LifeMD, Inc. (LFMD) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information
necessary to understand our audited consolidated financial statements for the period ended December 31, 2023 and highlight certain other
information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial
condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material
changes in our financial position and the operating results of our business during the fiscal year ended December 31, 2023, as compared
to the fiscal year ended December 31, 2022. This discussion should be read in conjunction with our consolidated financial statements
for the two-year period ended December 31, 2023 and related notes included elsewhere in this Annual Report on Form 10-K. These historical
financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition
and Results of Operations contains numerous forward-looking statements, all of which are based on our current expectations and could
be affected by the uncertainties and risks described throughout this filing, particularly in “Item 1A. Risk Factors.”
Overview
LifeMD,
Inc. is a direct-to-patient telehealth company with a portfolio of health and wellness brands. Our subscriptions
and products are marketed and sold directly to consumers through advertisements on Facebook, Google, Amazon, and other social media and
e-commerce platforms. Secondarily, we also sell our products through third party partner channels. We market branded and generic prescription
drugs that are then sold and shipped online directly to consumers in all 50 states and the District of Columbia and Puerto Rico. We have
also established a 50-state medical group that provides virtual consultations to our patients. Since inception, we have treated
approximately 854,000 customers and patients nationwide. We operate our business using a proprietary telehealth technology platform that
facilitates a compliant relationship between the patient, provider, us and pharmacy.
Our
portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands
within our segments complement one another and position us well for future growth.
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Developments
in 2023
Key
developments in our business during 2023 are described below:
Medifast
Collaboration and Private Placement
On
December 11, 2023, the Company entered into a collaboration with Medifast, Inc. through and with certain of its wholly-owned subsidiaries
(“Medifast”). Medifast will utilize the Company’s virtual care technology platform to provide its clients access to
a clinically supported weight management program, including GLP-1 medications, which are a class of medications that mainly help manage
blood sugar (glucose) levels in people with Type 2 diabetes but can also treat obesity. Pursuant to certain agreements between the parties,
Medifast has agreed to pay to the Company the amount of $10 million to support the collaboration, funding enhancements to the Company
platform, operations and supporting infrastructure, of which $5 million was paid at the closing on December 12, 2023, and the remainder
is to be paid in two $2.5 million installments on March 31, 2024 and June 30, 2024 (or earlier upon the Company’s achievement of
certain program milestones) (the “Medifast Collaboration”).
In
addition, in connection with the Medifast Collaboration, the Company entered into a stock purchase agreement and registration rights
agreement with Medifast’s wholly-owned subsidiary, Jason Pharmaceuticals, Inc., whereby the Company issued 1,224,425 shares of
its common stock in a private placement (the “Medifast Private Placement”) at a purchase price of $8.1671 per share, for
aggregate proceeds of approximately $10 million. The Company granted Jason Pharmaceuticals the right, for a period contemporaneous with
the ongoing collaboration, to appoint one non-voting observer to the Board of Directors of the Company, entitled to attend Board meetings.
Series
B Preferred Stock Conversion
On
July 10, 2023 and August 14, 2023, PA001 Holdings, LLC (“PA001 Holdings”), the holder of the Company’s Series B Preferred
Stock, elected to convert 2,275 and 1,225 shares, respectively, of the Company’s Series B Preferred Stock into common stock, at
a price of $3.25 per share of Series B Preferred Stock, pursuant to the terms of the Securities Purchase Agreement dated August 28, 2020
(the “PA001 Securities Purchase Agreement”). The conversion was calculated based on the original issuance price of the Series
B Preferred Stock plus all accrued dividends to date. The conversion resulted in 1,010,170 and 550,694 shares of the Company’s
common stock issued to PA001 Holdings, on July 12, 2023 and August 15, 2023, respectively. In connection with the PA001 Securities Purchase
Agreement, the Company and PA001 Holdings entered into a registration rights agreement pursuant to which the Company agreed to register
the shares of the Company’s common stock underlying the Series B Preferred Stock and associated warrants.
