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, Food and Drug Administration
(“FDA”) approved OTC minoxidil, 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 GoGoMeds.com (“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 ended March 31, 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 thousand to be paid out in quarterly
payments equal to the greater of 15% of net profits (as defined in the ResumeBuild APA) or $62,500, for a two-year period ending on the
two-year anniversary of the closing of the Acquisition. WorkSimpli borrowed the purchase price from the Company pursuant to a promissory
note with the obligation secured by an equity purchase guarantee agreement and a stock option pledge agreement from Fitzpatrick Consulting,
LLC and its sole member Sean Fitzpatrick, who is Co-Founder and President of WorkSimpli. (See Note 3).
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 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
July 14, 2021, the Company entered into an agreement to engage Axle Health Inc. (“Axle Health”) to assist the Company in
establishing a platform to enable patients of the Company’s medical practice clients (“MP Clients”) to schedule certain
nursing services, including blood draws, injections, and other basic healthcare services, and to furnish operational support services
to medical practices using the platform. In connection therewith, Axle Health granted the Company a revocable, nontransferable, non-exclusive
right and license, with the right to grant sublicenses, to install and use the software and other technology relating to the platform
developed, owned, or with the right to grant sublicenses to install and use the software and/or other technology developed, owned, or
licensed by Axle Health, including the platform, to facilitate the scheduling and provision of certain nursing services to patients of
MP Clients.
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 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.
On
August 30, 2021, the Company signed a letter of intent with Prescryptive Health (“Prescryptive”), a healthcare technology
company empowering consumers by improving the way healthcare is delivered. The partnership is expected to accelerate growth for both
companies by combining LifeMD’s expanding direct-to-patient telehealth brands and LifeMD primary care platform with Prescryptive’s
best-in-class digital pharmacy fulfillment and e-prescribing technology platform.
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
three months ended March 31, 2022 and 2021. Under the 2021 Shelf, the Company had the ability to raise up to $150 million, of which $58.5
million was utilized as of March 31, 2022. The Company has approximately $59.5 million available under the ATM Sales Agreement and $32
million available under the 2021 Shelf as of March 31, 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 dividend is included in the Company’s results
of operations for the three months ended March 31, 2022.
Liquidity
Evaluation
As
of March 31, 2022, the Company has an accumulated deficit approximating $156 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. Additionally, the Company expects its burn rate of cash to continue through the third quarter of 2022; however,
the Company expects this burn rate to improve and become cash flow positive by the fourth 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. Management
is unable to predict if and when the Company will be able to generate significant positive cash flow or achieve profitability. 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 $20.1
million as of the filing date, which includes
the $13.5 million
of net proceeds from the February 2021 Offering and the $55.3
million of net proceeds from the October 4, 2021
Offerings. 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. Positive indicators that lead to its conclusion that the Company will have sufficient cash over the next 12 months
following the date of this report include: (1) its continued strengthening of the Company’s revenues and improvement of operational
efficiencies across the business, (2) the expected improvement in its cash burn rate over the next 12 months, (3) $59.5
million available under the ATM Sales Agreement
and $32 million
available under the 2021 Shelf, (4) management’s ability to curtail expenses, if necessary, and (5) the overall market value of
the telehealth industry and how it believes that 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 months ended March 31, 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, CLPR, its recent acquisition,
Cleared, its majority owned subsidiary, WorkSimpli, in addition to LifeMD PC, the Company’s 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 March 31, 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 medical professional corporation, 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 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 $1.5 million for the three months ended March 31, 2022.
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) $6,538 of reimbursable expenses reclassified from cost
of revenues to other operating expenses, (2) $157,662 of taxes and licensing fees reclassified from other operating expenses to general
and administrative expenses, (3) $45,659 of software development costs reclassified from cost of revenues to development costs and (4)
$73,170 of development services costs reclassified from other operating expenses to development costs for the three months ended March
31, 2021.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606, Revenue from Contracts with Customers, by analyzing exchanges with its
customers using a five-step analysis:
1. |
Identify
the contract |
2. |
Identify
performance obligations |
3. |
Determine
the transaction price |
4. |
Allocate
the transaction price |
5. |
Recognize
revenue |
For
the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which
is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records
sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party
fulfillment service provider; in 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 $1.5 million and $1.2 million, respectively, during the three months ended March 31,
2022 and 2021.
