NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF THE ORGANIZATION AND BUSINESS
Corporate
History
LifeMD,
Inc. was formed in the State of Delaware on May 24, 1994, under its prior name, Immudyne, Inc. The Company changed its name to Conversion
Labs, Inc. on June 22, 2018 and then subsequently, on February 22, 2021, it changed its name to LifeMD, Inc. Effective February 22, 2021,
the trading symbol for the Company’s common stock, par value $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
skincare products, was amended and restated and the Company increased its ownership and voting interest in Immudyne PR to 78.2%. Concurrent
with the name change of the parent company to Conversion Labs, Inc., Immudyne PR was renamed to Conversion Labs PR LLC. On April 25,
2019, the operating agreement of Conversion Labs PR was amended and restated in its entirety to increase the Company’s ownership
and voting interest in Conversion Labs PR to 100%. On February 22, 2021, concurrent with the name of the parent company to LifeMD, Inc.,
Conversion Labs PR 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 (“SaaS”)
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 7) and concurrently increased its ownership stake in WorkSimpli to 85.6%.
On
January 18, 2022, the Company acquired Cleared Technologies, PBC, a Delaware public benefit corporation (“Cleared”), a rapidly
growing nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology (See Note 3).
Nature
of Business
The
Company is a direct-to-patient telehealth technology company that provides a smarter, cost-effective, and convenient way for patients
of its affiliated medical group to access healthcare. The Company believes that the traditional model of visiting a doctor’s office,
receiving a physical prescription, visiting a local pharmacy, and returning to see a doctor for follow up care or prescription refills
is inefficient, costly to patients, and discourages many patients from seeking much needed medical care. The U.S. healthcare system is
undergoing a paradigm shift, thanks to new technologies and the emergence of direct-to-patient healthcare. Direct-to-patient telehealth
technology companies, like the Company, connect consumers to affiliated, licensed, healthcare professionals for care across numerous
indications, including concierge care, men’s sexual health, and dermatology, among others.
The
Company’s telehealth platform helps patients access their licensed providers for diagnoses, virtual care, and prescription medications,
often delivered on a recurring basis. In addition to its telehealth prescription offerings, the Company sells over-the-counter (“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.
The Company
believes that brand innovation, customer acquisition, and service excellence form the heart of its business. As is exemplified with its
first brand, Shapiro MD, it has built a full line of proprietary 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 its newest brand, 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
June 2018, Conversion Labs closed the strategic acquisition of 51%
of WorkSimpli, which operates a SaaS application for converting, editing, signing, and sharing PDF documents called PDFSimpli. In
addition to WorkSimpli’s growth business model, this acquisition added deep search engine optimization and search engine
marketing expertise to the Company. The Company subsequently increased its ownership stake in WorkSimpli to its current 85.6%.
In early 2019, the Company had
launched a service-based business under the name Conversion Labs Media LLC (“CVLB Media”), a Puerto Rico limited liability
company, which was to be used to run e-commerce marketing campaigns for other online businesses. However, this business initiative was
terminated in early 2019 in order to focus on its core business, as well as the expansion of our telehealth opportunities. In 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”). GoGoMeds is a nationwide pharmacy licensed to dispense prescription
medications directly to consumers in all 50 states and the District of Columbia. However, since its inception, CVLB Rx did not conduct
any business and CVLB Rx was dissolved on August 7, 2020. Additionally, Conversion Labs Asia Limited (“Conversion Labs Asia”),
a Hong Kong company, had no activity during the three months and six months ended June 30, 2022 and 2021.
On
January 18, 2022, the Company acquired Cleared, a rapidly growing 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 $460,000 upfront cash payment, and two non-contingent milestone payments for 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 $507,000 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 (See Note 3).
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 SaaS online platforms (the
“Acquisition”). WorkSimpli paid to the Seller a purchase price $4,000,000.
The Seller is also entitled to a minimum of $500,000 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).
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”), our recent acquisition, 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., is the Company’s affiliated, variable interest entity in which we hold a
controlling financial interest (“LifeMD PC”). Unless otherwise specified, all dollar amounts are expressed in United
States dollars.
Partnerships
On
July 13, 2021, the Company, on behalf of its customers, entered into an agreement to engage Quest Diagnostics Incorporated (“Quest
Diagnostics”) as the Company’s laboratory services provider to perform certain clinical laboratory diagnostic services based
on orders submitted to Quest Diagnostics by licensed health care providers who are under contract with the Company and are authorized
under U.S. federal or state law to order laboratory tests. Patients of LifeMD Inc.’s affiliated providers gain access to more than
150 of the most ordered laboratory tests at preferential prices, and which can be completed in the comfort, safety, and convenience of
their home or office, or at any one of Quest Diagnostics’ 2,000 facilities.
On
August 4, 2021, the Company entered into a partnership agreement with Particle Health, a state-of-the-art, digital health company
with a HIPAA-compliant technology platform that converts electronic medical records data into a user-friendly, Fast Healthcare
Interoperability Resource (“FHIR”) format. Particle
Health enables healthcare companies by offering simple, secure access to vital medical data. With Particle Health’s platform
and patient consent, licensed affiliated medical providers on the LifeMD primary care platform gain instant access to comprehensive
patient health records, therefore enabling best-in-class, personalized care through a deeper understanding of their patients’
medical histories.
Liquidity
The
Company has funded operations in the past through the sales of its products, issuance of common and preferred stock, and through loans
and advances. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes and obtaining funding
from third-party sources or the issuance of additional shares of common stock.
On
February 11, 2021, the Company consummated the closing of a private placement offering (the “February 2021 Offering”), whereby
pursuant to the securities purchase agreement (the “February 2021 Purchase Agreement”) entered into by the Company and certain
accredited investors on February 11, 2021, the Investors purchased 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”).
