LifeMD, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note Regarding Forward-Looking Statements The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q. Certain statements made in this discussion are “forward-looking statements” within the meaning of 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not have a duty to update any of the forward-looking statements to conform these statements to actual results. Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report. The forward-looking statements made in this report are based only on events, or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. These risks include, by way of example and without limitation: ● changes in the market acceptance of our products; ● increased levels of competition; ● changes in political, economic or regulatory conditions generally and in the markets in which we operate; ● our ability to successfully commercialize our products on a large enough scale to generate profitable operations; ● our ability to maintain and develop relationships with customers and suppliers; ● our ability to quickly and effectively respond to new technological developments; ● our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on our proprietary rights; ● our ability to successfully integrate acquired businesses or new brands; ● the impact of competitive products and pricing; ● supply constraints or difficulties; ● general economic and business conditions; ● business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as COVID-19); ● our ability to continue as a going concern; ● our need to raise additional funds in the future; 26 ● our ability to successfully recruit and retain qualified personnel; ● our ability to successfully implement our business plan; ● our ability to successfully acquire, develop or commercialize new products and equipment; ● being able to scale our telehealth platform built to improve the experience and medical care provided to patients across the country; ● intellectual property claims brought by third parties; and ● the impact of any industry regulation. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”). We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), our wholly-owned subsidiary LifeMD PR, LLC (formerly Immudyne PR LLC, and Conversion Labs PR), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”) and our majority-owned subsidiary LegalSimpli Software, LLC, a Puerto Rico limited liability company. On July 15, 2021, LegalSimpli Software, LLC, changed its name to WorkSimpli Software, LLC (“WorkSimpli”). Unless otherwise specified, all dollar amounts are expressed in United States dollars. Corporate History We were formed in the State of Delaware on May 24, 1994, under our prior name, Immudyne, Inc. We changed our name to Conversion Labs, Inc. on June 22, 2018 and then subsequently, on February 22, 2021, we changed our name to LifeMD, Inc. Further, in connection with our name change, we changed our trading symbol to LFMD. In June 2018, the Company closed the strategic acquisition of 51% of WorkSimpli, a company that provides a software as a service (SaaS) for converting, editing, signing and sharing PDF documents called PDFSimpli. Effective January 22, 2021, we consummated a transaction to restructure the ownership of WorkSimpli through a series of agreements as further described below. Business Overview and Strategy We are a direct-to-patient telehealth technology company that provides a smarter, cost-effective and convenient way for a provider’s patients to access healthcare. We believe the traditional model of visiting a doctor’s office, 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 telehealth. Direct-to-patient telehealth companies, like LifeMD, Inc., connect consumers digitally to licensed healthcare professionals for care across various needs, such as virtual primary care, men’s sexual health, dermatology, and others. Our telemedicine platform provides patients access to licensed providers for diagnoses, virtual care, and prescription medications, often delivered on a recurring basis. In addition to our telemedicine technology offerings, we sell nutritional supplements and other over-the-counter products. Many of our products are available on a subscription basis, where patients 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 us. Our customer acquisition strategy combines strategic brand-building media placements, influencer partnerships, and direct response advertising methods across highly scalable marketing channels (i.e. national TV, streaming TV, streaming audio, YouTube, podcasts, Out of Home, print, magazines, online search, social media, and digital). Since inception, we have helped more than 420,000 customers and patients, providing them greater access to high-quality, convenient, and affordable care in all 50 states. Our telehealth revenue increased 135% for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Total revenue from recurring subscriptions is approximately 90%. In addition to our telehealth business, we own 85.6% of WorkSimpli, which operates PDFSimpli, a rapidly growing SaaS platform for converting, signing, editing and sharing PDF documents. This business has also seen 331% year over year revenue growth, with recurring revenue of 98%. 