HIMS & HERS HEALTH, INC. The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Form 10-K for the year endedDecember 31, 2021 (our "2021 Annual Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in ITEM 7 of Part II of our 2021 Annual Report and the accompanying unaudited condensed consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q. Our actual results may differ materially from those contained in any forward-looking statements. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date hereof or to conform these statements to actual results or revised expectations. Forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under "Risk Factors" in ITEM 1A of Part II of this quarterly report on Form 10-Q. Unless otherwise indicated or the context otherwise requires, references in this discussion and analysis to "we," "us," "our," the "Company," and "Hims & Hers" refer toHims & Hers Health, Inc. and its subsidiaries and variable interest entities. Overview Hims & Hers is a consumer-first platform transforming the way customers fulfill their health and wellness needs. Our mission is to make health and wellness solutions accessible, affordable, and convenient for everyone. Our digital platform enables access to treatments for a broad range of conditions, including those related to sexual health, hair loss, dermatology, mental health and primary care. Hims & Hers connects patients to licensed healthcare professionalswho can prescribe medications when appropriate. Prescriptions are fulfilled online through licensed pharmacies on a subscription basis, making accessing treatments simple, affordable, and straightforward. Through the Hims & Hers mobile applications, consumers can access a range of educational programs, wellness content, community support, and other services that promote lifelong health and wellness. We are leading an industry transformation by becoming the digital front door to health and wellness for a broad spectrum of consumers. We believe the future of healthcare will be led by trusted consumer first brands that empower people and give them more control over their health and wellness needs. We have endeavored to build a model that centers around the consumer, and provides them with tools and support to chart their own path to feeling their best. We connect technology and a seamless experience, with a brand that consumers recognize and trust. To further our mission, we offer a range of health and wellness products and services available for purchase directly by customers on our websites and mobile applications. Additionally, Hims & Hers products can be found in tens of thousands of top retail locations inthe United States . Reclassifications Beginning with the quarter endedSeptember 30, 2022 , we voluntarily reclassified certain operating expenses within the condensed consolidated statements of operations and comprehensive loss. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported financial position or results of operations. We elected the new presentation to provide additional granularity on our costs and to better align with management's view of our operating results. These classification changes are related to breaking out our previous selling, general, and administrative caption into three new captions entitled: (i) operations and support, (ii) technology and development, and (iii) general and administrative. The operations and support caption includes costs related to our supply chain, fulfillment and customer support functions. The 20
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technology and development caption includes costs related to the operation and enhancement of our digital platform and product development. The general and administrative caption includes costs relating to our corporate functions, including personnel costs, professional services, insurance, depreciation and amortization relating to corporate operating activities, and other general corporate costs.
Revenue and Key Business Metrics
Our management monitors two financial results, Online Revenue and Wholesale Revenue (both defined below), to track our total revenue generation.
"Online Revenue" represents the sales of products and services on our platform, net of refunds, credits, and chargebacks, and includes revenue recognition adjustments recorded pursuant to accounting principles generally accepted inthe United States of America ("U.S. GAAP"), primarily relating to deferred revenue and returns reserve. Online Revenue is generated by selling directly to consumers through our websites and mobile applications. Our Online Revenue consists of products and services purchased by customers directly through our online platform. The majority of our Online Revenue is subscription-based, where customers agree to be billed on a recurring basis to have products and services automatically delivered to them. "Wholesale Revenue" represents non-prescription product sales to retailers through wholesale purchasing agreements. We sell only non-prescription products to wholesale partners. In addition to being revenue generative and profitable, wholesale partnerships have the added benefit of generating brand awareness with new customers in physical environments. "Subscriptions" are defined as the number of customer agreements where the customer has agreed to be automatically billed on a recurring basis at a defined cadence. The billing cadence is typically defined as a number of months (for example, billed every month or every three months). Subscriptions are excluded from our reporting when payment has not occurred at the contracted billing cadence. Subscription billing is preferred by many of our customers because most of the products and services we make available treat chronic conditions and these product and service offerings are most effective when taken consistently and continuously. Customers can cancel subscriptions in between billing periods to stop receiving additional products and services and can reactivate subscriptions to continue receiving additional products and services. Subscriptions are sometimes also referred to by us as "subscription memberships" or "memberships."
"Net Orders" are defined as the number of online customer orders minus
transactions related to refunds, credits, chargebacks, and other negative
adjustments.