Avenue
Capital Credit Facility
On
March 21, 2023, the Company entered into and closed on a loan and security agreement (the “Avenue Credit Agreement”), and
a supplement to the Credit Agreement (the “Avenue Supplement”), with Avenue Venture Opportunities Fund II, L.P. and Avenue
Venture Opportunities Fund, L.P. (collectively, “Avenue”). The Avenue Credit Agreement provides for a convertible senior
secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1) $15 million in term loans funded
at closing, (2) $5 million of additional committed term loans which the Company received on September 26, 2023 under the First Amendment
to the Avenue Credit Agreement (the “Avenue First Amendment”) and (3) $20 million of additional uncommitted term loans, collectively
referred to as the “Avenue Facility”. The Avenue Facility matures on October 1, 2026. The Company issued Avenue warrants
to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments (the “Avenue
Warrants”). In addition, Avenue may convert up to $2 million of the $15 million in term loans funded at closing into shares of
the Company’s common stock at any time while the loans are outstanding, at a price per share equal to $1.49. Proceeds from the
Avenue Facility were used to repay the Company’s outstanding notes payable balances with CRG Financial and are expected to be used
for general corporate purposes. The Company is subject to certain affirmative and negative covenants under the Avenue Facility, including
the requirement, beginning on the closing date, to maintain at least $5 million of unrestricted cash to be tested at the end of each
month, and beginning on the period ended September 30, 2023, and at the end of each quarter thereafter, a trailing six-month cash flow,
subject to certain adjustments as provided by the Avenue Credit Agreement, of at least $2 million.
On
November 15, 2023, Avenue converted $1 million of the principal amount of the outstanding term loans into shares of the Company’s
common stock. This resulted in 672,042 shares of common stock issued to Avenue. Additionally on November 15, 2023, Avenue exercised 96,773
of the Avenue Warrants on a cashless basis, resulting in 79,330 shares of the Company’s common stock issued.
As
of December 31, 2023, there was $19 million outstanding under the Avenue Facility and the Company was in compliance with the Avenue Facility
covenants.
Amendment
to the Cleared Stock Purchase Agreement
On
February 4, 2023, the Company entered into the First Amendment (the ‘Cleared First Amendment”) to the Stock Purchase Agreement,
dated January 11, 2022, between the Company and the sellers of Cleared (the “Cleared Stock Purchase Agreement”). The Cleared
Stock Purchase Agreement was amended to, among other things: (i) reduce the total purchase price by $250 thousand to a total of $3.67
million; (ii) change the timing of the payment of the purchase price to $460 thousand paid at closing, with the remaining amount to be
paid in five quarterly installments beginning on or before February 6, 2023 and ending January 15, 2024; (iii) removing all “earn-out”
payments payable by the Company to the sellers; and (iv) removing certain representations and warranties of the Company and sellers in
connection with the transaction (See Note 3—Acquisitions to our consolidated financial statements included in this report). The
Company issued the following shares of common stock to the sellers of Cleared under the Cleared First Amendment: (1) 337,895 shares on
February 6, 2023, (2) 455,319 shares on April 17, 2023, (3) 158,129 shares on July 17, 2023, (4) 117,583 shares on October 17, 2023 and
(5) 95,821 shares on January 16, 2024.
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WorkSimpli
Software Capitalization Update
Effective
March 31, 2023, the Company redeemed 500 membership interest units in WorkSimpli. Following the retirement, Conversion Labs PR’s
ownership interest in WorkSimpli increased to 74.06%. On June 30, 2023, WorkSimpli’s Chief Operating Officer, exercised her option
agreement (the “WorkSimpli COO Option Agreement”) to purchase 889 membership interest units of WorkSimpli for an exercise
price of $1.00 per membership interest unit. Following the exercise of the WorkSimpli COO Option Agreement, Conversion Labs PR decreased
its ownership interest in WorkSimpli from 74.06% to 73.32%.
