LifeMD - Q3 2020

Transcript

Judith Goldring (Head of Investor Relations)

Good afternoon! Thank you for joining us today to discuss Conversion Labs' Third Quarter Results ended September 30th, 2020. Joining us today is the Chief Executive Officer of Conversion Labs, Justin Schreiber, and the company's Chief Financial Officer, Juan Pinheiro. Following their remarks, we'll open the call to your questions. Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by management during the call. I'd like to remind everyone that today's call is being recorded and will be made available for telecom replay via instructions in today's press release, which is available in the Investor Relations section of the company's website. Now, I'd like to turn the call over to Conversion Labs' CEO, Justin Schreiber. Please go ahead, sir.

Justin Schreiber (CEO)

Thank you, Judy, and good afternoon, everyone. Thanks for joining us today. After the market closed, we reported another quarter of continued outperformance across our key financial and operational metrics. 2020 continues to be a transformational year for Conversion Labs. Most of the growth is due to the launch of our direct-to-consumer telemedicine platform and the overall performance of our entire brand portfolio, generating strong organic growth and an increasing amount of subscription revenue. As we all know, the ongoing COVID-19 pandemic has accelerated everything e-commerce, but especially the adoption of telemedicine. This has greatly supported our aggressive growth strategy, focused on new patient acquisition and the continued optimization and build-out of our technology platform. It's important to emphasize the word platform.

What you own as a shareholder in Conversion Labs is part of a direct-to-consumer telemedicine platform that has been validated by our success this year in men's health and hair loss, but has tremendous potential across the entire healthcare product world. The tailwinds created by this paradigm shift towards telehealth has clearly helped strengthen the demand for our brands, especially in the third quarter, resulting in record revenue of $11 million. This is up 21% from just the previous quarter and up 252% compared to the same year ago quarter. This momentum has carried into the fourth quarter. As you may have seen, October was an outstanding month for us, with net revenues of $4.1 million, which is greater than the revenue we generated in Q4 of last year.

Looking at October and the first couple weeks of November, we've achieved an overall annualized revenue run rate of nearly $50 million. This compares to $12.5 million for all of last year, a solid fourfold increase. This run rate is also up by more than $2.1 million from September, showing a continued rapid acceleration in the overall growth of the business. We're particularly excited about our annual recurring revenue, ARR, from subscriptions to our products and services, which we started to report in July. In the last month of the third quarter, that is September, it increased by 458% to $19.3 million compared to September of last year. In October, this jumped by $2.8 million, or 14%, to $22.1 million, and was up 514% versus October of 2019.

As a result of our third quarter performance and the momentum we're seeing across our brands, we believe we're still on track to meet our full year revenue guidance. Despite the strong growth we've seen over the past few quarters, I believe it's only the first innings for Conversion Labs and telehealth. This is why, as an early mover in telehealth, the following quarters will be pivotal in establishing our reputation and status as a leading provider in virtual healthcare. Although we are seeing significant revenue growth across the business, it's important to understand that we are continuing to make significant investments in our infrastructure in order to support the exponential growth we believe lies ahead for the business. We've made big investments in our telehealth technology platform, our provider network, and on medical and compliance personnel as we continue to scale the business.

One of our biggest areas of focus and investment has been our internal customer service and sales team. Recently, we leased space for a 400-seat call center in South Carolina and have already hired the first 40 representatives that have been doing great work assisting our patients and customers for the past 60 days. We also completed a $15 million financing led by institutional investors that will enable us to continue to build out our telehealth platform and uplist to the Nasdaq Capital Market. I'll discuss these and more in further detail later in the call. I believe the milestones and the actions we accomplished in the third quarter will be invaluable, having set the foundation for more robust, even faster growth than we have seen before.

With that, I'd like to turn the call over to Juan, our CFO, who will take us through the financial details for the third quarter. Juan?

Juan Pinheiro (CFO)

Thank you, Justin, and good afternoon, everybody. As Justin mentioned, Q3 was another quarter of strong organic top-line growth. Revenue in the third quarter of 2020 increased 252% to a record $11 million, up from $3.1 million in the same year-ago quarter. Our PDFSimpli subsidiary contributed net sales of $1.6 million, up 136% from the same year-ago quarter. Gross profit in the third quarter increased 238% to $8.3 million, compared to $2.4 million in the same year-ago quarter.