Average Order Value ("AOV") is defined as Online Revenue divided by
The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, for the three and nine months endedSeptember 30, 2022 and 2021, as well as key metrics that drive Online Revenue (i.e.,Net Orders , AOV, and Subscriptions) and the dollar and percentage change between such periods (in thousands, except for AOV): Three Months EndedSeptember 30 , Nine
Months Ended
2022 2021 Change % Change 2022 2021 Change % Change
Online Revenue $ 139,781 $ 72,032 $ 67,749 94 % $ 341,345 $ 180,858 $ 160,487 89 %
Wholesale Revenue 5,055 2,141 2,914 136 % 18,368 6,321 12,047 191 %
Total revenue $ 144,836 $ 74,173 $ 70,663 95 % $ 359,713 $ 187,179 $ 172,534 92 %
Subscriptions (end of
period) 991 551 440 80 %
Net Orders 1,675 968 707 73 % 4,267 2,441 1,826 75 %
AOV $ 83 $ 74 $ 9 12 % $ 80 $ 74 $ 6 8 %
We generated $139.8 million in Online Revenue for the three months ended
September 30, 2022 , an increase of 94% as compared to $72.0 million for the
three months ended September 30, 2021 . Growth in Online Revenue for the three
months ended September 30, 2022 was driven primarily by growth in Subscriptions,
as well as growth in AOV and Net Orders . We
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generated$341.3 million in Online Revenue for the nine months endedSeptember 30, 2022 , an increase of 89% as compared to$180.9 million for the nine months endedSeptember 30, 2021 . Growth in Online Revenue for the nine months endedSeptember 30, 2022 was primarily driven by growth in Subscriptions, AOV, andNet Orders , as well as a full nine months of revenue for bothHonest Health Limited , which was acquired inJune 2021 and is nowHims & Hers UK Limited ("HHL"), andYoDerm, Inc. ("Apostrophe"), which was acquired inJuly 2021 . We generated$5.1 million in Wholesale Revenue for the three months endedSeptember 30, 2022 , an increase of 136% as compared to$2.1 million for the three months endedSeptember 30, 2021 . We generated$18.4 million in Wholesale Revenue for the nine months endedSeptember 30, 2022 , an increase of 191% as compared to$6.3 million for the nine months endedSeptember 30, 2021 . These increases were primarily due to the addition of new retail partners in the fourth quarter of 2021 and throughout 2022, which increased the overall volume of wholesale orders. Wholesale Revenue has trended upward in the long-term but, in the near term, can fluctuate on a quarter-to-quarter basis due to various factors, including delayed inventory purchases from our partners, seasonality trends, launches of new merchants and timing of specialized campaigns. For the three months endedSeptember 30, 2022 , AOV was$83 , an increase of 12% as compared to$74 for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , AOV was$80 , an increase of 8% as compared to$74 for the nine months endedSeptember 30, 2021 . AOV growth for the three and nine months endedSeptember 30, 2022 was driven by higher price points from product bundles with product mixes shifting towards higher priced items and longer duration multi-month Subscriptions. We continuously test and optimize the online experience and offerings to improve the customer experience, maximize sales, and improve gross margin. Our subscribers (sometimes also referred to by us as "members") select a cadence at which they wish to receive product shipments. In addition to a monthly cadence, we offer subscribers the ability to select from a range of multi-month Subscription shipment cadences, from every two to twelve months, depending on the product. The subscriber is billed upon each shipment. Subscribers can cancel subscriptions in between billing periods to stop receiving additional products and can reactivate subscriptions at any time. In addition, our customers can purchase product bundles or defined product kits, either consisting of non-prescription over-the-counter products or non-prescription products together with prescription medications, for a single all-inclusive price. Such offerings and their uptake by customers have contributed to the expansion of AOV over time. Additionally, the uptake of these offerings has resulted in higher gross profits and gross margins for our sales of products and services on our platform. For example, for multi-month Subscriptions, we may incur shipping and fulfillment expenses two or four times per year (for six-month and three-month subscription cadences, respectively) versus twelve times per year for monthly Subscriptions. The customer uptake of multi-month Subscriptions results in lower recurring costs and higher gross margins as compared to monthly Subscriptions. Subscriptions grew 80% to approximately 991,000 as ofSeptember 30, 2022 as compared to approximately 551,000 Subscriptions as ofSeptember 30, 2021 . Growth in Subscriptions was driven by increased marketing expenses, increased traffic to our platform (through our websites and mobile applications), and increased customer conversion rates from improved onsite and customer onboarding experiences. As a result of growth in Subscriptions, we generated approximately 1.7 millionNet Orders for the three months endedSeptember 30, 2022 , an increase of 73% as compared to approximately 1.0 millionNet Orders for the three months endedSeptember 30, 2021 . We generated approximately 4.3 millionNet Orders for the nine months endedSeptember 30, 2022 , an increase of 75% as compared to approximately 2.4 millionNet Orders for the nine months endedSeptember 30, 2021 .
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges.
New customer acquisition
Our ability to attract new customers is a key factor for our future growth. To
date, we have successfully acquired new customers through marketing and the
development of our brands as well as through acquisitions. As a result, revenue
has increased each year since our launch. If we are unable to acquire enough new
customers in the future, revenue might decline. New customer acquisition could
be negatively impacted if our marketing efforts are less effective in the
future. Increases in advertising rates could also negatively impact our ability
to acquire new customers. Consumer tastes, preferences, and
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sentiment for our brands may also change and result in decreased demand for our products and services. Changes in law or regulatory enforcement could also negatively impact our ability to acquire new customers.