2020
Equity and Incentive Plan
On
January 8, 2021, the Company approved the 2020 Equity and Incentive Plan (the “2020 Plan”). The 2020 Plan is administered
by the Compensation Committee of the Board and initially provided for the issuance of up to 1,500,000 shares of Common Stock. The number
of shares of Common Stock available for issuance under the 2020 Plan automatically increases by 150,000 shares of Common Stock on January
1st of each year, for a period of not more than ten years, commencing on January 1, 2021 and ending on (and including) January 1, 2030.
Awards under the 2020 Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights,
restricted stock, and restricted stock units.
On
June 24, 2021, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020 Plan to increase
the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by 1,500,000 shares.
On
June 16, 2022, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020 Plan to increase
the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by an additional 1,500,000
shares. As of December 31, 2023, the 2020 Plan, as amended and restated, provided for the issuance of up to 4,950,000 shares of Common
Stock. Remaining authorization under the 2020 Plan, as amended and restated, was 61,611 shares as of December 31, 2023.
Results
of Operations
Comparison
of the Year Ended December 31, 2023 to the Year Ended December 31, 2022
Our
financial results for the year ended December 31, 2023 are summarized as follows in comparison to the year ended December 31, 2022:
| December 31, 2023 | December 31, 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Telehealth revenue, net | $ | 98,152,919 | 64.34 | % | $ | 82,649,845 | 69.43 | % | ||||||||
| WorkSimpli revenue, net | 54,394,087 | 35.66 | % | 36,383,675 | 30.57 | % | ||||||||||
| Total revenue, net | 152,547,006 | 100.00 | % | 119,033,520 | 100.00 | % | ||||||||||
| Cost of telehealth revenue | 17,480,533 | 11.46 | % | 17,843,754 | 14.99 | % | ||||||||||
| Cost of WorkSimpli revenue | 1,419,931 | 0.93 | % | 824,274 | 0.69 | % | ||||||||||
| Total cost of revenue | 18,900,464 | 12.39 | % | 18,668,028 | 15.68 | % | ||||||||||
| Gross profit | 133,646,542 | 87.61 | % | 100,365,492 | 84.32 | % | ||||||||||
| Selling and marketing expenses | 76,451,466 | 50.12 | % | 78,369,430 | 65.84 | % | ||||||||||
| General and administrative expenses | 51,694,232 | 33.89 | % | 46,960,782 | 39.45 | % | ||||||||||
| Other operating expenses | 6,297,321 | 4.13 | % | 6,717,795 | 5.64 | % | ||||||||||
| Customer service expenses | 7,632,283 | 5.00 | % | 5,033,468 | 4.23 | % | ||||||||||
| Development costs | 6,060,513 | 3.97 | % | 2,970,202 | 2.50 | % | ||||||||||
| Goodwill and intangible asset impairment charges | - | - | % | 8,862,596 | 7.45 | % | ||||||||||
| Change in fair value of contingent consideration | - | - | % | (5,101,000 | ) | (4.29 | )% | |||||||||
| Total expenses | 148,135,815 | 97.11 | % | 143,813,273 | 120.82 | % | ||||||||||
| Operating loss | (14,489,273 | ) | (9.50 | )% | (43,447,781 | ) | (36.50 | )% | ||||||||
| Interest expense, net | (2,596,586 | ) | (1.70 | )% | (1,275,946 | ) | (1.07 | )% | ||||||||
| (Loss) gain on debt extinguishment | (325,198 | ) | (0.21 | )% | 63,400 | 0.05 | % | |||||||||
| Loss from operations before income taxes | (17,411,057 | ) | (11.41 | )% | (44,660,327 | ) | (37.52 | )% | ||||||||
| Income tax provision | (428,000 | ) | (0.28 | )% | (360,700 | ) | (0.30 | )% | ||||||||
| Net loss | (17,839,057 | ) | (11.69 | )% | (45,021,027 | ) | (37.82 | )% | ||||||||
| Net income attributable to non-controlling interest | 2,756,935 | 1.81 | % | 514,632 | 0.43 | % | ||||||||||
| Net loss attributable to LifeMD, Inc. | (20,595,992 | ) | (13.50 | )% | (45,535,659 | ) | (38.25 | )% | ||||||||
| Preferred stock dividends | (3,106,250 | ) | (2.04 | )% | (3,106,250 | ) | (2.61 | )% | ||||||||
| Net loss attributable to common stockholders | $ | (23,702,242 | ) | (15.54 | )% | $ | (48,641,909 | ) | (40.86 | )% |
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Total
revenue, net. Revenues for the year ended December 31, 2023 were approximately $152.5 million, an increase of 28% compared to approximately