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. The Company is using the net proceeds
to fund growth initiatives, as well as for general corporate purposes.
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) a senior secured redeemable debenture (the
“Debenture”) in the aggregate principal amount of $15.0 million (the “Aggregate Principal Amount”), 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
(the “Warrant”) 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 Warrant has a term of three years, and the Debenture has a maturity
date of three years. The Company received gross proceeds of $15.0 million. In October 2021, the Company used a portion of the net proceeds
from the October 4, 2021 Offerings noted below to pay the $15.0 million outstanding on the June 1, 2021 Purchase Agreement.
On
June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (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. (“B. Riley”) and Cantor Fitzgerald & Co. (“Cantor”, and collectively the “Agents”)
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. The Company intends to use any net proceeds from the sale
of securities for our operations and for other general corporate purposes, including, but not limited to, capital expenditures, general
working capital, and possible future acquisitions. There were no shares of common stock sold under the ATM Sales Agreement during the
six months ended June 30, 2022 and 2021. Under the 2021 Shelf, the Company has the ability to raise up to $150 million, of which $58.5
million was utilized as of June 30, 2022. The Company has approximately $59.5 million available under the ATM Sales Agreement and $32
million available under the 2021 Shelf as of June 30, 2022.
In
September 2021, the Company entered into two underwriting agreements (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 8.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, (the “Series A Preferred Stock”)
at a public offering price of $25.00 per share, prior to deducting underwriting discounts and commissions and estimated offering expenses
(the “Preferred Stock Offering”). In addition, the Company granted the underwriters an option to purchase up to an additional
210,000 shares of Series A Preferred Stock within 30 days. The option was not exercised. Under the Common Underwriting Agreement, the
Company agreed to sell to B. Riley 3,833,334 shares of common stock (including 500,000 shares pursuant to B. Riley’s option) (the
“Common Shares”), par value $0.01 per share, of the Company at a public offering price of $6.00 per share of common stock,
prior to deducting underwriting discounts and commissions and estimated offering expenses (the “Common Stock Offering”).
The Preferred Stock Offering and Common Stock Offering collectively referred to as the “October 4, 2021 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 Company used a
portion of the net proceeds to pay the $15.0 million outstanding on the June 1, 2021 Purchase Agreement and intends to use the remaining
net proceeds to fund the segregated dividend account, for working capital and general corporate purposes including, but not limited to,
new patient customer acquisition expenses and capital expenditures.
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 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. 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. The dividends are included in the Company’s results of operations for the three and six
months ended June 30, 2022.
Going
Concern Evaluation
As
of June 30, 2022, the Company has an accumulated deficit approximating $170 million and has experienced significant losses from its operations.
Although the Company is showing significant positive revenue trends, the Company expects to incur further losses through the third quarter
of 2022. To date, the Company has been funding operations primarily through the 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 $4.2 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 shareholders, 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.
In
order to mitigate the going concern issues, the Company has begun to implement strategies to strengthen revenues and improve operational
efficiencies across the business and is significantly curtailing expenses. Additionally, 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 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8
of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by accounting principles generally
accepted in the United States (“U.S. GAAP”) for complete audited financial statements. The accompanying unaudited financial
information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and
for the year ended December 31, 2021, included in our 2021 Annual Report on Form 10-K filed with the SEC. The information furnished in
this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary
for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations
for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022
or for any future period.
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, its recent
acquisition, Cleared, its majority owned subsidiary, WorkSimpli, in addition to 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 (See Note 7).
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 June 30, 2022
and December 31, 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. 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 shareholders 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
net loss for LifeMD PC was approximately $1.4 million and $2.9 million for the three and six months ended June 30, 2022, respectively.
Use
of Estimates
The
Company prepares its unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Some of the more significant estimates required to be made by management include the determination of reserves for accounts receivable,
returns and allowances, the valuation of inventory, and stockholders’ equity-based transactions. 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) $34,914 and $41,452 of reimbursable expenses reclassified
from cost of revenues to other operating expenses, (2) $87,491 and $245,153 of taxes and licensing fees reclassified from other operating
expenses to general and administrative expenses, (3) $20,896 and $66,555 of software development costs reclassified from cost of revenues
to development costs, (4) $56,293 and $129,463 of development services costs reclassified from other operating expenses to development
costs, (5) $3,669 and $49,639 of investor relations costs reclassified from general and administrative expenses to selling and marketing
expenses and (6) $23,976 and $23,976 of regulatory costs reclassified from cost of telehealth revenue to general and administrative expenses
for the three and six months ended June 30, 2021, respectively.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606, Revenue from Contracts with Customers, by analyzing exchanges with its
customers using a five-step analysis:
1. |
Identify the contract |
2. |
Identify performance obligations |
3. |
Determine the transaction
price |
4. |
Allocate the transaction
price |
5. |
Recognize revenue |
For
the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which
is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records
sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party
fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site; in
these limited cases, recognition of revenue should be deferred until that time, however the Company does not have a process to properly
record the recognition of revenue if orders are not immediately shipped, and deems the impact to be immaterial. In all cases, delivery
is considered to have occurred when title and risk of loss have transferred to the customer, which is usually commensurate upon shipment
of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring
shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order,
recording the revenue at the time it fulfills the shipment obligation to the customer.
For
its product-based contracts with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer
rebates, and other adjustments for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The
Company’s discounts and customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales
for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical
transaction detail and accounts for such provisions as contra revenue during the same period in which the related revenues are earned.
