LifeMD, Inc. Q3 FY2022 Earnings Call

Good afternoon. Thank you for joining us today to discuss the results for LifeMD’s Third Quarter Ended September 30, 2022. Joining the call today are Justin Schreiber, Chairman and Chief Executive Officer; and Marc Benathen, Chief Financial Officer of LifeMD. Following management’s prepared remarks, we will open the call for a question-and-answer session. I’d like to remind everyone that today’s call is being hosted via webcast and the recording will be made available via the link in today’s press release, which is available in the Investor Relations section of the company’s website. Before we begin, I would like to remind everyone that during this call, the company will make a number of forward-looking statements, which are subject to numerous risks and uncertainties that may cause the company’s actual results to differ materially from those projected. These risks and uncertainties are described in the company’s 10-K and 10-Q filings and within other filings that LifeMD may make with the SEC from time to time. Forward-looking statements made during this call are based on current information available to the company as of today, November 10, 2022. The company assumes no obligation to update or revise any forward-looking statements after today’s call, except as required by law. Also, please note that management will be discussing certain non-GAAP financial measures that the company believes are important in evaluating LifeMD’s performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release issued earlier today. Finally, I would like to remind everyone that today’s call is being recorded and will be available for replay in the Investor Relations section of the company’s website. Now, I would like to turn the call over to LifeMD’s CEO, Justin Schreiber. Please go ahead.

Thank you, and good afternoon, everyone. Today, after the market closed, we issued a press release containing our third quarter results and uploaded an updated corporate presentation for Q3 2022. I encourage everyone to download and review this presentation on our Investor Relations website at ir.lifemd.com. During the third quarter, LifeMD made significant progress on multiple strategic and operational initiatives to position the company for its next phase of growth and more importantly, an imminent path to profitability. I’d like to highlight the following five strategic and operational objectives we executed. First, we significantly bolstered LifeMD’s profitability across all business lines and on a consolidated basis, which served to drive our consolidated adjusted EBITDA loss to below $1 million for the quarter. Second, we continue to scale and create significant growth in our virtual primary care business. This strong growth was enabled by successfully launching a host of new features on our primary care platform, such as our prescription drug discount card program, Symptom Checker, and more. Third, we meaningfully optimized advertising spend and customer acquisition costs. And fourth, we further diversified our telehealth business through the continued scaling of recently launched telehealth products and growth in our B2B partnership business. Finally, we made extensive progress in both the WorkSimpli divestiture process plus significantly enhancing the long-term fundamentals, revenue, and profit growth potential of WorkSimpli. Our continued execution of these initiatives further reinforces our commitment to creating long-term value for our shareholders and underscores our drive to deliver upon major areas of guidance that we have provided, mainly in the areas of profitability and the creation of a primary care business with strong patient satisfaction and retention. Perhaps our biggest accomplishment this quarter was the tremendous traction we gained in profitability. We concluded our third quarter with an adjusted EBITDA loss of just $889,000. This represented an 86% improvement versus even the prior quarter sequentially, when our adjusted EBITDA loss totaled $6.9 million and is a testament to the tremendous focus we’ve placed on optimizing our customer acquisition and retention investment while pairing back areas that produce growth but not long-term profitability. This, coupled with the tremendous leverage that we are gaining against our fixed operating expenses, is laying the foundation on which we will continue our long-term growth with expanding profit margins. As we undertook this process, we eliminated investment in select product offerings that, while being growth drivers, did not meet our internal profitability thresholds. Now that we have established a solid base to build on, we expect sequential growth to return in the first quarter of 2023 with steadily increasing profit margins. LifeMD also saw continued momentum in the growth of our virtual primary care platform since its launch in the second quarter. I reiterate my belief that VPC, or primary care platform, represents one of the largest, if not the largest, business opportunity for LifeMD in the years ahead. We eclipsed our previous guidance of ending the third quarter with 2,000 subscribers by nearly 20% and continue to remain ahead of our previous expectations with growing momentum for this business. In fact, as of today, VPC has almost 4,000 subscribers. Moreover, in recent weeks, we have begun to increase our daily new acquisitions per day from approximately 30 new patients a day to 60 to 90 new patients a day without increasing our marketing spend budgets. I’m very encouraged by the continued strong retention we see in this business, which reflects the large unmet need for high-quality, affordable cash pay virtual primary care. LifeMD currently offers one of the most comprehensive virtual primary care offerings in the U.S., one where our members gain access to incredible doctors and nurse practitioners, discounted prescription medications, labs, imaging, referrals to specialists when needed and expert wellness guidance. Our platform not only supports urgent and generalized primary care offerings but also can facilitate treatment for hundreds of different conditions. And our programs are designed so that patients can see the same doctor over time, which I believe enhances outcomes and the patient experience. As I mentioned earlier, we made major headway in optimizing our marketing spend and CACs in the third quarter. We reduced our blended CAC by 18% versus prior year and 8% versus the prior quarter. This is a key driver behind both our ability to significantly reduce our marketing spend as a percentage of revenue and rapidly improve the profitability of the business. By operating effectively with these newly reduced CACs and focusing our capital on the offerings that drive the best long-term return on investment, we are well positioned amongst our peer group for a balanced combination of growth and profitability, which we believe will be a key driver of long-term shareholder value. Lastly, during this quarter, we continued to make significant progress in diversifying our telehealth business through new telehealth service offerings. VPC continues to rapidly scale with increasing momentum. Two recently launched indications, LEAP and our proprietary topical pain management offering, have also begun to rapidly expand. Following their launch in the second quarter, where they accounted for only about 1% of total revenue and subscriber base, these two offerings have grown to become just under 5% of our total revenue as of the end of the third quarter and combined to become nearly 12% of our total new patient acquisition volume in the third quarter. Beyond our direct-to-consumer telehealth business, we’re continuing to successfully build out our business-to-business operation, leveraging our best-in-class telehealth technology platform and affiliated medical group to partner directly with pharmaceutical companies. We recently completed our third pharma partnership, which adds four branded prescription products to our platform. We have built an impressive pipeline of potential deals, and we expect to see several close in 2023, which will help us further diversify our revenue mix with high-margin B2B revenue while providing additional opportunities for cross-selling on our VPC platform. WorkSimpli continues to be a tremendous performing asset for the consolidated company, producing rapidly increasing levels of profitability coupled with strong revenue growth. We are currently in the late stages of the divestiture process and actively negotiating after receiving interest from multiple bidders. Given the extreme value and profit accretion from WorkSimpli, which Marc will speak about later, we remain focused on ensuring that any divestiture maximizes value for LifeMD and our shareholders relative to the value WorkSimpli can create as part of our consolidated company. We are currently in the late stage of the WorkSimpli process and remain in a strong position to create significant value for shareholders with this asset.