Retention of customers
Our ability to retain customers is a key factor in our ability to generate revenue. Most of our customers purchase products and services through Subscription-based plans, where customers are billed and sent products and/or receive services on a recurring basis. The recurring nature of this revenue provides us with a certain amount of predictability for future revenue if past customer behavior stays consistent in the future. In addition, the uptake by customers of our Subscription offerings has contributed to the expansion of AOV over time and has resulted in higher gross profits and gross margins for our sale of products and services on our platform. We expect to retain a majority or a higher percentage of revenue from customerswho have maintained a Subscription for more than two years (sometimes referred to by us as "long-term revenue retention"). However, if customer behavior changes, or our assumptions regarding long-term revenue retention are incorrect, and customer retention decreases in the future, then future revenue will be negatively impacted. The ability of our customers to continue to pay for our products and services will also impact the future results of our operations.
Investments in growth
We expect to continue to focus on long-term growth. We intend to continue to invest in our fulfillment and operating capabilities, including our Affiliated Pharmacies and warehousing facilities, with the goal of fulfilling nearly all of our pharmaceutical and over-the-counter customer orders through affiliated and internal fulfillment capabilities. Additionally, we expect to make significant investments in marketing to acquire new customers and we expect to continue to make investments in product offerings and customer experience. We are working to enhance our offerings and expand the breadth of health and wellness products and services offered on our websites and mobile applications. This includes further investments in and development of mobile phone technology, including our mobile applications, in order to improve the customer experience on our platform. We may also explore additional investments in the ability to accept insurance on our platform for certain products or services in the future. In the short term, we expect these investments to increase our operating expenses; however, in the long term, we anticipate that these investments will positively impact our results of operations. If we are unsuccessful at improving our offerings or are unable to generate additional demand for our offerings, we may not recover the financial investments we make into the business and revenue may not increase in the future.
Expansion into new categories
We expect to continue to expand into new health and wellness categories with our offerings. Category expansion allows us to increase the number of health and wellness consumers for whom we can provide products and services. It also allows us to offer access to treatment of additional conditions that may already affect our current customers. Expanding into new health and wellness categories has required and will require financial investments in additional headcount, marketing and customer acquisition costs, additional operational capabilities, and may require the purchase of new inventory. If we are unable to generate sufficient demand in new health and wellness categories, we may not recover the financial investments we make into new categories and revenue may not increase in the future.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance withU.S. GAAP, we present Adjusted EBITDA (which is a non-GAAP financial measure), and Adjusted EBITDA margin (which is a non-GAAP ratio), each as defined below. We use Adjusted EBITDA and Adjusted EBITDA margin to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that Adjusted EBITDA and Adjusted EBITDA margin, when taken together with the correspondingU.S. GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA and Adjusted EBITDA margin to be important measures because they help illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of Adjusted EBITDA and Adjusted EBITDA margin is helpful to our investors as they are used by management in assessing the health of our business and our operating performance.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance
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withU.S. GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures or ratios differently or may use other financial measures or ratios to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA or Adjusted EBITDA margin as tools for comparison. Reconciliations are provided below to the most directly comparable financial measures stated in accordance withU.S. GAAP. Investors are encouraged to review ourU.S. GAAP financial measures and not to rely on any single financial measure to evaluate our business. Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. "Adjusted EBITDA" is defined as net loss before stock-based compensation, depreciation and amortization, impairment of long-lived assets, acquisition-related costs (which includes (i) acquisition professional services; and (ii) consideration paid for employee compensation with vesting requirements incurred directly as a result of acquisitions, inclusive of revaluation of earn-out consideration recorded in general and administrative expenses), income taxes, interest income, change in fair value of liabilities, one-time Merger bonuses and warrant expense, and amortization of debt issuance costs. "Adjusted EBITDA margin" is defined as Adjusted EBITDA divided by revenue.
The following table reconciles net loss to Adjusted EBITDA for the three and
nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue $ 144,836 $ 74,173 $ 359,713 $ 187,179
Net loss (18,840) (15,941) (54,771) (76,498)
Stock-based compensation 10,979 11,869 30,467 55,259
Depreciation and amortization 1,902 1,546 5,464 2,445
Impairment of long-lived assets 1,127 - 1,127 -
(Benefit) provision for income taxes (16) (3,173) 90 (3,049)
Acquisition-related costs (191) 4,342 75 7,214
Change in fair value of liabilities (450) (8,328) (1,012) (13,610)
Interest income (607) (103) (1,138) (298)
Merger bonuses - - - 5,219
Warrant expense in connection with Merger - - - 154
Amortization of debt issuance costs - - - 144
Adjusted EBITDA $ (6,096) Net loss as a % of revenue (13) % (21) % (15) % (41) % Adjusted EBITDA margin (4) % (13) % (5) % (12) % Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. We compensate for these limitations by providing specific information regarding theU.S. GAAP items excluded from Adjusted EBITDA. When evaluating our performance, you should consider Adjusted EBITDA in addition to, and not as a substitute for, other financial performance measures, including our net loss and otherU.S. GAAP results.
Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the 2019 novel coronavirus ("COVID-19") a global pandemic. The COVID-19 pandemic continues to persist, and we are closely monitoring its impact on all aspects of our business. We have a remote-first policy that permits most of our employees to work remotely should their particular positions allow, and we have 24
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taken measures in response to the ongoing COVID-19 pandemic, including implementing additional safety policies and procedures for employees working in our warehouse and Affiliated Pharmacies; suspending employee travel and in-person meetings prior to vaccination; and actively managing our fulfillment operations and inventory levels. We may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and stockholders. Our financial condition and results of operations to date have not been adversely impacted by the COVID-19 pandemic. However, it is possible that the COVID-19 pandemic, the measures taken by the federal, state, or local authorities (including vaccine mandates) and businesses affected, supply chain impacts, and the resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial positions as well as our customers, suppliers, and partners. Widespread supply chain issues resulting from the pandemic have impacted businesses across multiple industries, including those in which we operate. While we have not experienced material supply chain issues to date, if we experience delays or other challenges in obtaining supplies necessary for the production, fulfillment, or distribution of the products or services we offer, it could negatively affect our ability to satisfy our obligations to customers and maintain our operations in a cost-efficient manner and have a material adverse effect on our business. We will continue to monitor the status of the COVID-19 pandemic, and its related resurgences and variants, and adjust our strategy accordingly.
Basis of Presentation
Currently, we conduct business through one operating segment. Substantially all our long-lived assets are maintained in, and our losses are attributable to,the United States of America . Foreign operations are immaterial to the consolidated financial statements. The condensed consolidated financial statements include the accounts of our company, our wholly-owned subsidiaries, and variable interest entities for which we are the primary beneficiary. The variable interest entities are: (i) the Affiliated Medical Groups; and (ii) the Affiliated Pharmacies. We determined that we are the primary beneficiary of the Affiliated Medical Groups and the Affiliated Pharmacies for accounting purposes because we have the ability to direct the activities that most significantly affect these entities' economic performance and have the obligation to absorb the entities' losses. Under the variable interest entity model, we present the results of operations and the financial position of the entities as part of our condensed consolidated financial statements as if the consolidated group were a single economic entity.
Components of Results of Operations
Revenue
We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
Our consolidated revenue primarily comprises of online sales of health and wellness products through our websites and mobile applications, including prescription and non-prescription products. In contracts that contain prescription products issued as the result of a consultation, revenue also includes medical consultation services provided by Affiliated Medical Groups. Additionally, revenue is generated through wholesale arrangements.
For information on our significant accounting policies, see Note 2 to our accompanying unaudited condensed consolidated financial statements.
Cost of revenue
Cost of revenue consists of costs directly attributable to the products shipped and services rendered, including product costs, packaging materials, shipping costs, and labor costs directly related to revenue generating activities. Costs related to free products, where there is no expectation of future purchases from a customer, are considered to be operating expenses and are excluded from cost of revenue.
Gross profit and gross margin
Our gross profit represents total revenue less our total cost of revenue, and
our gross margin is our gross profit expressed as a percentage of our total
revenue. Our gross profit and gross margin have been and will continue to be
affected by a number of factors, including the prices we charge for our products
and services, the costs we incur from our vendors for certain
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components of our cost of revenues, the mix of the various products and services we sell in a period, the mix of Online Revenue and Wholesale Revenue in a period, the impact of acquisitions, and our ability to sell our inventory. We expect our gross margin to fluctuate from period to period depending on these and other factors. Marketing expenses The largest component of our marketing expenses consists of our discretionary customer acquisition costs. Customer acquisition costs, also called paid marketing expense, are the advertising and media costs associated with our efforts to acquire new customers, promote our brands, and build awareness for our products and services. Customer acquisition costs include advertising in digital media, social media, television, radio, out-of-home media and various other media outlets. Marketing expenses also include overhead expenses, including salaries, benefits, taxes and stock-based compensation for personnel; agency, contractor and consulting expenses; content production, software and other marketing operating costs. Marketing is an important driver of growth and we intend to continue to make significant investments in customer acquisition and our marketing organization. Historically, our marketing expenses have increased quarter-over-quarter, with such increases typically reflecting a decreasing percentage of revenue over recent quarters with respect to a given cohort. We expect this trend to continue, though marketing expenses may fluctuate as a percentage of revenue due to the timing and discretionary nature of these expenses.
Operations and support expenses
Operations and support expenses include the salaries, benefits, taxes, professional services expenses, and stock-based compensation for personnel, consultants, and contractors for our supply chain, retail, medical group, pharmacy, fulfillment, and customer service functions. These expenses also include operating expenses primarily relating to operating and support functions for facilities, warehousing and fulfillment, payment processing, third-party software and hosting to support those functions, and related depreciation. We expect operations and support expenses to increase for the foreseeable future as we continue to invest in our fulfillment and operating capabilities and grow our business. However, we anticipate operations and support expenses will decrease as a percentage of revenue over the long term, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses.