The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to
record estimates for returns and allowances to be applied to the entire product-based portfolio population. Customer discounts, returns,
and rebates on telehealth revenues approximated $1.6 million and $1.4 million for the three months ended June 30, 2022 and 2021, respectively.
Customer discounts, returns, and rebates on telehealth revenues approximated $3.1 million and $2.6 million for the six months ended June
30, 2022 and 2021, respectively.
The
Company, through its majority-owned subsidiary WorkSimpli, offers a subscription-based service providing a suite of software applications
to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any
type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with
customers, the Company offers an initial 14-day trial period which is billed at $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. As of June 30, 2022 and December 31, 2021, the Company
has accrued contract liabilities, as deferred revenue, of approximately $2.0 million and $1.5 million, respectively, which represent
obligations on in-process monthly or yearly contracts with customers and a portion attributable to the yet to be recognized initial 14-day
trial period collections. Customer discounts and allowances on WorkSimpli revenues approximated $580 thousand and $668 thousand for the
three months ended June 30, 2022 and 2021, respectively. Customer discounts and allowances on WorkSimpli revenues approximated $1.0 million
and $1.2 million for the six months ended June 30, 2022 and 2021, respectively.
For
the three and six months ended June 30, 2022 and 2021, the Company had the following disaggregated revenue:
SCHEDULE OF DISAGGREGATED REVENUE
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
% | | |
2021 | | |
% | | |
2022 | | |
% | | |
2021 | | |
% | |
Telehealth revenue | |
$ | 22,267,963 | | |
| 73 | % | |
$ | 15,799,610 | | |
| 71 | % | |
$ | 44,866,024 | | |
| 75 | % | |
$ | 29,082,925 | | |
| 72 | % |
WorkSimpli revenue | |
| 8,190,535 | | |
| 27 | % | |
| 6,514,001 | | |
| 29 | % | |
| 14,635,311 | | |
| 25 | % | |
| 11,428,798 | | |
| 28 | % |
Total net revenue | |
$ | 30,458,498 | | |
| 100 | % | |
$ | 22,313,611 | | |
| 100 | % | |
$ | 59,501,335 | | |
| 100 | % | |
$ | 40,511,723 | | |
| 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 payments received for the in-process monthly or yearly contracts with customers and a portion attributable to the
yet to be recognized initial 14-day trial period collections.
SCHEDULE
OF CONTRACT WITH CUSTOMER LIABILITY
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Beginning of period | |
$ | 1,788,555 | | |
$ | 1,339,309 | | |
$ | 1,499,880 | | |
$ | 916,880 | |
Additions | |
| 7,853,216 | | |
| 6,183,965 | | |
| 14,221,187 | | |
| 11,210,719 | |
Revenue recognized | |
| (7,649,269 | ) | |
| (6,141,336 | ) | |
| (13,728,565 | ) | |
| (10,745,661 | ) |
End of period | |
$ | 1,992,502 | | |
$ | 1,381,938 | | |
$ | 1,992,502 | | |
$ | 1,381,938 | |
Accounts
Receivable
Accounts
receivable principally consist of amounts due from third-party merchant processors, who process our subscription revenues; the merchant
accounts balance receivable represents the charges processed by the merchants that have not yet been deposited with the Company. The
unsettled merchant receivable amount normally represents processed sale transactions from the final one to three days of the month, with
collections being made by the Company within the first week of the following month. Management determines the need, if any, for an allowance
for future credits to be granted to customers, by regularly evaluating aggregate customer refund activity, coupled with the consideration
and current economic conditions in its evaluation of an allowance for future refunds and chargebacks. As of June 30, 2022 and December
31, 2021, the reserve for sales returns and allowances was approximately $493 thousand and $477 thousand, respectively. For all periods
presented, as noted above, the sales returns and allowances were recorded in accrued expenses on the unaudited condensed consolidated
balance sheets.
Inventory
As
of June 30, 2022 and December 31, 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 both June
30, 2022 and December 31, 2021, the Company recorded an inventory reserve in the amount of $57 thousand.
As
of June 30, 2022 and December 31, 2021, the Company’s inventory consisted of the following:
SUMMARY OF INVENTORY
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Finished Goods - Products | |
$ | 2,084,799 | | |
$ | 1,592,654 | |
Raw materials and packaging components | |
| 937,459 | | |
| 81,427 | |
Inventory reserve | |
| (57,016 | ) | |
| (57,481 | ) |
Total Inventory - net | |
$ | 2,965,242 | | |
$ | 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 June 30, 2022 and December 31, 2021, the Company has approximately $441 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 June 30, 2022 and December 31, 2021, the Company approximates its implicit purchase commitments to be $1.9
million and $511 thousand, respectively. As of June 30, 2022 and December 31, 2021, the vast majority of these product deposits are with
one vendor that manufacturers 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 June 30, 2022 and December
31, 2021, the Company capitalized $8.1 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 $9.5 million was acquired in conjunction with the Cleared acquisition during
the three months ended March 31, 2022, for which the purchase accounting is preliminary (see Note 3). The Company recorded a $2.7
million goodwill impairment charge during the three months ended June 30, 2022 related to
a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections.
Other
amortizable intangible assets include: (1) intangible assets acquired related to the ResumeBuild brand (with original cost of approximately
$4.5 million) with an estimated useful life of five years, (2) a customer relationship asset (with original cost of approximately $1,007,000)
with an estimated useful life of three years, (3) a purchased license (with original cost of $200,000), with an estimated useful life
of ten years and (4) purchased domain names (with original costs of $22,731) with estimated useful lives of three years. Intangible assets
are amortized over their estimated lives using the straight-line method. Costs incurred to renew or extend the term of recognized intangible
assets are capitalized and amortized over the useful life of the asset.
