invest in our growth for the foreseeable future. If we fail
to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service, or adequately address
competitive challenges.
We
have recently experienced a period of rapid growth in our headcount and operations. Our revenue grew from $92.9 million for the year
ended December 31, 2021 to $119.0 million for the year ended December 31, 2022. Our number of full-time employees has increased significantly
over the last few years, from 56 employees as of December 31, 2020 to 199 employees as of December 31, 2022.
We
anticipate that we will continue to significantly expand our operations and headcount in the near term as we continue to scale domestically.
We also anticipate entering the international market to meet perceived demand for our offerings. We are continually executing a number
of growth initiatives, strategies and operating plans designed to enhance our business. The anticipated benefits from these efforts are
based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives,
strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve,
or it may be more costly to do so than we anticipate.
This
growth has placed, and future growth will place, a significant strain on our management, administrative, operational, and financial infrastructure.
Our success will depend in part on our ability to manage this growth effectively and execute our business plan. To manage the expected
growth of our operations and personnel, we will need to continue to improve our operational, financial, and management controls, and
our reporting systems and procedures, and we will need to ensure that we maintain high levels of patient care and support. Failure to
effectively manage growth and execute our business plan could result in difficulty or delays in increasing the size of our customer base,
declines in quality of patient care, support, or satisfaction, increases in costs, difficulties in introducing new products or features,
or other operational difficulties, and any of these difficulties could adversely affect our business performance and results of operations.
We
face risk that may arise from acquisitions and investments, which could result in operating difficulties, dilution, and other harmful
consequences that may adversely impact our business, financial condition, and results of operations. Additionally, if we are not able
to identify and successfully acquire suitable businesses, our results of operations and prospects could be harmed.
We
may pursue inorganic methods of growth, including strategic acquisitions and mergers in the future, to add complementary or strategic
companies, products, solutions, technologies, or revenue. These transactions could be material to our results of operations and financial
condition. We also expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions.
The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to complete
acquisitions on favorable terms, if at all. The process of integrating an acquired company, business, or technology may create unforeseen
operating difficulties and expenditures.
Future
acquisitions could also result in expenditures of significant cash, dilutive issuances of our equity securities, the incurrence of debt,
restrictions on our business, contingent liabilities, amortization expenses, or write-offs of goodwill, any of which could harm our financial
condition. In addition, any acquisitions we announce could be viewed negatively by customers, providers, partners, suppliers, or investors.
Additionally,
competition within our industry for acquisitions of business, technologies, and assets may become intense. Even if we are able to identify
an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or the
target may be acquired by another company. We may enter into negotiations for acquisitions that are not ultimately consummated. Those
negotiations could result in diversion of management time and significant out-of-pocket costs. If we fail to evaluate and execute acquisitions
successfully, we may not be able to realize the benefits of these acquisitions, and our results of operations could be harmed. If we
are unable to successfully address any of these risks, our business, financial condition, or results of operations could be harmed.
Expansion
into international markets can be a driver of long-term growth, when we expand into international markets, we will face additional business,
political, legal, regulatory, operational, financial, and economic risks, any of which could increase our costs and hinder such growth.
Expanding
our business to attract customers, providers, and suppliers in countries other than the U.S. is an opportunity for growth for
us going-forward. An important part of targeting international markets is increasing our brand awareness and establishing relationships
with partners internationally.
Our
ability to expand our business and to attract talented employees, customers, providers, partners, and suppliers in various international
markets will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly
growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute resolution systems, regulatory
systems, and commercial infrastructures. Entering new international markets will be expensive, our ability to successfully gain market
acceptance in any particular market is uncertain and the distraction of our senior management team could harm our business, financial
condition, and results of operations.
Economic
uncertainty or downturns, particularly as it impacts particular industries, could adversely affect our business and results of operations.
In
recent years, the U.S. and other significant markets have experienced inflationary pressures and cyclical downturns, and worldwide
economic conditions remain uncertain. This has been the case in 2022. Economic uncertainty and associated macroeconomic conditions make
it extremely difficult for our partners, suppliers, and us to accurately forecast and plan future business activities and could cause
our customers to slow spending on our offerings and could limit the ability of our pharmacy partners to purchase sufficient quantities
of pharmaceutical products from suppliers, which could adversely affect our ability to fulfill customer orders and attract new providers.
Inflationary
pressures may lead to increases in the cost of our products, freight, overhead costs or wage rates and may adversely affect our operating
results. Sustained inflationary pressures may have an adverse effect on our ability to maintain current levels of gross profit if we
are unable to offset such higher costs through price increases.
A
significant downturn in the domestic or global economy may cause our customers to pause, delay, or cancel spending on our platform or
seek to lower their costs by exploring alternative providers or our competitors. To the extent purchases of our offerings are perceived
by customers and potential customers as discretionary, our revenue may be disproportionately affected by delays or reductions in general
healthcare spending. Also, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our
customers.
We
cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, or in any particular
industry. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial
condition, and results of operations could be materially adversely affected.
The
COVID-19 pandemic has increased interest in and customer use of telehealth solutions, including our platform, and we cannot guarantee
that this increased interest will continue after the pandemic.
The
World Health Organization declared a global emergency on January 30, 2020 with respect to the outbreak of COVID-19 and then characterized
it as a pandemic on March 11, 2020. The outbreak has spread globally, causing companies and various local, state, federal, and international
jurisdictions to impose restrictions, such as quarantines, closures, cancellations, and travel restrictions. The duration of the business
disruptions, travel restrictions and related financial impact cannot be reasonably estimated at this time. As the COVID-19 pandemic is
ongoing, the complete impact of the pandemic is still unknown and rapidly evolving.
Due
to COVID-19, telehealth has seen a steep increase in use across the industry, in part due to governmental waivers of statutory and regulatory
restrictions that have historically limited how telehealth may be used in delivering care in certain jurisdictions. We do not know if
this relaxation of regulatory barriers resulting from COVID-19 will remain or for how long. There is renewed focus on telehealth among
legislatures and regulators due to COVID-19 and the expanded use of telehealth that could result in regulatory changes inconsistent with
or that place additional restrictions on our current business model or operations in certain jurisdictions. If customer adoption of telehealth
generally, or our platform in particular materially decreases as the COVID-19 restrictions are lifted, or if COVID-19 results in regulatory
changes that limit our current activities, our industry, business, and results of operations could be adversely affected.
Our
business depends on continued and unimpeded access to the internet and mobile networks.
Our
ability to deliver our internet-based and mobile-application based services depends on the development and maintenance of the infrastructure
of the internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth
capacity, and security. Our services are designed to operate without interruption. However, we may experience future interruptions and
delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems
or those of our service providers, we may experience an extended period of system unavailability, which could negatively impact our relationship
with customers, providers, partners, and suppliers.
We
also rely on software licensed from third parties in order to offer our services. These licenses are generally commercially available
on varying terms. However, it is possible that this software may not continue to be available on commercially reasonable terms, or at
all. Any loss of the right to use any of this software could result in delays in the provisioning of our services until equivalent technology
is either developed by us, or, if available, is identified, obtained and integrated. Furthermore, our use of additional or alternative
third-party software would require us to enter into license agreements with third parties, and integration of our software with new third-party
software may require significant work and require substantial investment of our time and resources. Also, any undetected errors or defects
in third-party software could prevent the deployment or impair the functionality of our software, delay new updates or enhancements to
our solution, result in a failure of our solution, and injure our reputation. The occurrence of any of the foregoing events could have
an adverse impact on our business, financial condition, and results of operations.
Any
disruption of service at Amazon Web Services, partner pharmacies or other third-party service providers could interrupt access to our
platform or delay our customers’ ability to seek treatment.
We
currently host our platform, serve our customers, and support our operations in the U.S. using Amazon Web Services (“AWS”),
a provider of cloud infrastructure services, as well as through partner pharmacies and other third-party service providers, including
shipping providers and contract manufacturers. We do not have control over the operations of the facilities of partner pharmacies, AWS,
or other third-party service providers. Such facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods,
fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, and similar events. The occurrence of a
natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems
could result in lengthy interruptions in our ability to generate revenue through customer purchases on the platform. The facilities also
could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. Our platform’s
continuing and uninterrupted performance is critical to our success. Because our platform is used by our customers to engage with providers
who can diagnose, manage, and treat medical conditions, and pharmacies who can fulfill and ship prescription medication, it is critical
that our platform be accessible without interruption or degradation of performance. Customers may become dissatisfied by any system failure
that interrupts our ability to provide our platform or access to the products and services offered through our platform to them. Outages
and partner pharmacy closures could lead to claims of damages from our customers, providers, partners, suppliers, and others. We may
not be able to easily switch our AWS operations to another cloud provider if there are disruptions or interference with our use of AWS.
Sustained or repeated system failures could reduce the attractiveness of our offerings to customers and result in contract terminations,
thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely
impact use of our platform. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as
a result of any events that cause interruptions in our platform. Thus, any such disruptions could have an adverse effect on our business
and results of operations.
None
of our partner pharmacies, shipping providers, contract manufacturers, nor AWS have an obligation to renew their agreements with us on
commercially reasonable terms, or at all. If we are unable to renew our agreements with these third-party service providers on commercially
reasonable terms, if our agreements with these providers are prematurely terminated, we may experience costs or downtime in connection
with the transfer to, or the addition of, such new providers. If these third-party service providers were to increase the cost of their
services, we may have to increase the price of our offerings, and our results of operations may be adversely impacted.
We
depend on a number of other companies to perform functions critical to our ability to operate our platform, generate revenue from customers,
and to perform many of the related functions.
We
depend on LifeMD PC and their providers to deliver quality healthcare consultations and services through our platform. Through our platform,
providers are able to prescribe medication fulfilled by a partner pharmacy. Any interruption in the availability of a sufficient number
of providers or supply from our partner pharmacies could materially and adversely affect our ability to satisfy our customers and ensure
they receive consultation services and any medication that they have been prescribed. If we were to lose our relationship with LifeMD
PC, we cannot guarantee that we will be able to ensure access to a sufficient network of providers. Similarly, if we were to lose our
relationship with one of our partner pharmacies in the near term, we cannot guarantee that we will be able to find, diligence, and engage
with a replacement partner in a timely manner. Our ability to service customer requirements could be materially impaired or interrupted
in the event that our relationship with LifeMD PC or partner pharmacy is terminated. We also depend on cloud infrastructure providers,
payment processors, suppliers of non-prescription products and packaging, and various others that allow our platform to function effectively
and serve the needs of our customers. Difficulties with our significant partners and suppliers, regardless of the reason, could have
a material adverse effect on our business.
Our
payments system depends on third party service providers and is subject to evolving laws and regulations.
We
have engaged third-party service providers to perform underlying card processing and currency exchange. If these service providers do
not perform adequately or if our relationships with these service providers were to terminate, our ability to accept orders through the
platform could be adversely affected and our business could be harmed. In addition, if these service providers increase the fees they
charge us, our operating expenses could increase and if we respond by increasing the fees we charge to our customers, we could lose some
of our customers.
The
laws and regulations related to payments are complex and vary across different jurisdictions in the U.S. and globally. As a
result, we are required to spend significant time and effort to comply with those laws and regulations. Any failure or claim of our failure
to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, could result in liabilities,
or could force us to stop offering third-party payment systems. As we expand the availability of payments via third parties or offer
new payment methods to our customers in the future, we may become subject to additional regulations and compliance requirements.
Further,
through our agreement with our third-party credit card processor, we are indirectly subject to payment card association operating rules,
and certification requirements, including the Payment Card Industry Data Security Standard. We are also subject to rules governing electronic
funds transfers. Any change in these rules and requirements could make it difficult or impossible for us to comply. Any such difficulties
or failures with respect to the payment systems we utilize may have an adverse effect on our business.
We
depend on our talent to grow and operate our business, and if we are unable to hire, integrate, develop, motivate, and retain our personnel,
we may not be able to grow effectively.
Our
success depends in large part on our ability to attract and retain high-quality management in marketing, engineering, operations, healthcare,
regulatory, legal, finance and support functions. Competition for qualified employees is intense in our industry, and the loss of even
a few qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the planned
expansion of our business could harm our results of operations and impair our ability to grow. To attract and retain key personnel, we
use various measures, including an equity incentive program for key executive officers and other employees. These measures may not be
enough to attract and retain the personnel we require to operate our business effectively.
As
we continue to grow, we may be unable to continue to attract or retain the personnel we need to maintain our competitive position. In
addition to hiring new employees, we must continue to focus on retaining our best talent. Competition for these resources, particularly
for engineers, is intense. We may need to invest significant amounts of cash and equity for new and existing employees and we may never
realize returns on these investments. If we are not able to effectively increase and retain our talent, our ability to achieve our strategic
objectives will be adversely impacted, and our business will be harmed. The loss of one or more of our key employees, and any failure
to have in place and execute an effective succession plan for key employees, could seriously harm our business. Employees may be more
likely to leave us if the shares of our capital stock they own, or the shares of our capital stock underlying their equity incentive
awards have significantly reduced in value, or the vested shares of our capital stock they own or vested shares of our capital stock
underlying their equity incentive awards have significantly appreciated. Many of our employees may receive significant proceeds from
sales of our equity in the public markets once the applicable lock-up restrictions expire, which may reduce their motivation to continue
to work for us.
