Land Grab At LifeMD
Summary
- Revenue is accelerating and the company's platform is almost endlessly leverageable with new brands and products.
- However, as the company is still in the land-grab phase, investments are accelerating even more steeply, and one could argue, worryingly.
- So losses and dilution are set to continue for quite some time, but if you can see beyond that a pretty attractive picture emerges.
- The shares trade at a modest EV/S multiple of 5.4.
- Looking for a portfolio of ideas like this one? Members of SHU Growth Portfolio get exclusive access to our model portfolio. Learn More »
We bought shares of LifeMD (NASDAQ:LFMD) at the end of September last year at $8 for our SHU Growth Portfolio which had started a few months earlier.
The shares have been very volatile and the company is spending like there is no tomorrow. They have greatly ramped up their customer acquisition spending and are also introducing new brands and new products.
Management clearly believes they are in a crucial land-grab phase and the ones which invest the most will be the eventual winners. Here you see the sharply diverging revenue growth and operational metrics:
And look at the rising cost:
In Q4, operating expenses jumped to a whopping $41.2M from just $3.7M a year ago with S&M increasing by $15.2M and G&A increasing by $21.7M.
Source: 10-K
Even their adjusted EBITDA turned sharply negative in Q4 at -$9.7M. GAAP losses were a whopping $63.4M ($4.44 per share) although factoring out the non-cash and financing related items (adjusted EBITDA) reduces this to $16.3M with most of that adjustment coming from stock-based compensation ($37M).
There are quite a few ways management defends this huge ramp in operational cost:
- Media costs were very high in Q4, they've come down considerably in Q1 already.
- The ROI on customer acquisition is large.
- And it will be larger as they are now converting nearly all new customers on a subscription basis.
- $20.1M of this $41.2M S&M spending in Q4 was non-cash (stock-based comp and amortization).
- Revenue growth is exploding.
- Their concierge solution LifeMD increases upsell opportunities and stickiness.
With respect to the ROI on their S&M spending, management argues that it's paid back in 3-4 months and generates a 100%+ return within the first year of spending.
This could very well increase some more as newer customers almost entirely convert to the subscription model which was just 20% of revenue in early 2020 and is now running at 91% of revenue. Needless to say, the lifetime value of subscribers is substantially more than that of other customers. Management also argues that the ROI on their call centers is very high.
Revenue growth is of course rather spectacular at +227% in Q4 to $12.9M and +293% telehealth revenues of $10.3M (PDFSimpli came in at +96% or $2.6M, curious that this detracts from overall growth).
For the year the growth was 199% to $37.3M (telehealth +208% to $30.6M and PDFSimpli +165% to $6.7M). Gross margin is declining from 79.7% in 2019 to 76.1% in 2020 with gross profit at $28.4M (+185%). Here is where the revenue comes from, mostly Shapiro and Rex, and then PDFSimpli:
Source: 10-K
In Q4 the decline in gross margin was pretty substantial, from 79.6% a year ago to 59.1% in Q4 2020, due to a changing product mix and inventory write-offs for legacy products so we expect this to partially recover.
Subscription business
Their subscription business is mostly product-driven but also includes consults (Q4CC):
the patient or the customer is either paying a monthly or quarterly fee which is all inclusive of the treatment that our physicians provide right and the product whether it be prescription or OTC that the patient or customer is receiving from us.
It's auto-ship, auto-charge, which lowers costs.
New products
Their telehealth platform enables the company to offer highly customized and targeted offerings and tests new products and even whole new brands so it is endlessly leverageable.
The company is introducing new products and even whole new brands. As an example of the latter, it is introducing its new teledermatology brand Nava MD (the week after the Q4CC).
A host of new products for many common dermatological conditions will be introduced and the company entered into an exclusive licensing agreement with Restorsea, from the Q4CC:
It includes patented medical grade over-the-counter products for treating these prevalent skin conditions, integrating Restorsea's clinically proven technology into our Nava MD offerings represents a major competitive advantage for us as we enter this high growth market segment.
Then they are finalizing the soft rollout of their primary care and concierge business LifeMD, which specializes in integrative medicine and works on a cash subscription basis ($50-150/month). From the Q4CC:
The platform will combine a low-cost prescription drug offering, discounted access to all of our cascade telemedicine offerings and on demand access to the same doctor. While the offering will initially be launched in the U.S., we believe it has a global appeal given the high regard for U.S. medical professionals and treatment in international markets. We see this opening up new direct to consumer joint venture and partnership opportunities for LifeMD and further enhancing our value proposition.