Thank you, Justin, and good afternoon, everyone. The third quarter of 2022 is a major breakthrough quarter for LifeMD in realizing our pathway to profitability and sustainable long-term profitable growth. We drove our adjusted EBITDA loss to $889,000, which was a 90% improvement versus the prior year and ahead of even our internal expectations. We remain on track to achieve consolidated adjusted EBITDA profitability in the fourth quarter. As Justin mentioned, we have made extensive progress on the WorkSimpli process and are currently in the final stage of the process after receiving interest from multiple qualified bidders. At the same time, we are extremely cognizant of the tremendous growth and profit potential of this asset. During the third quarter, WorkSimpli not only grew revenue 57% year-over-year but also finished with over $1 million of EBITDA in the quarter, which is expected to exponentially grow in the quarters and years to come. In fact, we believe WorkSimpli has the potential to produce $20 million to $25 million or more in EBITDA in 2023 while producing significant double-digit top-line growth. We plan to provide a further update on WorkSimpli prior to the end of this year. Now, turning to the results for the third quarter of 2022. Revenue in the third quarter totaled a record $31.4 million, up 26% as compared to the same quarter a year ago. Ninety-three percent of total revenues in the third quarter were generated by recurring subscriptions. Telehealth net revenues grew by 15% to $21.4 million while WorkSimpli net revenues grew by 57% to $10 million. WorkSimpli revenues grew 23% sequentially as compared to the second quarter. Additionally, WorkSimpli achieved Q3 EBITDA margins of mid-teens. We expect WorkSimpli’s growth and rising profitability to continue at a rapid pace. On the telehealth side of the business, we increased our active subscriber base by 36% versus prior year to end the quarter with over 176,000 active subscribers. We were able to accomplish this subscriber growth while refocusing our efforts on our offerings that meet our profitability thresholds, redirecting investment into new verticals, and reducing our tax by 18% versus prior year. Gross margins for the third quarter reached 85%, up 500 basis points versus prior year. Gross profit for the quarter totaled $26.7 million, an increase of 35% from the same year-ago period. Operating expenses for the third quarter totaled $33.5 million, an increase of $1.1 million versus the year-ago period, excluding non-cash expenses of $4.5 million associated with stock-based compensation, depreciation, and amortization. Net of these expenses, operating expenses as a percentage of company revenue decreased by 1,900 basis points as compared to the prior year. Equally important, we reduced our marketing expense as a percentage of revenue to 55% versus 81% of revenue in the same year-ago period, and improved leverage in this key spending area by 1,700 basis points versus the prior quarter. Our GAAP net loss attributable to common stockholders for the third quarter totaled $8.1 million or $0.26 per share. This compares to a net loss attributable to common stockholders of $14.4 million or $0.54 per share in the third quarter of 2021. Adjusted EPS, a non-GAAP financial measure that excludes non-cash expenses, preferred stock dividends, litigation expense, and foreign currency translation, totaled a loss of $0.03 per share as compared to a loss of $0.34 per share in the same year-ago period. Adjusted EPS also improved 87% sequentially versus the prior quarter. Adjusted EBITDA, a non-GAAP financial measure excluding the same categories as noted in adjusted EPS, totaled a loss of $889,000 in the third quarter of 2022. This compares to an adjusted EBITDA loss of $9 million in the same year-ago quarter. Now, turning to our balance sheet. Cash totaled $5.8 million as of September 30, 2022, and we have reduced our cash burn rate to approximately $500,000 per month with the burn rate expected to continue to trend down. In fact, we expect to eliminate the cash burn on a consolidated basis by the end of this year. This underscores the company's commitment to prudent capital management, growing our profitability, and eliminating our cash burn. In addition to the potential monetization of the WorkSimpli asset, LifeMD has secured non-binding offers for attractive non-dilutive financing options that can further augment our balance sheet and capitalize the company regardless of the WorkSimpli transaction. This wraps up our financial results. I'd now like to turn the call back over to Justin.