Technology and development expenses
Technology and development expenses include the salaries, benefits, taxes, professional services expenses, and stock-based compensation for personnel, consultants, and contractors for our engineering, product management, product development, and data science functions. These expenses also include operating expenses primarily relating to technology and development functions for the operation, maintenance and enhancement of our digital platform, websites and mobile applications, inclusive of related expenses for third-party software and hosting to support those functions, and related depreciation. Expenses also include investments to develop new health and wellness products and services. We expect technology and development expenses to increase for the foreseeable future as we grow our business and continue to invest in our platform and new offerings. However, we anticipate technology and development expenses will decrease as a percentage of revenue over the long term, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses.
General and administrative expenses
General and administrative expenses ("G&A") include the salaries, benefits,
taxes, professional services expenses, and stock-based compensation for
personnel, consultants, and contractors for our executive, legal, human
resources, finance, brand strategy, and other corporate functions. These
expenses also include operating expenses primarily relating to general and
administrative functions for insurance, third-party software and hosting to
support those functions, related depreciation and amortization, and other
general corporate costs. We expect G&A to increase for the foreseeable future as
we increase headcount with the growth of our business. However, we anticipate
G&A will decrease as a percentage of revenue over the long term, although it may
fluctuate as a percentage of total revenue from period to period due to the
timing and amount of these expenses.
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Table of Contents Other income Other income primarily consists of the change in fair value of liabilities, as well as interest income from our cash and cash equivalents and investment accounts. Additionally, other income includes non-operating and one-time charges classified outside of operating expenses.
Benefit (provision) for income taxes
The benefit (provision) for income taxes is primarily due to state taxes and change in valuation allowance. Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates. Results of Operations
Comparisons for the three and nine months ended
The following table sets forth our unaudited condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage change between the two periods (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change % Change 2022 2021 Change % Change Revenue$ 144,836 $ 74,173 $ 70,663 95 %$ 359,713 $ 187,179 $ 172,534 92 % Cost of revenue 30,383 19,301 11,082 57 % 83,328 44,783 38,545 86 % Gross profit 114,453 54,872 59,581 109 % 276,385 142,396 133,989 94 % Operating expenses:(1) Marketing 78,462 38,293 40,169 105 % 187,045 93,195 93,850 101 % Operations and support 21,751 12,808 8,943 70 % 54,882 33,748 21,134 63 % Technology and development 7,977 6,242 1,735 28 % 20,926 16,807 4,119 25 % General and administrative 26,246 25,190 1,056 4 % 70,624 92,123 (21,499) (23) % Total operating expenses 134,436 82,533 51,903 63 % 333,477 235,873 97,604 41 % Loss from operations (19,983) (27,661) 7,678 (28) % (57,092) (93,477) 36,385 (39) % Other income: Change in fair value of liabilities 450 8,328 (7,878) (95) % 1,012 13,610 (12,598) (93) % Other income, net 677 219 458 209 % 1,399 320 1,079 337 % Total other income, net 1,127 8,547 (7,420) (87) % 2,411 13,930 (11,519) (83) % Loss before income taxes (18,856) (19,114) 258 (1) % (54,681) (79,547) 24,866 (31) % Benefit (provision) for income taxes 16 3,173 (3,157) (99) % (90) 3,049 (3,139) (103) % Net loss$ (18,840) $ (15,941) $ (2,899) 18 %$ (54,771) $ (76,498) $ 21,727 (28) % ______________
(1)Includes stock-based compensation expense as follows (in thousands):
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Marketing $ 1,241 $ 2,328 $ 3,136 $ 4,946
Operations and support 695 612 1,848 2,433
Technology and development 1,003 1,040 2,999 3,492
General and administrative 8,040 7,889 22,484 44,388
Total stock-based compensation expense $ 10,979 $
11,869
The following table sets forth our results of operations as a percentage of our total revenue for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 21 % 26 % 23 % 24 %
Gross profit 79 % 74 % 77 % 76 %
Operating expenses:
Marketing 54 % 52 % 52 % 50 %
Operations and support 15 % 17 % 15 % 18 %
Technology and development 6 % 8 % 6 % 9 %
General and administrative 18 % 35 % 20 % 49 %
Total operating expenses 93 % 112 % 93 % 126 %
Loss from operations (14) % (38) % (16) % (50) %
Other income:
Change in fair value of liabilities - % 11 % - % 7 %
Other income, net 1 % - % 1 % - %
Total other income, net 1 % 11 % 1 % 7 %
Loss before income taxes (13) % (27) % (15) % (43) %
Benefit (provision) for income taxes - % 4 % - % 2 %
Net loss (13) % (23) % (15) % (41) %
Revenue
Revenue was $144.8 million for the three months ended September 30, 2022 ,
compared to $74.2 million for the three months ended September 30, 2021 , an
increase of $70.7 million , or 95%. Revenue was $359.7 million for the nine
months ended September 30, 2022 , compared to $187.2 million for the nine months
ended September 30, 2021 , an increase of $172.5 million , or 92%. For a detailed
discussion of these increases, refer to "-Revenue and Key Business Metrics."