Gross profit as a percentage of revenue in the third quarter of 2020 decreased to 75.1% from 78.2% in the same year-ago quarter, due primarily to product mix, but still at the high level we've been expecting. Operating expense in the third quarter of 2020 was $28.8 million, up from $3.4 million in the same year-ago quarter. The increase was primarily due to increases of $8.5 million in selling and marketing expenses, as well as $16.7 million in general and administrative expenses. $120,000 in other operating expenses, $90,000 in customer service, and $57,000 in development costs.

It's important to note that the increase in general and administrative, and administrative expenses was largely due to $16.3 million in stock-based compensation, with the majority related to restricted share issue and liability, resulting from the attainment of performance thresholds exceeded in the period. This also contributed to the GAAP net loss attributable to common stockholders for the third quarter of $24.1 million, or negative $1.64 per share. This compares to a net loss attributable to common stockholders of $944,000, or negative $0.09 per share in the third quarter of 2019. The net loss for the third quarter of 2020 included other non-cash or financing-related charges, such as interest expense of $291,000, and combined with amortization expenses of $630,000.

Adjusted EBITDA, a non-GAAP term, which factors out these items, totaled negative $3.4 million in the third quarter of 2020, compared to negative $248,000 in the same year ago quarter. Now turning to our first nine months 2020 financial summary. Revenue in the first nine months of 2020 increased 186% to a record $24.4 million, up from $8.5 million in the same year ago period. PDFSimpli contributed net sales of $4.1 million, increasing 241% from the same year ago period. Gross profit in the first nine months increased 172% to $17.7 million, compared to $6.5 million in the same year ago period.

Gross profit as a percentage of revenue in the first nine months of 2020 decreased to 72.6% from 76.4% in the same year ago period. Again, due primarily to a changed product mix, but still at the high level we've been expecting. The more costly product mix reflects higher product-based costs that we believe are due to the impact of COVID-19 related disruptions to our product supply chain, which involved increased costs for procuring product inputs. We expect this to be resolved over time with an expected return to our historically higher margins. Operating expense in the first nine months of 2020 totaled $43.2 million, up from $8.9 million in the same year ago quarter.

The increase was primarily due to increases of $15.1 million of selling and marketing expenses, as well as $18.1 million in general and administrative expenses, $80,000 in customer service expenses, and $131,000 in development costs. The increase was primarily offset by a decrease of $36,000 in other operating expenses. General and administrative expenses for the nine months also included the aforementioned stock-based compensation. Our GAAP net loss attributable to common stockholders for the first nine months of 2020 was $29.9 million, or negative $2.38 per share, as compared to a net loss attributable to common stockholders of $2.4 million, or negative $0.25 per share in the first nine months of 2019.

The net loss for the first nine months of 2020 also included certain non-cash or financing-related charges, such as interest expense of $1.3 million, amortization expenses of $93,000, financing transactions expense of $52,000, acceleration of debt discount of $500,000, inventory valuation adjustment of $769,000, and stock-based compensation expense amounting to $16.9 million. Adjusted EBITDA, a non-GAAP term, totaled a loss of $5.3 million in the first nine months of 2020, compared to a loss of $787,000 in the same year-ago nine-month period. Turning to our balance sheet, cash totaled $917,000 at September 30, 2020, as compared to $336,000 at June 30, 2020.

Subsequent to the end of the quarter, we completed a private placement equity offering with institutional investors, which generated net proceeds of $13.2 million. So as of today, our cash balance totals approximately $11.7 million. We believe our current cash position and available funds provide the company with ample liquidity to meet our current needs and plans for growth. This wraps up our financial results. I'd like now - I'd like to turn now the call back over to Justin. Thank you.

Justin Schreiber (CEO)

Thanks, Juan. The momentum that we've seen throughout the year continued into the third quarter and continues into the final quarter, with November on track to be our strongest month yet.

... Looking ahead, the telehealth opportunity for Conversion Labs is truly incredible. More importantly, because of the increased access to healthcare enabled by telehealth companies like Conversion Labs, millions of Americans will gain access to important medical treatment that they otherwise might not have had access to. It's very fulfilling for our whole team to be creating and delivering products and services that can make such a big difference in the lives of our customers, and all the while creating tremendous value for our investors who have helped make this all happen. As an early mover in telehealth, it's paramount that we continue to make intelligent investments in our infrastructure to support our accelerating growth in this rapidly growing marketplace. This includes big investments in our telehealth technology platform, our provider network, and on medical, financial, operations, and compliance personnel that are critical as we scale the business.