The
Company, through its majority-owned subsidiary WorkSimpli, offers a subscription-based service providing a suite of software applications
to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any
type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with
customers, the Company offers an initial 14-day trial period which is billed at $1.95, followed by a monthly subscription, or a yearly
subscription to the Company’s software suite dependent on the subscriber’s enrollment selection. The Company has estimated
that there is one product and one performance obligation that is delivered over time, as the Company allows the subscriber to access
the suite of services for the time period of the subscription purchased. The Company allows the customer to cancel at any point during
the billing cycle, in which case the customers subscription will not be renewed for the following month or year depending on the original
subscription. The Company records the revenue over the customers subscription period for monthly and yearly subscribers or at the end
of the initial 14-day service period for customers who purchased the initial subscription, as the circumstances dictate. The Company
offers a discount for the monthly or yearly subscriptions being purchased, which is deducted at the time of payment at the initiation
of the contract term, therefore the Contract price is fixed and determinable at the contract initiation. Monthly and annual subscriptions
for the service are recorded net of the Company’s known discount rates. As of March 31, 2022 and December 31, 2021, the Company
has accrued contract liabilities, as deferred revenue, of approximately $1.8 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 $448 thousand and $554 thousand, respectively,
during the three months ended March 31, 2022 and 2021.
For
the three months ended March 31, 2022 and 2021, the Company had the following disaggregated revenue:
SCHEDULE
OF DISAGGREGATED REVENUE
| |
Three Months Ended March 31, | |
| |
2022 | | |
% | | |
2021 | | |
% | |
Telehealth revenue | |
$ | 22,598,061 | | |
| 78 | % | |
$ | 13,283,315 | | |
| 73 | % |
WorkSimpli revenue | |
| 6,444,776 | | |
| 22 | % | |
| 4,914,797 | | |
| 27 | % |
Total net revenue | |
$ | 29,042,837 | | |
| 100 | % | |
$ | 18,198,112 | | |
| 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
| |
2022 | | |
2021 | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Beginning of period | |
$ | 1,499,880 | | |
$ | 916,880 | |
Additions | |
| 6,367,970 | | |
| 5,024,866 | |
Revenue recognized | |
| (6,079,295 | ) | |
| (4,602,437 | ) |
End of period | |
$ | 1,788,555 | | |
$ | 1,339,309 | |
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 March 31, 2022 and December
31, 2021, the reserve for sales returns and allowances was approximately $495 thousand and $477 thousand, respectively. For all periods
presented, as noted above, the sales returns and allowances were recorded in accounts payable and accrued expenses on the unaudited condensed
consolidated balance sheets.
Inventory
As
of March 31, 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 March
31, 2022 and December 31, 2021, the Company recorded an inventory reserve in the amount of $57,481.
As
of March 31, 2022 and December 31, 2021, the Company’s inventory consisted of the following:
SUMMARY
OF INVENTORY
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Finished Goods - Products | |
$ | 1,215,022 | | |
| 1,592,654 | |
Raw materials and packaging components | |
| 82,493 | | |
| 81,427 | |
Inventory reserve | |
| (57,481 | ) | |
| (57,481 | ) |
Total Inventory - net | |
$ | 1,240,034 | | |
$ | 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 March 31, 2022 and December 31, 2021, the Company has approximately $615 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 March 31, 2022 and December 31, 2021, the Company approximates its implicit purchase commitments to be
$1.3 million and $511 thousand, respectively. As of March 31, 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 March 31, 2022 and December
31, 2021, the Company capitalized $5.7 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
and intangible assets include those acquired in conjunction with the Cleared acquisition for which the purchase accounting is preliminary
(see Note 3). 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 are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and
are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities (asset group). If the sum of the projected undiscounted cash flows (excluding interest charges) of an
asset group is less than its carrying value and the fair value of an asset group is also less than its carrying value, the assets will
be written down by the amount by which the carrying value of the asset group exceeded its fair value. However, the carrying amount of
a finite-lived intangible asset can never be written down below its fair value. Any loss would be recognized in income from continuing
operations in the period in which the determination is made.