Cost of revenue and gross profit
Cost of revenue was$30.4 million for the three months endedSeptember 30, 2022 , compared to$19.3 million for the three months endedSeptember 30, 2021 , an increase of$11.1 million , or 57%. This increase was due to increased costs associated with medical consultation services of 91%, increased shipping costs of 67%, and increased product and packaging costs of 40%, compared to the three months endedSeptember 30, 2021 . Cost of revenue was$83.3 million for nine months endedSeptember 30, 2022 , compared to$44.8 million for nine months endedSeptember 30, 2021 , an increase of$38.5 million , or 86%. This increase was primarily due to increased costs associated with medical consultation services of 94%, increased product and packaging costs of approximately 87%, and increased shipping costs of 73% compared to the nine months endedSeptember 30, 2021 . These increases were due to overall increased business activity and growth ofNet Orders , as well as a full nine months of operations for both HHL and Apostrophe. 28
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Gross profit was$114.5 million for the three months endedSeptember 30, 2022 , compared to$54.9 million for the three months endedSeptember 30, 2021 , an increase of$59.6 million , or 109%. Correspondingly, gross margin was 79% for the three months endedSeptember 30, 2022 , compared to 74% for the three months endedSeptember 30, 2021 . Gross profit was$276.4 million for the nine months endedSeptember 30, 2022 , compared to$142.4 million for the nine months endedSeptember 30, 2021 , an increase of$134.0 million , or 94%. Correspondingly, gross margin was 77% for the nine months endedSeptember 30, 2022 , compared to 76% for the nine months endedSeptember 30, 2021 . The increases in gross margin for the three and nine months endedSeptember 30, 2022 were primarily due to lower product and packaging costs as a percent of revenue as a result of fulfilling greater order volume by Affiliated Pharmacies at lower costs as compared to third-party pharmacies. These increases were partially offset by Wholesale Revenue, which is lower margin than Online Revenue, comprising a larger proportion of total revenue, as well as a full nine months of operations for both HHL and Apostrophe.
Marketing expenses
Marketing expenses were$78.5 million for the three months endedSeptember 30, 2022 , compared to$38.3 million for the three months endedSeptember 30, 2021 , an increase of$40.2 million , or 105%. The most significant component of marketing expenses is customer acquisition costs, which increased to$67.3 million in the three months endedSeptember 30, 2022 , compared to$28.4 million for the three months endedSeptember 30, 2021 , an increase of 137%. Marketing expenses were$187.0 million for the nine months endedSeptember 30, 2022 , compared to$93.2 million for the nine months endedSeptember 30, 2021 , an increase of$93.9 million , or 101%. Customer acquisition costs increased to$157.4 million in the nine months endedSeptember 30, 2022 , compared to$70.8 million for the nine months endedSeptember 30, 2021 , an increase of 122%. The increases in customer acquisition costs were a result of management's decision to increase investment in display, search, and linear and streaming television marketing, as we continue to identify opportunities to drive new customer growth, as well as the customer acquisition costs associated with a full period of the operations of HHL and Apostrophe for both the three and nine months endedSeptember 30, 2022 .
Operations and support
Operations and support expenses were$21.8 million for the three months endedSeptember 30, 2022 , compared to$12.8 million for the three months endedSeptember 30, 2021 , an increase of$8.9 million or 70%. The increase in operations and support was primarily driven by an increase in order fulfillment, transaction processing, and selling costs of$3.1 million , an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses and excluding stock-based compensation) of$2.8 million , an increase in professional services of$1.7 million , and an increase in depreciation, amortization, and technology costs of$0.5 million . Operations and support expenses were$54.9 million for the nine months endedSeptember 30, 2022 , compared to$33.7 million for the nine months endedSeptember 30, 2021 , an increase of$21.1 million or 63%. The increase in operations and support was primarily driven by an increase in employee compensation (excluding stock-based compensation) of$9.5 million , an increase in order fulfillment, transaction processing, and selling costs of$6.3 million , an increase in professional services of$3.4 million , and an increase in depreciation, amortization, and technology costs of$1.2 million .