$119.0 million for the year ended December 31, 2022. The increase in revenues was attributable to both the increase in telehealth revenue
of 19% and an increase in WorkSimpli revenue of 50%. Telehealth revenue accounts for 64% of total revenue and has increased during the
year ended December 31, 2023 due to an increase in online sales demand primarily for LifeMD virtual primary care which experienced an
increase in revenue of approximately $11.8 million during the year ended December 31, 2023 compared to the year ended December 31, 2022,
Medifast Collaboration revenue and a decrease in product refunds and rebates. WorkSimpli revenue accounts for 36% of total revenue and
has steadily increased year over year due to a combination of higher demand, increased market awareness, enhanced digital capabilities,
continued marketing campaign expansion and the addition of the ResumeBuild brand in the first quarter of 2022.
Total
cost of revenue. Total cost of revenue consists of (1) the cost of 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 1% to approximately $18.9 million for the year
ended December 31, 2023 compared to approximately $18.7 million for the year ended December 31, 2022. The combined cost of revenue
increase was due to an increase in WorkSimpli sales volume partially offset by improved pricing on telehealth costs during the year
ended December 31, 2023 when compared to the year ended December 31, 2022. Telehealth costs decreased to 18% of associated
telehealth revenues during the year ended December 31, 2023, from 22% of associated telehealth revenues during the year ended
December 31, 2022 primarily due to improved pricing on pharmacy fulfillment costs and shipping. WorkSimpli costs increased to 3% of associated WorkSimpli revenues during the
year ended December 31, 2023, from 2% of associated WorkSimpli revenues during the year ended December 31, 2022.
Gross
profit. Gross profit increased by approximately 33% to approximately $133.6 million for the year ended December 31, 2023 compared to
approximately $100.4 million for the year ended December 31, 2022. Gross profit as a percentage of revenues was 88% for the year ended
December 31, 2023 compared to 84% for the year ended December 31, 2022. Gross profit as a percentage of revenues for telehealth was 82%
for the year ended December 31, 2023 compared to 78% for the year ended December 31, 2022, and for WorkSimpli was 97% for the year ended
December 31, 2023 compared to 98% for the year ended December 31, 2022. The increase in sales volume for both telehealth and WorkSimpli,
Medifast Collaboration revenue, improved pricing and a decrease in product refunds and rebates have contributed to the increase in gross
profit.
Total
expenses. Operating expenses for the year ended December 31, 2023 were approximately $148.1 million, as compared to approximately $143.8
million for the year ended December 31, 2022. This represents an increase of 3%, or $4.3 million. The increase is primarily attributable
to:
| (i) | General and administrative expenses: During the year ended December 31, 2023, stock-based compensation was $12.5 million, with the majority related to stock compensation expense attributable to service-based stock options and restricted stock units, as compared to stock-based compensation expense of $13.7 million for the year ended December 31, 2022. This category also consists of merchant processing fees, payroll expenses for corporate employees, taxes and licenses, amortization expense and legal and professional fees. During the year ended December 31, 2023, the Company had an increase of approximately $4.7 million in general and administrative expenses, primarily related to increases in compensation costs and WorkSimpli dividends paid during the year ended December 31, 2023. |
|---|---|
| (ii) | Customer service expenses: This consists of rent, insurance, payroll and benefit expenses related to the Company’s customer service department located in South Carolina and Puerto Rico. During the year ended December 31, 2023, the Company had an increase of approximately $2.6 million, or 52%, primarily related to increases in infrastructure costs and headcount in the Company’s customer service department. |