We
permit most of our employees to work remotely should their particular positions allow. While we believe that most of our operations can
be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed and many
employees may have additional personal needs to attend to or distractions in their remote work environment. To the extent our current
or future remote work policies result in decreased productivity, harm our company culture, or otherwise negatively affect our business,
our financial condition and results of operations could be adversely affected.
We
are at risk that the non-prescription inventory that we store may become damaged, facility disruption may also harm our business.
We
hold non-prescription inventory at some of our facilities. A natural disaster, fire, power interruption, work stoppage or other calamity
at this facility would significantly disrupt our ability to deliver our products and operate our business. If any material amount of
our facility, machinery, or inventory were damaged or unusable, we would be unable to meet our obligations to customers and wholesale
partners, which could materially adversely affect our business, financial condition, and results of operations.
We
rely significantly on revenue from customers purchasing subscription-based prescription products and may not be successful in expanding
our offerings.
To
date the majority of our revenue has been, and we expect it to continue to be, derived from customers who purchase subscription-based
prescription products through the platform. In our subscription arrangements, customers select a cadence at which they wish to receive
product shipments. These customers generate a substantial majority of our revenue. The introduction of competing offerings with lower
prices for consumers, fluctuations in prescription prices, changes in consumer purchasing habits, including an increase in the use of
mail-order prescriptions, changes in the regulatory landscape, and other factors could result in changes to our contracts or a decline
in our revenue, which may have an adverse effect on our business, financial condition, and results of operations. Because we derive a
vast majority of our revenue from customers who purchase subscription-based prescription products, any material decline in the use of
such offerings could have a pronounced impact on our future revenue and results of operations, particularly if we are unable to expand
our offerings overall.
In
the past we have, and in the future we may, actively employ social media and Patient Care Center activities as part of our marketing
strategy, which could give rise to regulatory violations, liability, breaches of data security, or reputational damage.
Despite
our efforts to monitor evolving social media communication guidelines and comply with applicable laws and regulations, there is risk
that the use of social media by us, our employees or our customers to communicate about our products or business may cause us to be found
in violation of applicable requirements, including requirements of regulatory bodies such as the FDA and the Federal Trade Commission.
For example, adverse events, product complaints, off-label usage by physicians, unapproved marketing, or other unintended messages could
require an active response from us, which may not be completed in a timely manner and could result in regulatory action by a governing
body. In addition, our employees may knowingly or inadvertently make use of social media in ways that may not comply with our social
media policy or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other
intellectual property, or result in public exposure of personal information of our employees, clinical trial patients, customers, and
others. Furthermore, negative posts or comments about us or our products in social media could seriously damage our reputation, brand
image, and goodwill.
Any
significant interruptions in the operations of our Patient Care Center could cause us to lose sales and disrupt our ability to process
orders and deliver our solutions in a timely manner.
We
rely on our Patient Care Center to sell our products, respond to customer service and technical support requests, and process orders.
Any significant interruption in the operation of these facilities, including an interruption caused by our failure to successfully expand
or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to receive and process orders and provide
products and services, which could result in lost and cancelled sales and damage to our brand and reputation.
As
we grow, we will need more capacity from our existing Patient Care Center. If our Patient Care Center operators do not convert inquiries
into sales at expected rates, our ability to generate revenue could be impaired. Training and retaining qualified Patient Care Center
operators is challenging, and if we do not adequately train our Patient Care Center personnel, they may convert inquiries into sales
at an acceptable rate.
Risks
Related to Governmental Regulation
We
may be subject to claims that we are engaged in the corporate practice of medicine or that our contractual arrangements with our affiliated
medical group constitutes unlawful fee splitting.
We
have contracted with physician-owned professional corporations (“P.C.’s”) or professional associations (“P.A.’s”)
to facilitate the delivery of telehealth services to their patients. We have entered into a management services agreement with our affiliated
medical group pursuant to which we provide these P.C.’s and P.A.’s with a comprehensive set of non-clinical management and
administrative services. The affiliated medical group is solely responsible for practicing medicine and all clinical decision-making
and will pay us for our management services from the fees collected from patients. This relationship is subject to various state laws
that prohibit fee splitting or the practice of medicine by lay entities or persons. Corporate practice of medicine laws and enforcement
varies by state. In some states, decisions and activities such as contracting with third party payors, setting rates and the hiring and
management of non-clinical personnel may implicate the restrictions on the corporate practice of medicine.
In
addition, corporate practice of medicine restrictions are subject to broad powers of interpretation and enforcement by state regulators.
Some of these requirements may apply to us even if we do not have a physical presence in a state, solely because we provide management
services to a provider licensed in the state or facilitate the provision of telehealth to a resident of the state. State medical practice
boards, other regulatory authorities, or other parties, including the physicians or other providers in our affiliated medical group or
with whom we otherwise contract, may assert that, despite these arrangements, we are engaged in the corporate practice of medicine or
that our contractual arrangements with our affiliated medical group constitutes unlawful fee splitting. In this event, failure to comply
could lead to adverse judicial or administrative action against us and/or our affiliated providers, civil or criminal penalties, receipt
of cease-and-desist orders from state regulators, loss of provider licenses, the need to make changes to the terms of engagement with
providers that interfere with our business and other materially adverse consequences.
In
the U.S., we conduct business in a heavily regulated industry, and if we fail to comply with these laws and government regulations, we
could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have
a material adverse effect on our business, financial condition, and results of operations.
The
U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes
and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and
private payors (if applicable); our contractual relationships with LifeMD PC, other third-party providers, vendors, and customers; our
marketing activities; and other aspects of our operations. Of particular importance are:
● |
the
federal physician self-referral law, commonly referred to as the Stark Law, that, subject to limited exceptions, prohibits physicians
from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if
the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an
ownership interest or a compensation arrangement) with the entity, and prohibit the entity from billing Medicare or Medicaid for
such designated health services; |
|
|
● |
the
federal Anti-Kickback Statute that prohibits the knowing and willful offer, payment, solicitation, or receipt of any bribe, kickback,
rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing, or recommending or arranging
for or to induce the referral of an individual or the ordering, purchasing, or leasing of items or services covered, in whole or
in part, by any federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge
of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim
including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim
for purposes of the False Claims Act; |
|
|
● |
the
criminal healthcare fraud provisions of HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice
to defraud any healthcare benefit program or falsifying, concealing, or covering up a material fact or making any material false,
fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Similar
to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent
to violate it to have committed a violation; |
Because
of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our
business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws
may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages,
overpayment, recoupment, imprisonment. The risk of our being found in violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open
to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or
any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action
against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant
legal expenses, divert our management’s attention from the operation of our business and result in adverse publicity.
To
enforce compliance with the federal laws, the U.S. Department of Justice and the U.S. Department of Health and Human Services Office
of Inspector General, (“OIG”), have recently increased their scrutiny of healthcare providers, which has led to a number
of investigations, prosecutions, convictions, and settlements in the healthcare industry. Dealing with investigations can be time- and
resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase
our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under
the federal False Claims Act, which provides for treble damages and penalties of $5,000 to $10,000 per false claim or statement, which
is further adjusted for inflation, healthcare providers often resolve allegations without admissions of liability for significant and
material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain
additional compliance and reporting requirements as part of a consent decree, settlement agreement, or corporate integrity agreement.
Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial
resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws.
The
laws, regulations, and standards governing the provision of healthcare services may change significantly in the future. We cannot assure
you that any new or changed healthcare laws, regulations, or standards will not materially adversely affect our business. We cannot assure
you that a review of our business by judicial, law enforcement, regulatory, or accreditation authorities will not result in a determination
that could adversely affect our operations.
State
legislative and regulatory changes specific to the area of telehealth law may present the LifeMD PC any remaining third-party medical
groups and independent physicians on our platform with additional requirements and state compliance costs, which may create additional
operational complexity and increase costs.
LifeMD
PC’s third-party medical groups’, and independent physicians’ ability to provide telehealth services to patients in
a particular jurisdiction is dependent upon the laws that govern the provision of remote care, the practice of medicine, and healthcare
delivery in general in that jurisdiction. Laws and regulations governing the provision of telehealth services are evolving at a rapid
pace and are subject to changing political, regulatory, and other influences. Some states’ regulatory agencies or medical boards
may have established rules or interpreted existing rules in a manner that limits or restricts providers’ ability to provide telehealth
services or for physicians to supervise nurse practitioners and physician assistants remotely. Additionally, there may be limitations
placed on the modality through which telehealth services are delivered. For example, some states specifically require synchronous (or
“live”) communications and restrict or exclude the use of asynchronous telehealth modalities, which is also known as “store-and-forward”
telehealth. However, other states do not distinguish between synchronous and asynchronous telehealth services. Because this is a developing
area of law and regulation, we continually monitor compliance in every jurisdiction in which we operate. However, we cannot be assured
that third-party medical groups’, or independent providers’ activities and arrangements, if challenged, will be found to
be in compliance with the law or that a new or existing law will not be implemented, enforced, or changed in manner that is unfavorable
to our business model. We cannot predict the regulatory landscape for those jurisdictions in which we operate and any significant changes
in law, policies, or standards, or the interpretation or enforcement thereof, could occur with little or no notice. The majority of the
consultations provided through our platform are asynchronous consultations for customers located in jurisdictions that permit the use
of asynchronous telehealth. If there is a change in laws or regulations related to our business, or the interpretation or enforcement
thereof, that adversely affects our structure or operations, including greater restrictions on the use of asynchronous telehealth or
remote supervision of nurse practitioners or physician assistants, it could have a material adverse effect on our business, financial
condition, and results of operations.
Changes
in public policy that mandate or enhance healthcare coverage could have a material adverse effect on our business, operations, and/or
results of operations.
Our
mission is to make healthcare accessible, affordable, and convenient for everyone. It is reasonably possible that our business operations
and results of operations could be materially adversely affected by public policy changes at the federal, state, or local level, which
include mandatory or enhanced healthcare coverage. Such changes may present us with new marketing and other challenges, which may, for
example, cause use of our products and services to decrease or make doing business in particular states less attractive. If we fail to
adequately respond to such changes, including by implementing effective operational and strategic initiatives, or do not do so as effectively
as our competitors, our business, operations, and results of operations may be materially adversely affected
We
cannot predict the enactment or content of new legislation and regulations or changes to existing laws or regulations or their enforcement,
interpretation or application, or the effect they will have on our business or results of operations, which could be materially adverse.
Even if we could predict such matters, we may not be able to reduce or eliminate the potential adverse impact of public policy changes
that could fundamentally change the dynamics of our industry.
Changes
in insurance and healthcare laws, as well as the potential for further healthcare reform legislation and regulation, have created uncertainty
in the healthcare industry and could materially affect our business, financial condition, and result of operations.
The
Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010,
generally known as the “Health Care Reform Law,” significantly expanded health insurance coverage to uninsured Americans
and changed the way healthcare is financed by both governmental and private payers. Since then, the Health Care Reform Law has prompted
legislative efforts to significantly modify or repeal the Health Care Reform Law, which may impact how the federal government responds
to lawsuits challenging the Health Care Reform Law. We cannot predict what further reform proposals, if any, will be adopted, when they
may be adopted, or what impact they may have on our business. While we currently only accept payments from customers—not any third
parties or insurance providers—and our business model may not be directly impacted by healthcare reform, healthcare reform will
impact the healthcare industry in which we operate. If we are required to comply with the Health Care Reform Law and fail to comply or
are unable to effectively manage such risks and uncertainties, our financial condition and results of operations could be adversely affected.
The
products we sell and our third-party suppliers are subject to FDA regulations and other state and local requirements, and if we or our
third party suppliers fail to comply with federal, state, and local requirements, our ability to fulfill customers’ orders through
our platform could be impaired.
The
products available through our platform, and the third-party suppliers and manufacturers of these products, are subject to extensive
regulation by the FDA and state and local authorities, including pharmaceuticals, OTC drugs, OTC devices, cosmetics, and dietary supplements.
These authorities can enforce regulations related to methods and documentation of the testing, production, compounding, control, quality
assurance, labeling, packaging, sterilization, storage, and shipping of products. Government regulations specific to pharmaceuticals
are wide ranging and govern, among other things: the ability to bring a pharmaceutical to market, the conditions under which it can be
sold, the conditions under which it must be manufactured, and permissible claims that may be made for such product. Failure to meet—or
significant changes to—any federal, state, or local requirements attendant to the sales and marketing of a regulated product could
result in enforcement actions, impede our ability to provide access to affected products, and have a material adverse effect on our business,
financial condition and results of operations.
We
may be subject to fines, penalties, and injunctions if we are determined to be promoting the use of products for unapproved uses.
Certain
of the products available through our platform require approval by the FDA and are subject to the limitations placed by FDA on the approved
uses in the product prescribing information. While providers are legally permitted to prescribe medications for off-label uses, and although
we believe our product promotion is conducted in material compliance with FDA and other regulations, if the FDA determines that our product
promotion constitutes promotion of an unapproved use of an approved product or of an unapproved product, the FDA could request that we
modify our product promotion or subject us to regulatory and/or legal enforcement actions, including the issuance of a warning letter,
injunction, seizure, civil fine, and criminal penalties. It is also possible that other federal, state, or foreign enforcement authorities
might take action if they consider the product promotion to constitute promotion of an unapproved use of an approved product or of an
unapproved product, which could result in significant fines or penalties under other statutes, such as laws prohibiting false claims
for reimbursement.