Thanks, Marc. In summary, third-quarter results were strong demonstrating our commitment and ability to build a profitable long-term business with strong margins. While growth slowed as we had guided, this was the intentional result of shifting our spending into areas producing the best balance of growth and profitability, while responsibly investing in the scaling of new verticals, including primary care, pain, sleep, and B2B partnerships with pharma companies. I believe we have one of the strongest business and clinical teams in telehealth, coupled with amazing technology, and have never been more excited to watch our continued transition into a world-class provider of diversified telehealth services and products. Additionally, beyond our core telehealth business, WorkSimpli remains a tremendously attractive asset with a rapidly increasing financial profile that is solidly accretive to our overall company results. In closing, I would like to thank our entire team for their hard work and tenacious commitment to building a platform that positively impacts the lives and health of so many people. Also, I'd like to thank our shareholders who've been very supportive in a difficult economic environment. The future is bright for LifeMD. With that, I would like to open the call for Q&A.

Thank you. We'll take our first question from David Larsen, BTIG.

Hi. Congratulations on a good quarter, especially the progress on earnings. Can you maybe talk a little bit more about sort of the disciplined approach that you've been taking to, I guess, focus on like more profitable product sales areas and basically, I guess, focus less on lower profit areas, like what exactly are those areas that you kind of exited and maybe can you talk a little bit more about the decline in or improvement in marketing spend in certain areas? Thanks a lot.

Yes, David, this is Marc. So firstly, we focus pretty heavily obviously on data. As we've done more data, we've been able to see more so for us there's been a greater focus on longer-term subscriptions, which we've found to be stickier, have stronger unit economics. There were certain, without getting into specifics of certain subscription products, but a couple of products in our core portfolio where the returns on investments were nowhere near the typical 1.5 to 2x that we earned in the first year while they drove sales growth. As we've gotten more data, we've taken away marketing dollars from there and reallocated it to the growth of some of the new areas like VPC, sleep, and pain, which we're all going to continue to pay significant dividends for us, especially heading into 2023. So a lot of it was having more data available to us, beginning to test in the last nine months, moving to longer subscription terms, and then having diversified our product mix a little bit more. This has allowed us to take away from some of those more shorter-term subscriptions, lower performing from an ROI standpoint areas that we were investing in.

Okay. That's very helpful. And I think you mentioned that the number of subscribers was up pretty significantly on a year-over-year basis. Can you talk about how that impacts the actual telehealth net orders? It looks like the net orders may have declined sequentially, but I think that's by design, right?

