What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-08 · 158 added, 118 removed, 242 unchanged (53% of the section changed)

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Additionally, Hims & Hers products can be found in tens of thousands of top retail locations in the United States.

Reclassifications

Beginning with the quarter ended September 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.

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

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Average Order Value (“AOV”) is defined as Online Revenue divided by Net Orders.

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

We believe the following metrics are useful in evaluating our business.

The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, for the three and six months ended June 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 Ended June 30, Six Months Ended June 30,

The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, for the three and nine months ended September 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 Ended September 30, Nine Months Ended September 30,

2022 2021 Change % Change 2022 2021 Change % Change

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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 %

As of June 30,

2022 2021 Change % Change

Subscriptions 817 453 364 80 %

We generated $107.5 million in Online Revenue for the three months ended June 30, 2022, an increase of 85% as compared to $58.1 million for the three months ended June 30, 2021.

Growth in Online Revenue for the three months ended June 30, 2022 was driven by growth in Subscriptions, AOV, and Net Orders, as well as the inclusion of the operations of YoDerm, Inc.

(“Apostrophe”), which was acquired in July 2021, and a full three months of revenue for Honest Health Limited, which was acquired in June 2021 and is now Hims & Hers UK Limited (“HHL”).

We generated $201.6 million in Online Revenue for the six months ended June 30, 2022, an increase of 85% as compared to $108.8 million for the six months ended June 30, 2021.

Growth in Online Revenue for the six months ended June 30, 2022 was primarily driven by growth in Subscriptions, AOV, and Net Orders, as well as the inclusion of the operations of Apostrophe and a full six months of revenue for HHL.

We generated $6.1 million in Wholesale Revenue for the three months ended June 30, 2022, an increase of 140% as compared to $2.5 million for the three months ended June 30, 2021.

We generated $13.3 million in Wholesale Revenue for the six months ended June 30, 2022, an increase of 218% as compared to $4.2 million for the six months ended June 30, 2021.

These increases were primarily due to the addition of new retail partners in the fourth quarter of 2021 and the first half of 2022, which increased the overall volume of wholesale orders.

For the three months ended June 30, 2022, AOV was $78, an increase of 5% as compared to $74 for the three months ended June 30, 2021.

For the six months ended June 30, 2022, AOV was $78, an increase of 5% as compared to $74 for the six months ended June 30, 2021.

AOV growth for the three and six months ended June 30, 2022 was driven by higher price points from larger product bundles and multi-month Subscriptions.

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.

generated $341.3 million in Online Revenue for the nine months ended September 30, 2022, an increase of 89% as compared to $180.9 million for the nine months ended September 30, 2021.

Growth in Online Revenue for the nine months ended September 30, 2022 was primarily driven by growth in Subscriptions, AOV, and Net Orders, as well as a full nine months of revenue for both Honest Health Limited, which was acquired in June 2021 and is now Hims & Hers UK Limited (“HHL”), and YoDerm, Inc.

(“Apostrophe”), which was acquired in July 2021.

We generated $5.1 million in Wholesale Revenue for the three months ended September 30, 2022, an increase of 136% as compared to $2.1 million for the three months ended September 30, 2021.

We generated $18.4 million in Wholesale Revenue for the nine months ended September 30, 2022, an increase of 191% as compared to $6.3 million for the nine months ended September 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 ended September 30, 2022, AOV was $83, an increase of 12% as compared to $74 for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, AOV was $80, an increase of 8% as compared to $74 for the nine months ended September 30, 2021.

AOV growth for the three and nine months ended September 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.

In our Subscription arrangements, customers (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 customers the ability to select from a range of multi-month Subscription shipment cadences, from every two to twelve months, depending on the product.

The customer is billed upon each shipment.

Customers can cancel subscriptions in between billing periods to stop receiving additional products and can reactivate subscriptions at any time.

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.

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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 817,000 as of June 30, 2022 as compared to approximately 453,000 Subscriptions as of June 30, 2021.

Growth in Subscriptions was driven by increased marketing expenses, increased traffic to our platform (through the mobile applications and websites), increased customer conversion rates from improved onsite and customer onboarding experiences, and the addition of Subscriptions from the 2021 acquisitions of Apostrophe and HHL.