We'll have to see but it looks like LifeMD could open a lot of new revenue streams. On the other hand, these (and other) initiatives require the company to keep investing heavily in new professionals, physicians, clinical support, and customer service, but that's the land-grab argument treated above.
Existing brands will also add new treatments for new indications, for instance in the Rex MD (Men's health) and Shapiro MD (hair loss) lines and new products in dermatology, mental health, cholesterol. And it's not going to stop there (Q4CC):
for competitive reasons I'd rather not speak specifically on other indications that we plan to launch in this year but I'll just say generically that we're looking at several other markets that we think are a perfect fit for direct to consumer telemedicine, total addressable market are massive, even bigger than erectile dysfunction and hair loss and we're very, very excited to launch another in addition to scaling the hair loss and launching the derm business and adding indications in addition to patients for health and direction we're very excited to prove out another one or two indications this year in massive markets. So more to come on some other areas
And they are also building an additional platform (Q4CC):
we're building a great technology platform that is similar to the kind of one medical but the world, right, that would integrate in one place, all the patients lab, almost there kind of medical history with us pull in all their medical records, when they initially onboard onto the platform. And so we're really excited to launch that we're aiming to launch on the summer.
This is likely to open new avenues and increase the stickiness of patients, but first, they have to finish building it and then gather all the data, again a pretty significant investment.
Outlook
Management forecasts revenue between $85M and $95M (+128%-+155% y/y). This looks doable as the yearly run rate has already reached $75M in Q1 2021.
Source: FinViz
Cash
At the end of the year, the company had $9.18M in cash and $779K in notes outstanding. That's not a whole lot so they organized a $14M private placement in February 2021. All these investments have to be paid for largely in shares:
And there is more to come:
Source: 10-K
So fully diluted, there are some 35M shares out.
Valuation
At 35M shares and $14 per share, the company has a market capitalization of a little under $500M, which looks to produce a surprisingly modest EV/S multiple of 5.4.
However, given the pace of investment, there is almost certainly new financing necessary on a fairly significant scale. The company will also be producing pretty substantial losses for some time to come. If we take:
- Revenues at midpoint of $90M
- Gross margin at 70%
- Q4 adjusted operational cost at $21
We get a $21M operational loss. Now, the company has a history of exceeding guidance, but on the other hand, we think the operational cost could rise well beyond the $21M run rate (minus non-cash items like amortization and stock-based compensation).
Conclusion
While growth is terribly impressive and likely to endure for some time to come, we must not be entirely blind to the enormous investments this requires and keeps the company from reaching breakeven or generating cash for quite some time to come. There are three main reasons we're not overly worried about this, at least not yet:
- The company's spectacular revenue growth.
- Platform economics; their platform is endlessly leverageable with new products, brands, and services.
- They have managed to convert most clients to subscription clients.
So we think it's likely that the leverage will take over at some time, although when that will be is pretty difficult to say at this point. It doesn't look to be anytime soon so it's likely the company will need additional rounds of finance and will lead to a rather volatile ride, even if we believe that ultimately, the net vector of that ride is up.
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This article was written by
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Analyst’s Disclosure: I am/we are long LFMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (144)
46. For example, the Report distorts LifeMD executives’ involvement with Redwood Scientific Technologies, Inc. (“Redwood Scientific”) and explicitly states that Schreiber and Galluppi were engaged in fraud committed by Redwood Scientific.
47. This statement is demonstrably false.
48. No current or former member of LifeMD’s management team was involved in
decision-making or had significant equity ownership in Redwood Scientific at any time.
49. Schreiber held only a passive investment and non-controlling interest in the company.
50. Further, although Galluppi nominally held the title “CTO”, he held no equity in Redwood Scientific and resigned in October 2015, departing more than two and a half years prior to the FTC action against Redwood Scientific.
In addition to the foregoing, the Report contains a myriad of other errors,
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Case 2:05-mc-02025 Document 633 Filed 05/13/21 Page 11 of 22
51. The fact that Schreiber and Galluppi had no involvement in any fraud by Redwood Scientific is confirmed by the filings in Federal Trade Commission v. Cardiff, et al., 5:18-cv- 02104 (C.D. Cal. 2018).
52. The FTC sued Redwood Scientific, other persons, and related entities, asserting unfair and deceptive trade practices.
53. Neither Schreiber nor Galluppi were sued, and their names do not even appear in the FTC’s Uncontroverted Statement of Facts and Conclusions of Law in Support of its Motion for Summary Judgement, the FTC’s response to Defendants’ Statement of Facts, or the Court’s Order Granting Plaintiff’s Motion for Summary Judgment, which adopted the facts relied upon by the FTC. See Federal Trade Commission v. Cardiff, et al., 5:18-cv-02104 (C.D. Cal. 2018) DE 423-3, 499-1 & 511. This information was public and readily available to Defendants when they published the Report.