27 Many people can relate to the hassle and inconvenience of seeking medical care. We believe that telehealth platforms like ours will fundamentally shift how a provider’s patients perceive and access healthcare in the United States, by necessity and by preference. With the average wait time to see a physician in the United States now greater than 29 days and the United States projected significant shortfall of licensed physicians by 2030, we believe the U.S. healthcare infrastructure must change to accommodate patients. Timely and convenient access to healthcare and prescription medications is a critical factor in improving quality of care and patient outcomes. Our mission is to radically change healthcare with our portfolio of direct-to-patient telehealth technology brands that encompass on-demand medical treatment, online pharmacy and over-the-counter products. We want our brands to be top-of-mind for consumers considering telehealth. In the United States, healthcare spending is currently $4.0 trillion and is expected to grow to $6.2 trillion by 2028, according to the Centers for Medicare and Medicaid Services. Physician services and prescription medications account for approximately 30% of healthcare spending, or over $1 trillion annually, and we believe that we have the infrastructure, medical expertise, and technical know-how to shift a substantial portion of this market to an online, virtual format. Our telemedicine platforms are fast and convenient, and we believe the adoption of our services has increased rapidly because of these features, including lower out-of-pocket costs for a provider’s patients and the satisfaction of a simple healthcare process. We believe the opportunities are immense and that we are well positioned to capitalize on these large-scale economic shifts in healthcare. We believe that brand innovation, customer acquisition and service excellence form the heart of our business. As is exemplified with our first brand, Shapiro MD, we have built a full line of proprietary over-the-counter (“OTC”) products for male and female hair loss, FDA approved OTC minoxidil, an FDA-cleared medical device, and now a 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. Our men’s brand, RexMD, currently offers access to provider-based treatment through telehealth for men’s health conditions, currently providing prescription medications and OTC products for chronic conditions such as sexual health and hair loss. Rex MD has recently expanded its services to provide access to primary care and will soon offer treatments for additional chronic indications present in men’s health. We have built a platform that allows us to efficiently launch telehealth brands and offerings wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands. In addition to our telehealth business, we own 85.6% of WorkSimpli, which operates PDFSimpli, a rapidly growing SaaS platform for converting, signing, editing and sharing PDF documents. Our Brand Portfolio We have built a strategic portfolio of wholly-owned telemedicine platform brands that address large unmet needs in men’s health, hair loss and dermatology. LifeMD is also preparing to offer administrative support to various professional entities that will provide a direct concierge medicine offering to patients under the LifeMD brand. We continue to scale our offerings in a calculated manner, ensuring that each brand or indication we launch will enhance current and future patients’ experiences with our platform. Our process across each brand and condition we treat is to guide the provider’s patient through a medical intake process and product selection, after which a licensed U.S. physician within our contracted network conducts a virtual consultation and, if appropriate, prescribes necessary prescription medications and/or recommends over-the-counter products. Prescription medications and over-the-counter products are filled by pharmacy fulfillment partners and shipped directly to the patient. The number of patients and customers we serve across the nation continues to increase at a robust pace, with more than 420,000 individuals having purchased our products and services to date. Hair Loss: ShapiroMD Launched in 2017, ShapiroMD offers access to virtual medical treatment, prescription medications, patented doctor formulated over-the-counter products, and an FDA approved medical device for male and female hair loss through our telemedicine platform. ShapiroMD has emerged as a leading destination for hair loss treatment across the United States and has served more than 200,000 customers and patients since inception with a 4.9 star Trustpilot