The
information that we provide to healthcare providers, customers, and our partners could be inaccurate or incomplete, which could harm
our business, financial condition, and results of operations.
We
collect and transmit healthcare-related information to and from our customers, providers, and partner pharmacies in connection with the
telehealth consultations conducted by the providers and prescription medication fulfillment by our partner pharmacies. If the data that
we provide to our customers, providers, or partner pharmacies are incorrect or incomplete or if we make mistakes in the capture or input
of these data, our reputation may suffer and we could be subject to claims of liability for resulting damages. While we maintain insurance
coverage, this coverage may prove to be inadequate or could cease to be available to us on acceptable terms, if at all. Even unsuccessful
claims could result in substantial costs and the diversion of management resources. A claim brought against us that is uninsured or under-insured
could harm our business, financial condition, and results of operations.
Our
use, disclosure, and other processing of personally identifiable information, including health information, is subject to federal, state,
and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information
we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our customers, providers,
and revenue.
Numerous
state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity,
and other processing of health information and other types of personal data or personally identifiable information (“PII”).
We believe that, because of our operating processes, we are not a covered entity or a business associate under HIPAA, which establishes
a set of national privacy and security standards for the protection of protected health information by health plans, healthcare clearinghouses,
and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract
for services. Notwithstanding that we do not believe that we meet the definition of a covered entity or business associate under HIPAA,
we have executed business associate agreements with certain other parties and have assumed obligations that are based upon HIPAA-related
requirements.
In
addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability,
integrity and security of health information and other types of PII, including the California Confidentiality of Medical Information
Act. These laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules.
These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new
laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. This
complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for
us, the LifeMD PC and the providers and potentially exposes us to additional expense, adverse publicity, and liability. While we have
implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data
protection, some health information and other PII or confidential information is transmitted to us by third parties, who may not implement
adequate security and privacy measures, and it is possible that laws, rules, and regulations relating to privacy, data protection, or
information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who
transmit health information and other PII or confidential information to us. If we or these third parties are found to have violated
such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change
our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws and regulations
could cause us to incur substantial costs or require us to change our business practices, systems, and compliance procedures in a manner
adverse to our business.
We
also publish statements to our customers through our privacy policy consent to telehealth, and terms and conditions, that describe how
we handle health information or other PII. If federal or state regulatory authorities or private litigants consider any portion of these
statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences,
including, without limitation, costs of responding to investigations, defending against litigation, settling claims, and complying with
regulatory or court orders. Any of the foregoing consequences could seriously harm our business and our financial results. Furthermore,
the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to us may limit customers’
use and adoption of, and reduce the overall demand for, our platform. Any of the foregoing consequences could have a material adverse
impact on our business and our financial results.
Public
scrutiny of internet privacy and security issues may result in increased regulation and different industry standards, which could deter
or prevent us from providing services to our customers, thereby harming our business.
The
regulatory framework for privacy and security issues worldwide is evolving and is likely to remain in flux for the foreseeable future.
Various government and consumer agencies have also called for new regulation and changes in industry practices. Practices regarding the
registration, collection, processing, storage, sharing, disclosure, use, and security of personal and other information by companies
offering an online service like our platform have recently come under increased public scrutiny.
For
example, the CCPA requires, among other things, covered companies to provide new disclosures to California consumers and afford such
consumers new abilities to opt-out of certain sales of personal information. Similar legislation has been proposed or adopted in other
states. Aspects of the CCPA and these other state laws and regulations, as well as their enforcement, remain unclear, and we may be required
to modify our practices in an effort to comply with them. Additionally, the CPRA was passed on November 3, 2020 and became effective
on January 1, 2023, with a look-back to January 2022. The CPRA significantly modifies the CCPA, potentially resulting in further uncertainty
and requiring us to incur additional costs and expenses.
Our
business, including our ability to operate and to expand internationally, could be adversely affected if legislation or regulations are
adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to
these practices, the design of our websites, mobile applications, solutions, features, or our privacy policies. In particular, the success
of our business has been, and we expect will continue to be, driven by our ability to responsibly gather and use data from data subjects.
Therefore, our business could be harmed by any significant change to applicable laws, regulations, or industry standards or practices
regarding the storage, use, or disclosure of data our customers or providers share with us, or regarding the manner in which the express
or implied consent of customers or providers for such collection, analysis, and disclosure is obtained. Such changes may require us to
modify our platform, possibly in a material manner, and may limit our ability to develop new offerings, functionality, or features.
If
our security measures fail or are breached and unauthorized access to a consumer’s data is obtained, our services may be perceived
as insecure, we may incur significant liabilities, our reputation may be harmed, and we could lose sales and customers.
Our
services involve the storage and transmission of customers’ and our vendors’ proprietary information, sensitive or confidential
data, including valuable intellectual property and personal information of employees, consumers, customers, and others, as well as the
protected health information, (“PHI”), of our customers. Because of the extreme sensitivity of the information we store and
transmit, the security features of our computer, network, and communications systems infrastructure are critical to the success of our
business. A breach or failure of our security measures could result from a variety of circumstances and events, including third-party
action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of
upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors, or catastrophic
events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the
increased sophistication and activities of perpetrators of cyber-attacks. As cyber threats continue to evolve, we may be required to
expend additional resources to further enhance our information security measures and/or to investigate and remediate any information
security vulnerabilities. If our security measures fail or are breached, it could result in unauthorized persons accessing sensitive
consumer or partner data (including PHI), a loss of or damage to our data, an inability to access data sources, or process data or provide
our services to our customers. Such failures or breaches of our security measures, or our inability to effectively resolve such failures
or breaches in a timely manner, could severely damage our reputation, adversely affect customers, vendors, or investor confidence in
us, and reduce the demand for our services from existing and potential customers. In addition, we could face litigation, damages for
contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs
for remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security
and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and
in any event, insurance coverage would not address the reputational damage that could result from a security incident.
We
may experience cyber-security and other breach incidents that remain undetected for an extended period. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate
these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, or if we are
unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could
be harmed and we could lose sales, customers, and vendors which could have a material adverse effect on our business, operations, and
financial results.
Risks
Related to Intellectual Property and Litigation
Failure
to protect or enforce our intellectual property rights could harm our business and results of operations.
Our
intellectual property includes a combination of patent, copyright, service mark, trademark, and trade secret laws, as well as confidentiality
procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection.
We cannot assure you that any patents will issue with respect to any currently pending patent applications, in a manner that gives us
the protection that we seek, if at all, or that any future patents issued to us will not be challenged, invalidated, or circumvented.
Our currently issued patents and any patents that we may issue in the future, with respect to pending or future patent applications,
may not provide sufficient broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot
assure you that any future service mark registrations will be issued with respect to pending or future applications or that any registered
service marks will be enforceable or provide adequate protection of our proprietary rights.
In
addition, from time to time we make our technology and other intellectual property available to others under license agreements, including
open source license agreements and trademark licenses under agreements with our partners for the purpose of co-branding or co-marketing
our products or services. We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom
we do business in order to limit access to and disclosure of our proprietary information. We cannot be certain that the steps we have
taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently
develop technologies that are competitive to ours or infringe our intellectual property.
We
strive to protect our intellectual property rights by relying on federal, state, and common law rights and other rights provided under
foreign laws. These laws are subject to change at any time and could further restrict our ability to protect or enforce our intellectual
property rights. In addition, the existing laws of certain foreign countries in which we operate may not protect our intellectual property
rights to the same extent as do the laws of the U.S. The enforcement of our intellectual property rights also depends on our
legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights
have been infringed. Furthermore, effective patent, trademark, service mark, copyright, and trade secret protection may not be available
in every country in which our services are available over the Internet. We may, over time, increase our investment in protecting innovations
through investments in filings, registrations, or similar steps to protect our intellectual property, and these processes are expensive
and time-consuming.
We
may be in the future subject to claims that we violated intellectual property rights of others, which are extremely costly to defend
and could require us to pay significant damages and limit our ability to operate.
Companies
in our industry, and other intellectual property rights holders seeking to profit from royalties in connection with grants of licenses,
own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of
infringement or other violations of intellectual property rights. Our future success depends in part on not infringing upon the intellectual
property rights of others. We have in the past and may in the future receive notices that claim we have misappropriated, infringed, or
otherwise misused other parties’ intellectual property rights. We may be unaware of the intellectual property rights of others
that may cover some or all of our technology. Because patent applications can take years to issue and are often afforded confidentiality
for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover
our technology.
Any
intellectual property claim against us or parties indemnified by us, regardless of merit, could be time consuming and expensive to settle
or litigate and could divert our management’s attention and other resources. These claims also could subject us to significant
liability for damages and could result in our having to stop using technology, content, branding, or business methods found to be in
violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual property held
by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we could be required
to pay significant royalties, which would increase our operating expenses. We may also be required to develop alternative non-infringing
technology, content, branding or business methods, which could require significant effort and expense, be infeasible, or make us less
competitive in the market. Such disputes could also disrupt our business, which would adversely impact our customer satisfaction and
ability to attract customers. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively
than we can because they have substantially greater resources. If we cannot license or develop technology, content, branding, or business
methods for any allegedly infringing aspect of our business, we may be unable to compete effectively. Additionally, we may be obligated
to indemnify our customers in connection with litigation and to obtain licenses or refund subscription fees, which could further exhaust
our resources. In the case of infringement or misappropriation caused by technology that we obtain from third parties, any indemnification
or other contractual protections we obtain from such third parties, if any, may be insufficient to cover the liabilities we incur as
a result of such infringement or misappropriation. Any of these results could harm our results of operations.
We
may be subject to legal proceedings and litigation, including intellectual property disputes, which are costly to defend and could materially
harm our business and results of operations.
We
may be party to lawsuits and legal proceedings in the normal course of business. These matters are often expensive and disruptive to
normal business operations. We may face allegations, lawsuits, and regulatory inquiries, audits, and investigations regarding data privacy,
security, labor and employment, consumer protection, practice of medicine, and intellectual property infringement, including claims related
to privacy, patents, publicity, trademarks, copyrights, and other rights. A portion of the technologies we use incorporates open source
software, and we may face claims claiming ownership of open source software or patents related to that software, rights to our intellectual
property or breach of open source license terms, including a demand to release material portions of our source code or otherwise seeking
to enforce the terms of the applicable open source license. We may also face allegations or litigation related to our acquisitions, securities
issuances, or business practices, including public disclosures about our business. Litigation and regulatory proceedings, and particularly
the healthcare regulatory and class action matters we could face, may be protracted and expensive, and the results are difficult to predict.
Certain of these matters may include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive
relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings
may result in significant settlement costs or judgments, penalties and fines, or require us to modify our solution or require us to stop
offering certain features, all of which could negatively impact our acquisition of customers and revenue growth. We may also become subject
to periodic audits, which could likely increase our regulatory compliance costs and may require us to change our business practices,
which could negatively impact our revenue growth. Managing legal proceedings, litigation and audits, even if we achieve favorable outcomes,
is time-consuming and diverts management’s attention from our business.
The
results of regulatory proceedings, litigation, claims, and audits cannot be predicted with certainty, and determining reserves for pending
litigation and other legal, regulatory, and audit matters requires significant judgment. There can be no assurance that our expectations
will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the
time and resources necessary to litigate or resolve them, could harm our reputation, business, financial condition and results of operations.
If
we incur product liability claims, such claims could increase our costs; adversely affect our reputation, business, and results of operations;
and we may not be able to maintain or obtain insurance.
Our
business involves LifeMD PC’s medical providers performing medical consultations and, if warranted, prescribing medication to our
customers. This activity, as well as the sale of other products on our platform, exposes us to the risk of negligence and product liability
claims.
Some
of our products are designed for human consumption and use, and we face liability claims if the use of our products is alleged to have
resulted in injury or death claims that may be made by customers, third-party service providers, or manufacturers of products and services
we make available. To date, we have not (i) conducted any product recalls, (ii) received any product liability claims from third parties,
or (iii) received any reports from an end consumer of any adverse effect resulting from our products. A product recall or liability claim
against us could result in increased costs and could adversely affect our reputation with our customers, which, in turn, could have an
adverse effect on our business, financial condition, and results of operations. While we do maintain product liability insurance coverage,
this insurance is subject to deductibles and coverage limitations, and we cannot be sure that we will be able to maintain insurance coverage
at acceptable costs or in a sufficient amount, that our insurer will not disclaim coverage as to a future claim or that a product liability
claim would not otherwise adversely affect our business, financial condition and results of operations. The cost of any product liability
litigation or other proceeding, even if resolved in our favor, could be substantial, could divert management attention, and may result
in adverse publicity or result in reduced acceptance of our platform and offerings. These liabilities could prevent or interfere with
our growth and expansion efforts. Uncertainties resulting from the initiation and continuation of product liability litigation or other
proceedings could have an adverse effect on our ability to compete in the marketplace.
We
rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third
parties and our own systems for providing services to our customers and vendors, and any failure or interruption in the services provided
by these third parties or our own systems could expose us to litigation and negatively impact our relationships with customers, adversely
affecting our brand and our business.
While
we control and have access to our servers, we do not control the operation of these facilities. The cloud vendor and the owners of our
data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable
to renew these agreements on commercially reasonable terms, or if one of our cloud vendors or data center operators is acquired, we may
be required to transfer our servers and other infrastructure to a new vendor or a new data center facility, and we may incur significant
costs and possible service interruption in connection with doing so. Problems faced by our cloud vendors or third-party data center locations
with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers
allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our cloud vendors or third-party
data center operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as
bankruptcy faced by our cloud vendors or third-party data centers operators or any of the service providers with whom we or they contract
may have negative effects on our business, the nature and extent of which are difficult to predict.