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 intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use
of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could
cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
During
the three months ended March 31, 2021, the Company had a total of $184,914 of its PPP loans forgiven by the U.S. Small Business Administration
(“SBA”) (see Note 6). As of both March 31, 2022 and 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. Conversion Labs 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 March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Series B Preferred Stock | |
| 1,299,389 | | |
| 1,162,466 | |
Restricted Stock Units (RSUs) | |
| 1,412,500 | | |
| 47,500 | |
Stock options | |
| 4,376,931 | | |
| 4,395,000 | |
Warrants | |
| 3,859,638 | | |
| 3,550,471 | |
Potentially dilutive securities | |
| 10,948,458 | | |
| 9,155,437 | |
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 and accrued expenses
and the face amount of notes payable approximate fair value for all periods presented.
Concentrations
of Risk
The
Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company, at times,
maintains balances in various operating accounts in excess of federally insured limits. We are dependent on certain third-party manufacturers
and pharmacies, although we believe that other contract manufacturers or third-party pharmacies could be quickly secured if any of our
current manufacturers or pharmacies cease to perform adequately. As of March 31, 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. We purchased 100% of our finished goods from
six (6) OTC manufacturers for both the three months ended March 31, 2022 and for the year ended December 31, 2021.
Recently
Adopted Accounting Pronouncements
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2021-08, Business Combinations (Topic 805); Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
This new guidance affects all entities that enter into a business combination within the scope of ASC 805-10. Under this new guidance,
the acquirer should determine what contract assets and/or liabilities it would have recorded under ASC 606, Revenue from Contracts
with Customers, as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the
same terms as the acquirer. Under current U.S. GAAP, contract assets and contract liabilities acquired in a business combination are
recorded by the acquirer at fair value. This update is effective for fiscal years beginning after December 15, 2022. Early adoption is
permitted. The Company is currently evaluating the effects that the adoption of this guidance will have on our consolidated financial
statements and related disclosures.
Other
Recent Accounting Pronouncements
All
other accounting standards updates that have been issued or proposed by the FASB that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE
3 – ACQUISITIONS
On
January 18, 2022, the Company completed the acquisition of Cleared 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 preliminary 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 and intangible assets | |
$ | 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, 2022, as well as the revenue and earnings generated during the period after the acquisition date, were not material for separate disclosure
and, accordingly, have not been presented.
In
February 2022, WorkSimpli closed on the ResumeBuild APA to purchase the related intangible assets associated with the ResumeBuild brand.
WorkSimpli paid to the Seller a purchase price of $4,500,000, including cash paid upfront and contingent
consideration of $500 thousand. In accordance with ASC 805, Business Combinations, the Company accounted for the ResumeBuild
APA as an acquisition of assets as substantially all the fair value of the gross assets acquired is concentrated in a group of similar
assets. The Company has elected to group the complementary intangible assets acquired as a single brand intangible asset. Additionally,
the Seller is entitled to quarterly payments equal to the greater of 15% of net profits (as defined in the ResumeBuild APA) or $62,500,
for a two-year period ending on the two-year anniversary of the closing of the Acquisition. The Company estimated the fair value of the
contingent consideration using the income approach and will remeasure the fair value quarterly with changes accounted for through earnings.