rating. In Q1 2021, ShapiroMD greatly enhanced its offerings for female hair loss treatment with the addition of topical compounded medications to its product portfolio. Men’s Health: RexMD Launched in 2019, RexMD is a men’s telehealth platform brand offering access to virtual medical treatment for a variety of men’s health needs. After treatment from a licensed physician, if appropriate, we dispense and ship prescription medications and over-the-counter products directly to a provider’s patients. Since RexMD’s initial launch in the erectile dysfunction treatment market, it has expanded into additional indications, including but not limited to, premature ejaculation and hair loss. Our vision for RexMD is to become a leading telehealth destination for men. 28 Dermatology: NavaMD Launched in the first quarter of 2021, Nava MD is a female-oriented tele-dermatology brand that offers access to virtual medical treatment from dermatologists and other providers, and, if appropriate, prescription oral and compounded topical medications to treat dermatological conditions such as anti-aging and acne. In addition to the brand’s telehealth offerings, NavaMD’s proprietary products leverage intellectual property and proprietary formulations licensed from Restorsea, a leading medical grade skincare technology platform. Restorsea’s clinically proven skincare technology platform is the result of more than $50 million invested in R&D and intellectual property development, and Restorsea has received 35 patents along with broad industry and academic acclaim, with its breakthrough clinical results having been published in the peer-reviewed Journal of Drugs in Dermatology and Journal of Clinical and Aesthetic Dermatology. Nava MD is one of the first direct-to-patient brands to offer this advanced skincare technology. Nava MD offers access to tele-dermatology services to a provider’s patients in all 50 states. Immune Health: iNR Wellness MD Launched in 2018, iNR Wellness MD is a supplement for immune and digestive support. The iNR Wellness product line is a daily nutritional supplement that contains yeast, oat, and mushroom beta glucans. Majority Owned Subsidiary: WorkSimpli WorkSimpli operates PDFSimpli, an online software-as-a-service (SAAS) platform that allows users to create, edit, convert, sign and share PDF documents. WorkSimpli was acquired through the purchase of 51% of the membership interests of WorkSimpli Software, LLC, a Puerto Rico limited liability company, which operates a marketing-driven software solutions business. In addition to WorkSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company. On January 22, 2021, the Company consummated a transaction and increased its ownership of WorkSimpli to 85.6%. As of September 30, 2021, WorkSimpli was ranked in the top 4,232 websites globally, in which it was also ranked in the top 563 for specific countries with more than 14 million registrants globally. Since its launch, WorkSimpli has converted or edited over 11 terabytes of documents for customers from the legal, financial, real-estate and academic sectors. WorkSimpli had over 139,200 active subscriptions as of September 30, 2021. Significant Developments During the Three Months Ended September 30, 2021 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 laboratory tests which can be completed in 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 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 offers healthcare companies secure access to vital medical data. With Particle Health’s platform, and patient consent, licensed medical providers on the upcoming LifeMD primary care platform gain access to comprehensive patient health records, therefore enabling personalized care through a deeper understanding of their patients’ medical histories. On August 30, 2021, the Company entered into a strategic partnership 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 upcoming primary care platform with Prescryptive’s best-in-class digital pharmacy fulfillment and e-prescribing technology platform. 29 Supply Chain The continuing impact on business activity brought about by COVID-19 continues to evolve, globally in macro terms, and in micro terms, as such affects the Company. Among other things, our supply chain is subject to the effects of COVID-19, as well as to natural disasters and other events beyond our control, such as raw material, component and labor shortages, global and regional shipping and logistics constraints, work stoppages, power outages and the physical effects of climate change, including changes in weather patterns. In addition, human rights concerns, including forced labor and human trafficking, in foreign countries and associated governmental responses have the potential to disrupt our supply chain and our operations could be adversely impacted. Although we do not believe that raw materials used in the products we sell are sourced from regions with forced labor concerns, any