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. 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 intend 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 (“U.S. 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); ● current and potential material weaknesses in our internal control over financial reporting; ● our ability to continue as a going concern; ● our need to raise additional funds in the future; ● 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. 26 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”), our recent acquisition, Cleared Technologies PBC, a Delaware public benefit corporation (“Cleared”) and our majority-owned subsidiary WorkSimpli Software, LLC (formerly known as LegalSimpli Software, LLC), a Puerto Rico limited liability company (“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. 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 and concurrently increased its ownership stake in WorkSimpli to 85.6%. On January 18, 2022, the Company acquired Cleared, a rapidly growing nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology. Business Overview and Strategy We are a direct-to-patient telehealth technology company that provides a smarter, cost-effective, and convenient way for Americans 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, and slow, and discourages many individuals from seeking much needed medical care. The U.S. healthcare system is undergoing a paradigm shift, thanks to new technologies and the emergence of telehealth. Direct-to-patient telehealth companies, like LifeMD, Inc., are leading the shift by connecting consumers digitally to licensed healthcare professionals for care across various needs, such as virtual primary care, men’s sexual health, dermatology, and others. Our telehealth platform provides patients with access to licensed providers for diagnoses, virtual care, and prescription medications, often delivered on a recurring basis. In addition to our telehealth offerings, we sell complementary nutritional supplements and over-the-counter (“OTC”) 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 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 550,000 customers and patients, providing them greater access to high-quality, convenient, and affordable care in all 50 states. Our telehealth revenue increased 70% for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Total revenue from recurring subscriptions is approximately 91%. 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 seen 31% year over year revenue growth, with recurring revenue of 98%. We believe that telehealth platforms like ours will fundamentally shift how individuals 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, according to a 2018 Merritt Hawkins Survey, 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 brands that encompass on-demand medical treatment, online pharmacy, and OTC products. We want our brands to be top-of-mind for consumers considering telehealth. 27 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 necessary to help shift a substantial portion of this market to an online, virtual format. We believe that we are well positioned to capitalize on this large-scale shift in healthcare. We believe that an amazing customer experience, incredible healthcare, and new customer acquisition form the heart of our business. As is exemplified with our first brand, ShapiroMD, we have built a full line of proprietary and patented OTC products for male and female hair loss, U.S. Food and Drug Administration (“FDA”) approved OTC minoxidil, and now a telehealth platform offering that gives consumers access to virtual medical treatment 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, such as sexual health and hair loss. RexMD continues to expand its treatment offerings to address 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 identify 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. Our Brand Portfolio We have built a strategic portfolio of wholly-owned telehealth platform brands supported by an affiliated, 50-state physician network and an integrated national network of third party pharmacies that address large unmet needs in men’s health, hair loss, virtual primary care, and dermatology. We continue to experience aggressive growth across our brands. Our process across each brand is to guide consumers through a medical intake process and product selection, after which a licensed U.S. physician conducts a virtual consultation and, if appropriate, prescribes prescription medications and/or recommends OTC products. Prescription medications and OTC 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 550,000 individuals having purchased our products and services to date. Hair Loss: ShapiroMD Launched in 2017, ShapiroMD is a telehealth platform brand that offers access to virtual medical treatment, prescription medications, patented-doctor formulated OTC products, an FDA approved medical device for male and female hair loss, and female specific topical compounded medications for hair loss through our telehealth platform. ShapiroMD has emerged as a leading destination for hair loss treatment across the United States and has served more than 250,000 customers and patients since inception with a 4.9-star Trustpilot rating. Men’s Health: RexMD Launched in 2019, RexMD is a men’s telehealth platform brand that offers access to virtual medical treatment for a variety of men’s health needs. After treatment from a licensed physician, if appropriate, one of our partner pharmacies will dispense and ship prescription medications and OTC products directly to the customer. Since RexMD’s initial launch in the erectile dysfunction treatment market, it has expanded into additional indications, including but not limited to, premature ejaculation, testosterone, and hair loss. Our vision for RexMD is to become a leading telehealth destination for men. RexMD has emerged as a leading men’s telehealth platform across the United States and has served more than 300,000 customers and patients since inception with a 4.5-star Trustpilot rating. Variable Interest Entity: LifeMD Primary Care Beta launched in the fourth quarter of 2021, LifeMD PC is a personalized, subscription-based virtual primary care platform. The LifeMD PC clinic provides patients in all 50 states with 24/7 access to a high-quality provider for their primary care, urgent care and chronic care needs. LifeMD PC offers a mobile first platform that incorporates virtual consultations and treatment, prescription medications, diagnostics, and imaging. LifeMD PC capabilities are supported by robust partnerships as further discussed below. No revenue was recorded related to the LifeMD PC during the three months ended March 31, 2022. Dermatology: NavaMD Launched in the first quarter of 2021, NavaMD 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 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 at least 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. NavaMD is one of the first direct-to-patient brands to offer this advanced skincare technology. 