One of our biggest areas of focus and investment has been our internal customer service and sales team. In October, we leased space for a 400-seat call center in South Carolina and hired our first 40 customer representatives. They've been doing phenomenal work assisting our patients and customers over the last 60 days, and the positive feedback we've been receiving has been tremendous. I believe the goals and milestones we accomplished in the third quarter will prove to be invaluable going forward, setting a stronger foundation for more robust, even faster growth than we have seen before. To support these investments in our growth, we recently completed a $15 million financing led by a select group of institutional investors who believe in our long-term outlook. BTIG, a highly regarded investment bank, serves as our exclusive placement agent.

The funding enables us to continue the build-out of our telehealth platform and our planned uplisting to the Nasdaq Capital Market. Last week, we also engaged B. Riley, another prominent investment bank, as a financial advisor to the company. We believe the support of both banks and hopefully coverage from their research analysts will be very valuable as we continue to increase the awareness of our story among institutional investors and build a world-class telemedicine business. Prior to the recent $13.2 million raise, we attracted a strategic $3.5 million investment from a select group of private investors and family offices, which included business and finance thought leaders David Blitzer from Blackstone and Wes Edens from Fortress.

As important as this funding is, the quality team members we have and continue to attract. We recently appointed two extremely impressive members to our board of directors, Roberto Simon and Dr. Connie Mariano. Roberto currently serves as the CFO of WEX, a nearly $8 billion fintech services provider traded on the New York Stock Exchange. He previously served as the CFO of Revlon, overseeing its global finance and IT operations as it grew to nearly $2 billion in annual sales. Given his extraordinary financial credentials, Roberto has been appointed chair of our audit committee, which was also another step in our preparation for our Nasdaq listing. Dr.

Connie Mariano, as some of you may know, has served our country as a U.S. Navy Rear Admiral and as the White House physician for three sitting presidents. Needless to say, she's a huge pioneer in breaking barriers and an incredible presence and leader in healthcare. We're thrilled to benefit from her knowledge and guidance as we continue to develop our presence in telehealth. With these appointments, our board now has eight members, with five serving as independent directors. Following our recent five-to-one reverse split, to meet the final qualifications, we've submitted our application to uplist to the Nasdaq Capital Market. We now meet all the listing requirements for Nasdaq, and based on our conversations from a few days ago, we believe that we are within one to two weeks of a listing. We believe a Nasdaq listing can be transformational for all shareholders.

It will open the doors wider to institutional investors and especially for retail, where we have a very relatable and compelling investment story for the individual investor. Altogether, we expect Nasdaq to dramatically improve liquidity and trade execution for our investors. I'd like to make a final point on our financing strategy as it relates to future growth. We do not believe that we will need to raise equity to support our growth following this financing. I can't say that we will never sell equity again, as this might make sense for our shareholders if our share price were to appreciate significantly. Our plan, which we've already begun to execute on, is to use non-dilutive sources of capital to finance our patient and customer acquisition efforts, and we believe that given our proven unit economics and relatively quick cash-on-cash return, this is very doable.

Everyone at Conversion Labs is excited about this upcoming phase for our company. If you've been following us closely, you'll know that we grew our e-commerce and now telemedicine business from basically zero to now a $50 million annual revenue run rate, with less than $15 million in total invested capital. This is because we treat every dollar invested in Conversion Labs like it was our own. Although we're not perfect and therefore can occasionally make mistakes, we have been pretty good at investing our capital wisely in areas that we believe will deliver great returns to our shareholders. Our balance sheet is now stronger than it's ever been before, and this will enable us to scale many of our planned campaigns where we have proven and very attractive unit economics. It also gives us the ability to test and scale new traffic sources, both online and offline.

In the past quarter, we launched Rex MD on streaming TV and saw very promising results. This week, we are launching additional creative for Rex MD on 16 national networks, and we are extremely optimistic about this traffic source. We think that there is a big offline opportunity for our telemedicine brand, and we plan to exploit this over the coming quarters. We expect our call center operation in South Carolina to be a major growth driver for Conversion Labs going forward. Within just the first 60 days of operations, it is dramatically reducing our customer acquisition costs. We believe it also will dramatically improve the experience of our patients, which will have a positive impact on customer lifetime value.

We know that in order to build a leading telehealth company, which we aspire to do, we have to deliver not only the highest quality of care, but also the best patient experience with our company, healthcare providers, and customer service professionals. Our new call center will be an important part of this effort. Tapping the power of social media will also be key. We are in late-stage discussions with certain key female influencers that we believe will be a major catalyst for growth in our Shapiro MD telemedicine offering. This will dovetail nicely with the licensing agreement we obtained for Restorsea's leading medical-grade skincare technology platform. We're extremely excited to leverage their platform for the upcoming launch of our new Teledermatology brand, Nava MD, that we announced last month.