delays or other supply chain disruption resulting from these concerns, associated governmental responses, or a desire to source products, components or materials from other manufacturers or regions could result in shipping delays, cancellations, penalty payments, or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, cash flows, and financial condition. In connection with these potential impacts on our supply chain, we are, as a general matter, seeing a trend of increases in (i) pricing on air and ocean freight, as well as for component and product parts, and (ii) the overall time to receive shipments. If these trends continue, many of our estimates and assumptions for the period ended September 30, 2021 may be subject to a material change in future periods. COVID-19 Vaccine Mandate We are making preparations to comply with a rule issued by the Occupational Safety and Health Administration (“OSHA”) to ensure that our employees are fully vaccinated against COVID-19 by January 4th or that they test negative for COVID-19 at least once per week. Employees must receive time off to get vaccinated and sick leave to recover from any side effects. Any unvaccinated employees must wear face coverings while at work. We are in the process of assessing the financial and staffing impact of these requirements. Results of Operations Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020 Revenue Our financial results for the three months ended September 30, 2021 are summarized as follows in comparison to the three months ended September 30, 2020. September 30, 2021 September 30, 2020 $ % of Sales $ % of Sales Telehealth revenue, net $ 18,540,897 74.32 % $ 9,438,136 85.76 % WorkSimpli revenue, net 6,406,302 25.68 % 1,567,627 14.24 % Total revenues, net 24,947,199 100 % 11,005,763 100 % Cost of telehealth revenue 4,969,306 19.92 % 1,601,920 14.56 % Cost of WorkSimpli revenue 127,181 0.51 % 73,662 0.66 % Total cost of revenue 5,096,487 20.43 % 1,675,582 15.22 % Gross profit 19,850,712 79.57 % 9,330,181 84.78 % Selling and marketing expenses 20,293,935 81.35 % 10,528,833 95.67 % General and administrative expenses 10,695,663 42.87 % 18,441,756 167.56 % Other operating expenses 815,378 3.27 % 542,965 4.93 % Customer service expenses 505,880 2.03 % 230,788 2.10 % Development costs 131,160 0.52 % 118,346 1.08 % Total expenses 32,442,016 130.04 % 29,862,688 271.34 % Operating loss (12,591,304 ) (50.47 )% (20,532,507 ) (186.56 )% Other income (expense), net (1,824,777 ) (7.32 )% (291,096 ) (2.65 )% Net loss before provision for income taxes (14,416,081 ) (57.79 )% (20,823,603 ) (189.21 )% Provision for income taxes — — % — — % Net loss attributable to noncontrolling interests (62,706 ) 0.25 % (201,233 ) 1.83 % Net loss attributable to LifeMD, Inc. $ (14,353,375 ) (57.54 )% $ (20,622,370 ) (187.38 )% 30 Revenues for the three months ended September 30, 2021 were approximately $24.9 million, an increase of 127% compared to approximately $11.0 million for the three months ended September 30, 2020. The increase in revenues was attributable to both the increase in telehealth revenue of 97% and an increase in revenue for WorkSimpli of 309%. Telehealth revenue accounts for 74% of total revenue and has increased in the three months ended September 30, 2021 due to an increase in online sales demand, with the majority of the growth of our telehealth brands, RexMD and ShapiroMD. Revenue for WorkSimpli accounts for 26% of total revenue and has steadily increased due to a combination of higher demand, increased market awareness, enhanced digital capabilities and continued marketing campaign expansion. Total cost of revenues consists of the cost of (1) telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, MD consult fees and shipping costs directly attributable to our prescription and OTC products and (2) the cost of WorkSimpli revenue consisting primarily of information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 204% to approximately $5.1 million for the three months ended September 30, 2021 compared to approximately $1.7 million for the three months ended September 30, 2020. The combined cost of revenue increase was due to increased costs related to our increased sale volumes when compared to the prior period ended September 30, 2020. Gross profit increased by approximately 113% to approximately $19.9 million for the three months ended September 30, 2021 compared to approximately $9.3 million for the three months ended September 30, 2020, as a result of increased combined sales. Telehealth costs increased to 27% of associated telehealth revenues during the three months ended September 30, 2021, from 17% of associated telehealth revenues during the three months ended September 30, 2020. WorkSimpli costs decreased to 2% of associated WorkSimpli revenues during the three months ended September 30, 2021, from 5% of associated WorkSimpli revenues during the three months ended September 30, 2020. WorkSimpli