Yes, so as I mentioned before, we've been moving more and more towards three, six, and twelve-month subscriptions versus a lot of the one-month offerings. So what ended up happening is you're getting more per order, which is obviously also positively affecting your return on investment and your gross margin. Quite frankly, many of these people who make the bigger commitment are also stickier customers. So you're getting more subscribers, but just given the cadence of how those orders are being shipped, means that we're getting more per order, but you're not necessarily going to have as many orders for us. The most relevant metric, particularly as we've made this transition, is subscribers. We've obviously always shared orders with Streets, so we continue to share that, but subscribers is really the measure of the health and the growth of the business.

Okay. And then, Justin, can you talk a little bit about the virtual primary care platform? Like how many providers are actually in the virtual primary care solution, how many physicians or nurses do you have on staff? And can you share any metrics around the number of patients that are being added on a daily or monthly or quarterly basis? And then also, I think importantly, what the cross-sell and upsell potential looks like with the virtual primary care platform?

Sure, David, happy to. Right now we have just on the virtual primary care platform, we have around 15 full-time doctors and nurse practitioners treating patients. We're actively recruiting new nurse practitioners and doctors, and one of the limitations of scaling is not a limitation, but we've just been very careful about scaling this the right way while also keeping our standards high. One of the things we’ve seen over the last couple of weeks has been a stellar growth rate. We went from 25 or 30 patients a day to closer to 100 new patients a day. One thing I'm really happy about is the patient reviews of their experience with LifeMD are practically across the board. I mean, their reviews are out of five stars, almost all 4.8, 4.8 to five, which is great. I mean, that's the number one metric that we look at internally. The retention rates look good as well. We're really focused on launching some new offerings that we think will improve the return on ad spend even more and make it clear to patients the value-add they are getting from their LifeMD membership. We're now beginning to mail out physical prescription discount cards to all of our members, which we think will really reinforce the value that people are getting. We've launched the symptom checker on desktop, and we're soon rolling that out on mobile. We're working on some new features set to launch in Q1, one of the big initiatives is to offer immediate consults to patients. So right now most patients are getting a consult within a couple of hours, but we know that patients prefer immediate appointments. We've got a lot of new initiatives coming up, including an overhaul of our dashboard that we’ll be rolling out in the next 30 to 60 days, which is expected to be transformative for the entire patient experience. We're also working on securing large partnerships that can enhance our offering and strengthen LifeMD’s brand.

Okay. That’s very exciting. And then just one more for me. You mentioned – you used the phrase a couple of big partnerships. I mean, could LifeMD be a brand that we see in like a large retail channel or perhaps some large health plans? Just any more color around that would be helpful, I think?

There are two partnership areas that we’re very focused on as a company. One is partnering within the pharma services world. That could help us scale the B2B business as quickly as possible. The second is partnering with national retailers, most of whom have pharmacies as well. We think there is a lot that we could do to increase the visibility of the LifeMD brand and make it easier for our patients to access on-demand prescriptions. We are in talks with a number of potential partners, and I believe that’s something that we’ll execute on in the coming quarter or two.

Okay. Congratulations on a good quarter, especially on profitability, and I will hop back in the queue.

Thank you. Next, we’ll move on to Marc Wiesenberger of B. Riley Securities.

Thank you. Good afternoon. Continuing on with the VPC segment, you talked about really accelerating patient adoption without increasing the spend. I’m wondering if you could talk a little bit more about where you’re getting these patients and through what channels? And is the level of spend that you’re currently using to acquire them kind of sustainable going forward?

Yes, Marc, sure. Most of the new patient acquisition for the primary care platform is coming from search right now, particularly high intent searches from people looking for treatment from a virtual provider. We’ve seen a significant improvement in CAC since we launched the primary care platform, where I still believe that even as we scale it, we can reduce acquisition costs and improve return on that spend considerably. There’s just a lot of opportunity there. The unit economics still need some refinement to get them where we want them to be, but we’ve got a clear game plan for getting there. When you look at the urgent conditions we’re treating, the chronic care management opportunities, and some of the other specialty areas that we’re imminently going into, this platform could grow very quickly.

Understood. Helpful. And right now, I believe VPC is all cash paid. But I think in the past, you might have alluded to opportunities to expand beyond that. Is that still on the radar? And how do you think about moving beyond just purely cash pay?

