LifeMD, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The unaudited consolidated results include LifeMD’s telehealth operations and its 85.6%-owned WorkSimpli software business.
Business context
LifeMD operates direct-to-patient telehealth brands, including Rex MD, Shapiro MD and Nava MD, and sells certain over-the-counter products. WorkSimpli operates the PDFSimpli subscription software platform. Management reported that approximately 90% of revenue was recurring; the company had served more than 420,000 customers and patients, and WorkSimpli had more than 139,200 active subscriptions at quarter-end.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $24.95 million | $11.01 million | $65.46 million | $24.40 million |
| Gross profit / margin | $19.85 million / 79.6% | $9.33 million / 84.8% | $53.03 million / 81.0% | $19.48 million / 79.8% |
| Operating loss | $(12.59) million | $(20.53) million | $(40.64) million | $(25.49) million |
| Net loss | $(14.42) million | $(20.82) million | $(43.32) million | $(26.80) million |
| Net loss attributable to LifeMD common stockholders | $(14.35) million | $(24.20) million | $(42.79) million | $(31.11) million |
| Basic and diluted loss per share | $(0.54) | $(1.65) | $(1.66) | $(2.47) |
- Growth and mix: Q3 revenue rose 127% year over year: telehealth revenue increased 97% to $18.54 million and WorkSimpli revenue increased 309% to $6.41 million. For the first nine months, revenue rose 168%; telehealth grew 135% and WorkSimpli 331%.
- Margins and spending: Q3 gross margin declined to 79.6%, which management attributed principally to product mix and a one-time non-cash write-off of legacy product deposits. Selling and marketing expense rose 93% year over year to $20.29 million in Q3 and 183% to $61.37 million for the nine-month period. It exceeded gross profit in both periods.
- Profitability: Operating and net losses remained substantial. Q3 operating loss improved from the prior year, when general and administrative expense included $18.06 million of expense for milestone shares issued to executives. Nine-month net loss widened, despite higher revenue and gross profit.
- Cash flow: Nine-month operating cash use was $27.26 million, compared with $5.60 million in 2020; investing cash use was $1.82 million. Financing provided $29.35 million, leaving cash up $0.27 million to $9.45 million at September 30.
Balance sheet, debt and liquidity
- At September 30, cash was $9.45 million; current assets were $14.13 million and current liabilities $19.88 million, resulting in negative working capital of $5.74 million. Stockholders’ deficit was $18.66 million.
- Current liabilities included $18.38 million of accounts payable and accrued expenses, up from $11.79 million at year-end. Management said the increase partly reflected extended vendor payment terms. Accrued sales tax was $2.00 million, versus $0.13 million at year-end.
- The June 2021 financing included a $15.0 million senior secured debenture, with interest rates stepping from 6% to 9% and then 12%. Its September 30 carrying amount, net of discount, was $10.82 million. The company reported that it repaid the $15.0 million outstanding in October 2021 using proceeds from subsequent offerings.
- On October 4, 2021, the company closed common and Series A preferred stock offerings, reporting approximately $55.3 million of net proceeds before debt repayment. The Series A preferred stock carries an 8.875% annual cumulative dividend. The company reported cash of approximately $41.4 million as of the filing date and estimated use of approximately $19 million over the next 12 months.
- At September 30, the company reported approximately $59.5 million remaining under its ATM agreement and $90 million available under its shelf registration. Further securities issuance could dilute common stockholders; preferred dividends add a cash obligation.
Outlook, risks and unusual items
- Management expected further losses and cash burn through the end of 2022, while anticipating improvement in the cash burn rate. It stated that it could not predict when significant positive cash flow or profitability would be achieved. Management’s 12-month liquidity assessment relied in part on the October financing, available financing capacity, revenue growth, expense controls and expected operating improvements.
- Key operating risks include the ability to sustain customer growth and make marketing spend productive, competition, telehealth regulation and corporate-practice-of-medicine or fee-splitting claims, reliance on third-party manufacturers and pharmacies, and supply-chain delays and cost increases. The company also noted it was assessing the financial and staffing effects of OSHA’s COVID-19 vaccination or testing requirements.
- Disclosure controls and procedures were reported ineffective because of material weaknesses, including inadequate segregation of duties, insufficient written accounting and reporting procedures, gaps in IT access and disaster recovery controls, and lack of formal related-party and whistleblower policies. Management described remediation efforts; the filing reported no material change in internal control during the quarter.
- Two securities class actions and an ADA accessibility lawsuit were voluntarily dismissed in 2021. Management said it knew of no other potentially material pending legal proceedings, while noting the possibility of future litigation.
- Other notable matters include $184,914 of PPP loan forgiveness during the nine-month period; approximately $3.8 million of implicit inventory purchase commitments at quarter-end; and significant stock-based compensation, including $3.11 million in Q3 and $7.98 million for nine months.
Important facts for investors to verify
- Whether revenue growth and recurring subscriptions translate into improved contribution economics, lower customer acquisition costs and reduced cash burn.
- How the company’s reported post-offering cash balance and 12-month cash-use estimate reconcile to the quarter-end cash, offering proceeds and October debt repayment.
- Vendor payment terms, the sales-tax accrual, product deposits and purchase commitments, and whether these create near-term working-capital pressure.
- The debenture repayment and any remaining debt, as well as the ongoing cost and dilution implications of preferred stock, warrants, options and future equity sales.
- Progress in remediating material weaknesses in financial reporting controls and any subsequent developments in regulatory, litigation or supply-chain risks.