Additionally,
if our cloud or data centers vendors are unable to keep up with our growing needs for capacity, this could have an adverse effect on
our business. For example, a rapid expansion of our business could affect the service levels at our cloud vendors or data centers or
cause such cloud systems or data centers and systems to fail. Any changes in third-party service levels at our cloud vendors or data
centers or any disruptions or other performance problems with our solution could adversely affect our reputation and may damage our customers’
stored files or result in lengthy interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue
refunds to customers for prepaid and unused subscriptions, subject us to potential liability, or adversely affect client renewal rates.
In
addition, our ability to deliver our Internet-based services depends on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth
capacity, and security. Our services are designed to operate without interruption in accordance with our service level commitments. However,
we have experienced and expect that we may experience future interruptions and delays in services and availability from time to time.
In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability,
which could negatively impact our relationship with customers.
We
exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services
they provide. Interruptions in our network access and services may in connection with third-party technology and information services
reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability,
or adversely affect client renewal rates. Although we maintain a security and privacy damages insurance policy, the coverage under our
policies may not be adequate to compensate us for all losses that may occur related to the services provided by our third-party vendors.
In addition, we may not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.
Risks
Related to Our Financial Reporting, Results of Operations and Capital Requirements
There
is substantial doubt about our ability to continue as a going concern.
Our
historical financial statements have been prepared under the assumption that we will continue as a going concern. As of December 31,
2022, the Company had an accumulated deficit of $190.6 million. We have limited financial resources, and as of December 31, 2022 we had
a working capital deficit of $20.1 million and a cash balance of $4.0 million. We will need to raise additional capital or secure debt
funding to support on-going operations. The sources of this capital are expected to be the sale of equity and debt, which may not be
available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access
additional capital moving forward, it may hurt our ability to grow and to generate future revenues, our financial position, and liquidity.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. Unless management is able to obtain
additional financing, it is unlikely that the Company will be able to meet its funding requirements during the next 12 months. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty. The doubt regarding our potential ability
to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or at all. Additionally,
if we are unable to continue as a going concern, our stockholders may lose some or all of their investment in the Company.
Our
results of operations, as well as our key metrics, may fluctuate on a quarterly and annual basis, which may result in us failing to meet
the expectations of industry and securities analysts or our investors.
Our
results of operations have in the past and could in the future vary significantly from quarter-to-quarter and year-to-year and may fail
to match the expectations of securities analysts because of a variety of factors, many of which are outside of our control and, as a
result, should not be relied upon as an indicator of future performance. As a result, we may not be able to accurately forecast our results
of operations and growth rate. Any of these events, and risk factors discussed in this annual report, could cause the market price of
our common stock to fluctuate.
The
impact of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, we believe
that quarter-to-quarter comparisons of our results of operations may not be meaningful and should not be relied upon as an indication
of future performance.
Our
substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react
to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from
meeting our obligations.
As
of December 31, 2022, the Company had total liabilities of $33.0 million. As of December 31, 2022, we had availability of $59.5 million
available under the ATM Sales Agreement and $32 million available under the 2021 Shelf, after giving effect to letters of credit and
borrowing base limitations. We and our subsidiaries have the ability to incur additional indebtedness in the future, subject to the restrictions
contained in our credit facilities and the indentures governing our outstanding notes. If new indebtedness is added to our current debt
levels, interest rates and the related risks that we now face could intensify. Our ability to make scheduled payments on or to refinance
our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive
conditions, and to certain financial, business and other factors beyond our control. We cannot assure you we will maintain a level of
cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
We
have identified a material weakness in our internal control over financial reporting.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and effective disclosure
controls and procedures. In particular, under Section 404 of the Sarbanes-Oxley Act, we are required to perform system and process evaluation
and testing on the effectiveness of our internal control over financial reporting. In performing this evaluation and testing our management
concluded that our internal control over financial reporting is not effective as of December 31, 2022 because of material weaknesses.
Correcting this issue, and thereafter our continued compliance with Section 404 will require that we incur substantial accounting expense
and expend significant management efforts. Moreover, if we are not able to correct our internal control issues and comply with the requirements
of Section 404 in a timely manner, or if in the future we or our independent registered public accounting firm identifies deficiencies
in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline,
and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial
and management resources. It could adversely affect our ability to report our financial condition and results of operations in a timely
and accurate manner, which could negatively affect investor confidence in our company, and, as a result, the value of our common stock
could be adversely affected.
Risks
Related to Investments in our Securities
There
can be no assurance that we can continue to pay dividends on our preferred stock. We currently do not intend to pay dividends on our
common stock. As a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
The
declaration, amount and timing of dividends on our securities are subject to capital availability and determinations by our Board of
Directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and our agreements
applicable to the declaration and payment of cash dividends. Our ability to pay dividends will depend upon, among other factors, our
cash flows from operations, our available capital and potential future capital requirements for strategic transactions, including acquisitions,
debt service requirements, share repurchases and investing in our existing markets as well as our results of operations, financial condition
and other factors beyond our control that our Board of Directors may deem relevant. A reduction in or suspension or elimination of our
dividend payments could have a negative effect on our stock price.
We
pay cumulative cash dividends on the Series A Preferred Stock, when and as declared by our Board of Directors. If we do not pay dividends
on any outstanding shares of Series A Preferred Stock for six or more quarterly dividend periods (whether or not declared or consecutive),
holders of Series A Preferred Stock will be entitled to elect two additional directors to our Board of Directors to serve until all unpaid
dividends have been fully paid or declared and set apart for payment. We currently do not expect to declare or pay dividends on our common
stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our
common stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our common stock
appreciates and you sell your shares at a profit.
Your
ownership interest may be diluted by the future issuance of additional shares of our common stock or preferred stock.
We
are in a capital intensive business and we may not have sufficient funds to finance the growth of our business or to support our projected
capital expenditures. As a result, we will require additional funds from future equity or debt financings, including sales of preferred
shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business.
We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of
holders of our common stock and preferred stock. We are currently authorized to issue 100,000,000 shares of common stock and 5,000,000
shares of preferred stock. Additionally, the Board may subsequently approve increases in authorized common stock and preferred stock.
The potential issuance of such additional shares of common or preferred stock or convertible debt may create downward pressure on the
trading price of our already outstanding common stock and preferred stock. We may also issue additional shares of common stock or other
securities that are convertible into or exercisable for common stock in future public offerings or private placements for capital raising
purposes or for other business purposes. The future issuance of a substantial number of common shares or preferred shares, or the perception
that such issuance could occur, could adversely affect the prevailing market price of our already outstanding common stock and preferred
stock. A decline in the price of our common shares or preferred shares could make it more difficult to raise funds through future offerings
of our preferred shares, common shares or securities convertible into common shares.
We
have significant numbers of warrants and stock options outstanding, and incentive awards outstanding under our 2020 Equity Incentive
Plan. To the extent that any of the outstanding warrants and options described above are exercised, dilution, to the interests of our
stockholders may occur. For the life of such warrants and options, the holders will have the opportunity to profit from a rise in the
price of the Common Stock with a resulting dilution in the interest of the other holders of Common Stock. The existence of such warrants
and options may adversely affect the market price of our Common Stock and the terms on which we can obtain additional financing, and
the holders of such warrants and options can be expected to exercise them at a time when we would, in all likelihood, be able to obtain
additional capital by an offering of our unissued capital stock on terms more favorable to us than those provided by such warrants and
options.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
All
of our facilities are leased domestically including an office space located in Puerto Rico, a U.S. territory. 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 2023 and a patient care center in Greenville, South Carolina for which the lease expires in 2024. Additionally,
we lease warehouse space in Lancaster, Pennsylvania for which the lease expires in 2023. Our majority-owned subsidiary, WorkSimpli leases
office space in Puerto Rico for which the lease expires in 2024.
Leased
premises range from approximately 1,000 to 14,000 square feet with monthly rents ranging from $2,200 per month to $34,400 per month.
We
believe that our existing facilities are adequate for current and presently foreseeable operations. In general, our properties are well
maintained and are being utilized for their intended purposes. Additional space may be required as we expand our business activities.
We do not foresee any significant difficulties in obtaining additional facilities if deemed necessary.
ITEM
3. LEGAL PROCEEDINGS
We
may become involved in various lawsuits and legal proceedings arising in the ordinary course of business. Litigation is subject to inherent
uncertainties and an adverse result in these or other matters may arise from time to time that may have an adverse effect on our business,
financial conditions or operating results. Future litigation may be necessary to defend ourselves and our customers by determining the
scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights. For additional information
on pending legal proceedings see Note 10—Commitments and Contingencies to our consolidated financial statements included in this
report.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
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 $0.01 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
immune support, skincare, and hair loss 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. 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 change of the parent company
to LifeMD, Inc., Conversion Labs PR LLC 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”) (See Note 8) and
concurrently increased its ownership interest in WorkSimpli to 85.6%. 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%. 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—Acquisitions
to our consolidated financial statements included in this report).
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.
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 years ended December 31, 2022 and 2021.
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—Acquisitions
to our consolidated financial statements included in this report).
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 $62,500, for a two-year period ending
on the two-year anniversary of the closing of the Acquisition. 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—Acquisitions to
our consolidated financial statements included in this report).
Unless
otherwise indicated, the terms “LifeMD,” “Company,” “we,” “us,” and “our”
refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), our wholly subsidiary LifeMD PR LLC (formerly Immudyne PR LLC, and “Conversion
Labs PR”), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”), 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.
As
of December 31, 2022, the Company has an accumulated deficit approximating $190.6 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 $14.6 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 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 having an aggregate offering price
of up to $60 million, 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. As of December 31,
2022, the Company has $59.5 million available under the ATM Sales Agreement and $32 million available under the 2021 Shelf.
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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and its wholly owned subsidiary, LifeMD PR, 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 85.6% 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%. 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 December 31, 2022
and 2021, 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 and net loss for LifeMD PC was approximately $499 thousand and $5.8 million for the year ended December 31, 2022, respectively.
Use
of Estimates
The
Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more
significant estimates required to be made by management include the determination of reserves for accounts receivable, returns and allowances,
the valuation of inventory, stockholders’ equity-based transactions, estimates to cash flow projections, and liquidity assessment.
Actual results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to conform the prior year’s data to the current presentation. These reclassifications have no
effect on previously reported operating loss, stockholders’ deficit, or cash flows. Given the increase in the Company’s software
business and to conform the Company’s presentation of operating results to industry standards, 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: (1) $169,385 of development services costs reclassified
from other operating expenses to development costs and (2) $35,165 of lease expenses reclassified from general and administrative expenses
to other operating expenses, for the year ended December 31, 2021.
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 some cases, the customer does not obtain control until the product reaches the customer’s delivery
site; in these cases, recognition of revenue is deferred until that time. 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 product revenues approximated $5.2 million and $4.7 million, respectively, during the years ended December 31, 2022 and
2021.
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 customers subscription will not be renewed for the following month or year depending on the original
subscription. The Company records the revenue over the customers subscription period for monthly and yearly subscribers or at the end
of the initial 14-day service period for customers who purchased the initial subscription, as the circumstances dictate. The Company
offers a discount for the monthly or yearly subscriptions being purchased, which is deducted at the time of payment at the initiation
of the contract term; therefore the Contract price is fixed and determinable at the contract initiation. Monthly and annual subscriptions
for the service are recorded net of the Company’s known discount rates. Customer discounts and allowances on WorkSimpli revenues
approximated $2.5 million and $1.8 million, respectively, during the years ended December 31, 2022 and 2021.
As
of December 31, 2022 and 2021, the Company has accrued contract liabilities, as deferred revenue, of approximately $5.5 million and $1.5
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.
For
the years ended December 31, 2022 and 2021, the Company had the following disaggregated revenue:
SCHEDULE OF DISAGGREGATED REVENUE
| |
Year Ended December 31, | |
| |
2022 | | |
% | | |
2021 | | |
% | |
| |
| | |
| | |
| | |
| |
Telehealth revenue | |
$ | 82,649,845 | | |
| 69 | % | |
$ | 68,197,128 | | |
| 73 | % |
WorkSimpli revenue | |
| 36,383,675 | | |
| 31 | % | |
| 24,678,678 | | |
| 27 | % |
Total net revenue | |
$ | 119,033,520 | | |
| 100 | % | |
$ | 92,875,806 | | |
| 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
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Beginning of period | |
$ | 1,499,880 | | |
$ | 916,880 | |
Additions | |
| 37,410,617 | | |
| 23,430,037 | |
Revenue recognized | |
| (33,362,991 | ) | |
| (22,847,037 | ) |
End of period | |
$ | 5,547,506 | | |
$ | 1,499,880 | |
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 December 31, 2022 and 2021,
the reserve for sales returns and allowances was approximately $815 thousand and $477 thousand, respectively. For all periods presented,
the sales returns and allowances were recorded in accrued expenses on the consolidated balance sheets.
Inventory
As
of December 31, 2022 and 2021, inventory primarily consisted of finished goods related to the Company’s OTC products included in
the telehealth revenue section of the table above. Inventory is maintained at the Company’s third-party warehouse location in Wyoming
and at 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 December
31, 2022 and 2021, the Company recorded an inventory reserve in the amount of $160,898 and $57,481, respectively.