Patently False Statements About LifeMD’s Licensing Practices
54. The Report outright lies about LifeMD’s licensing practices, using Dr. Badii and Dr. Kalter as purported examples of LifeMD’s use of unlicensed physicians.
55. LifeMD’s physician network consists of nearly 90 board-certified and monitored medical providers who legally dispense prescription medications.
56. LifeMD has never allowed an unlicensed medical provider to perform a telehealth consult for any of its brands.
57. The truth is that Dr. Badii was and still is a medical doctor licensed to treat patients and prescribe prescription medications in multiple states, which can be verified online through a simple web search.
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Case 2:05-mc-02025 Document 633 Filed 05/13/21 Page 12 of 22
58. LifeMD, through its own quality assurance processes, discovered in March 2021 that Dr. Badii had been sanctioned by the DEA for issues related to prescribing controlled substances, and was barred from prescribing controlled substances.
59. LifeMD immediately removed him from their physician network.
60. LifeMD has never prescribed controlled substances, an elementary fact that could
easily be verified by anyone that reviewed the company’s website and filings with the SEC.
61. All treatments and medications prescribed by Dr. Badii for LifeMD were lawful and in compliance with all federal and state laws related to prescribing prescription medicine.
62. In the case of Dr. Kalter, a web design error inadvertently listed Dr. Kalter as licensed in California rather than Massachusetts, where Dr. Kalter is licensed.
63. As soon as LifeMD realized the error, it immediately fixed it.
64. Notably, Dr. Kalter never performed a consult or wrote a single prescription for LifeMD in California, even though he would be permitted to do so pursuant to an executive order signed by California’s Governor. This information was readily available to Defendants when they published the Report.
Patently False Statements About Veritas MD Telehealth Platform
65. In their Report, Defendants question LifeMD’s press release claims regarding the Veritas MD Telehealth Platform, stating they are “filled with hot air.”
66. Contrary to the Report’s misstatements, LifeMD’s disclosures about its digital health platform, formerly known as Veritas MDTM, are accurate.
67. Defendants falsely portray LifeMD as a consumer-facing application, when in fact LifeMD serves as the technological and operational backbone behind the REX MDTM, Shapiro
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Case 2:05-mc-02025 Document 633 Filed 05/13/21 Page 13 of 22
MDTM, and Nava MDTM telehealth products. This information was readily available to Defendants when they published the Report.
Patently False Statements About LifeMD’s Relationship with BV Global Fulfillment
68. The Report also misrepresents LifeMD’s relationship with BV Global Fulfillment and JLS Ventures, indicating that insiders are improperly enriched by the transaction.
69. To the contrary, the rates LifeMD has paid and still pays to BV Global are in line with, if not lower than, what many third-party logistics providers charge for comparable services. 70. In addition, as is typical in contracting with a third-party logistics provider, LifeMD
pays the shipping costs in connection with delivery of its telehealth products to consumers.
71. Notably, LifeMD’s relationship with BV Global is prominently disclosed in all of LifeMD’s filings, and this relationship has never been flagged or mentioned as an issue in any audit or due diligence by institutions that have invested into LifeMD. This information was readily
available to Defendants when they published the Report.
Patently False Statements About Schreiber And JLS Ventures Compensation
72. In the Report, Defendants falsely state that LifeMD’s 2019 Form 10-K indicates that JLS Ventures earned an astounding 900,000 shares for providing credit card processing services to the company, yet these disclosures have been removed in the Company’s 2020 Form 10-K.
73. In fact, neither Schreiber nor JLS Ventures received any compensation for the credit card processing, a fact clearly stated in LifeMD’s 2019 Form 10-K; rather, the referenced shares were incentive based, for Schreiber’s work as CEO.
www.reddit.com/...
I posted a negative comment under his many unfounded bearish comments and it got ERASED. There is no credibility here. Pretty soon more investment funds will follow Millenium into LFMD with a lot more cash. So just follow the real money. The real investors.
seekingalpha.com/...Although they had an incentive to trash management with a short position and I have no clue if the short report is accurate. Personally, I read enough in the filings that I didn't trust their ethics so I moved on.
Good way to play the stocks volatility, I am going to see if it begins to settle out in the teens to add some more.to me $LFMD seems like a stock that will be cheap until all of the sudden it trades in the 30s. This is why I use covered calls to hedge a bit and make some profit while shares languish.