28 Allergy, Asthma & Immunology: Cleared In January 2022, the Company acquired Cleared, a telehealth brand that provides personalized treatments for allergy, asthma, and immunology. Its offerings include in-home tests for both environmental and food allergies, prescriptions for allergies and asthma, and FDA-approved immunotherapies for treating chronic allergies. Cleared leverages a network of medical professionals and providers in all 50 states, a growing pipeline of pharmaceutical partners, and treatments and tests that cost up to 50 percent less than the brand-name competition. The offerings include free consultations and ongoing care from U.S.-licensed allergists and nurses. Majority Owned Subsidiary: WorkSimpli WorkSimpli operates PDFSimpli, an online 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 increased its ownership of WorkSimpli to 85.6%. Significant Developments During the Three Months Ended March 31, 2022 Cleared Acquisition On January 18, 2022, the Company acquired Cleared, a rapidly growing nationwide allergy telehealth platform that provides personalized treatments for allergy, asthma, and immunology. 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. ResumeBuild Asset Purchase Agreement 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. Supply Chain The ongoing 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 modest increases in (i) pricing on air and ocean freight, as well as for component and product parts, (ii) the overall time to receive shipments, and (iii) the overall time for shipment and delivery to our customers from third-party shippers. 29 Results of Operations Revenue Our financial results for the three months ended March 31, 2022 are summarized as follows in comparison to the three months ended March 31, 2021: March 31, 2022 March 31, 2021 % of % of $ Sales $ Sales Telehealth revenue, net $ 22,598,061 77.81 % $ 13,283,315 72.99 % WorkSimpli revenue, net 6,444,776 22.19 % 4,914,797 27.01 % Total revenue, net 29,042,837 100 % 18,198,112 100 % Cost of telehealth revenue 5,086,068 17.51 % 3,123,025 17.16 % Cost of WorkSimpli revenue 162,107 0.56 % 88,032 0.49 % Total cost of revenue 5,248,175 18.07 % 3,211,057 17.65 % Gross profit 23,794,662 81.93 % 14,987,055 82.35 % Selling and marketing expenses 21,909,825 75.45 % 18,640,731 102.43 % General and administrative expenses 12,302,478 42.36 % 7,021,541 38.58 % Other operating expenses 1,327,734 4.57 % 636,787 3.50 % Customer service expenses 933,307 3.21 % 295,277 1.62 % Development costs 428,333 1.47 % 311,056 1.71 % Total expenses 36,901,677 127.06 % 26,905,392 147.84 % Operating loss (13,107,015 ) (45.13 )% (11,918,337 ) (65.49 )% Other (expenses) income, net (167,934 ) (0.58 )% 45,451 0.25 % Net loss (13,274,949 ) (45.71 )% (11,872,886 ) (65.24 )% Net income (loss) attributable to non-controlling interest 24,726 0.09 % (270,503 ) (1.48 )% Net loss attributable to LifeMD, Inc. (13,299,675 ) (45.80 )% (11,602,383 ) (63.76 )% Preferred stock dividends (776,563 ) (2.67 )% - - % Net loss attributable to common shareholders $ (14,076,238 ) (48.47 )% $ (11,602,383 ) (63.76 )% Revenues for the three months ended March 31, 2022 were approximately $29.0 million, an increase of 60% compared to approximately $18.2 million for the three months ended March 31, 2021. The increase in revenues was attributable to both the increase in telehealth revenue of 70% and an increase in WorkSimpli revenue of 31%. Telehealth revenue accounts for 78% of total revenue and has increased during the three months ended March 31, 2022 due to an increase in online sales demand, with the majority of the growth of our telehealth brands, RexMD and ShapiroMD. WorkSimpli revenue accounts for 22% of total revenue and has steadily increased year over year 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 revenue consists of the cost of (1) telehealth revenues, which primarily include product costs, pharmacy fulfillment costs, physician 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 63% to approximately $5.2 million for the three months ended March 31, 2022 compared to approximately $3.2 million for the three months ended March 31, 2021. The combined cost of revenue increase was due to increased sales volume during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021. Telehealth costs decreased to 23% of associated telehealth revenues experienced during the three months ended March 31, 2022, from 24% of associated telehealth revenues during the three months ended March 31, 2021. WorkSimpli costs increased to 3% of associated WorkSimpli revenues for the three months ended March 31, 2022 as compared to 2% of associated WorkSimpli revenues for the three months ended March 31, 2021. Gross profit increased by approximately 59% to approximately $23.8 million for the three months ended March 31, 2022 compared to approximately $15 million for the three months ended March 31, 2021, as a result of increased combined sales. Gross profit as a percentage of revenues was 82% for both the three months ended March 31, 2022 and March 31, 2021. Gross profit as a percentage of revenues for telehealth was 78% for the three months ended March 31, 2022 compared to 77% for the three months ended March 31, 2021, and for WorkSimpli was 98% for both the three months ended March 31, 2022 and March 31, 2021. More stringent inventory management procedures implemented in 2021 have contributed to the stabilization in gross profit. Operating Expenses Operating expenses for the three months ended March 31, 2022 were approximately $36.9 million, as compared to approximately $26.9 million for the three months ended March 31, 2021. This represents an increase of 37%, or $10 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 March 31, 2022, the Company had an increase of approximately $3.3 million, or 18% 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. 