revenues as a percentage of total revenues increased to 26% during the three months ended September 30, 2021, from 14% during the three months ended September 30, 2020. Gross profit as a percentage of revenues was 80% for the three months ended September 30, 2021 as compared to 85% for the three months ended September 30, 2020 primarily due to product sales mix and one-time costs associated with the non-cash write-off of legacy product deposits. Operating Expenses Three Months Ended September 30, 2021 2020 Selling and marketing expenses $ 20,293,935 $ 10,528,833 General and administrative expenses 10,695,663 18,441,756 Other operating expenses 815,378 542,965 Customer service expenses 505,880 230,788 Development costs 131,160 118,346 Total expenses $ 32,442,016 $ 29,862,688 Operating expenses for the three months ended September 30, 2021 were approximately $32.4 million, as compared to approximately $29.9 million for the three months ended September 30, 2020. This represents an increase of 9%, or $2.6 million. The increase is primarily attributable to: (i) Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the three months ended September 30, 2021, the Company had an increase of approximately $9.8 million, or 93% in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current period’s sales growth reported. This ramp up is expected to both increase and maintain sustained revenue growth in future years, based on the Company’s recurring revenue subscription-based sales model. Selling and marketing expenses as a percentage of revenue was 81.4% for the three months ended September 30, 2021, as compared to 95.7% for the three months ended September 30, 2020. This represents a decrease of 14.3%. 31 (ii) General and administrative expenses: During the three months ended September 30, 2021, stock-based compensation expense was $3.1 million, with the majority related to stock compensation expense attributable to service-based stock options, as compared to stock-based compensation expense of $16.4 million for the three months ended September 30, 2020. This category also consists of merchant processing fees, payroll expenses for executive management, amortization expense and legal and professional fees. During the three months ended September 30, 2021, the Company had a decrease of approximately $7.8 million in general and administrative expenses, primarily related to the decrease in stock-based compensation costs referenced above partially offset by an increase in legal and professional fees and other increases in infrastructure expenses incurred to support the sales volume increases. (iii) Other operating expenses: This consists of rent, insurance, royalty expense, bank charges and IT services. During the three months ended September 30, 2021, the Company had an increase of approximately $272 thousand, or 50%, primarily related to increases in the general cost environment necessary to support the Company’s sales growth. (iv) Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in South Carolina and Puerto Rico. During the three months ended September 30, 2021, the Company had an increase of approximately $275 thousand, primarily related to increases in headcount in the Company’s customer service department. (v) Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the three months ended September 30, 2021, the Company had an increase of approximately $13 thousand, primarily resulting from technology platform improvements and amortization expense. Other (Expenses) / Income Three Months Ended September 30, 2021 2020 Interest (expense), net $ (1,824,777 ) $ (291,096 ) Gain on debt forgiveness — — Total $ (1,824,777 ) $ (291,096 ) Other expense, which consists of interest expense increased by approximately $1.5 million due to interest expense and amortization of debt discount recorded related to the June 1, 2021 Purchase Agreement for the three months ended September 30, 2021. Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 Revenue Our financial results for the nine months ended September 30, 2021 are summarized as follows in comparison to the nine months ended September 30, 2020. September 30, 2021 September 30, 2020 $ % of Sales $ % of Sales Telehealth revenues, net $ 47,623,822 72.75 % $ 20,263,750 83.05 % WorkSimpli revenues, net 17,835,100 27.25 % 4,136,608 16.95 % Total revenues, net 65,458,922 100 % 24,400,358 100 % Cost of telehealth revenue 12,113,336 18.51 % 4,718,143 19.33 % Cost of WorkSimpli revenue 314,428 0.48 % 204,241 0.84 % Total cost of revenue 12,427,764 18.99 % 4,922,384 20.17 % Gross profit 53,031,158 81.01 % 19,477,974 79.83 % Selling and marketing expenses 61,372,815 93.76 % 21,669,046 88.81 % General and administrative expenses 28,194,305 43.07 % 21,868,097 89.62 % Other operating expenses 2,390,694 3.65 % 654,947 2.69 % Customer service expenses 1,274,392 1.95 % 488,455 2.00 % Development costs 435,356 0.66 % 288,813 1.18 % Total expenses 93,667,562 143.09 % 