NOTE
4 – GOODWILL AND INTANGIBLE ASSETS
As
of March 31, 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: | | |
|
| |
March 31, | | |
December 31, | | |
Amortizable |
| |
2022 | | |
2021 | | |
Life |
Preliminary Goodwill – Cleared Acquisition | |
$ | 9,454,736 | | |
$ | - | | |
|
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 | |
| (1,323,704 | ) | |
| (1,209,310 | ) | |
|
Total net goodwill and amortizable intangible assets | |
$ | 13,860,603 | | |
$ | 19,761 | | |
|
The
aggregate amortization expense of the Company’s intangible assets for the three months ended March 31, 2022 and 2021 was approximately
$114,394 and $83,903, respectively. Total amortization expense for the remainder of 2022 is $680,683. Total amortization expense for
2023 through 2026 is approximately $900,000 per year and $112,500 for 2027.
NOTE
5 – ACCRUED EXPENSES
As
of March 31, 2022 and December 31, 2021, the Company has the following amounts related to accrued expenses:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued selling and marketing expenses | |
| 4,611,643 | | |
| 4,981,453 | |
Accrued compensation | |
| 830,692 | | |
| 1,657,843 | |
Accrued dividends payable | |
| 776,563 | | |
| 871,476 | |
Sales tax payable | |
| 2,001,217 | | |
| 2,000,000 | |
Purchase price payable | |
| 1,562,712 | | |
| - | |
Other accrued expenses | |
| 1,767,405 | | |
| 2,084,833 | |
Total accrued expenses | |
$ | 11,550,232 | | |
$ | 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. The Company currently believes that a majority of the
PPP Loan proceeds will qualify for debt forgiveness; however, there can be no assurance that the Company will qualify for forgiveness
from the SBA until it occurs. During the three months ended March 31, 2021, the Company had a total of $184,914 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 both March 31, 2022 and 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 $17,271 for the three months ended
March 31, 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 March 31, 2022.
Options
and Warrants
During
the three months ended March 31, 2022, the Company issued an aggregate of 25,535 shares of common stock related to the cashless exercise
of options.
During
the three months ended March 31, 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, 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 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 Three Months Ended March 31, 2022
During
the three months ended March 31, 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 March 31, 2022, net income attributed to the non-controlling interest amounted to $24,726 and for the three months
ended March 31, 2021, net loss attributed to the non-controlling interest amounted to $270,503. During both the three months ended March
31, 2022 and 2021, the Company paid distributions to non-controlling shareholders of $36,000.
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, 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 “CVLBPR
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 CVLBPR Note was extinguished.
Concurrently,
in furtherance of the WSS Restructuring, Conversion Labs PR entered into two Membership Interest Purchase Agreements (the “Founding
Members MIPAs”) with two founding members of WSS (the “Founding Members”) whereby Conversion Labs PR purchased from
the Founding Members an aggregate of 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. Remaining authorization under the 2020
Plan was 276,052 shares as of March 31, 2022.
The
forms of award agreements to be used in connection with awards made under the 2020 Plan to the Company’s executive officers and
non-employee directors are:
● |
Form
of Non-Qualified Option Agreement (Non-Employee Director Awards) |
● |
Form
of Non-Qualified Option Agreement (Employee Awards); and |
● |
Form
of Restricted Stock Award Agreement. |
Previously,
the Company had granted service-based stock options and performance-based stock options separate from the 2020 Plan.
During
the three months ended March 31, 2022, the Company issued an aggregate of 238,500 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 three-year period, dependent on the specific agreements’ terms.
The
following is a summary of outstanding options activity under our 2020 Plan for the three months ended March 31, 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 | |
| 38,500 | | |
| 3.28 – 4.30 | |
|
4.81 years | |
| 3.69 | |
Cancelled/Forfeited/Expired | |
| (78,802 | ) | |
| 7.07 | |
|
8.85 years | |
| 7.07 | |
Balance at March 31, 2022 | |
| 2,023,198 | | |
$ | 3.28 – 21.02 | |
|
7.72 years | |
$ | 9.39 | |
| |
| | | |
| | |
|
| |
| | |
Exercisable at December 31, 2021 | |
| 636,229 | | |
$ | 4.57 – 21.02 | |
|
8.95 years | |
$ | 9.18 | |
Exercisable at March 31, 2022 | |
| 787,411 | | |
$ | 3.28 – 21.02 | |
|
8.68 years | |
$ | 9.30 | |
The
total fair value of the options granted was approximately $142,247, which was determined by the Black-Scholes Pricing Model with the
following assumptions: dividend yield of 0%, expected term of 4 years, volatility of 387.81% – 465.55%, and risk-free rate of 1.26%–1.62%.