Technology and development
Technology and development expenses were$8.0 million for the three months endedSeptember 30, 2022 , compared to$6.2 million for the three months endedSeptember 30, 2021 , an increase of$1.7 million or 28%. The increase in technology and development expenses were primarily driven by an increase in employee compensation (excluding stock-based compensation) of$1.9 million and an increase in depreciation, amortization, and technology costs of$0.8 million . These costs were partially offset by a decrease in product development costs of$1.5 million , which primarily resulted from one-time costs incurred during the third quarter of 2021. Technology and development expenses were$20.9 million for the nine months endedSeptember 30, 2022 , compared to$16.8 million for the nine months endedSeptember 30, 2021 , an increase of$4.1 million or 25%. The increase in technology and development expenses were primarily driven by an increase in employee compensation (excluding stock-based compensation) of$3.8 million , an increase in depreciation, amortization, and technology costs of$1.8 million , and 29
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an increase in professional services of
General and administrative
General and administrative expenses were$26.2 million for the three months endedSeptember 30, 2022 , compared to$25.2 million for the three months endedSeptember 30, 2021 , an increase of$1.1 million or 4%. The increase in general and administrative expenses was primarily driven by an increase in corporate events and travel costs of$1.7 million , an increase in employee compensation (excluding stock-based compensation) of$1.1 million , and an increase in depreciation, amortization, and technology costs of$0.5 million . This increase was partially offset by a decrease in professional services of$3.1 million that was primarily driven by acquisition fees incurred for the purchase of businesses during the three months endedSeptember 30, 2021 . General and administrative expenses were$70.6 million for the nine months endedSeptember 30, 2022 , compared to$92.1 million for the nine months endedSeptember 30, 2021 , a decrease of$21.5 million , or 23%. The decrease was primarily driven by a decrease in stock-based compensation of$21.9 million . The decrease in stock-based compensation was attributable to the expenses incurred during the nine months endedSeptember 30, 2021 related to the earn-out consideration issued as part of the Merger (as defined in Note 1 - Organization to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q) as well as the recognition of expense related to stock options granted to the Chief Executive Officer and vesting of restricted stock units, which were both contingent upon the achievement of a liquidity event that was satisfied upon the closing of the Merger. All of these resulted in either one-time expenses or cumulative catch-up expense as a result of the Merger. In the nine months endedSeptember 30, 2021 , we also incurred$5.1 million of bonus expense almost entirely as a result of the previously disclosed transaction bonus related to the Merger. Furthermore, for the nine months endedSeptember 30, 2022 , the decrease in general and administrative expenses was also attributable to a decrease in professional services of$6.3 million , and was partially offset by an increase in employee compensation (excluding stock-based compensation) of$4.8 million , an increase in depreciation, amortization, and technology costs of$3.4 million , an increase in corporate events and travel costs of$2.2 million , and an increase in insurance premiums of$0.9 million . Other income Other income was$1.1 million for the three months endedSeptember 30, 2022 , compared to$8.5 million for the three months endedSeptember 30, 2021 , a decrease of$7.4 million . The decrease was driven primarily by a gain from the change in fair value of liabilities for the three months endedSeptember 30, 2022 of$0.5 million related to earn-out liabilities, compared to a gain from the change in fair value of liabilities for the three months endedSeptember 30, 2021 of$8.3 million related to warrant liabilities. Other income was$2.4 million for the nine months endedSeptember 30, 2022 , compared to$13.9 million for the nine months endedSeptember 30, 2021 , a decrease of$11.5 million . The decrease was driven primarily by a gain from the change in fair value of liabilities for the nine months endedSeptember 30, 2022 of$1.0 million related to earn-out liabilities, compared to a gain from the change in fair value of liabilities for the nine months endedSeptember 30, 2021 of$13.6 million related to warrant liabilities. The decrease was also driven by interest income for the nine months endedSeptember 30, 2022 of$1.1 million , compared to$0.3 million for the nine months endedSeptember 30, 2021 .
Benefit (provision) for income taxes
Benefit for income taxes was less than$0.1 million for the three months endedSeptember 30, 2022 and$3.2 million for the three months endedSeptember 30, 2021 . Provision for income taxes was$0.1 million for the nine months endedSeptember 30, 2022 , while the benefit for income taxes was$3.0 million for the nine months endedSeptember 30, 2021 . The changes were primarily due to the partial release of valuation allowance totaling$3.1 million in the third quarter of 2021 as a result of the tax liability recorded for the Apostrophe acquisition, serving as a source of income for existing tax assets.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , our principal sources of liquidity are cash and cash equivalents in the amount of$58.0 million , which are primarily invested in money market funds, and investments in the amount of$140.4 million , which are primarily invested in corporate, government, and asset-backed bonds. During the nine months endedSeptember 30, 2022 , we made payments for the Apostrophe acquisition earn-out payable totaling$29.9 million , such payment amounts determined in fiscal year 2021 in accordance with the terms of the related acquisition agreement. The remaining portion of the Apostrophe earn-out payable of$13.0 million will be paid in the fourth quarter of 30
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2022, also based on the terms of the related acquisition agreement. The
Apostrophe earn-out payment of
We have historically incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses at least for the next 12 months due to the investments that we intend to make in our business. We believe our existing cash resources and funds raised from the closing of the Merger are sufficient to support planned operations for the next 12 months. As a result, management believes that our current financial resources are sufficient to continue operating activities for at least one year past the issuance date of the unaudited condensed consolidated financial statements. Our future capital requirements will depend on many factors, including the number of orders we receive, the size of our customer base, the continuing market acceptance of telehealth, and the timing and extent of spend to support the expansion of sales, marketing and development activities, which may be impacted by inflationary or other macroeconomic factors. We completed two acquisitions in 2021 and expect to continue to pursue opportunities to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We have based our estimate of our future capital requirements on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations would be harmed. Cash Flows