As
of December 31, 2022 and 2021, the Company’s inventory consisted of the following:
SUMMARY OF INVENTORY
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Finished Goods - Products | |
$ | 2,587,370 | | |
$ | 1,592,654 | |
Raw materials and packaging components | |
| 1,276,891 | | |
| 81,427 | |
Inventory reserve | |
| (160,898 | ) | |
| (57,481 | ) |
Total Inventory - net | |
$ | 3,703,363 | | |
$ | 1,616,600 | |
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 December 31, 2022 and 2021, the Company has approximately $127 thousand and $204 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 December 31, 2022, the Company approximates its implicit purchase commitments to be approximately $399 thousand. As of
December 31, 2022 and 2021, the vast majority of these product deposits are with two vendors that manufacturer the Company’s finished
goods inventory for its Shapiro hair care 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 December 31, 2022 and
2021, the Company capitalized $12.1 million and $3.6 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 during the year ended December 31, 2022. 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—Acquisitions to our consolidated financial statements included in this report).
Other
intangible assets are comprised of: (1) a customer relationship asset, (2) the Cleared trade name, (3) Cleared developed technology,
(4) a purchased license and (5) a purchased domain name. 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 December 31,
2022 and 2021, the Company determined that no events or changes in circumstances existed that would indicate any impairment of its long-lived
assets.
Paycheck
Protection Program
During
the year ended December 31, 2020, the Company received aggregate loan proceeds in the amount of approximately $249 thousand under the
Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses
of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds
for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness
will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. The unforgiven portion of the
PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company used
the proceeds for purposes consistent with the PPP.
During
the years ended December 31, 2022 and 2021, the Company had a total of $63,400 and $184,914, respectively, of its PPP loans forgiven
by the Small Business Administration (“SBA”) (see Note 6). As of December 31, 2022, the Company had no remaining PPP loan
balance. As of December 31, 2021, the PPP loan balance was $63,400 and is reflected on the Company’s unaudited condensed consolidated
balance sheet as current liabilities, within notes payable, net.
Income
Taxes
The
Company files corporate federal, state, and local tax returns. LifeMD PR and WorkSimpli file tax returns in Puerto Rico; both are limited
liability companies and file separate tax returns with any tax liabilities or benefits passing through to its members.
The
Company records current and deferred taxes in accordance with 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.
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share is based on the weighted average number of shares outstanding during each period presented. Convertible
securities, warrants and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common
stock equivalents are excluded from dilutive earnings per share when the effects would be antidilutive.
The
Company follows the provisions of ASC 260, Diluted Earnings per Share. In computing diluted EPS, basic EPS is adjusted for the
assumed issuance of all potentially dilutive securities. The dilutive effect of call options, warrants and share-based payment awards
is calculated using the “treasury stock method,” which assumes that the “proceeds” from the exercise of these
instruments are used to purchase common shares at the average market price for the period. The dilutive effect of traditional convertible
debt and preferred stock is calculated using the “if-converted method.” Under the if-converted method, securities are assumed
to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation
for the entire period being presented.
The
following table summarizes the number of shares of common stock issuable pursuant to our convertible securities that were excluded from
the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price
could be less than the average market price of the common shares:
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES
|
|
2022 |
|
|
2021 |
|
|
|
Year
Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock |
|
|
1,404,868 |
|
|
|
1,264,868 |
|
Restricted
Stock Units (RSUs) |
|
|
1,743,250 |
|
|
|
975,375 |
|
Stock
options |
|
|
3,758,920 |
|
|
|
4,257,233 |
|
Warrants |
|
|
3,859,638 |
|
|
|
3,888,438 |
|
Potentially
dilutive securities |
|
|
10,766,676 |
|
|
|
10,385,914 |
|
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.
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, and accrued expenses
and the face amount of notes payable approximate fair value for all periods presented.
Concentrations
of Risk
The
Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company, at times,
maintains balances in various operating accounts in excess of federally insured limits. We are dependent on certain third-party manufacturers
and pharmacies, although we believe that other contract manufacturers or third-party pharmacies could be quickly secured if any of our
current manufacturers or pharmacies cease to perform adequately. As of December 31, 2022, we utilized four (4) suppliers for fulfillment
services, six (6) suppliers for manufacturing finished goods, five (5) suppliers for packaging, bottling, and labeling, and three (3)
suppliers for prescription medications. As of December 31, 2021, we utilized four (4) suppliers for fulfillment services, six (6) suppliers
for manufacturing finished goods and four (4) suppliers for packaging, bottling and labeling.
Recently
Adopted Accounting Pronouncements
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. This update is effective for fiscal years beginning after December 15, 2022. Early adoption is
permitted. The Company is currently evaluating the effects that the adoption of this guidance will have on our consolidated financial
statements and related disclosures.
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.
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 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, 2021, 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 $62,500, for a two-year period ending on the
two-year anniversary of the closing of the Acquisition. 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 for both the years ended December 31, 2022 and 2021. 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 December 31, 2022 and 2021, the Company has the following amounts related to amortizable intangible assets:
SCHEDULE OF GOODWILL AND INTANGIBLE ASSETS
| |
2022 | | |
2021 | | |
Life | |
| |
December 31, | | |
Amortizable | |
| |
2022 | | |
2021 | | |
Life | |
Amortizable Intangible Assets: | |
| | | |
| | | |
| | |
ResumeBuild brand | |
$ | 4,500,000 | | |
$ | - | | |
| 5 years | |
Customer relationship asset | |
| 1,006,840 | | |
| 1,006,840 | | |
| 3 years | |
Cleared trade name | |
| 133,339 | | |
| - | | |
| 5 years | |
Cleared developed technology | |
| 12,920 | | |
| - | | |
| 1 year | |
Purchased licenses | |
| 200,000 | | |
| 200,000 | | |
| 10 years | |
Website domain name | |
| 22,731 | | |
| 22,231 | | |
| 3 years | |
Less: accumulated amortization | |
| (2,043,971 | ) | |
| (1,209,310 | ) | |
| | |
Total net amortizable intangible assets | |
$ | 3,831,859 | | |
$ | 19,761 | | |
| | |
During
the year ended December 31, 2022, the Company recorded an $826,931 impairment loss related to a decline in the estimated fair value of
the Cleared customer relationship intangible asset with an original cost of $918,812 and accumulated amortization of $91,881. The aggregate
amortization expense of the Company’s intangible assets for the years ended December 31, 2022 and 2021 was $926,542 and $342,310,
respectively. Total amortization expense for 2023 through 2026 is approximately $930 thousand per year and for 2027 is approximately
$112 thousand.
NOTE
5 – ACCRUED EXPENSES
As
of December 31, 2022 and 2021, the Company has the following amounts related to accrued expenses:
SCHEDULE OF ACCRUED EXPENSES
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Accrued selling and marketing expenses | |
$ | 3,508,883 | | |
$ | 4,981,453 | |
Sales tax payable | |
| 2,501,035 | | |
| 2,000,000 | |
Purchase price payable | |
| 2,463,002 | | |
| - | |
Accrued dividends payable | |
| 776,563 | | |
| 871,476 | |
Accrued compensation | |
| 576,027 | | |
| 1,657,843 | |
Accrued interest | |
| 448,718 | | |
| - | |
Other accrued expenses | |
| 1,892,281 | | |
| 2,084,833 | |
Total accrued expenses | |
$ | 12,166,509 | | |
$ | 11,595,605 | |
NOTE
6 – NOTES PAYABLE
PPP
Loan and Forgiveness
In
June 2020, the Company and its subsidiaries received three loans in the aggregate amount of approximately $249 thousand (the “PPP
Loan”) under the new Paycheck Protection Program legislation administered by the SBA. These loans bear interest at one percent
per annum (1.0%) and mature five years from the date of the first disbursement. The proceeds of the PPP Loan must be used for payroll
costs, lease payments on agreements entered into before February 15, 2020 and utility payments under lease agreements entered into before
February 1, 2020. At least 60% of the proceeds must be used for payroll costs and certain other expenses and no more than 40% may be
used on non-payroll expenses. Proceeds from the PPP Loan used by the Company for the approved expense categories may be fully forgiven
by the SBA if the Company satisfies applicable employee headcount and compensation requirements. During the years ended December 31,
2022 and 2021, the Company had a total of $63,400 and $184,914 of its PPP loans forgiven by the SBA which is included in gain on debt
forgiveness on the accompanying consolidated statement of operations.
As
of December 31, 2022, the Company had no remaining PPP loan balance. As of December 31, 2021, the PPP loan balance was $63,400 and is
reflected on the Company’s consolidated balance sheet as current liabilities, within notes payable, net.
Working
Capital Loans
In
October 2022, the Company received proceeds of $976,000 under a 12-month working capital loan with Amazon. The terms of the loan include
interest in the amount of $62,157. The total outstanding balance of $976,000, is included in notes payable, net, on the accompanying
consolidated balance sheet as of December 31, 2022.
In
November 2022, the Company received proceeds of $1,930,000 under two 10-month working capital loans with Balanced Management. The terms
of the loans include loan origination fees in the amount of $60,000 and total interest of $840,000. The total outstanding balance of
$1,821,250, is included in notes payable, net on the accompanying consolidated balance sheet as of December 31, 2022.
Merchant
Funding Agreement
On
March 17, 2021, the Company entered into a Merchant Funding Agreement with MO Technologies USA, LLC (“MO Tech”), which provides
cash advances to the Company based on the Company’s accounts receivable for a total cash advance of $600,000. The terms of the
funding agreement include a service charge of 3.99% on cash advances from MO Tech. The total balance owed under this agreement was repaid
in full in May 2021.
On
June 23, 2021, the Company entered into a Merchant Funding Agreement with MO Tech, which provides cash advances to the Company based
on the Company’s accounts receivable for a total cash advance of $350,000. The terms of the funding agreement include a service
charge of 3.99% on cash advances from MO Tech. The total balance owed under this agreement was repaid in full in August 2021.
Total
interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $653,156 and $159,494 for the years ended
December 31, 2022 and 2021, respectively.
NOTE
7 – LONG-TERM DEBT
Securities
Purchase Agreement
On
June 1, 2021, the Company entered into a securities purchase agreement (the “June 1, 2021 Purchase Agreement”) with a financial
institution (the “Purchaser”), pursuant to which the Company sold and issued: (i) the Debenture in the aggregate principal
amount of $15.0 million and (ii) warrants to purchase up to an aggregate of 1,500,000 shares of the Company’s common stock at an
exercise price of $12.00 per share of which 500,000 warrants were issued to the Purchaser upon closing with the remaining 1,000,000 warrants
only issued to the Purchaser in increments of 500,000 if the Debenture remains outstanding for twelve and twenty four months, respectively,
following the closing date of the June 1, 2021 Purchase Agreement. The total fair value of the 500,000 warrants issued to the Purchaser
upon closing was $6,270,710. The fair value of the warrants was determined using the Black-Scholes Pricing Model with the following assumptions:
dividend yield of 0%, expected term of 5 years, volatility of 132.4%, and risk-free rate of 0.80%. The total fair value was recorded
to debt discount and was included as a reduction to long-term debt. The debt discount was assigned a twelve-month amortization period.
Total amortization of debt discount was $0 and $2,090,236 for the years ended December 31, 2022 and 2021, respectively. The Warrant has
a term of three years. The Aggregate Principal Amount of the Debenture, together with interest, is due and payable on June 1, 2024. The
Debenture bears interest as follows: (i) for the period beginning on June 1, 2021 and ending on the date that is six (6) months thereafter
(the “Initial Interest Rate Period”) shall be six percent (6%), (ii) for the period beginning the date following the Initial
Interest Rate Period and ending on the date that is three (3) months thereafter (the “Second Interest Rate Period”), nine
percent (9%), and (iii) for the period beginning the date following the Second Interest Rate Period and ending on June 1, 2024, twelve
percent (12%). Until such time as the obligations shall have been paid in full, the Company shall apply thirty-five percent (35%) of
the gross proceeds received by the Company from At-The-Market offerings of its Common Stock to partial redemptions of each Debenture
on a pro rata basis. The Company received gross proceeds of $15.0 million (net proceeds of $14.9 million) as a result of the June 1,
2021 Purchase Agreement. In October 2021, the Company used a portion of the net proceeds from the October 4, 2021 Offerings to pay the
$15.0 million outstanding on the June 1, 2021 Purchase Agreement and recorded a loss on debt extinguishment of $4,180,474. The loss on
debt extinguishment is included in the accompanying consolidated statement of operations as of December 31, 2021.
Total
interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $0 and $2,405,222 for the years ended December
31, 2022 and 2021, respectively.
NOTE
8 – STOCKHOLDERS’ EQUITY
The
Company has authorized the issuance of up to 100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock,
$0.0001 par value, of which 5,000 shares are designated as Series B Convertible Preferred Stock, 1,610,000 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 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 the ATM Sales Agreement whereby the Company may offer and sell, from time to time, shares of common stock
having an aggregate offering price of up to $60 million. As of December 31, 2022, the Company has utilized $58.5 million of the 2021
Shelf. The Company has approximately $59.5 million available under the ATM Sales Agreement and $32 million available under the 2021 Shelf
as of December 31, 2022.