44,969,358 184.30 % Operating loss (40,636,404 ) (62.08 )% (25,491,384 ) (104.47 )% Other income (expense), net (2,681,236 ) (4.10 )% (1,313,010 ) (5.38 )% Net loss before provision for income taxes (43,317,640 ) (66.18 )% (26,804,394 ) (109.85 )% Provision for income taxes — — % — — % Net loss attributable to noncontrolling interests (531,182 ) 0.82 % (408,180 ) 1.67 % Net loss attributable to LifeMD, Inc. $ (42,786,458 ) (65.36 )% $ (26,396,214 ) (108.18 )% 32 Revenues for the nine months ended September 30, 2021 were approximately $65.5 million, an increase of 168% compared to approximately $24.4 million for the nine months ended September 30, 2020. The increase in revenues was attributable to both the increase in telehealth revenue of 135% and an increase in WorkSimpli revenue of 331%. Telehealth revenue accounts for 73% of total revenue and has increased in the nine months ended September 30, 2021 due to an increase in online sales demand, with the majority of the growth from our telehealth brands, RexMD and ShapiroMD. WorkSimpli revenue accounts for 27% of total revenue and has steadily increased quarter over quarter due to a combination of higher demand, increased market awareness, enhanced digital capabilities and continued marketing campaign expansion. While a portion of our growth could be attributable to the COVID-19 pandemic, management strongly believes our growth is primarily a result of the strength of our healthcare brands. Total cost of revenues consists of the cost of (1) telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, MD consult fees and shipping costs directly attributable to our prescription and OTC products and (2) the cost of WorkSimpli revenue consisting primarily of information technology fees related to providing the services made available on our online platform. Total cost of revenue increased by approximately 152% to approximately $12.4 million for the nine months ended September 30, 2021 compared to approximately $4.9 million for the nine months ended September 30, 2020. The combined cost of revenue increase was due to increased costs related to our increased sale volumes when compared to the prior period ended September 30, 2020. Gross profit increased by approximately 172% to approximately $53.0 million for the nine months ended September 30, 2021 compared to approximately $19.5 million for the nine months ended September 30, 2020, as a result of increased combined sales. Telehealth costs increased to 25% of associated telehealth revenues during the nine months ended September 30, 2021, from 23% of associated telehealth revenues during the nine months ended September 30, 2020. WorkSimpli costs decreased to 2% of associated WorkSimpli revenues during the nine months ended September 30, 2021, from 5% of associated WorkSimpli revenues during the nine months ended September 30, 2020. WorkSimpli revenues as a percentage of total revenues increased to 27% during the nine months ended September 30, 2021, from 17% during the nine months ended September 30, 2020. Gross profit as a percentage of revenues was 81% for the nine months ended September 30, 2021 compared to 80% for the nine months ended September 30, 2020. The increase of 1% in gross profit was principally attributable to higher WorkSimpli revenues as a percentage of total revenues, partially offset by lower telehealth revenues as a percentage of total revenues. Operating Expenses Nine Months Ended September 30, 2021 2020 Selling and marketing expenses $ 61,372,815 $ 21,669,046 General and administrative expenses 28,194,305 21,868,097 Other operating expenses 2,390,694 654,947 Customer service expenses 1,274,392 488,455 Development costs 435,356 288,813 Total expenses $ 93,667,562 $ 44,969,358 Operating expenses for the nine months ended September 30, 2021 were approximately $93.7 million, as compared to approximately $45.0 million for the nine months ended September 30, 2020. This represents an increase of 108%, or $48.7 million. The increase is primarily attributable to: (i) Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the nine months ended September 30, 2021, the Company had an increase of approximately $39.7 million, or 183% in selling and marketing costs resulting from additional sales and marketing initiatives to drive the current period’s sales growth reported. This ramp up is expected to both increase and maintain sustained revenue growth in future years, based on the Company’s recurring revenue subscription-based sales model. (ii) General and administrative expenses: During the nine months ended September 30, 2021, stock-based compensation was approximately $8.0 million, with the majority related to stock compensation expense attributable to service-based stock options, as compared to stock-based compensation expense of $16.9 million for the nine months ended September 30, 2020. This category also consists of merchant processing fees, payroll expenses for corporate employees, amortization expense and legal and professional fees. During the nine months ended September 30, 2021, the Company has had an increase of approximately $6.3 million in general and administrative expenses, primarily related to increases in legal and professional fees and other increases in infrastructure expenses incurred to support the sales volume increases partially offset by a decrease in stock-based compensation costs referenced above. 