Total compensation expense under the 2020 Plan options above was approximately $1,644,490 and $1,181,505 for the three months ended March
31, 2022 and 2021, respectively, with unamortized expense remaining of approximately $11,916,040 as of March 31, 2022.
The
following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the three
months ended March 31, 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 | | |
4.76 years | |
| 4.12 | |
Exercised | |
| (40,000 | ) | |
|
1.40 | | |
1.19 years | |
| 1.40 | |
Balance at March 31, 2022 | |
| 1,668,733 | | |
$ |
1.00 – 19.61 | | |
5.68 years | |
$ | 5.51 | |
| |
| | | |
|
| | |
| |
| | |
Exercisable December 31, 2021 | |
| 1,019,164 | | |
$ |
1.00 – 19.61 | | |
5.21 years | |
$ | 3.60 | |
Exercisable at March 31, 2022 | |
| 1,091,997 | | |
$ |
1.00 – 19.61 | | |
5.21 years | |
$ | 3.97 | |
The
total fair value of the options granted was approximately $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 approximately $550,400 and $406,534 for the three months ended March 31, 2022 and
2021, respectively, with unamortized expense remaining of approximately $4,349,079 as of March 31, 2022. All of the service-based options
exercised during the three months ended March 31, 2022, were exercised on a cashless basis which resulted in 25,535 shares issued.
The
following is a summary of outstanding performance-based options activity for the three months ended March 31, 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 | | |
3.76 years | |
| 4.12 | |
Balance at March 31, 2022 | |
| 685,000 | | |
$ |
1.25 – 4.12 | | |
5 years | |
$ | 2.15 | |
| |
| | | |
|
| | |
| |
| | |
Exercisable December 31, 2021 | |
| 100,000 | | |
$ |
1.75 – 2.50 | | |
1.96 years | |
$ | 2.01 | |
Exercisable at March 31, 2022 | |
| 100,000 | | |
$ |
1.75 – 2.50 | | |
1.72 years | |
$ | 2.01 | |
The
total fair value of the options granted was approximately $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 approximately $105,797 for the three months ended March 31, 2022, with unamortized
expense remaining of approximately $317,391. No compensation expense was recognized on the performance-based option plan above for the
three months ended March 31, 2021 as the performance terms had not been met or were not probable.
Restricted
Stock Units (RSUs) (under the 2020 Plan)
A
summary of outstanding RSU activity under our 2020 Plan is as follows:
SCHEDULE OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
| |
RSU Outstanding Number of Shares | |
Balance at December 31, 2021 | |
| 375,375 | |
Granted | |
| 547,500 | |
Vested | |
| (60,375 | ) |
Balance at March 31, 2022 | |
| 862,500 | |
The
total fair value of the 547,500 RSUs granted was approximately $1,713,025 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 approximately $976,120 and $12,163 for the
three months ended March 31, 2022 and 2021, respectively, with unamortized expense remaining of approximately $4,800,769 as of March
31, 2022. During the three months ended March 31 2022, 60,375 RSUs vested, of which 47,500 RSUs were issued.
RSUs
(outside of 2020 Plan)
The
Company granted 620,000 RSUs outside of the 2020 Plan during the year ended December 31, 2021. The total fair value of these RSUs was
approximately $6,867,600. Total compensation expense for RSUs outside of the 2020 Plan was $591,000 and $120,600 for the three months
ended March 31, 2022 and 2021, respectively, with unamortized expense remaining of approximately $5,430,000 as of March 31, 2022. During
the three months ended March 31, 2022, 50,000 RSUs vested and were issued. As of March 31, 2022, 550,000 RSUs outside of the 2020 Plan
remain outstanding.