Impairment
of Long-Lived Assets
Long-lived
assets include equipment, capitalized software, and intangible assets subject to amortization. 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 June 30, 2022 and December 31, 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 $249,000 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 six months ended June 30, 2022 and 2021, the Company had a total of $63,400 and $184,914, respectively, of its PPP loans forgiven
by the U.S. Small Business Administration (“SBA”) (See Note 6). As of June 30, 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, 2018, 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 (“EPS”) 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
| |
Three Months Ended | | |
Three Months Ended | | |
Six Months Ended | | |
Six Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2022 | | |
June 30, 2021 | |
| |
| | |
| | |
| | |
| |
Series B Preferred Stock | |
| 1,334,293 | | |
| 1,194,293 | | |
| 1,316,841 | | |
| 1,178,379 | |
Restricted Stock Units (RSUs) | |
| 1,445,750 | | |
| 664,375 | | |
| 1,429,125 | | |
| 355,938 | |
Stock options | |
| 4,259,198 | | |
| 4,013,400 | | |
| 4,318,065 | | |
| 4,204,200 | |
Warrants | |
| 3,859,638 | | |
| 3,984,787 | | |
| 3,859,638 | | |
| 3,767,629 | |
Potentially dilutive securities | |
| 10,898,879 | | |
| 9,856,855 | | |
| 10,923,669 | | |
| 9,506,146 | |
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
carrying value of the Company’s financial instruments, including cash, accounts receivable, accounts payable, 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 June 30, 2022, we utilized four (4) suppliers for fulfillment
services, seven (7) suppliers for manufacturing finished goods, four (4) suppliers for packaging, bottling, and labeling, and two (2) 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
Issued 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 and 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
preliminary 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 includes up to $72.8 million
of potential earn-out payable in cash or stock upon achievement of revenue targets, which is 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 allocation of the consideration transferred to the assets acquired and the liabilities assumed is preliminary. This
can be revised as a result of additional information obtained due to the finalization of the valuation inputs and assumptions as well
as completing the assessment of the tax attributes of the business combination. Additional adjustments that could have a material impact
on the Company’s results of operations and financial position may be recorded within the measurement period, which will not exceed
one year from the acquisition date.
The
following table summarizes the preliminary acquisition date fair values of assets acquired and liabilities assumed:
SCHEDULE OF FAIR VALUE OF ASSETS AND LIABILITIES
| |
| | |
Preliminary purchase price, net of cash acquired | |
$ | 9,091,762 | |
Less: | |
| | |
Inventory | |
| 7,168 | |
Fixed assets | |
| 37,888 | |
Accounts payable and other current liabilities | |
| (408,030 | ) |
Goodwill | |
$ | 9,454,736 | |
The
amount allocated to goodwill and intangible assets reflects the benefits the Company expects to realize from the growth of the acquisition’s
operations. 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.
During
the three months ended June 30, 2022, the Company recorded a reduction of $2.7 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 through the earnout period. During the three months ended June 30, 2022, the Company also
recorded a $2.7 million goodwill impairment charge based on the decline in the Cleared financial projections (See Note 4).
In
February 2022, WorkSimpli closed on the ResumeBuild APA to purchase the related intangible assets associated with the ResumeBuild brand.
WorkSimpli paid to the Seller a purchase price of $4,500,000,
including cash paid upfront and contingent consideration of $500,000. 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
As
of June 30, 2022 and December 31, 2021, the Company has the following amounts related to goodwill and intangible assets:
SCHEDULE OF GOODWILL AND INTANGIBLE ASSETS
| |
Goodwill and Intangible Assets as at: | | |
| |
| |
June 30, | | |
December 31, | | |
Amortizable | |
| |
2022 | | |
2021 | | |
Life | |
Goodwill – Cleared Acquisition | |
$ | 6,719,736 | | |
$ | - | | |
| | |
Other Amortizable Intangible Assets: | |
| | | |
| | | |
| | |
ResumeBuild brand | |
| 4,500,000 | | |
| - | | |
| 5 years | |
Customer relationship asset | |
| 1,006,840 | | |
| 1,006,840 | | |
| 3 years | |
Purchased licenses | |
| 200,000 | | |
| 200,000 | | |
| 10 years | |
Website domain name | |
| 22,731 | | |
| 22,231 | | |
| 3 years | |
Less: accumulated amortization | |
| (1,550,597 | ) | |
| (1,209,310 | ) | |
| | |
Total net goodwill and amortizable intangible assets | |
$ | 10,898,710 | | |
$ | 19,761 | | |
| | |
During
the three months ended June 30, 2022, the Company recorded a $2.7 million goodwill impairment charge related to a decline in the estimated
fair value of Cleared as a result of a decline in the Cleared financial projections. The
aggregate amortization expense of the Company’s intangible assets for the three months ended June 30, 2022 and 2021 was approximately
$226,893 and $255,937, respectively. The aggregate amortization expense of the Company’s intangible assets for the six months ended
June 30, 2022 and 2021 was approximately $341,287 and $339,840, respectively. Total amortization expense for the remainder of 2022 is
$453,789. Total amortization expense for 2023 through 2026 is approximately $900,000 per year and $112,500 for 2027.