| (iii) | Development costs: This mainly relates to third-party technology services for developing and maintaining our online platforms and information technology services for our online products. During the year ended December 31, 2023, the Company had an increase of approximately $3.1 million, or 104%, primarily resulting from technology platform improvements and amortization expenses. |
| (iv) | Change in fair value of contingent consideration: During the year ended December 31, 2022, the Company recorded a $5.1 million reduction to the Cleared contingent consideration as a result of the remeasurement of the fair value. The decline in the estimated fair value of the Cleared contingent consideration is a result of a decline in the Cleared financial projections and the removal of all earn-out payments payable by the Company from the terms of the Cleared First Amendment. |
31
These
increases in operating expenses were partially offset by decreases in the following:
| Column 1 | Column 2 |
|---|---|
| (i) | Selling and marketing expenses: This mainly consists of online marketing and advertising expenses. During the year ended December 31, 2023, the Company had a decrease of approximately $1.9 million, or 2%, in selling and marketing costs as a result of a Company-wide strategic reduction in costs and alignment of sales and marketing initiatives to drive the Company’s recurring revenue subscription-based sales model. |
| (ii) | Other operating expenses: This consists of rent and lease expense, insurance, office supplies and software subscriptions, royalty expense and bank charges. During the year ended December 31, 2023, the Company had a decrease of approximately $420 thousand, or 6%, primarily related to decreases in office supplies and software subscriptions. |
|---|---|
| (iii) | Goodwill impairment charge: During the year ended December 31, 2022, the Company recorded an $8.9 million goodwill impairment charge related to a decline in the estimated fair value of Cleared as a result of a decline in the Cleared financial projections. |
Interest
expense, net. Interest expense, net consists of interest expense related to the Avenue Facility, notes payable and the Series B Preferred
Stock for the year ended December 31, 2023 and interest expensed on the Company’s notes payable and Series B Convertible Preferred
Stock for the year ended December 31, 2022. Interest expense increased by approximately $1.3 million during the year ended December 31,
2023 as compared to the year ended December 31, 2022 primarily due to interest expensed on the Avenue Facility during the year ended
December 31, 2023.
(Loss)
gain on debt extinguishment. The Company recorded a $325 thousand loss on debt extinguishment related to the repayment of the CRG Financial
loan during the year ended December 31, 2023 due to a prepayment penalty and various fees associated with the CRG Financial loan. The
Company recorded a $63 thousand gain on debt forgiveness of Paycheck Protection Program (“PPP”) loans during the year ended
December 31, 2022.
Working
Capital
| December 31, 2023 | December 31, 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| Current assets | $ | 42,604,267 | $ | 11,311,357 | ||||
| Current liabilities | 34,781,724 | 31,374,151 | ||||||
| Working capital (deficit) | $ | 7,822,543 | $ | (20,062,794 | ) |
Working
capital increased by approximately $27.9 million during the year ended December 31, 2023. The increase in current assets is primarily
attributable to an increase in cash of approximately $29.2 million as a result of the Avenue Facility and the Medifast Collaboration
and Private Placement and an increase in accounts receivable of $2.4 million. Current liabilities increased by $3.4 million, which was
primarily attributable to an increase in deferred revenue of
$3.3 million and an increase in accounts payable and accrued expenses of $2.7 million, partially offset by a decrease in notes payable of $2.5 million.