Restorsea's IP and clinical results were the culmination of over $50 million in R&D investment that produced 35 patents and broad industry and medical acclaim. The clinical results have been published in peer-reviewed journals such as Journal of Drugs in Dermatology and Journal of Clinical and Aesthetic Dermatology. Nava MD will be positioned as an online skincare telehealth brand that offers prescription-grade teledermatology products to patients in all 50 states. Teledermatology is one of the fastest growing segments of the already quickly growing telehealth market. Fortune Business Insights thinks this market segment alone will be growing at a 24% compounded annual growth rate and hit $45 billion by 2027. We will also soon formally launch new indications under our Rex MD brand. We expect this to cement our presence as a leader in men's telehealth.

Rex MD's expanding capabilities will be enabled by our proprietary telehealth technology platform, Veritas MD, which is also nearing its official launch. Looking ahead, we see our Conversion Labs telemedicine platform continuing to drive growth and opportunities, and especially greater shareholder value over the months and years to come. We remain committed to the opportunities that lie ahead, and we continue to develop and improve upon the customer healthcare experience. Once again, thank you for your continued interest in Conversion Labs. And with that, I'd like to open the call to your questions. Judy?

Judith Goldring (Head of Investor Relations)

Thank you. At this time, if you do have a question, you may signal us by pressing star one. Again, that will be star one for questions today. We'll hear first from Andrew D'Silva with B. Riley Securities.

Andrew D'Silva (Senior Healthcare Research Analyst)

Good afternoon. Thank you very much for taking my questions. Congrats on all the progress year to date. Just hoping you could discuss stickiness of subscriptions and what kind of forward visibility that's giving you right now. Also, as it relates to the subscriptions, you noted all brands increased 30%, quarter-over-quarter. Could you give a little insight into how much of that growth is tied to cross-pollination versus new Conversion Labs subscribers?

Justin Schreiber (CEO)

Sure. Thanks, Andy. Look, we haven't formally put out retention numbers, you know, for our telemedicine business. So, you know, it's tough to really say in a quantifiable way what the stickiness is. But, you know, that's a number that we plan to really, you know, start talking about, I think, in the first quarter. But we've seen, you know, as we've communicated, you know, over and over, you know, to all of our shareholders, you know, we've seen extremely strong, you know, unit economics with a relatively quick, you know, cash-on-cash return. Obviously, it's a new business, so it's a little bit, you know, we have limited, you know, data on the kind of long-term lifetime value of these customers.

But we'll be talking more about that, you know, in twenty twenty-one. I think that regarding your second question, we don't see at the moment a lot of, you know, cross-pollination between, for instance, Shapiro and Rex, and that's, you know, more of an infrastructure thing. And one thing, Andy, that we're, you know, really gonna start to see how we think we'll start to see out of the call center, and we already have a little bit, is more of that happening. You know, we're investing a lot in the, you know, training these reps to really help our patients. And, you know, also, as we launch Veritas, you know, that's another interesting thing, right?

As we bring on physicians, you know, onto our platform with the launch of Veritas, you know, we'll have more ability to, you know, the physicians will have more of an ability to talk about, you know, different products across our portfolio.

Andrew D'Silva (Senior Healthcare Research Analyst)

Useful color. Thank you. And the last question for me is just as far as demographics go, can you give a little sense of what the age of the total pool is right now and where you're finding the most success? Also, just curious how that overlaps with some of the new offerings you're expecting to add on in the coming quarters.

Justin Schreiber (CEO)

Sure. Yeah, I'm gonna let Stefan Galluppi answer that, who's our Chief Marketing Officer. Stefan, you wanna talk a little bit about the demo- the demographics we're seeing?

Stefan Galluppi (CMO)

Yeah, absolutely. For Rex MD, the average age of our customers for the ED offer is 65 years old, so we're a bit on the high side. And then what was the second question?

Andrew D'Silva (Senior Healthcare Research Analyst)

... Yeah, as far as the age demographic goes, how do you feel that bodes for you going forward as you begin to layer on more offerings? Is that fifty-five-year-old demographic ideal at this point, or do you need to move younger age groups?

Stefan Galluppi (CMO)

No, we think it fits perfectly in line with the rollout of all the additional categories that we're entering into.

Andrew D'Silva (Senior Healthcare Research Analyst)

Okay, perfect. Thank you very much. Best of luck closing out 2020.

Justin Schreiber (CEO)

Thanks, Andrew.