NOTE
5 – ACCRUED EXPENSES
As
of June 30, 2022 and December 31, 2021, the Company has the following amounts related to accrued expenses:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued selling and marketing expenses | |
$ | 4,156,544 | | |
$ | 4,981,453 | |
Accrued compensation | |
| 603,287 | | |
| 1,657,843 | |
Accrued dividends payable | |
| 776,562 | | |
| 871,476 | |
Sales tax payable | |
| 2,201,583 | | |
| 2,000,000 | |
Purchase price payable | |
| 1,633,227 | | |
| - | |
Other accrued expenses | |
| 1,862,106 | | |
| 2,084,833 | |
Total accrued expenses | |
$ | 11,233,309 | | |
$ | 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 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 six months ended June 30, 2022 and 2021, the
Company had a total of $63,400 and $184,914, respectively, of its PPP loans forgiven by the SBA which is included in gain on debt forgiveness
on the accompanying unaudited condensed consolidated statement of operations. As of June 30, 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.
Total
interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $0 and $229,351 for the three months ended
June 30, 2022 and 2021, respectively. Total interest expense on notes payable, inclusive of amortization of debt discounts, amounted
to $0 and $368,814 for the six months ended June 30, 2022 and 2021, respectively.
NOTE
7 – 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. Under the 2021 Shelf, the Company had the ability to raise up to $150 million.
The Company has approximately $59.5 million available under the ATM Sales Agreement and $32 million available under the 2021 Shelf as
of June 30, 2022.
Options
and Warrants
During
the six months ended June 30, 2022, the Company issued an aggregate of 25,535 shares of common stock related to the cashless exercise
of options.
During
the six months ended June 30, 2022, the Company issued an aggregate of 90,400 shares of common stock related to the exercise of options
for gross proceeds of $90,400.
During
the six months ended June 30, 2022, the Company issued an aggregate of 22,000 shares of common stock related to the exercise of warrants
for gross proceeds of $38,500.
Membership
Interest Purchase Agreement
On
July 31, 2019 the Company entered into a certain membership interest purchase agreement (the “MIPA”) by and between the
Company; Conversion Labs PR (now “LifeMD PR”), a majority owned subsidiary; Taggart International Trust, an entity
controlled by the Company’s Chief Executive Officer, Mr. Justin Schreiber; and American Nutra Tech LLC, a company controlled
by its Chief Innovation and Marketing Officer, Mr. Stefan Galluppi (“Mr. Schreiber, Taggart International Trust, Mr. Galluppi,
and American Nutra Tech LLC each a “Related Party” and collectively, the “Related Parties”). Pursuant to the
MIPA, the Company purchased 21.83333%
of the membership interests (the “Remaining Interests”) of Conversion Labs PR from the Related Parties, bringing the
Company’s ownership of Conversion Labs PR to 100%.
As
consideration for the Company’s purchase of the Remaining Interests from the Related Parties, Mr. Schreiber and Mr. Galluppi
agreed to cancel all potential issuances of restricted stock and or options related to their employment with the Company, in
exchange for the immediate issuance of 500,000
shares of the Company’s restricted common stock to each of Mr. Schreiber and Mr. Galluppi (the “Initial
Issuances”) (equal to 1,000,000
shares in the aggregate). Mr. Schreiber and Mr. Galluppi were also entitled to additional issuances pursuant to certain milestones
as follows: (i) 500,000
shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (1,000,000
shares in the aggregate) on the business day following a consecutive ninety (90) day period, during which the Company’s Common
Stock shall have traded at an average price per share equal to or higher than $2.50
(the “First Milestone”), and (ii) an additional 500,000
shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (1,000,000
shares in the aggregate) following a consecutive ninety (90) day period during which the Common Stock shall have traded at an
average price per share equal to or higher than $3.75
(the “Second Milestone” and, together with the First Milestones, the “Milestones”). Having achieved the
Milestones, the Company, on December 9, 2020, issued an aggregate of 1,000,000
shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (the “Milestone Shares”) (2,000,000
shares in the aggregate). The Milestone Shares are subject to the previously disclosed 180-day Lock-Up Agreement, each of which Mr.
Schreiber and Mr. Galluppi signed on November 3, 2020.
The
Company recorded an aggregate expense of $18,060,000 reflected in general and administrative expenses during the three months ended September
30, 2020 for the issuance of these 2,000,000 shares, of which 1,200,000 shares were issued during the three months ended March 31, 2021.
Common
Stock
Common
Stock Transactions During the Six Months Ended June 30, 2022
During
the six months ended June 30, 2022, the Company issued an aggregate of 147,500 shares of common stock for services expensed in prior
periods.
Noncontrolling
Interest
For
the three months ended June 30, 2022, net income attributed to the non-controlling interest amounted to $46,001 and for the three months
ended June 30, 2021, net loss attributed to the non-controlling interest amounted to $197,973. During both the three months ended June
30, 2022 and 2021, the Company paid distributions to non-controlling shareholders of $36,000. For the six months ended June 30, 2022,
net income attributed to the non-controlling interest amounted to $70,727 and for the six months ended June 30, 2021, net loss attributed
to the non-controlling interest amounted to $468,476. During both the six months ended June 30, 2022 and 2021, the Company paid distributions
to non-controlling shareholders of $72,000.
WorkSimpli
Software Restructuring Transaction
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 provides 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 Options shall 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.
The
first two tranches of performance options granted to Sean Fitzpatrick and Varun Pathak vested immediately after the consummation of the
restructuring transaction and therefore have been recorded as part of the acquisition through equity. The third tranche is not deemed
probable and therefore has not been recognized to date.
Stock
Options
2020
Equity Incentive Plan (the “2020 Plan”)
On
January 8, 2021, the Company approved the Company’s 2020 Plan. Approval of the 2020 Plan was included as Proposal 1 in the Company’s
definitive proxy statement for its Special Meeting of Shareholders filed with the Securities and Exchange Commission on December 7, 2020.