Liquidity
and Capital Resources
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Net cash provided by (used in) operating activities | $ | 8,820,232 | $ | (22,935,149 | ) | |||
| Net cash used in investing activities | (8,733,284 | ) | (13,905,733 | ) | ||||
| Net cash provided by (used in) financing activities | 29,100,820 | (528,200 | ) | |||||
| Net increase (decrease) in cash | 29,187,768 | (37,369,082 | ) |
Net
cash provided by operating activities was approximately $8.8 million for the year ended December 31, 2023, as compared with net cash
used in operating activities of approximately $22.9 million for the year ended December 31, 2022. The increase in net cash provided by
operating activities was primarily related to the decrease in the Company’s net loss of $27.2 million to $17.8 million for the
year ended December 31, 2023, as compared with $45.0 million for the year ended December 31, 2022. Other significant factors contributing
to net cash provided by operating activities during the year ended December 31, 2023, include $12.5 million in non-cash stock-based compensation
charges, $6.9 million in non-cash depreciation and amortization, a net increase in accounts payable, accrued expenses and other operating
activities of $5.1 million, an increase in deferred revenue of $3.3 million and a $325 thousand loss on debt extinguishment. The significant
factors contributing to the net cash used in operating activities during the year ended December 31, 2022, include $13.7 million in non-cash
stock-based compensation charges, $8.9 million in non-cash goodwill and intangible asset impairment charges related to a decline in the
estimated fair value of Cleared as a result of a decline in the Cleared financial projections and $3.8 million in non-cash depreciation
and amortization, partially offset by a $5.1 million reduction to the Cleared contingent consideration as a result of the remeasurement
of the fair value. Additionally, an increase in inventory of $2.2 million due to the timing of purchases, an increase in accounts receivable
of $2.2 million and a decrease in accrued expenses and other operating activities of $2.2 million excluding noncontingent payments to
Cleared contributed to net cash used in operations for the year ended December 31, 2022. These factors contributing to net cash used
in operations were partially offset by an increase in deferred revenue of $4.0 million due to increased sales for products which the
customer has not yet obtained control due to delivery not commensurate upon shipment of the product and accounts payable of $1.3 million
as a result of the Company extending payables and credit terms with vendors.
32
Net
cash used in investing activities for the year ended December 31, 2023 was approximately $8.7 million, as compared with net cash used
in investing activities of $13.9 million for the year ended December 31, 2022. Net cash used in investing activities for the year ended
December 31, 2023 was primarily due to cash paid for capitalized software costs of approximately $8.4 million, cash paid for the purchase
of equipment of $204 thousand and cash paid for the purchase of intangible assets of approximately $149 thousand. Net cash used in investing
activities for the year ended December 31, 2022 was primarily due to cash paid for capitalized software costs of approximately $8.5 million,
cash paid for the purchase of the ResumeBuild brand of approximately $4.0 million, cash paid for the Cleared acquisition of approximately
$1.0 million and cash paid for the purchase of equipment of $367 thousand.
Net
cash provided by financing activities for the year ended December 31, 2023 was approximately $29.1 million as compared with net cash
used in financing activities of approximately $528 thousand for the year ended December 31, 2022. During the year ended December 31,
2023, net cash provided by financing activities consisted of: (1) $19.5 million in net proceeds received from the Avenue Facility, (2)
$10 million in proceeds received from the Medifast Private Placement, (3) $6.2 million in net proceeds received from the sale of common
stock under the ATM Sales Agreement (as defined below), (4) $2.3 million in proceeds received from notes payable and (5) $95 thousand
in proceeds received from the exercise of stock options. These factors contributing to net cash provided by financing activities were
partially offset by repayments of notes payable of approximately $5.1 million net of a $325 thousand loss on debt extinguishment on the
CRG Financial loan, preferred stock dividends of approximately $3.1 million, contingent consideration payments made related to the ResumeBuild
brand acquisition of approximately $313 thousand, net payments made related to adjustments in the membership interest units of WorkSimpli
of approximately $306 thousand, and distributions to non-controlling interest of $144 thousand. During the year ended December 31, 2022,
net cash used in financing activities consisted of preferred stock dividends of $3.1 million, repayment of notes payable of $169 thousand,
contingent consideration payments made related to the ResumeBuild brand acquisition of $156 thousand and distributions to non-controlling
interest of $144 thousand. These decreases were partially offset by proceeds from notes payable of $2.9 million, proceeds from the exercise
of options and warrants of $129 thousand and proceeds received from the sale of a portion of the Company’s membership interest
in WorkSimpli of $12 thousand.
