LifeMD, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 14, 2021. LifeMD operates direct-to-patient telehealth and consumer health brands, alongside its majority-owned PDFSimpli software business. Following a January restructuring, LifeMD owned approximately 85.6% of LegalSimpli on a fully diluted basis. The company changed its name from Conversion Labs, Inc. to LifeMD, Inc. in February 2021.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net revenue | $18.20 million | $4.30 million; up 323% |
| Product revenue | $13.28 million | $2.96 million; up 349% |
| Software revenue | $4.91 million | $1.35 million; up 264% |
| Gross profit / margin | $14.93 million / 82.1% | $2.97 million / 68.9% |
| Operating loss | $(11.92) million | $(1.74) million |
| Net loss | $(11.87) million | $(2.53) million |
| Net loss attributable to LifeMD common stockholders | $(11.60) million; $(0.47) per share | $(2.39) million; $(0.23) per share |
| Operating cash flow | $(9.11) million | $0.66 million provided |
| Investing cash flow | $(0.05) million | $(0.47) million |
| Financing cash flow | $13.38 million | $(0.94) million |
Gross margin improved by about 13 percentage points; management cited lower product costs and improved inventory management, including normalization from COVID-related supply-chain disruption in the prior-year quarter. Selling and marketing expense rose to $18.64 million from $2.75 million, principally reflecting increased marketing to support growth. General and administrative expense was $6.86 million, including $2.33 million of stock-based compensation. Operating expenses totaled $26.85 million, exceeding gross profit and driving the larger operating loss. Q1 2021 included a $184,914 gain from PPP loan forgiveness; interest expense was $139,463.
Cash was $13.41 million at March 31, versus $9.18 million at December 31, 2020. The company reported current assets of $17.84 million, current liabilities of $15.44 million, and positive working capital of $2.39 million, compared with a $1.43 million working-capital deficit at year-end. Net proceeds of approximately $13.5 million from a February private placement were the main source of financing cash. Current notes payable, net, were $674,269; this included a $600,000 merchant funding advance and $74,269 of remaining PPP loans. The $500,000 bank loan received in December 2020 was repaid in January 2021. Total stockholders’ deficit was $0.84 million; Series B preferred stock was presented as $3.78 million of mezzanine equity.
Material changes and business developments
- Rex MD product revenue was $9.84 million, versus $0.49 million in Q1 2020; Shapiro MD revenue was $3.38 million, versus $2.34 million. Management attributed growth to online demand, brand expansion, and marketing, and said COVID-19 may have contributed to some growth.
- PDFSimpli software revenue reached $4.91 million, compared with $1.35 million a year earlier. Management cited increased demand, market awareness, digital capabilities, and marketing expansion.
- The February offering sold 608,696 common shares at $23 per share for approximately $14.0 million gross proceeds and $13.5 million net proceeds. Common shares issued increased during the quarter; the filing reported 26,149,156 shares outstanding as of May 14, 2021.
- LifeMD increased its LegalSimpli ownership from 51% to approximately 85.6% through a restructuring involving note exchange and membership-interest purchases. Performance options could reduce its ownership to approximately 73% if specified sales and margin thresholds are achieved.
Outlook, risks, and unusual items
- Outlook and funding: Management expected further losses through year-end 2021 and continued cash burn through Q2, with improvement anticipated in later quarters. It estimated cash use of approximately $8.4 million over the 12 months following the filing and stated that available cash was expected to be sufficient for that period, based on its forecasts. Management could not predict when significant positive cash flow or profitability would be achieved and noted future financing might be needed.
- Going concern: The company had an accumulated deficit of approximately $90.2 million at March 31 and significant operating losses. Management’s liquidity assessment depended on revenue growth, improved operating efficiency and cash burn, and access to future financing; it cautioned that financing availability and favorable terms were not assured.
- Contingencies: Two purported securities class actions were filed after quarter-end, alleging misleading statements concerning the company’s business, operations, and prospects. Damages were not quantified. The company said it intended to defend the cases; outcomes and insurance coverage are uncertain.
- Controls: Management concluded disclosure controls were not effective because of material weaknesses, including inadequate segregation of duties, insufficient accounting and reporting policies, inadequate system access controls, lack of a formal related-party transaction approval policy, and no written whistleblower policy.
- Other exposures: Product deposits were $1.30 million and implicit purchase commitments approximately $2.6 million, with most deposits concentrated with one Shapiro product manufacturer. The company relied on a limited number of suppliers and disclosed related-party rent, warehousing, fulfillment, and consulting arrangements.
- Unusual expense and dilution: Stock-based compensation was $2.33 million for the quarter; the filing also reported substantial unamortized compensation expense for outstanding awards. The company issued 1.20 million shares for services expensed in prior periods.
Important facts for investors to verify
- Whether rapid product and software revenue growth can continue and translate into improving operating margins, given marketing expense and operating losses.
- Actual cash burn after Q1, execution against management’s forecast of approximately $8.4 million cash use over the following 12 months, and any need for additional financing.
- Customer acquisition economics, subscription retention, refunds and chargebacks, and the concentration and reliability of suppliers and fulfillment providers.
- The status and potential cost of the two securities class actions, including applicable insurance coverage.
- Progress in remediating the disclosed material weaknesses and the financial impact of stock-based awards, share issuance, and potential LegalSimpli ownership changes.