Judith Goldring (Head of Investor Relations)

We'll hear next from Corey Deutsch with Paradigm Opportunities LLC.

Corey Deutsch (Founder and Portfolio Manager)

Hey, Justin, Juan, Stefan, and the broader Conversion Labs team. First and foremost, I wanted to congratulate you guys on a truly phenomenal quarter.

Justin Schreiber (CEO)

Yeah, thanks, Corey.

Corey Deutsch (Founder and Portfolio Manager)

Yeah. And then second, you know, obviously this is not something that you guys are forecasting in, nor modeling, but, you know, with the recent upticks in COVID, and with the ongoing conversation about a potential second shutdown in the US, how do you see the opportunity there in the sense of, you know, the expedited growth that may cause for the company?

Justin Schreiber (CEO)

Yeah, that's a great question. You know, I think a lot of people, we've gotten some phone calls, right, with the Pfizer, Moderna, you know, vaccine announcements, and, you know, people tend to think that telemedicine is kind of a, you know, a COVID play and that these vaccines are negative for the business. But, you know, I, first of all, I disagree with that entirely, right? Telemedicine's here to stay, and COVID has accelerated the stream, and people are comfortable with it, and it's not going anywhere. It's only gonna grow. But yeah, as far as the next couple months go, there's without a doubt, you know, lockdowns drive, you know, e-commerce.

So, you know, certainly, like we saw early, earlier in the year with both our telemedicine portfolio and our, you know, over-the-counter and our SaaS portfolio, like we, no question about it, Corey, that if we see the lockdowns, you know, happen like we're expecting over the winter months here, it's a big growth driver for us. So how big? You know, I'm not sure. You know, and obviously lockdowns plus stimulus, you know, then it's an even bigger growth driver. So, but those two things, although sad overall for the economy and for the population, are big growth drivers for Conversion Labs.

Corey Deutsch (Founder and Portfolio Manager)

Yeah. Thanks, Justin. Again, congratulations on the quarter, and, you know, regardless of what happens in the broader U.S., you know, how you guys are positioning the company for growth and winning going forward is very impressive, so great job, guys.

Justin Schreiber (CEO)

Thank you.

Thank you.

Judith Goldring (Head of Investor Relations)

Thank you for questions. That is all we have at this time, and as a final reminder, that is star one for questions at this time. We'll hear next from John DeMeo with Newbridge Securities.

John Demeo (Branch Supervisor and Compliance Principal)

Hey, you mentioned about the uplisting to the Nasdaq. You said one to two weeks. Can you be a little bit more specific, or you just don't know?

Justin Schreiber (CEO)

We just don't know, but you know, we had a great, you know, our counsel had a terrific call with the Nasdaq last week. We believe we've satisfied all their requests, so you know, we're hopeful to get the green light any day, but they haven't given us a ... They just haven't given us the green light yet, formally, there's still just a couple of you know a process that's relatively quick, so we think it's imminent.

John Demeo (Branch Supervisor and Compliance Principal)

Okay. Thank you.

Judith Goldring (Head of Investor Relations)

At this time, I'd like to turn things back to Justin Schreiber for any closing remarks.

Justin Schreiber (CEO)

Thanks, everyone, for attending our call today. Thanks especially to our shareholders who have joined us during the most exciting time of our company's history. And everybody be well and stay happy. Judy, go ahead and wrap up the call.

Judith Goldring (Head of Investor Relations)

Thank you, ladies and gentlemen. Now, before we conclude today's call, I would like to provide the company's safe harbor statements that include important cautions regarding forward-looking statements made during today's call. The information that the company has provided in this conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the company's plans, strategies, and prospects, both business and financial. Although the company believes that its plans, intentions, and expectations reflected on or suggested by these forward-looking statements are reasonable, the company cannot assure you that it will achieve or realize these plans, intentions, or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions.

Many of the forward-looking statements made during the conference call may be identified by the use of forward-looking words such as believe, expect, anticipate, should, plan, will, may, intend, estimated, and potential, among others. Important factors that could cause actual results to differ materially from the forward-looking statements made during this conference call include market conditions and those set forth in reports or documents that the company files from time to time with the United States Securities and Exchange Commission. All forward-looking statements attributable to Conversion Labs or a person acting on its behalf are expressly qualified in their entirety by this cautionary language. Before we end today's call, I would like to remind everyone that this call will be available for replay starting later this evening and running through November 31st. Please refer to the earnings release for our dial-in replay instructions available via the company's website at www.conversionlabs.com.

Thank you for joining us today, and this concludes today's conference call. You may now disconnect.