In the past 90 days, we’ve spoken with multiple payers, and some of those conversations are still ongoing. We’re trying to figure out the right strategy there. Our business allows patients to use their insurance card for prescriptions or for services like diagnostics and lab work. Most of our business is actually covered by insurance. We have had some conversations with payers about getting coverage for the virtual consults. However, given that the delta between most people’s co-pay and what we’re charging for a consult is not that material, the outcome of these conversations is still pending. Based on our experience, the less time we spend looking at this, the less material it seems to be for scaling our primary care business.

Got it. Okay. And then you talked about the transition to more multi-month subscriptions. And previously, you indicated that growth in the back half of this year would moderate, but looking for that to inflect at the start of next year. Wondering how, with those longer subscriptions, how churn has been progressing relative to your expectations? And do you still expect to see that growth inflect beginning of 2023?

Yes. We do expect a return to growth in the first quarter of 2023. As for churn, the early feedback is it’s consistent with our expectations. It has been steady with some of the other subscription lines. The difference is they’re getting more at every single cycle. So the economics prove to be a lot better with the payback being much stronger and the margins being a lot higher as well.

Great. And then I’d love to hear some commentary about the ad market and pricing trends and maybe any changes in potential strategy for attracting new patients across the whole portfolio going into calendar 2023?

Yes, Marc, we have some really exciting stuff in the pipeline. Actually, one big national campaign launching in the next 7 to 10 days that we think will positively impact the growth of our business, along with a couple of other initiatives. We’ve spent significant time on this over the last six months, and we’re extremely optimistic about it. Coupled with improving retention and cross-selling, along with sticking to a disciplined acquisition strategy, that’s why Marc and I feel very positive about Q1 of next year and are putting up some great growth numbers.

Great. And then just a final one for me on WorkSimpli. It seems the language has changed a little bit. I think previously, you had talked about progressing with one specific bidder, maybe moving a little further along. Curious if that entity is still the one that you're focusing on? Or maybe just a little bit more detail on how that divestiture process is progressing? Thank you.

Yes. Since it's in a privately governed process right now, I can't speak to too much detail other than that everything is progressing. The big thing is WorkSimpli has continued to become more valuable, and its results have continued to accelerate. The financial projections we have for the upcoming year and even beyond are substantially higher than when we first entered the process. We are weighing all of these factors against the valuation and we have a very clear understanding of what the current valuation is. We are far along in our discussions with interested bidders, and there will be an ultimate decision by the end of the year.

Great. Thank you very much. Congrats on a good quarter.

Thank you. We'll take a follow-up question from David Larsen, BTIG.

One more quick one for me. Can you maybe talk a little bit about what drove this significant increase in WorkSimpli revenue from $5 million a quarter in 1Q of 2021 to $10 million this quarter? And then also, it sounds to me like you don't really have to sell WorkSimpli. One of the questions I've been getting from investors is why sell it, why not hang on to it? Has that been a consideration? Thanks.

Yes. So first of all, as we mentioned last year, WorkSimpli, like many growth businesses, did some testing regarding a few different approaches, which contributed to short-term stagnation at the end of last year heading into the beginning of this year. That's all behind us. We've defined the business model very well. WorkSimpli is a cash cow and run by a great leadership team, which has diversified their business. They no longer just provide PDF services; they are also in the resume HR market and a few other adjacent markets. Regarding your second question, it is indeed something we're considering. This asset is becoming more and more valuable, generating significant cash flow that can easily be used to invest in core telehealth operations because the CapEx in WorkSimpli is minimal. We are weighing all our options and will make the decision that maximizes value for shareholders. We are not forced to sell the asset for a price that does not fully recognize its value.

David, I'll just mention quickly, too. A lot of people forget about the asset that LifeMD financed the acquisition of, which is part of WorkSimpli, resumebuild.com. While the PDF business has grown, the unit economics are even better on the ResumeBuild side. In an economy that is expected to have recessionary pressures, the demand for resume services is likely to increase significantly. This asset is perfectly positioned, and with management's skills to scale, it is amazing. The diversification of this business, which now includes multiple assets, will prove very valuable and will create significant shareholder value. As we said, we're not planning to rush into a sale, and maintaining our growth and profitability profile gives us multiple options.

Okay, great. Thanks very much.

Thank you. And there are no further questions today, and that will also conclude today's question-and-answer and teleconference. We do appreciate your participation. At this time, you may now disconnect. Thank you, and have a great day.