The 2020 Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) and initially provided
for the issuance of up to 1,500,000 shares of Common Stock. The number of shares of Common Stock available for issuance under the 2020
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
June 30, 2022, the Plan provided for the issuance of up to 4,800,000 shares of Common Stock. Remaining authorization under the 2020 Plan
was 1,787,885 shares as of June 30, 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 the 2020 Plan.
During
the six months ended June 30, 2022, the Company issued an aggregate of 288,500 stock options to employees under the 2020 Plan and the
prior plan. These stock options have a contractual term of 4 to 5 years and vest in increments, which fully vest the options over a two
to three-year period, dependent on the specific agreements’ terms.
The
following is a summary of outstanding options activity under our 2020 Plan for the six months ended June 30, 2022:
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, 2021 |
|
|
2,063,500 |
|
|
$ |
4.57 –
21.02 |
|
|
8.04 years |
|
$ |
9.41 |
|
Granted |
|
|
88,500 |
|
|
|
3.28 – 13.74 |
|
|
4.24 years |
|
|
9.37 |
|
Cancelled/Forfeited/Expired |
|
|
(156,135 |
) |
|
|
7.07
– 13.74 |
|
|
8.82
years |
|
|
9.14 |
|
Balance at June 30, 2022 |
|
|
1,995,865 |
|
|
$ |
3.28
– 21.02 |
|
|
7.34
years |
|
$ |
9.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2021 |
|
|
636,229 |
|
|
$ |
4.57 – 21.02 |
|
|
8.95 years |
|
$ |
9.18 |
|
Exercisable at June 30, 2022 |
|
|
977,326 |
|
|
$ |
3.28 – 21.02 |
|
|
8.22 years |
|
$ |
9.43 |
|
The
total fair value of the options granted was $711,312, 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% – 465.55%, and risk-free rate of 0.90%–1.62%. Total
compensation expense under the 2020 Plan options above was $1,840,116 and $1,239,421 for the three months ended June 30, 2022 and 2021,
respectively, with unamortized expense remaining of $9,225,969 as of June 30, 2022. Total compensation expense under the 2020 Plan options
above was $3,484,606 and $2,196,074 for the six months ended June 30, 2022 and 2021, respectively.
The
following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the six
months ended June 30, 2022:
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, 2021 |
|
|
1,658,733 |
|
|
$ |
1.00 –
19.61 |
|
|
5.85 years |
|
$ |
5.45 |
|
Granted |
|
|
50,000 |
|
|
|
4.12 |
|
|
4.51 years |
|
|
4.12 |
|
Exercised |
|
|
(130,400 |
) |
|
|
1.00
– 1.40 |
|
|
0.47
years |
|
|
1.12 |
|
Balance at June 30, 2022 |
|
|
1,578,333 |
|
|
$ |
1.00
– 19.61 |
|
|
5.73
years |
|
$ |
5.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2021 |
|
|
1,019,164 |
|
|
$ |
1.00 – 19.61 |
|
|
5.21 years |
|
$ |
3.60 |
|
Exercisable at June 30, 2022 |
|
|
1,096,726 |
|
|
$ |
1.00 – 19.61 |
|
|
5.51 years |
|
$ |
4.51 |
|
The
total fair value of the options granted 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 $547,381 and $529,508 for the three months ended June 30, 2022 and 2021, respectively, with unamortized
expense remaining of $3,801,698 as of June 30, 2022. Total compensation expense under the above service-based option plan was $1,097,781
and $936,493 for the six months ended June 30, 2022 and 2021, respectively. Of the total service-based options exercised during the six
months ended June 30, 2022, 40,000 options were exercised on a cashless basis, which resulted in 25,535 shares issued and 90,400 options
were exercised for cash.
The
following is a summary of outstanding performance-based options activity for the six months ended June 30, 2022:
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, 2021 |
|
|
535,000 |
|
|
$ |
1.25 –
2.50 |
|
|
5.59 years |
|
$ |
1.60 |
|
Granted |
|
|
150,000 |
|
|
|
4.12 |
|
|
3.51
years |
|
|
4.12 |
|
Balance at June 30, 2022 |
|
|
685,000 |
|
|
$ |
1.25
– 4.12 |
|
|
4.75
years |
|
$ |
2.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2021 |
|
|
100,000 |
|
|
$ |
1.75 – 2.50 |
|
|
1.96 years |
|
$ |
2.01 |
|
Exercisable at June 30, 2022 |
|
|
100,000 |
|
|
$ |
1.75 – 2.50 |
|
|
1.47 years |
|
$ |
2.01 |
|
The
total fair value of the options granted 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% and risk-free rate of 1.37%. Total compensation expense under the
above performance-based option plan was $105,797 and $173,397 for the three months ended June 30, 2022 and 2021, respectively, with unamortized
expense remaining of $211,594. Total compensation expense under the above performance-based option plan was $211,594 and $173,397 for
the six months ended June 30, 2022 and 2021, respectively.
Restricted
Stock Units (RSUs) (under the 2020 Plan)
The
following is a summary of outstanding RSU activity under our 2020 Plan for the six months ended June 30, 2022:
SCHEDULE
OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
| |
RSUs Outstanding Number of Shares | |
Balance at December 31, 2021 | |
| 375,375 | |
Granted | |
| 563,000 | |
Vested | |
| (87,625 | ) |
Balance at June 30, 2022 | |
| 850,750 | |
The
total fair value of the 563,000 RSUs granted was $1,751,235 which was determined using the fair value of the quoted market price on the
date of grant. Total compensation expense under the 2020 Plan RSUs above was $595,038 and $0 for the three months ended June 30, 2022
and 2021, respectively, with unamortized expense remaining of $4,243,941 as of June 30, 2022. Total compensation expense under the 2020
Plan RSUs above was $1,571,158 and $357,163 for the six months ended June 30, 2022 and 2021, respectively. During the six months ended
June 30, 2022, 87,625 RSUs vested, of which 47,500 RSUs were issued.