Liquidity
and Capital Resources Outlook
To
date, the Company has been funding operations primarily through the sales of its products, issuance of common and preferred stock, and
through loans and advances. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes and
obtaining funding from third-party sources or the issuance of additional shares of common stock. Our primary short-term and long-term
requirements for liquidity and capital are for customer acquisitions, funding business acquisitions and investments we may make from
time to time, working capital including our noncancelable operating lease obligations, noncontingent consideration, capital expenditures
and general corporate purposes. For more information on our operating lease obligations, see Note 9—Leases to our consolidated
financial statements included in this report. There can be no assurances that we will be successful in increasing revenues, improving
operational efficiencies, or that financing will be available or, if available, that such financing will be available under favorable
terms.
On
December 11, 2023, the Company entered into a collaboration with Medifast. Pursuant to certain agreements between the parties, Medifast
has agreed to pay to the Company the amount of $10 million to support the collaboration, funding enhancements to the Company platform,
operations and supporting infrastructure, of which $5 million was paid at the closing on December 12, 2023, and the remainder is to be
paid in two $2.5 million installments on March 31, 2024 and June 30, 2024 (or earlier upon the Company’s achievement of certain
program milestones). See “Medifast Collaboration and Private Placement” under Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
In
addition, in connection with the Medifast Collaboration, on December 11, 2023, the Company entered into a stock purchase agreement with
Medifast’s wholly-owned subsidiary, Jason Pharmaceuticals, Inc., whereby the Company issued 1,224,425 shares of its common stock
in the Medifast Private Placement, at a purchase price of $8.1671 per share, for aggregate proceeds of approximately $10 million.
On
March 21, 2023, the Company entered into and closed on the Avenue Credit Agreement, and the Avenue Supplement. The Avenue Credit Agreement
provides for a convertible senior secured credit facility of up to an aggregate amount of $40 million, comprised of the following: (1)
$15 million in term loans funded at closing, (2) $5 million of additional committed term loans which the Company received on September
26, 2023 under the Avenue First Amendment and (3) $20 million of additional uncommitted term loans, collectively referred to as the “Avenue
Facility”. The Avenue Facility matures on October 1, 2026. The Company issued Avenue Warrants
to purchase $1.2 million of the Company’s common stock at an exercise price of $1.24, subject to adjustments. In addition, Avenue
may convert up to $2 million of the $15 million in term loans funded at closing into shares of the Company’s common stock at any
time while the loans are outstanding, at a price per share equal to $1.49. Proceeds from the Avenue Facility were used to repay
the Company’s outstanding notes payable balances with CRG Financial and are expected to be used for general corporate purposes.
As of December 31, 2023, there was $19 million outstanding under the Avenue Facility, and the Company was in compliance with the Avenue
Facility covenants. Loans under the Avenue Facility accrue interest at a variable rate per annum equal to the greater of (i) the sum
of 4.75% plus the Prime Rate (as defined in the Avenue Supplement) and (ii) 12.50%. At December 31, 2023, the interest rate was 13.25%.
Payments are interest only until November 2024. The Company may prepay the loans, subject to a prepayment penalty of 1.00% to 3.00% of
the principal amount prepaid, depending on the timing of the prepayment.
33
In January and February 2023, the Company received proceeds of $2 million under a $2.5 million loan facility with CRG Financial,
maturing on December 15, 2023. The loan facility includes interest of 12%. The Company repaid the $2 million outstanding loan balance
on March 21, 2023 with the proceeds received from the Avenue Facility and recorded a $325 thousand loss on debt extinguishment due to
a prepayment penalty and various fees associated with the CRG Financial loan. As of both December 31, 2023 and 2022, the outstanding
balance was $0 related to the CRG Financial loan.
During
the year ended December 31, 2023, the Company received proceeds of $348 thousand under a 10-month financing agreement with Arthur J.
Gallagher Risk Management Services, LLC. The terms of the agreement include finance fees in the amount of $13 thousand. As of December
31, 2023 and 2022, the outstanding balance was $217 thousand and $0, respectively, and is included in notes payable, net, on the accompanying
consolidated balance sheet.