30 (ii) General and administrative expenses: During the period ended March 31, 2022, stock-based compensation was $4.5 million, with the majority related to stock compensation expense attributable to the service-based options. This category also consists of merchant processing fees, payroll expenses for corporate employees, amortization expense and legal and professional fees. During the three months ended March 31, 2022, the Company has had an increase of approximately $5.3 million in general and administrative expenses, primarily related to the increase in stock-based compensation costs referenced above, 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 information technology services for our online products. During the three months ended March 31, 2022, the Company had an increase of approximately $691 thousand, or 109%, 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 March 31, 2022, the Company had an increase of approximately $638 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 March 31, 2022, the Company had an increase of approximately $117 thousand, primarily resulting from technology platform improvements and amortization expense. Other Income (Expense) Three Months Ended March 31, 2022 2021 Interest expense, net $ (167,934 ) $ (139,463 ) Gain on debt forgiveness - 184,914 Total $ (167,934 ) $ 45,451 Other income (expense) consists of interest expense for the three months ended March 31, 2022 primarily related to interest accrued on the Series B Convertible Preferred Stock and interest expense and gain on debt forgiveness of Paycheck Protection Program loans for the three months ended March 31, 2021. Interest expense increased by approximately $28 thousand during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Working Capital March 31, 2022 December 31, 2021 Current assets $ 29,579,462 $ 44,921,440 Current liabilities 25,612,668 22,825,589 Working capital $ 3,966,794 $ 22,095,851 Working capital decreased by approximately $18.1 million during the three months ended March 31, 2022. The decrease in current assets is primarily attributable to a decrease in cash of approximately $16.2 million, a decrease in inventory of $0.4 million partially offset by an increase in accounts receivable of approximately $0.8 million. Current liabilities increased by $2.8 million, which was primarily attributable to an increase in accounts payable and accrued expenses of $2.6 million as a result of the Company extending payables and credit terms with vendors and accrual of the first noncontingent milestone payment related to the Cleared acquisition of $1.5 million due on the first anniversary of the acquisition. Liquidity and Capital Resources Three Months Ended March 31, 2022 2021 Net loss $ (13,274,949 ) $ (11,872,886 ) Net cash used in operating activities $ (8,091,143 ) $ (9,106,829 ) Net cash used in investing activities $ (7,378,189 ) $ (48,860 ) Net cash (used in) provided by financing activities $ (774,063 ) $ 13,383,270 Net (decrease) increase in cash $ (16,243,395 ) $ 4,227,581 31 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. Net cash used in operating activities was approximately $8.1 million for the three months ended March 31, 2022, as compared with approximately $9.1 million three months ended March 31, 2021. The significant factors contributing to the cash used in operations during the three months ended March 31, 2022, include the net loss of approximately $13.3 million (inclusive of $4.5 million in non-cash, stock-based compensation charges), principally offset by the Company’s increase in accounts payable of approximately $0.7 million, excluding the $1.5 million accrual for the first noncontingent milestone payment related to the Cleared acquisition due on the first anniversary of the acquisition. Net cash used in investing activities for the three months ended March 31, 2022 was approximately $7.4 million, as compared with approximately $49 thousand for the three months ended March 31, 2021. Net cash used in investing activities was due to cash paid for capitalized software costs of approximately $2.1 million, cash paid for the purchase of the ResumeBuild brand of approximately $4.0 million and cash paid for the Cleared acquisition of approximately $1.0 million. Net cash used in financing activities for the three months ended March 31, 2022 was approximately $774 thousand as compared with net cash provided by financing activities of approximately $13.4 million for the three months ended March 31, 2021. During the three months ended March 31, 2022, financing activities consisted of preferred stock dividends of $777 thousand, distributions to non-controlling interest of $36 thousand and proceeds from the exercise of warrants of $38 thousand. Liquidity and Capital Resources Outlook 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 from officers and directors. Our primary short-term and long-term requirements for liquidity and capital are for customer acquisition, fund business acquisitions and investments we may make from time to time, working capital including our noncancelable operating lease obligations, capital expenditures and general corporate purposes. The Company’s continued operations are dependent upon obtaining an increase in its sales volumes which the Company has been successful in achieving to date. The Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment, which included the available financing, consideration of positive and negative evidence impacting management’s forecasts, and 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) the Company’s ability to raise up to $150 million under the 2021 Shelf, with approximately $59.5 million available under the ATM Sales Agreement and $32 million available under the 2021 Shelf as of March 31 2022, (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. 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 Accounting Standards Codification (“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. 32 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 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, 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. Customer discounts and allowances on WorkSimpli revenues approximated $448 thousand and $554 thousand, respectively, during the three months ended March 31, 2022 and 2021. 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 is 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. 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. 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 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, 2018, remain open to audit by all related taxing authorities. 33 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. Recently Issued Accounting Standards 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. Application of New or Revised Accounting Standards—Not Yet Adopted 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. 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.