RSUs
(outside of 2020 Plan)
The
following is a summary of outstanding RSU activity outside of the 2020 Plan for the six months ended June 30, 2022:
SCHEDULE
OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
| |
RSUs Outstanding Number of Shares | |
Balance at December 31, 2021 | |
| 600,000 | |
Granted | |
| 60,000 | |
Vested | |
| (65,000 | ) |
Balance at June 30, 2022 | |
| 595,000 | |
The
total fair value of the 60,000 RSUs granted was $215,400 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 $347,700 and $0 for the three months ended June 30, 2022
and 2021, respectively, with unamortized expense remaining of $5,297,700 as of June 30, 2022. Total compensation expense for RSUs outside
of the 2020 Plan was $938,700 and $0 for the six months ended June 30, 2022 and 2021, respectively. During the six months ended June
30, 2022, 65,000 RSUs vested, of which 50,000 were issued.
Warrants
The
following is a summary of outstanding and exercisable warrants activity during the six months ended June 30, 2022:
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, 2021 |
|
|
3,888,438 |
|
|
$ |
1.40 –
12.00 |
|
|
4.94 years |
|
$ |
5.59 |
|
Exercised |
|
|
(22,000 |
) |
|
|
1.75 |
|
|
0.46 years |
|
|
1.75 |
|
Cancelled/Forfeited/Expired |
|
|
(6,800 |
) |
|
|
2.00 |
|
|
- |
|
|
2.00 |
|
Balance at June 30, 2022 |
|
|
3,859,638 |
|
|
$ |
1.40
– 12.00 |
|
|
4.23
years |
|
$ |
5.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2021 |
|
|
2,621,307 |
|
|
$ |
1.40 – 12.00 |
|
|
6.36 years |
|
$ |
5.98 |
|
Exercisable June 30, 2022 |
|
|
3,747,319 |
|
|
$ |
1.40 – 12.00 |
|
|
4.26 years |
|
$ |
5.66 |
|
Total
compensation expense on the above warrants for services was $604,974 for both the three months ended June 30, 2022 and 2021, with unamortized
expense remaining of $437,279 as of June 30, 2022. Total compensation expense on the above warrants for services was $1,209,948 for both
the six months ended June 30, 2022 and 2021.
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 $4,041,006 and $2,547,300 for the three months ended June 30, 2022 and 2021, respectively. 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 $8,513,787 and $4,873,075 for the six months ended June 30, 2022 and 2021, respectively. Such
amounts are included in general and administrative expenses in the unaudited condensed consolidated statement of operations. Unamortized
expense remaining related to service-based stock options, performance-based stock options, warrants and RSUs was $23,218,181 as of June
30, 2022.
NOTE
8 – LEASES
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases
in ASC 840, Lease Accounting. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees
to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases
as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.
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 2023.
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 June 30, 2022:
SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITIES
| |
| | |
Remainder of fiscal year 2022 | |
$ | 419,809 | |
Fiscal year 2023 | |
| 732,409 | |
Fiscal year 2024 | |
| 484,580 | |
Fiscal year 2025 | |
| 68,850 | |
Less: imputed interest | |
| (130,065 | ) |
Present value of operating lease liabilities | |
$ | 1,575,583 | |
Operating
lease expenses were $201,279 and $97,093 for the three months ended June 30, 2022 and 2021, respectively, and $403,691 and $190,503 for
the six months ended June 30, 2022 and 2021, respectively, and were included in other operating expenses in our consolidated statement
of operations.
Supplemental
cash flow information related to operating lease liabilities consisted of the following:
SCHEDULE OF CASH FLOW RELATED TO OPERATING LEASE LIABILITIES
| |
June 30, | |
| |
2022 | | |
2021 | |
Cash paid for operating lease liabilities | |
$ | 323,580 | | |
$ | 179,870 | |
| |
| | | |
| | |
Supplemental
balance sheet information related to operating lease liabilities consisted of the following:
SCHEDULE OF BALANCE SHEETS RELATED TO OPERATING LEASE LIABILITIES
| |
June 30, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term in years | |
| 3.28 | | |
| 3.75 | |
Weighted average discount rate | |
| 7.16 | % | |
| 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 $2,100 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
9 - 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 June 30, 2022 and December
31, 2021, no amount was included in accounts payable and 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 June 30, 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 June 30, 2022 and December 31, 2021, the
Company approximates its implicit purchase commitments to be $1.9 million and $511 thousand, respectively.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. As of June 30, 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 (without prejudice that it will be one mediation nor used to support consolidation should mediation fail), with a target
completion date of on or before August 26, 2022. The parties have discussed potential mediators. 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. The Company intends to continue to vigorously defend against this action. As of June 30, 2022, the Company
has accrued all amounts it deems appropriate for this matter.
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 have 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 (without prejudice that it will be one mediation nor used to support consolidation should mediation fail),
with a target completion date of on or before August 26, 2022. 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. The Company intends
to continue to vigorously defend against this action. As this action is in its preliminary phase, a potential loss cannot yet be estimated.
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
June 28, 2022, Blair served its first set of document requests. Per court order, the Company's responses are due August 31, 2022.