Series
A Preferred Stock
As
noted above, in September 2021, the Company entered into the Preferred Underwriting Agreement and the Common Underwriting Agreement with
B.Riley. Pursuant to the Preferred Underwriting Agreement, the Company agreed to sell 1,400,000 shares of its Series A Preferred Stock
under the Preferred Stock Offering. The option was not exercised. Pursuant to the Common Underwriting Agreement, the Company agreed to
sell to B. Riley 3,833,334 Common Shares under the Common Stock Offering. The offerings, closed on October 4, 2021. Net proceeds after
deducting the underwriting discounts and commissions, the structuring fee and estimated offering expenses payable by the Company, but
before repayment of debt, from the Offerings was approximately $55.3 million.
The
Series A Preferred Stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights.
The Company will pay cumulative distributions on the Series A Preferred Stock, from the date of original issuance, in the amount of $2.21875
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 will be payable quarterly in arrears, on or about the 15th day of January, April, July and October of each year. The first dividend
on the Series A Preferred Stock sold in this offering was declared on December 23, 2021 to holders of record as of January 4, 2022 and
was paid on January 14, 2022. The first dividend is included is the Company’s results of operations for the year ended December
31, 2021. Dividends declared and paid on the Series A Preferred Stock during the year ended December 31, 2022 are as follows: (1) the
second quarterly dividend on the Series A Preferred Stock was declared on March 25, 2022 to holders of record as of April 5, 2022 and
was paid on April 15, 2022, (2) the third quarterly dividend on the Series A Preferred Stock was declared on June 27, 2022 to holders
of record as of July 5, 2022 and was paid on
July 15, 2022, (3) the fourth quarterly dividend on the Series A Preferred Stock was declared on September 27, 2022 to holders of
record as of October 7, 2022 and was paid on October 17, 2022 and (4) the fifth quarterly dividend on the Series A Preferred Stock
was declared on December 27, 2022 to holders of record as of January 6, 2023 and was paid on January 17, 2023. The dividends are
included in the Company’s results of operations for the year ended December 31, 2022.
Holders
of the Series A Preferred Stock have no voting rights except in the case of certain dividend nonpayments. If dividends on the Series
A Preferred Stock are in arrears, whether or not declared, for six or more quarterly periods, whether or not these quarterly periods
are consecutive, holders of Series A Preferred Stock and holders of all other classes or series of parity preferred stock with which
the holders of Series A Preferred Stock are entitled to vote together as a single class will be entitled to vote, at a special meeting
called by the holders of record of at least 10% of any series of preferred stock as to which dividends are so in arrears or at the next
annual meeting of stockholders, for the election of two additional directors to serve on our Board until all dividend arrearages have
been paid. If and when all accumulated dividends on the Series A Preferred Stock for all past dividend periods shall have been paid in
full, holders of shares of Series A Preferred Stock shall be divested of the voting rights set forth above.
The
Series A Preferred Stock is perpetual and has no maturity date. The Series A Preferred Stock will be redeemable at our option, in whole
or in part, at the following redemption prices, plus any accrued and unpaid dividends up to, but not including, the date of redemption:
1) on and after October 15, 2022 and prior to October 15, 2023, at a redemption price equal to $25.75 per share, 2) on and after October
15, 2023 and prior to October 15, 2024, at a redemption price equal to $25.50 per share, 3) on and after October 15, 2024 and prior to
and prior to October 15, 2025 at a redemption price equal to $25.25 per share and 4) on and after October 15, 2025 at a redemption price
equal to $25.00 per share. In addition, upon the occurrence of a delisting event or change of control, we may, subject to certain conditions,
at our option, redeem the Series A Preferred Stock, in whole or in part within 90 days after the first date on which such delisting event
occurred or within 120 days after the first date on which such change of control occurred, as applicable, by paying $25.00 per share,
plus any accumulated and unpaid dividends up to, but not including, the redemption date.
Upon
the occurrence of a delisting event or a change of control, each holder of Series A Preferred Stock will have the right unless we have
provided or provide notice of our election to redeem the Series A Preferred Stock, to convert some or all of the shares of Series A Preferred
Stock held by such holder into a number of shares of our common stock (or equivalent value of alternative consideration) per share of
Series A Preferred Stock, or the “Common Stock Conversion Consideration”. In the case of a delisting event or change of control,
pursuant to which shares of common stock shall be converted into cash, securities or other property or assets (the “Alternative
Form Consideration”), a holder of shares of Series A Preferred Stock shall receive upon conversion of such shares of Series A Preferred
Stock the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the delisting
event or change of control, had such holder held a number of shares of common stock equal to the Common Stock Conversion Consideration
immediately prior to the effective time of the delisting event or change of control.
Series
B Convertible Preferred Stock
On
August 27, 2020, the Secretary of State of the State of Delaware delivered confirmation of the effective filing of the Company’s
Certificate of Designations of the Series B Convertible Preferred Stock, which established 5,000 shares of the Company’s Series
B Preferred Stock, having such designations, rights and preferences as set forth therein (the “Series B Designations”).
The
shares of Series B Preferred Stock have a stated value of $1,000 per share (the “Series B Stated Value”) and are convertible
into Common Stock at the election of the holder of the Series B Preferred Stock, at a price of $3.25 per share, subject to adjustment
(the “Conversion Price”). Each holder of Series B Preferred Stock shall be entitled to receive, with respect to each share
of Series B Preferred Stock then outstanding and held by such holder, dividends at the rate of thirteen percent (13%) per annum (the
“Preferred Dividends”).
The
Preferred Dividends shall accrue and be cumulative from and after the date of issuance of any share of Series B Preferred Stock on a
daily basis computed on the basis of a 365-day year and compounded quarterly. The Preferred Dividends are payable only when, as, and
if declared by the Board of Directors of the Company (the “Board”) and the Company has no obligation to pay such
Preferred Dividends; provided, however, if the Board determines to pay any Preferred Dividends, the Company shall pay such dividends
in kind in a number of additional shares of Series B Preferred Stock (the “PIK Shares”) equal to the quotient of (i) the
aggregate amount of the Preferred Dividends being paid by the Company in respect of the shares of Series B Preferred Stock held by
such holder, divided by (ii) the Series B Issue Price (as defined in the Series B Designations); provided, further, that, at the
election of the purchasers holding a majority of the shares of Series B Preferred Stock then outstanding, in their sole discretion,
such Preferred Dividends shall be paid in cash or a combination of cash and PIK Shares. Notwithstanding the foregoing, the Preferred
Dividends may be paid in cash at the election of the Company if, and only if, (a) the purchasers holding a majority of the shares of
Series B Preferred Stock then outstanding consent in writing to the payment of any specific dividend in cash, or (b) at any time
following the twenty-four (24) month anniversary of the Closing, (i) the prevailing volume-weighted average price (“VWAP”) of the Common
Stock over the trailing ninety (90)-day period is equal to or greater than $15.00
per share (subject to adjustments for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events), and (ii) the average trading volume of the Common Stock over the
trailing ninety (90)-day period is equal to or greater than 40,000
shares of Common Stock per day, or (c) at any time following the thirty-six (36) month anniversary of the Closing.
The
holders of Series B Preferred Stock rank senior to the Common Stock with respect to payment of dividends and rights upon liquidation
and will vote together with the holders of the Common Stock on an as-converted basis, subject to beneficial ownership limitations, on
each matter submitted to a vote of holders of Common Stock (whether at a meeting of stockholders or by written consent). In addition,
as further described in the Series B Designations, if at least 30% of the number of shares of Series B Preferred Stock sold at the Closing
are outstanding, the Company will not take certain corporate actions without the affirmative vote at a meeting (or the written consent
with or without a meeting) of the purchasers holding a majority of the shares of Series B Preferred Stock then outstanding.
If
at any time following the twelve (12)-month anniversary of the Closing (a) the prevailing VWAP
(as defined in the Series B Designations) of the Common Stock over the trailing ninety (90)-day period is equal to or greater than $15.00
per share ($3.00 pre-split) (subject to adjustments for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events), and (b) the average trading volume of the Common Stock over the trailing
ninety (90)-day period is equal to or greater than 40,000 shares of Common Stock per day, the Company shall have the right, but not the
obligation, in its sole discretion, to elect to convert all, but not less than all, of the then-outstanding shares of Series B Preferred
Stock into Common Stock by delivering written notice of such election (the “Forced Conversion Notice”) to the holders of
the Series B Preferred Stock within ten (10) Business Days following the satisfaction of the criteria of clauses (a) and (b) above (a
“Forced Conversion”). On the Forced Conversion Date (as defined in the Series B Designations), each share of Series B Preferred
Stock shall be converted into the number of fully paid and non-assessable shares of Common Stock equal to the quotient of: (x) the sum
of (1) the Series B Issue Price, plus (2) any accrued but unpaid dividends on such share of Series B Preferred Stock as of immediately
prior to the conversion thereof, including the Preferred Dividends, divided by (y) the Conversion Price of such share of Series
B Preferred Stock in effect at the time of conversion. The Forced Conversion Notice shall state (i) the number of shares of Series B
Preferred Stock held by such Holder that are proposed to be converted, and (ii) the date on which such Forced Conversion shall occur,
which date shall be the thirtieth (30th) day following the date such Forced Conversion Notice is deemed given (a “Forced
Conversion Date”).
In
the event of a Forced Conversion, a holder may elect, in its sole discretion and in lieu of the Forced Conversion, to have each then-outstanding
share of Series B Preferred Stock held by such holder be redeemed by the Company (a “Forced Conversion Redemption”) by delivering
written notice to the Company (a “Forced Conversion Redemption Notice” and the date such Holder delivers such notice to the
Corporation, a “Forced Conversion Redemption Notice Date”) prior to the Forced Conversion Date, which notice shall state
(a) the number of shares of Series B Preferred Stock that are to be redeemed, (b) the date on which such Forced Conversion Redemption
shall occur, which date shall be the tenth (10th) Business Day following the applicable Forced Conversion Redemption Notice Date (the
“Forced Conversion Redemption Date”) and (c) the wire instructions for the payment of the applicable amount owed to such
holder. Each share of Series B Preferred Stock that is the subject of a Forced Conversion Redemption shall be redeemed by the Company
in cash at a price per share equal to the sum of (1) the Series B Issue Price, plus (2) any accrued but unpaid dividends on such share
of Series B Preferred Stock, including the Preferred Dividends (the “Per Share Forced Conversion Redemption Price”).
If a
sufficient number of shares of Common Stock are not available to effect the conversion of the Series B Preferred Stock outstanding into
Common Stock and the exercise of the Warrants, each holder shall have the right, in its sole and absolute discretion (in addition to and
not to the exclusion of any remedy such holder may have at law or in equity), to require that the Company redeem (an “Optional Redemption”),
to the fullest extent permitted by law and out of funds lawfully available therefor, all or any portion of such holder’s Series
B Preferred Stock then outstanding by delivering written notice thereof. The Series B Preferred Stock contains certain Change of Control
provisions that preclude permanent equity classification.
Securities
Purchase Agreement
On
August 28, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an investor (the
“Investor”), to purchase from the Company an aggregate of 3,500 units (the “Units”), at a purchase price of $1,000
per Unit, each consisting of (i) one share of Series B Convertible Preferred Stock, and (ii) a warrant to purchase 400 shares of common
stock of the Company. The warrants are exercisable immediately upon issuance, have a 5 year term, an exercise price of $4.60 per share,
and provide for a cashless exercise. The aggregate purchase price for the Units is $3,500,000, of which (i) $2,892,500 is being paid
in cash at the closing of the transaction and (ii) $607,500, is being paid by the conversion of the outstanding principal and interest
due on the Secured Convertible Promissory Note (the “Note”) issued by the Company to the Investor on July 27, 2020. The Purchase
Agreement provides that the Investor may not sell, transfer, or otherwise dispose of the Series B Preferred Stock or warrants (or the
shares of Common Stock issuable thereunder) for a period of one year following the closing.
As
a result of the Purchase Agreement, the Company recorded a deemed dividend to the holders of the Series B Preferred Stock of $3,500,000
for the value of the warrants and beneficial conversion feature in excess of the purchase price. Additionally, the Company recorded this
instrument in the mezzanine section of the accompanying consolidated balance sheet of $3,500,000 for the value of the Series B Preferred
Stock redemption feature. Total dividends accrued for both the years ended December 31, 2022 and 2021 were $455,000 and are included
in interest expense on the consolidated statement of operations. The balance for the Series B Preferred Stock was $4,565,822 as of December
31, 2022.
Options
and Warrants
During
the year ended December 31, 2022, the Company issued an aggregate of 90,400 shares of common stock related to the exercise of options
for total proceeds of $90,400.
During
the year ended December 31, 2022, the Company issued an aggregate of 29,691 shares of common stock related to cashless exercise of options.
During
the year ended December 31, 2022, the Company issued an aggregate of 22,000 shares of common stock related to the exercise of warrants
for total proceeds of $38,500.
During
the year ended December 31, 2021, the Company issued an aggregate of 375,000 shares of common stock related to the exercise of options
for total proceeds of $670,750.
During
the year ended December 31, 2021, the Company issued an aggregate of 873,047 shares of common stock related to cashless exercise of options.
During
the year ended December 31, 2021, the Company issued an aggregate of 162,033 shares of common stock related to the exercise of warrants
for total proceeds of $480,609.
Common
Stock
Common
Stock Transactions During the Year Ended December 31, 2022
During
the year ended December 31, 2022, the Company issued an aggregate of 306,250 shares of common stock for services rendered.