The following table provides a summary of cash flow data (in thousands):
Nine
Months Ended
2022 2021
Net cash used in operating activities $ (19,812) $ (31,307)
Net cash provided by (used in) investing activities 28,696 (166,510)
Net cash (used in) provided by financing activities (22,668) 235,121
Cash Flows from Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary use of cash from operating activities includes costs of revenue, marketing expenses, and personnel-related expenditures to support the growth of our business. Net cash used in operating activities was$19.8 million for the nine months endedSeptember 30, 2022 . The most significant component of our cash used was a net loss of$54.8 million . This included non-cash expense related to stock-based compensation of$30.5 million , depreciation and amortization of$5.5 million , non-cash operating lease cost of$1.2 million , impairment of long-lived assets of$1.1 million , and net amortization on securities of$1.0 million . Non-cash expense was partially offset by non-cash income of$1.0 million related to the change in fair value of liabilities. In addition, a net cash outflow totaling$2.7 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in inventory of$8.8 million , a decrease in earn-out payable of$6.9 million , an increase in prepaid expenses and other current assets of$3.6 million , cash payments on operating lease liabilities of$1.2 million , and a decrease in deferred revenue of$1.1 million . This outflow was partially offset by an increase in accounts payable and accrued liabilities of$18.9 million . Net cash used in operating activities was$31.3 million for the nine months endedSeptember 30, 2021 . The most significant component of our cash used was a net loss of$76.5 million . This included non-cash expense related to stock-based compensation of$55.3 million , depreciation and amortization of$2.4 million , net amortization on securities of$1.7 million , and non-cash operating lease cost of$1.1 million . Non-cash expense was partially offset by non-cash income of$13.6 million related to the change in fair value of warrant and earn-out liabilities and benefit for deferred taxes of$3.2 million . In addition, a net cash inflow totaling$0.2 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in accounts payable and accrued liabilities of$5.5 million and a decrease in prepaid expenses and other current assets of$2.6 million . This inflow was partially offset by an increase in inventory of$6.9 million and a decrease in operating lease liabilities of$1.1 million . 31
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Cash Flows from Investing Activities
Cash flows from investing activities primarily relate to our treasury operations of investing in available-for-sale investments, as well as acquisitions, investment in website and mobile application development and internal-use software, and purchases of property and equipment.
Net cash provided by investing activities for the nine months endedSeptember 30, 2022 was$28.7 million , which was primarily due to net investment cash inflows of$33.8 million . This cash inflow was partially offset by investments of$3.3 million in website development and internal-use software, including investment in our mobile technology, and$1.3 million in purchases of property and equipment. Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$166.5 million , which was primarily due to net investment cash outflows of$116.5 million , as well as acquisition of businesses, net of cash acquired of$46.5 million , and investments of$3.2 million in website development and internal-use software, including investment in our mobile technology.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months endedSeptember 30, 2022 was$22.7 million , which was primarily due to the payments for earn-out consideration for acquisitions of$23.0 million and payments for taxes related to net share settlement of equity awards of$2.4 million . This cash outflow was partially offset by proceeds from the exercise of stock options of$2.2 million . Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$235.1 million , which was primarily due to the proceeds from the issuance of Class A common stock as a result of the Merger of$197.7 million , proceeds from thePIPE Investment of$75.0 million , proceeds received from employee repayment of promissory notes of$1.2 million , and proceeds from the exercise of warrants and stock options of$1.4 million . This cash inflow was partially offset by payments related to pre-closing stock repurchase of$22.0 million , Merger transaction costs of$12.9 million , and payments for taxes related to net share settlement of equity awards of$5.2 million .
Contractual Obligations and Commitments
Our contractual obligations and commitments include earn-out payables and earn-out liabilities related to acquisitions, operating leases, and non-cancelable purchase obligations primarily related to cloud-based software contracts used in operations. Total contractual obligations and commitments as ofSeptember 30, 2022 were$21.5 million , of which$16.2 million was payable within 12 months. Critical Accounting Estimates The preparation of our condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant estimates and assumptions by management include, among others, valuation of inventory, valuation and recognition of stock-based compensation expense, valuation of contingent consideration in business combinations, purchase price allocation for business combinations, and estimates used in the capitalization of website and mobile application development and internal-use software costs. Management believes that the estimates and judgments upon which it relies are reasonable based upon information available at the time that these estimates and judgments were made. Actual results may differ from management's estimates. To the extent that there are material differences between these estimates and actual results, our condensed consolidated financial statements will be affected. For a discussion of our critical accounting estimates, please refer to ITEM 7 under Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report for the year endedDecember 31, 2021 . SinceDecember 31, 2021 , there have been no material changes to our critical accounting estimates. 32
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