Further, the Company is required to provide initial written discovery requests on plaintiff by August 17, 2022. A case
management conference concerning the status of completion of written discovery and document production is scheduled for
October 6, 2022. The court intends to enter a case management schedule and trial date at that conference. 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
10 – RELATED PARTY TRANSACTIONS
Chief
Executive Officer
Conversion
Labs PR utilizes office space in Puerto Rico, which is subleased from Fried LLC, a third party, and incurs expense of approximately $3,000
a month for this office space. The Company previously 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 which was $0 and $22,500 for the three months ended
June 30, 2022 and 2021, respectively, and $0 and $45,000 for the six months ended June 30, 2022 and 2021, respectively.
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. The Company reimbursed BV Global a total of $319,444 and $418,526
during the three and six months ended June 30, 2021, respectively. As of December 31, 2021, the Company owed BV Global $61,824, which
is included in accounts payable on the accompanying unaudited condensed consolidated balance sheets.
WorkSimpli
Software
During
the six months ended June 30, 2022 and 2021, WorkSimpli utilized LegalSubmit Pvt. Ltd. (“LegalSubmit”), a company owned by
WorkSimpli’s Chief Software Engineer, to provide software development services. WorkSimpli paid LegalSubmit a total of $351,953
and $186,503 during the three months ended June 30, 2022 and 2021, respectively, and $651,323 and $359,340 during the six months ended
June 30, 2022 and 2021, respectively, for these services. There were no amounts owed to LegalSubmit as of both June 30, 2022 and December
31, 2021.
Amended
Officer Employment Agreements
On
April 1, 2022, Justin Schreiber, the Company’s CEO, entered into an Employment Agreement (the “Schreiber Employment Agreement”)
with the Company. The Schreiber Employment Agreement is for an indefinite term and may be terminated with or without cause. Pursuant
to the Schreiber Employment Agreement, Mr. Schreiber will receive an annual base salary of $300,000 and shall be eligible to earn a performance
bonus in such amount, if any, as determined in the sole discretion of the Board, with a target amount of 75% of the base salary.
On
January 27, 2022, the Company and Marc Benathen, our Chief Financial Officer (“CFO”), entered into the First Amendment to
his employment agreement to provide that Mr. Benathen receive 75,000 RSUs, with 25,000 of the RSUs vesting on the grant date and the
first and second anniversaries of the grant date. Additionally, the First Amendment to his employment agreement provided that Mr. Benathen
is eligible to receive up to 250,000 Performance Stock Units (“PSUs”), which will vest subject to the Company achieving certain
key revenue, EBITDA and share price appreciation milestones.
On
January 27, 2022, the Company and Eric H. Yecies, our General Counsel (“GC”) and Chief Compliance Officer
(“CCO”), entered into the First Amendment to his employment agreement to provide that our CCO receive 37,500
RSUs, with 12,500
of the RSUs vesting on the grant date and the first and second anniversaries of the grant date. Additionally, the First Amendment to
his employment agreement provided that our CCO is eligible to receive up to 105,000
PSUs, which will vest subject to the Company achieving certain key revenue, EBITDA and share price appreciation
milestones.
Officer
Appointment
On
February 4, 2022, Maria Stan was appointed as Controller and Principal Accounting Officer of the Company. In connection with her appointment
as Principal Accounting Officer, Ms. Stan entered into an amendment to her employment agreement with the Company, whereby the Company
granted her an additional long-term incentive award of 15,000 RSUs, with 5,000 units vesting on the grant date and the first and second
anniversaries of the grant date, and 50,000 PSUs. The PSUs vest upon the achievement of certain key revenue, EBITDA and share price appreciation
milestones.
NOTE
11 – SEGMENT DATA
Our
portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands
within our segments complement one another and position us well for future growth. Relevant segment data for the three and six months
ended June 30, 2022 and 2021 is as follows:
SCHEDULE OF RELEVANT SEGMENT DATA
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Telehealth | |
| | |
| | |
| | |
| |
Revenue | |
$ | 22,267,963 | | |
$ | 15,799,610 | | |
$ | 44,866,024 | | |
$ | 29,082,925 | |
Gross margin | |
| 80.0 | % | |
| 74.6 | % | |
| 78.7 | % | |
| 75.4 | % |
Operating loss | |
$ | (15,945,799 | ) | |
$ | (14,782,474 | ) | |
$ | (29,217,656 | ) | |
$ | (24,897,459 | ) |
WorkSimpli | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 8,190,535 | | |
$ | 6,514,001 | | |
$ | 14,635,311 | | |
$ | 11,428,798 | |
Gross margin | |
| 97.8 | % | |
| 98.5 | % | |
| 97.7 | % | |
| 98.4 | % |
Operating income (loss) | |
$ | 306,674 | | |
$ | (1,344,289 | ) | |
$ | 471,516 | | |
$ | (3,147,641 | ) |
Consolidated | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 30,458,498 | | |
$ | 22,313,611 | | |
$ | 59,501,335 | | |
$ | 40,511,723 | |
Gross margin | |
| 84.8 | % | |
| 81.5 | % | |
| 83.4 | % | |
| 81.9 | % |
Operating loss | |
$ | (15,639,125 | ) | |
$ | (16,126,763 | ) | |
$ | (28,746,140 | ) | |
$ | (28,045,100 | ) |
Relevant
segment data as of June 30, 2022 and December 31, 2021 is as follows:
| |
June 30, 2022 | | |
December 31, 2021 | |
Total Assets | |
| | | |
| | |
Telehealth | |
$ | 30,950,175 | | |
$ | 48,056,920 | |
WorkSimpli | |
| 7,019,306 | | |
| 1,866,323 | |
Consolidated | |
$ | 37,969,481 | | |
$ | 49,923,243 | |
NOTE
12 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date these consolidated financial statements were issued and has identified the following:
In
August 2022, the Company issued an aggregate of 63,750 shares of common stock for services rendered.