During
the year ended December 31, 2022, the Company issued 400,000 shares of common stock related to a legal settlement.
Common
Stock Transactions During the Year Ended December 31, 2021
On
February 11, 2021, the Company consummated the closing of the February 2021 Offering, whereby pursuant to the February 2021 Purchase
Agreement entered into by the Company and certain accredited investors on February 11, 2021 the investors purchased 608,696 shares of
the Company’s common stock par value $0.01 per share at a purchase price of $23.00 per share for aggregate gross proceeds of approximately
$14.0 million. The Purchase Price was funded on the closing date and resulted in net proceeds to the Company of approximately $13.5 million
after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company.
As
noted above, in September 2021, the Company entered into the Common Underwriting Agreement with B.Riley. Pursuant to the Common Underwriting
Agreement, the Company agreed to sell to B. Riley 3,833,334 Common Shares under the Common Stock Offering which closed on October 4,
2021. The Common Stock Offering resulted in net proceeds to the Company of approximately $21.8 million after deducting the underwriting
discounts and commissions, the structuring fee and estimated offering expenses payable by the Company, but before repayment of debt.
During
the year ended December 31, 2021, the Company issued an aggregate of 1,347,875 shares of common stock for services rendered.
During
the year ended December 31, 2021, the Company sold 70,786 shares of common stock under the ATM Sales Agreement for net proceeds of $493,481.
WorkSimpli
Software Restructuring Transaction (“WSS Restructuring”)
Effective
January 22, 2021 (the “WSS Effective Date”), the Company consummated the WSS Restructuring. To effect the WSS Restructuring
the Company’s wholly-owned subsidiary Conversion Labs PR (now “LifeMD 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 $375,823 (the “CVLB PR Note”), issued by WSS in favor of Conversion Labs PR, for 37,531 newly issued membership
interests of WSS (the “Exchange”). Upon consummation of the Exchange the CVLB PR 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 2,183 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 12,000 membership interests of WSS for an aggregate purchase price of
$300,000. The CVLB PR MIPA provided that the transaction may be completed in three (3) tranches with a purchase price of $100,000 per
tranche to be made at the sole discretion of Conversion Labs PR. Payment for the first tranche of $100,000 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.
Concurrently
with the WSS Restructuring, Conversion Labs PR entered into option agreements with Sean Fitzpatrick (the “Fitzpatrick Option Agreement”)
and Varun Pathak (the “Pathak Option Agreement” together with Fitzpatrick Option Agreement the “Option Agreements”),
pursuant to which Conversion Labs PR granted options to purchase membership interest units of WSS. Upon vesting, the Fitzpatrick Options
and the Pathak Options provide for the potential re-purchase of up to an additional 13.25% of WSS by Fitzpatrick and Pathak in the aggregate
with Conversion Labs PR ownership ratably reduced to approximately 72.98%.
The
Fitzpatrick Option Agreement grants Sean Fitzpatrick the option to purchase 10,300 membership interest units of WSS for an exercise price
of $1.00 per membership interest unit. The Fitzpatrick Options vest in accordance with the following (i) 3,434 membership interests upon
WSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 3,434 membership interests upon WSS achieving $4,000,000 of gross
sales in any fiscal quarter, and (iii) 3,434 membership interests upon WSS achieving $8,000,000 of gross sales with a ten percent (10%)
net profit margin in any fiscal quarter.
The
Pathak Option Agreement grants Varun Pathak the option to purchase 2,100 membership interest units of WSS for an exercise price of $1.00
per membership interest unit. The Pathak Options vest in accordance with the following (i) 700 membership interests upon WSS achieving
$2,500,000 of gross sales in any fiscal quarter (ii) 700 membership interests upon WSS achieving $4,000,000 of gross sales in any fiscal
quarter, and (iii) 700 membership interests upon WSS achieving $8,000,000 of gross sales with a ten percent (10%) net profit margin in
any fiscal quarter.
WorkSimpli
Software Capitalization Update
On
September 30, 2022, Sean Fitzpatrick and Varun Pathak exercised their options to purchase 10,300 and 2,100 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%.
Stock
Options
2020
Equity Incentive Plan (the “2020 Plan”)
On
January 8, 2021, the Company approved 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 Stockholders filed with the Securities and Exchange Commission on December 7, 2020. The 2020
Plan is administered by the Compensation Committee of the Board and initially provided for the issuance of up to 1,500,000 shares of
Common Stock. The number of shares of Common Stock available for issuance under the Plan automatically increases by 150,000 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 1,500,000 shares. As of
January 1, 2022, the Plan provided for the issuance of up to 3,300,000 shares of Common Stock.
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 1,500,000 shares. As of
December 31, 2022, the Plan provided for the issuance of up to 4,800,000 shares of Common Stock. Remaining authorization under the 2020
Plan was 1,732,163 shares as of December 31, 2022.
The
forms of award agreements to be used in connection with awards made under the 2020 Plan to the Company’s executive officers and
non-employee directors are:
● |
Form
of Non-Qualified Option Agreement (Non-Employee Director Awards) |
● |
Form
of Non-Qualified Option Agreement (Employee Awards); and |
● |
Form
of Restricted Stock Award Agreement. |
Previously,
the Company had granted service-based stock options and performance-based stock options separate from this plan.
During
the year ended December 31, 2022, the Company issued an aggregate of 369,500 stock options to employees and advisory board members under
the 2020 Plan and the prior plan. These stock options have contractual terms of 3.5 – 4 years and vest in increments which fully
vest the options over a one-to-three-year period, dependent on the specific agreements’ terms.
A
summary of outstanding options activity under our 2020 Plan is as follows:
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, 2020 |
|
|
720,000 |
|
|
$
|
7.21
– 8.81 |
|
|
|
9.76
years |
|
|
$ |
7.73 |
|
Granted |
|
|
1,354,500 |
|
|
|
4.57
– 21.02 |
|
|
|
8.99
years |
|
|
|
10.34 |
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited/Expired |
|
|
(11,000 |
) |
|
|
13.74 |
|
|
|
9.48
years |
|
|
|
13.74 |
|
Balance
at December 31, 2021 |
|
|
2,063,500 |
|
|
$ |
4.57
– 21.02 |
|
|
|
8.04
years |
|
|
$ |
9.41 |
|
Granted |
|
|
169,500 |
|
|
|
2.30
– 13.74 |
|
|
|
3.78
years |
|
|
|
6.12 |
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited/Expired |
|
|
(448,413 |
) |
|
|
3.68
– 13.74 |
|
|
|
7.99
years |
|
|
|
7.66 |
|
Balance
at December 31, 2021 |
|
|
1,784,587 |
|
|
$ |
2.30
– 21.02 |
|
|
|
6.95
years |
|
|
$ |
9.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2021 |
|
|
636,229 |
|
|
$ |
4.57
– 21.02 |
|
|
|
8.95
years |
|
|
$ |
9.18 |
|
Exercisable
at December 31, 2022 |
|
|
1,185,153 |
|
|
$ |
2.30
– 21.02 |
|
|
|
7.64
years |
|
|
$ |
9.62 |
|
The
total fair value of the options granted during the year ended December 31, 2022 was $919,280, which was determined by the Black-Scholes
Pricing Model with the following assumptions: dividend yield of 0%, expected term of 4 years, volatility of 135.65% – 741.77%,
and risk-free rate of 0.90% – 3.62%. Total compensation expense under the 2020 Plan options above was $5,319,512 and $5,566,981
for the years ended December 31, 2022 and 2021, respectively, with unamortized expense remaining of $5,635,180 as of December 31, 2022.
A
summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) is as follows:
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, 2020 | |
| 2,457,400 | | |
$ | 0.80
- 7.95 | | |
| 5.25
years | | |
$ | 2.30 | |
Granted | |
| 490,000 | | |
| 3.78
– 19.61 | | |
| 6.53
years | | |
| 11.64 | |
Exercised | |
| (1,122,000 | ) | |
| 0.80
– 2.00 | | |
| 2.22
years | | |
| 1.38 | |
Cancelled/Forfeited/Expired | |
| (166,667 | ) | |
| 1.50
– 7.50 | | |
| 8.74
years | | |
| 4.51 | |
Balance
at December 31, 2021 | |
| 1,658,733 | | |
$ | 1.00
– 19.61 | | |
| 5.85
years | | |
$ | 5.45 | |
Granted | |
| 50,000 | | |
| 4.12 | | |
| 4.01
years | | |
| 4.12 | |
Exercised | |
| (149,400 | ) | |
| 1.00
– 2.00 | | |
| | | |
| 1.23 | |
Cancelled/Forfeited/Expired | |
| (120,000 | ) | |
| 1.00
– 4.12 | | |
| 3.21
years | | |
| 3.33 | |
Balance
at December 31, 2022 | |
| 1,439,333 | | |
$ | 1.00
– 19.61 | | |
| 5.63
years | | |
$ | 6.11 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable
December 31, 2021 | |
| 1,019,164 | | |
$ | 1.00
– 19.61 | | |
| 5.21
years | | |
$ | 3.60 | |
Exercisable
at December 31, 2022 | |
| 1,158,764 | | |
$ | 1.00
– 19.61 | | |
| 5.63
years | | |
$ | 5.25 | |
The
total fair value of the options granted during the year ended December 31, 2022 was $205,995, which was determined by the Black-Scholes
Pricing Model with the following assumptions: dividend yield of 0%, expected term of 4 years, volatility of 420.16%, and risk-free rate
of 1.37%. Total compensation expense under the above service-based option plan was $2,126,756 and $2,013,749 for the years ended December
31, 2022 and 2021, respectively, with unamortized expense remaining of $2,566,728 as of December 31, 2022. Of the total service-based
options exercised during the year ended December 31, 2022, 59,000 options were exercised on a cashless basis which resulted in 29,691
shares issued and 90,400 options were exercised for cash.
A
summary of outstanding performance-based options activity is as follows:
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, 2020 |
|
|
1,155,000 |
|
|
$
|
1.25
– 2.50 |
|
|
|
4.94
years |
|
|
$
|
1.71 |
|
Granted |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(235,000 |
) |
|
|
2.00 |
|
|
|
0.03
years |
|
|
|
2.00 |
|
Cancelled/Forfeited/Expired |
|
|
(385,000 |
) |
|
|
1.25
– 2.00 |
|
|
|
3.94
years |
|
|
|
1.67 |
|
Balance
at December 31, 2021 |
|
|
535,000 |
|
|
$ |
1.25
– 2.50 |
|
|
|
5.59
years |
|
|
$ |
1.60 |
|
Granted |
|
|
150,000 |
|
|
|
4.12 |
|
|
|
3.01
years |
|
|
|
4.12 |
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited/Expired |
|
|
(150,000 |
) |
|
|
4.12 |
|
|
|
3.01
years |
|
|
|
4.12 |
|
Balance
at December 31, 2022 |
|
|
535,000 |
|
|
$ |
1.25
– 2.50 |
|
|
|
4.59
years |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2021 |
|
|
100,000 |
|
|
$ |
1.75
– 2.50 |
|
|
|
1.96
years |
|
|
$ |
2.01 |
|
Exercisable
at December 31, 2022 |
|
|
470,000 |
|
|
$ |
1.50
– 2.50 |
|
|
|
4.58
years |
|
|
$ |
1.61 |
|
The
total fair value of the options granted during the year ended December 31, 2022 was $617,980, which was determined by the Black-Scholes
Pricing Model with the following assumptions: dividend yield of 0%, expected term of 3.5 years, volatility of 444.0%, and risk-free rate
of 1.37%. Total compensation expense under the above performance-based option plan was $423,188 and $222,897 for the years ended December
31, 2022 and 2021, respectively. All of the performance-based options exercised during the year ended December 31, 2021, were exercised
on a cashless basis which resulted in 215,877 shares issued.
Restricted
Stock Units (RSUs) (under 2020 Plan)
A
summary of outstanding RSU activity under our 2020 Plan is as follows:
SCHEDULE
OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
|
|
RSU
Outstanding
Number of Shares |
|
Balance
at December 31, 2020 |
|
|
- |
|
Granted |
|
|
459,250 |
|
Vested |
|
|
(77,875 |
) |
Forfeited |
|
|
(6,000 |
) |
Balance
at December 31, 2021 |
|
|
375,375 |
|
Granted |
|
|
922,500 |
|
Vested |
|
|
(177,125 |
) |
Forfeited |
|
|
(92,500 |
) |
Balance
at December 31, 2022 |
|
|
1,028,250 |
|
The
total fair value of the 922,500 RSUs granted was $2,716,440 which was determined using the fair value of the quoted market price on the
date of grant. Total compensation expense under the above 2020 Plan RSUs was $2,626,654 and $1,001,536 for the years ended December 31,
2022 and 2021, respectively, with unamortized expense remaining of $3,955,850 as of December 31, 2022. During the year ended December
31, 2022, 177,125 RSUs vested, of which 111,250 RSUs were issued.
RSUs
(outside of 2020 Plan)
A
summary of outstanding RSU activity (outside of our 2020 Plan) is as follows:
SCHEDULE
OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
| |
RSU Outstanding Number of Shares | |
Balance at December 31, 2020 | |
| - | |
Granted | |
| 620,000 | |
Vested | |
| (20,000 | ) |
Balance at December 31, 2021 | |
| 600,000 | |
Granted | |
| 260,000 | |
Vested | |
| (145,000 | ) |
Balance at December 31, 2022 | |
| 715,000 | |
The
total fair value of the 260,000 granted RSUs was $743,400 which was determined using the fair value of the quoted market price on the
date of grant. Total compensation expense for RSUs outside of the 2020 Plan was $1,609,257 and $846,600 for the years ended December
31, 2022 and 2021, respectively, with unamortized expense remaining of $5,155,143 as of December 31, 2022. During the year ended December
31, 2022, 145,000 RSUs vested and were issued.