In
October 2022, the Company received proceeds of $976 thousand under a 12-month working capital loan with Amazon. The terms of the loan
include interest in the amount of $62 thousand. As of December 31, 2023 and 2022, the outstanding balance was $111 thousand and $976
thousand, respectively, and is included in notes payable, net, on the accompanying consolidated balance sheet. The outstanding balance as of December 31, 2023 was repaid in January 2024.
In
November 2022, the Company received proceeds of $1.9 million under two 10-month working capital loans with Balanced Management. The terms
of the loans include loan origination fees in the amount of $60 thousand and total interest of $840 thousand. As of December 31, 2023
and 2022, the outstanding balance was $0 and $1.821 million, respectively, and is included in notes payable, net, on the accompanying
consolidated balance sheet.
On
June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act, which was declared effective on
June 22, 2021 (the “2021 Shelf”). Under the 2021 Shelf at the time of effectiveness, the Company originally had the ability
to raise up to $150 million by selling common stock, preferred stock, debt securities, warrants, and units. In conjunction with the 2021
Shelf, the Company also entered into an At Market Issuance Sales Agreement (the “ATM Sales Agreement”) with B. Riley Securities,
Inc. and Cantor Fitzgerald & Co. relating to the sale of its common stock. In accordance with the terms of the ATM Sales Agreement,
the Company may, but is not obligated to, offer and sell, from time to time, shares of common stock, through or to the Agents, acting
as agent or principal. Sales of common stock, if any, will be made by any method permitted that is deemed an “at the market offering”
as defined in Rule 415 under the Securities Act. As of December 31, 2023, the Company had $53.3 million available under the ATM Sales
Agreement and $32.0 million available under the 2021 Shelf.
The
Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment, which included
the available financing and consideration of positive and negative evidence impacting management’s forecasts, market, and industry
factors. Positive indicators that lead to its conclusion that the Company will have sufficient cash over the next 12 months following
the date of this report include: (1) its continued strengthening of the Company’s revenues and improvement of operational efficiencies
across the business, (2) the expected continued improvement in its cash burn rate over the next 12 months and positive operating cash
flows during the year ended December 31, 2023, (3) positive working capital of $7.8 million as of December 31, 2023, (4) $53.3 million
available under the ATM Sales Agreement and $32.0 million available under the 2021 Shelf, (5) current cash balance of approximately $26.4
million as of the filing date, (6) management’s ability to curtail expenses, if necessary, and (7) the overall market value of
the telehealth industry and how it believes that will continue to drive interest in the Company already evidenced by the Medifast Collaboration
and Private Placement noted above.
Critical
Accounting Estimates
We prepare
our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management
to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the
balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are
material differences between these estimates and actual results, our financial condition or results of operations would be affected. We
base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking into account our
circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
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We consider
an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain
at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period
or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial
condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical,
as defined above.
Our
significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies to our consolidated
financial statements included in this report. We believe that these accounting policies are critical for one to fully understand
and evaluate our financial condition and results of operations.
Recently
Adopted Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize
the current expected credit loss (“CECL”) impairment model to estimate its lifetime “expected credit loss” and
record an allowance that is deducted from the amortized cost basis of the financial assets and certain other instruments, including but
not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities are recorded through
an allowance for credit losses. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning of the first
reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date
of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller
reporting companies. The Company adopted ASU 2016-13 as of January 1, 2023. The adoption did not have a material impact on the
Company’s financial statements.
In
October 2021, the FASB issued 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. The Company adopted ASU 2021-08 as of January 1, 2023. The adoption
did not have a material impact on the Company’s financial statements.
Other
Recent Accounting Pronouncements
In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). The amendments in this update improve reportable segment
disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 will become effective
for the Company’s annual period beginning on January 1, 2024. The Company does not expect the application of ASU 2023-07 to have
a material impact to its consolidated financial statements and related disclosures.
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In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to improve its income
tax disclosure requirements. Under ASU 2023-09, entities must annually: (1) disclose specific categories in the rate reconciliation and
(2) provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will become effective for the
Company beginning on January 1, 2025. The Company does not expect the application of ASU 2023-09 to have a material impact to its consolidated
financial statements and related disclosures.
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.