Warrants
The
following is a summary of outstanding and exercisable warrants activity during the three months ended March 31, 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 | | |
0.21 years | |
| 1.75 | |
Cancelled/Forfeited/Expired | |
| (6,800 | ) | |
|
2.00 | | |
- | |
| 2.00 | |
Balance at March 31, 2022 | |
| 3,859,638 | | |
$ |
1.40 – 12.00 | | |
4.48 years | |
$ | 5.61 | |
| |
| | | |
|
| | |
| |
| | |
Exercisable December 31, 2021 | |
| 2,621,307 | | |
$ |
1.40 – 12.00 | | |
6.36 years | |
$ | 5.98 | |
Exercisable March 31, 2022 | |
| 3,546,232 | | |
$ |
1.40 – 12.00 | | |
4.72 years | |
$ | 5.69 | |
Total
compensation expense on the above warrants for services was approximately $604,974 for both the three months ended March 31, 2022 and
2021 with unamortized expense remaining of approximately $1,042,253.
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 approximately $4,472,781 and $2,325,775 for the three months ended March 31, 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 approximately $27,855,532
as of March 31, 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 March 31, 2022:
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITIES
| |
| | |
Remainder of fiscal year 2022 | |
$ | 614,098 | |
Fiscal year 2023 | |
| 732,409 | |
Fiscal year 2024 | |
| 484,580 | |
Fiscal year 2025 | |
| 68,850 | |
Less: imputed interest | |
| (159,404 | ) |
Present value of operating lease liabilities | |
$ | 1,740,533 | |
Operating
lease expenses were $202,412 and $93,410 for the three months ended March 31, 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
| |
March 31, | |
| |
2022 | | |
2021 | |
Cash paid for operating lease liabilities | |
$ | 129,290 | | |
$ | 89,935 | |
Supplemental
balance sheet information related to operating lease liabilities consisted of the following:
SCHEDULE
OF BALANCE SHEETS RELATED TO OPERATING LEASE LIABILITIES
| |
March 31, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term in years | |
| 3.51 | | |
| 3.75 | |
Weighted average discount rate | |
| 7.15 | % | |
| 7.15 | % |
We
have elected to apply the short-term lease exception to the warehouse space we lease in Lancaster, Pennsylvania. This lease has a term
of 12 months and is not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. Straight-line
lease payments are $2,100 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 March 31, 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 March 31, 2022.
Upon
execution of the Alphabet Agreement, Alphabet was granted a 10-year stock option to purchase 20,000 shares of the Company’s common
stock at an exercise price of $2.50. Further, if Licensed Products have gross receipts of $7,500,000 in any calendar year, the Company
will grant Alphabet an option to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.50; (ii) if Licensed
Products have gross receipts of $10,000,000 in any calendar year, the Company will grant Alphabet an additional option to purchase 20,000
shares of the Company’s common stock at an exercise price of $2.50 and (iii) if Licensed Products have gross receipts of $20,000,000
in any calendar year, the Company will grant Alphabet an option to purchase 40,000 shares of the Company’s common stock at an exercise
price of $3.75. The likelihood of meeting these performance goals for the licensed products are remote and, therefore, the Company has
not recognized any compensation.
Purchase
Commitments
Many
of the Company’s vendors require product deposits when a purchase order is placed for goods or fulfillment services related to
inventory requirements. The Company’s history of product deposits with its inventory vendors, creates an implicit purchase commitment
equaling the total expected product acceptance cost in excess of the product deposit. As of March 31, 2022 and December 31, 2021, the
Company approximates its implicit purchase commitments to be $1.3 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 March 31, 2022, other than
as set forth below, the Company’s management does not believe that there are any potential legal matters that could have an adverse
effect on the Company’s consolidated financial position.