Warrants
A
summary of outstanding and exercisable warrant activity is as follows:
SCHEDULE
OF WARRANT AND RESTRICTED STOCK 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, 2020 | |
| 3,550,471 | | |
$ | 1.40 – 5.75 | | |
| 6.85 years | | |
$ | 4.56 | |
Granted | |
| 500,000 | | |
| 12.00 | | |
| 4.67 years | | |
| 12.00 | |
Exercised | |
| (162,033 | ) | |
| 1.75 – 4.75 | | |
| 1.83 years | | |
| 2.97 | |
Balance at December 31, 2021 | |
| 3,888,438 | | |
$ |
1.40 – 12.00 | | |
| 5.85 years | | |
$ | 5.59 | |
Granted | |
| - | | |
| | | |
| | | |
| | |
Exercised | |
| (22,000 | ) | |
| 1.75 | | |
| | | |
| 1.75 | |
Cancelled/Forfeited/Expired | |
| (6,800 | ) | |
| 2.00 | | |
| | | |
| 2.00 | |
Balance at December 31, 2022 | |
| 3,859,638 | | |
$ | 1.40 – 12.00 | | |
| 4.89 years | | |
$ | 5.60 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable December 31, 2021 | |
| 2,621,307 | | |
$ | 1.40 – 12.00 | | |
| 6.36 years | | |
$ | 5.98 | |
Exercisable December 31, 2022 | |
| 3,836,993 | | |
$ | 1.40 – 12.00 | | |
| 4.88 years | | |
$ | 5.63 | |
Total
compensation expense on the above warrants for services was $1,629,247 and $2,419,896 for the years ended December 31, 2022 and 2021,
respectively, with unamortized expense remaining of $17,981 as of December 31, 2022.
Stock-based
Compensation
The
total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock
options, warrants and RSUs amounted to $13,734,614 and $12,071,659 for the years ended December 31, 2022 and 2021, respectively. Such
amounts are included in general and administrative expenses in the consolidated statement of operations. Unamortized expense remaining
related to service-based stock options, performance-based stock options, warrants and RSUs was $17,330,882 as of December 31, 2022, which
is expected to be recognized through 2025.
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 2023, 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 office space in Puerto Rico for which the lease expires
in 2024.
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 consolidated balance sheet as of December 31, 2022:
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITIES
| |
| | |
Fiscal year 2023 | |
$ | 823,350 | |
Fiscal year 2024 | |
| 523,206 | |
Fiscal year 2025 | |
| 68,850 | |
Less: imputed interest | |
| (85,177 | ) |
Present value of operating lease liabilities | |
$ | 1,330,229 | |
Operating
lease expenses were $871,344 and $47,565 for the years ended December 31, 2022 and 2021, respectively, and were included in other operating
expenses in our consolidated statement of operations.
Other
information related to operating lease liabilities consisted of the following:
SCHEDULE
OF OTHER INFORMATION RELATED TO OPERATING LEASE LIABILITIES
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Cash paid for operating lease liabilities | |
$ | 773,952 | | |
$ | 392,241 | |
Weighted average remaining lease term in years | |
| 2.82 | | |
| 3.75 | |
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 $2,700 per month. Additionally, Conversion Labs PR utilizes office space in Puerto Rico, which is subleased from Fried
LLC, on a month-to-month basis, incurring rental expense of approximately $3,000 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 December 31, 2022 and
2021, approximately $138 thousand and $0, respectively, was 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 December 31, 2022.
Upon
execution of the Alphabet Agreement, Alphabet was granted a 10-year stock option to purchase 20,000 shares of the Company’s common
stock at an exercise price of $2.50. Further, if Licensed Products have gross receipts of $7,500,000 in any calendar year, the Company
will grant Alphabet an option to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.50; (ii) if Licensed
Products have gross receipts of $10,000,000 in any calendar year, the Company will grant Alphabet an additional option to purchase 20,000
shares of the Company’s common stock at an exercise price of $2.50 and (iii) if Licensed Products have gross receipts of $20,000,000
in any calendar year, the Company will grant Alphabet an option to purchase 40,000 shares of the Company’s common stock at an exercise
price of $3.75. The likelihood of meeting these performance goals for the licensed products are remote and, therefore, the Company has
not recognized any compensation.
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 December 31, 2022, the Company approximates
its implicit purchase commitments to be approximately $399 thousand.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. As of December 31, 2022, other than
as set forth below, the Company’s management does not believe that there are any potential legal matters that could have an adverse
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 1 million shares (i.e., 200,000
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 1 million shares (i.e., 200,000 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., 1,000,000 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 $5,020,000 and $33,020,000 in alleged damages related to failure to award the aforementioned stock but only specifically
states that “Harborside has incurred damages in excess of $75,000, 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 400,000 shares
of common stock during the year ended December 31, 2022 and it is possible that the Company will issue 100,000 additional shares of common
stock in the future 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 $273,859, and, therefore, “LifeMD has been unjustly enriched in an amount in excess of $273,859,
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 400,000 shares of common
stock during the year ended December 31, 2022 and it is possible that the Company will issue 100,000 additional shares of common
stock in the future related to this settlement. The costs of this settlement are reflected in the Company’s financial
results.
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 $1,000,000 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 conducted several case management and status conferences, beginning in October 2022 and continuing through January
2023. The Company intends to vigorously defend against this action. As this action is in its preliminary phase, a potential loss cannot
yet be estimated.
NOTE
11 – RELATED PARTY TRANSACTIONS
Chief
Executive Officer
Prior
to 2022, the Company made payments to JLS Ventures, an entity wholly owned by our Chief Executive Officer (“CEO”), for rent
on Conversion Labs PR’s Puerto Rico office space. Amounts paid to JLS Ventures were $0 and $78,750 for the years ended December 31, 2022 and 2021,
respectively. Beginning in 2022, Conversion Labs PR subleased the office space from Fried
LLC, which is not a related party of the Company.
Conversion
Labs PR utilizes BV Global Fulfillment (“BV Global”), previously owned by a related person (the “Owner”) of the
Company’s CEO, to warehouse a portion of the Company’s finished goods inventory and for fulfillment services. On December
31, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) with BV Global and the Owner, whereby BV Global
and the Owner agreed to sell to the Company certain purchased assets of BV Global in exchange for approximately $9 thousand. Prior to
entering into the APA, the Company paid a monthly fee of $13,000 to $16,000 for fulfillment services and reimbursed BV Global for their
direct costs associated with shipping the Company’s products.
WorkSimpli
Software
During
the year ended December 31, 2022, WorkSimpli utilized LegalSubmit Pvt. Ltd. (“LegalSubmit”), a company owned by WorkSimpli’s
Chief Software Engineer, to provide software development services. WorkSimpli paid LegaSubmit a total of approximately $1.5 million and
$850 thousand during the years ended December 31, 2022 and 2021, respectively, for these services. There were no amounts owed to LegalSubmit
as of both December 31, 2022 and 2021.
NOTE
12 – INCOME TAXES
As
of December 31, 2022, the Company has approximately $94.3 million of operating loss carryforwards for federal income tax reporting purposes
that may be applied against future taxable income. Portions of the net operating loss carryforwards will expire in 2023 if not utilized
prior, and will continue to expire during various years through 2038. The net operating loss carryforwards could be subject to limitation
in any given year in the event of a change in ownership as defined by Internal Revenue Code Section 382.
The
valuation allowance overall increased by approximately $11.8 million and $20.8 million during the years ended December 31, 2022 and 2021,
respectively. The Company has fully reserved the deferred tax asset resulting from available net operating loss carryforwards.
The
income tax provision charged to continuing operations for the years ended December 31, 2022 and 2021 was as follows:
SCHEDULE
OF INCOME TAX PROVISION CHARGES
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
U.S. federal | |
$ | - | | |
$ | - | |
State and local | |
| 6,700 | | |
| 7,700 | |
Total | |
| 6,700 | | |
| 7,700 | |
Deferred: | |
| | | |
| | |
U.S. federal | |
| 1,719,000 | | |
| - | |
State and local | |
| (1,365,000 | ) | |
| - | |
Total | |
| 354,000 | | |
| - | |
Provision for income taxes | |
$ | 360,700 | | |
$ | 7,700 | |
The
provision for income taxes differs from the expected amount of income tax expense (benefit) determined by applying a combined U.S. federal
and state (Puerto Rico) income tax rate of 25% to pretax income (loss) for the years ended December 31, 2022 and 2021 as follows:
SCHEDULE
OF PROVISION DIFFERS FROM THE AMOUNT OF INCOME TAX
|
|
2022 |
|
|
2021 |
|
|
|
December
31, |
|
|
|
2022 |
|
|
2021 |
|
Computed
“expected” tax expense (benefit) |
|
$ |
(9,474,000 |
) |
|
$ |
(12,684,000 |
) |
Increase
(decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
State
taxes |
|
|
(714,000 |
) |
|
|
(618,000 |
) |
Permanent
differences |
|
|
730,000 |
|
|
|
(52,000 |
) |
Apportionment
of Puerto Rico income |
|
|
(108,000 |
)
|
|
|
76,000 |
|
Nondeductible
expenses |
|
|
- |
|
|
|
- |
|
Change
in valuation allowance |
|
|
9,973,000 |
|
|
|
13,192,000 |
|
Other |
|
|
(46,300 |
)
|
|
|
93,700 |
|
Provision
for income taxes |
|
$ |
360,700 |
|
|
$ |
7,700 |
|
Net
deferred tax liabilities consist of the following components as of December 31, 2022 and 2021:
SCHEDULE
OF NET DEFERRED TAX LIABILITIES
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Deferred tax liability: | |
| | | |
| | |
Other | |
$ | - | | |
$ | - | |
| |
| - | | |
| - | |
Deferred tax assets: | |
| | | |
| | |
Stock-based compensation | |
| 11,646,000 | | |
| 6,899,000 | |
Sec 174 – software development | |
| 142,000 | | |
| - | |
Temporary differences | |
| 2,389,000 | | |
| 1,201,000 | |
Net operating loss carryforwards | |
| 21,382,000 | | |
| 15,673,000 | |
Total | |
| 35,559,000 | | |
| 23,773,000 | |
Less valuation allowance | |
| (35,559,000 | ) | |
| (23,773,000 | ) |
Total | |
$ | - | | |
$ | - | |
NOTE
13 – 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 years ended December
31, 2022 and 2021 is as follows:
SCHEDULE OF RELEVANT SEGMENT DATA
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Telehealth | |
| | | |
| | |
Revenue | |
$ | 82,649,845 | | |
$ | 68,197,128 | |
Gross margin | |
| 78.4 | % | |
| 74.3 | % |
Operating loss | |
$ | 45,918,588 | | |
$ | 51,411,142 | |
Total assets | |
$ | 18,163,464 | | |
$ | 48,056,920 | |
| |
| | | |
| | |
WorkSimpli | |
| | | |
| | |
Revenue | |
$ | 36,383,675 | | |
$ | 24,678,678 | |
Gross margin | |
| 97.7 | % | |
| 98.2 | % |
Operating (income) loss | |
$ | (2,470,807 | ) | |
$ | 2,889,939 | |
Total assets | |
$ | 7,502,389 | | |
$ | 1,866,323 | |
| |
| | | |
| | |
Consolidated | |
| | | |
| | |
Revenue | |
$ | 119,033,520 | | |
$ | 92,875,806 | |
Gross margin | |
| 84.3 | % | |
| 80.6 | % |
Operating loss | |
$ | 43,447,781 | | |
$ | 54,301,081 | |
Total assets | |
$ | 25,665,853 | | |
$ | 49,923,243 | |
NOTE
14 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date these consolidated financial statements were issued and has identified the following:
Working
Capital Loan
In
the first quarter of 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%. Mr. Bhatia, a member of the Board of the Company, also serves on the
Board of Directors of CRG Financial.
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.
Stock
Issued for Service
In
2023, the Company issued an aggregate of 99,375 shares of common stock for services rendered.
Avenue
Capital Credit Facility
On
March 21, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with Avenue Capital (the
“Lender”). The Credit Agreement provides for a 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 available in the fourth quarter of 2023 and (3) $20
million of additional uncommitted term loans, collectively referred to as the “Facility”. The term of the Facility is 42
months.
Proceeds
from the Facility are expected to be utilized to: (1) repay the Company’s outstanding notes payable balances with CRG Financial,
(2) general corporate purposes and (3) at the Company’s election, re-financing up to $5 million of the Series B Preferred Stock.
Interest
is based on the greater of: (1) the Prime Rate plus 4.75%
and (2) 12.5%. There is an upfront commitment fee of 1%
of the total $20
million in committed capital and the Company shall grant the Lender one or more warrants to purchase the Company’s common
stock in an amount up to 6%
of the outstanding credit commitment of the Lender.
The
Facility includes various covenants including maintaining a minimum of $5 million in unrestricted cash on hand, limitations and events of default customary for similar facilities for similarly rated
borrowers. As of the date of filing, there is $15
million outstanding under the Facility and the Company is in compliance with the Facility terms.