33 (iii) Other operating expenses: This consists of rent, insurance, royalty expense, bank charges and IT services for our online products. During the nine months ended September 30, 2021, the Company had an increase of approximately $1.7 million or 265%, primarily related to increases in the general costs necessary to support the Company’s sales growth. (iv) Customer service expenses: This consists of payroll and benefit expenses related to the Company’s customer service department located in South Carolina and Puerto Rico. During the nine months ended September 30, 2021, the Company had an increase of approximately $786 thousand, primarily related to increases in headcount in the Company’s customer service department. (v) Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms. During the nine months ended September 30, 2021, the Company had an increase of approximately $147 thousand, primarily resulting from technology platform improvements and amortization expense. Other (Expenses) / Income Nine Months Ended September 30, 2021 2020 Interest (expense), net $ (2,866,150 ) $ (1,313,010 ) Gain on debt forgiveness 184,914 - Total $ (2,681,236 ) $ (1,313,010 ) Other expense, which consists of interest expense, amortization of debt discount recorded related to the June 1, 2021 Purchase Agreement and gain on debt forgiveness of PPP loans increased by approximately $1.4 million and is included in other expense for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, the balance consisted of interest expense. Working Capital September 30, 2021 December 31, 2020 Current assets $ 14,132,557 $ 12,063,395 Current liabilities 19,877,258 13,490,096 Working capital $ (5,744,701 ) $ (1,426,701 ) Working capital decreased by approximately $4.3 million during the period ended September 30, 2021. The increase in current assets is primarily attributable to an increase in accounts receivable of approximately $0.9 million, other current assets of $0.5 million, inventory and product deposits (combined increase of approximately $0.4 million) and an increase in cash of approximately $0.3 million. Current liabilities increased by $6.4 million, which was primarily attributable an increase in accounts payable and accrued liabilities of $6.6 million as a result of the Company extending payables and credit terms with vendors and an increase in deferred revenue of $0.5 million during the period ended September 30, 2021. These increases were partially offset by a decrease in notes payable, net of $0.7 million due to repayments exceeding proceeds received during the nine months ended September 30, 2021. Liquidity and Capital Resources Nine Months Ended September 30, 2021 2020 Net loss $ (43,317,640 ) $ (26,804,394 ) Net cash used in operating activities $ (27,259,550 ) $ (5,595,382 ) Net cash used in investing activities $ (1,823,843 ) $ (730,586 ) Net cash provided by financing activities $ 29,351,291 $ 6,135,981 Net increase (decrease) in cash $ 267,898 $ (189,987 ) Since inception, the Company has funded operations through the collections from revenues provided by the sales of its products, issuances of common and preferred stock, receipt of loans and advances from officers and directors and the issuance of convertible notes to third-party investors. 34 Net cash used in operating activities was approximately $27.3 million for the nine months ended September 30, 2021, as compared with approximately $5.6 million for the nine months ended September 30, 2020. The significant factors contributing to the cash used in operations during the nine months ended September 30, 2021, include the net loss of approximately $43.3 million (inclusive of approximately $8.0 million in non-cash, stock-based compensation charges) further described above, partially offset by the Company’s increase in accounts payable and accrued expenses of approximately $6.9 million and amortization of debt discount of $2.1 million. Net cash used in investing activities for the nine months ended September 30, 2021 was approximately $1.8 million, as compared with net cash used in investing activities of $731 thousand for the nine months ended September 30, 2020. Net cash used in investing activities was due to cash paid for capitalized software costs of approximately $1.7 million, the purchase of equipment of $70 thousand and the purchase of an intangible asset of $22 thousand. Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $29.4 million as compared with approximately $6.1 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, financing activities consisted of: (1) net proceeds of $14.9 million from the private placement whereby investors purchased (a) a senior secured redeemable debenture in the aggregate principal amount of $15.0 million and (b) warrants to purchase up to an additional 1,500,000 shares of the Company’s common stock at an exercise price of $12.00 per share, pursuant to the June 1, 2021 Purchase Agreement, (2) net proceeds of $13.5 million from the private placement of 608,696 common shares, at a purchase price of $23.00 per share for aggregate gross proceeds of $14.0 million pursuant to the February 2021 Purchase Agreement, (3) net proceeds from the exercise of options and warrants during the period of approximately $1.3 million, (4) net proceeds from the sale of common stock under the ATM Sales Agreement of approximately $0.5 million, in connection with our filed shelf registration and launch of an at-the-market program on June 8, 2021, and (5) our entry into a merchant funding agreement pursuant to which we may obtain cash advances. Subsequent to the quarter ended September 30, 2021, we closed on the October 4, 2021 Common Stock and Preferred Stock Offerings whereby the Company received total net proceeds of $55.3 million. These increases in net cash from financing activities were partially offset by the repayment of notes payable and the purchase of the additional membership interest of WorkSimpli. See Notes 1, 5 and 6 to our unaudited condensed consolidated financial statements included in this report for further discussion of certain of these financing activities. Liquidity and Capital Resources Outlook The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes which the Company has been successful in achieving to date. The Company intends to use the net proceeds of the financing activities described above for customer acquisition, as well as for working capital, general corporate purposes and to repay existing indebtedness. See Note 1 to our unaudited condensed consolidated financial statements included in this report for further liquidity evaluation. Critical Accounting Policies and Estimates Our significant accounting policies are more fully described in the notes to our unaudited condensed consolidated financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations. Revenue Recognition The Company records revenue under the adoption of ASC 606 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 35 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. 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 customer’s 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 September 30, 2021 and December 31, 2020, the Company has accrued contract liabilities, as deferred revenue, of approximately $1,436,000 and $917,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers. Customer discounts and allowances on WorkSimpli revenues approximated $377,000 and $275,000 for the three months ended September 30, 2021 and 2020, respectively, and approximated $1,599,000 and $545,000 for the nine months ended September 30, 2021 and 2020, respectively. 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 Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software , are expensed as incurred. As of September 30, 2021 and December 31, 2020, the Company capitalized $2,169,644 and $438,136, respectively, related to internally developed software costs which is amortized over the useful life and included in development costs on our statement of operations. Intangible Assets Intangible assets are comprised of: (1) a customer relationship asset (with original cost of approximately $1,007,000) with an estimated useful life of three years, (2) a purchased license (with original cost of $200,000) with an estimated useful life of ten years and (3) a purchased domain name (with an original cost of $22,231) with an estimated useful life 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. Income Taxes The Company files corporate federal and state 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. 36 The Company records current and deferred taxes in accordance with Accounting Standards Codification (“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 consolidated 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, 2017 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 stock shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free 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. Application of New or Revised Accounting Standards—Not Yet Adopted In August 2020, the FASB issued ASU 2020-06, “ Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”)”, which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year, or January 1, 2021, should the Company elect to early adopt. The Company is currently evaluating the impact the adoption of ASU 2020-06 could have on the Company’s financial statements and disclosures. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item. 37