On
December 10, 2021, a purported breach of contract, breach of duty of good faith and fair dealing, unjust enrichment, quantum meruit,
and fraud lawsuit, captioned Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, was filed in the United States District
Court for the Southern District of New York against the Company. The Harborside Complaint alleges, among other things, that the Company
breached a Consulting Services Agreement dated as of June 5, 2019, and Harborside was entitled to 1
million shares (i.e., 200,000
shares post 5-for-1
reverse stock split) in the Company if the Conversion
Labs Rx business achieved a topline revenue of $10
million and an additional 1
million shares (i.e., 200,000
shares post 5-for-1
reverse stock split) for each additional $5
million in topline revenue up to a maximum of
5
million shares (i.e., 1,000,000
shares post 5-for-1
reverse stock split). The Complaint further alleges
that the Company fraudulently induced Harborside to give up its ownership interest in Conversion Labs Rx and that it was a breach of
the duty of good faith and fair dealing and fraudulent for the Company to have dissolved Conversion Labs Rx. Consequently, alleges Harborside,
the Company was unjustly enriched, and Harborside is entitled to recover from the Company for quantum meruit. The Harborside Complaint
implies between $5,020,000
and $33,020,000
in alleged damages related to failure to award
the aforementioned stock but only specifically states that “Harborside has incurred damages in excess of $75,000,
with the exact amount to be determined with specificity at trial” for each of the 5 counts. On February 11, 2022, the Company filed
a Motion to Dismiss the Harborside Complaint, which Harborside opposed. The Company replied on April 4, 2022 and is currently
awaiting a decision from the Court on whether the case will be fully or partially dismissed. 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
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. 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. The Company’s response to the Blair Complaint is due on May 20, 2022. 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, 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 March 31, 2022 and
2021, respectively.
Conversion
Labs PR utilizes BV Global Fulfillment (“BV Global”), previously owned by a related person 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 (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 $99,082 during the three months
ended March 31, 2021. As of December 31, 2021, the Company owed BV Global $61,824, which is included in accounts payable and accrued
liabilities on the accompanying unaudited condensed consolidated balance sheets.
WorkSimpli
Software
During
the three months ended March 31, 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 $299,370
and $172,837 during the three months ended March 31, 2022 and 2021, respectively, for these services. There were no amounts owed to LegalSubmit
as of both March 31, 2022 and December 31, 2021.
Amended
Officer Employment Agreements
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 our 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 months ended March
31, 2022 and 2021 is as follows:
SCHEDULE
OF RELEVANT SEGMENT DATA
| |
2022 | | |
2021 | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Telehealth | |
| | | |
| | |
Revenue | |
$ | 22,598,061 | | |
$ | 13,283,315 | |
Gross margin | |
| 77.5 | % | |
| 76.5 | % |
Operating loss | |
$ | (13,271,857 | ) | |
$ | (10,114,985 | ) |
WorkSimpli | |
| | | |
| | |
Revenue | |
$ | 6,444,776 | | |
$ | 4,914,797 | |
Gross margin | |
| 97.5 | % | |
| 98.2 | % |
Operating income (loss) | |
$ | 164,842 | | |
$ | (1,803,352 | ) |
Consolidated | |
| | | |
| | |
Revenue | |
$ | 29,042,837 | | |
$ | 18,198,112 | |
Gross margin | |
| 81.9 | % | |
| 82.4 | % |
Operating loss | |
$ | (13,107,015 | ) | |
$ | (11,918,337 | ) |
Relevant
segment data as of March 31, 2022 and December 31, 2021 is as follows:
| |
March 31, 2022 | | |
December 31, 2021 | |
Total Assets | |
| | | |
| | |
Telehealth | |
$ | 43,553,660 | | |
$ | 48,056,920 | |
WorkSimpli | |
| 6,736,816 | | |
| 1,866,323 | |
Consolidated | |
$ | 50,290,476 | | |
$ | 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:
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
April 25, 2022, the Board approved, subject to stockholder approval, an amendment to the 2020 Plan to increase the maximum number of
shares of common stock available for issuance under the 2020 Plan by 1,500,000 shares. The amendment is being presented as Proposal 2
at the Annual Meeting of Stockholders, to be held on June 16, 2022.