As a result of growth in Subscriptions, we generated approximately 1.4 million Net Orders for the three months ended June 30, 2022, an increase of 76% as compared to approximately 0.8 million Net Orders for the three months ended June 30, 2021.

We generated approximately 2.6 million Net Orders for the six months ended June 30, 2022, an increase of 76% as compared to approximately 1.5 million Net Orders for the six months ended June 30, 2021.

Subscriptions grew 80% to approximately 991,000 as of September 30, 2022 as compared to approximately 551,000 Subscriptions as of September 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 million Net Orders for the three months ended September 30, 2022, an increase of 73% as compared to approximately 1.0 million Net Orders for the three months ended September 30, 2021.

We generated approximately 4.3 million Net Orders for the nine months ended September 30, 2022, an increase of 75% as compared to approximately 2.4 million Net Orders for the nine months ended September 30, 2021.

Key Factors Affecting Results of Operations

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Increases in advertising rates could also negatively impact our ability to acquire new customers.

Consumer tastes, preferences, and sentiment for our brands may also change and result in decreased demand for our products and services.

Consumer tastes, preferences, and

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.

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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 products and services offered on our websites and mobile applications.

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 also may continue exploring investments in the ability to accept insurance on our platform for certain products or services in the future.

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;

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Expansion into new categories

We expect to continue to expand into new categories with our offerings.

Category expansion allows us to increase the number of customers 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 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 categories, we may not recover the financial investments we make into new categories and revenue may not increase in the future.

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

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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 with U.S.

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.

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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, acquisition-related costs (which include professional services and consideration paid for employee equity with vesting requirements incurred directly as a result of acquisitions), provision for 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” 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 six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles net loss to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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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

Provision for income taxes 12 34 106 124

Change in fair value of liabilities (450) (8,328) (1,012) (13,610)

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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 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;

We have a remote-first policy that permits most of our employees to work remotely should their particular positions allow, and we have

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;

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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 SG&A (as defined below) and are excluded from cost of revenue.

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 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.

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.

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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 reflecting a decreasing percentage of revenue over recent quarters with respect to a given cohort.

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.

Selling, general, and administrative expenses

Selling, general, and administrative expenses (“SG&A”) include the salaries, benefits, taxes, and stock-based compensation for personnel for our executive, engineering, finance, supply chain management, and other administrative functions.

SG&A also includes general operating expenses for professional services, third-party software and hosting, facilities, warehousing and fulfillment, customer service, payment processing, depreciation and amortization, and acquisition-related expenses.

We expect SG&A to increase for the foreseeable future as we increase headcount with the growth of our business.

In addition, SG&A increases when we incur acquisition costs related to purchasing businesses.

However, we anticipate SG&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.

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.

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.

Provision for income taxes

The provision for income taxes is primarily due to state taxes and change in valuation allowance.

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.

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Results of Operations

Comparisons for the three and six months ended June 30, 2022 and 2021

The following table sets forth our unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2022 and 2021, and the dollar and percentage change between the two periods (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Comparisons for the three and nine months ended September 30, 2022 and 2021

The following table sets forth our unaudited condensed consolidated statement of operations for the three and nine months ended September 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

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Marketing 78,462 38,293 40,169 105 % 187,045 93,195 93,850 101 %

Selling, general, and administrative 46,876 36,740 10,136 28 % 90,458 98,438 (7,980) (8) %

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 %

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Loss before income taxes (18,856) (19,114) 258 (1) % (54,681) (79,547) 24,866 (31) %

Provision for income taxes (12) (34) 22 (65) % (106) (124) 18 (15) %

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) %

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(1) Includes stock-based compensation expense as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Marketing $ 1,241 $ 2,328 $ 3,136 $ 4,946

Selling, general, and administrative 9,560 8,388 17,593 40,772

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 $ 30,467 $ 55,259

The following table sets forth our results of operations as a percentage of our total revenue for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Marketing 54 % 52 % 52 % 50 %

Selling, general, and administrative 41 % 61 % 42 % 87 %

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 %

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Loss before income taxes (13) % (27) % (15) % (43) %

Provision for income taxes — % — % — % — %

Benefit (provision) for income taxes — % 4 % — % 2 %

Net loss (13) % (23) % (15) % (41) %

Revenue was $113.6 million for the three months ended June 30, 2022, compared to $60.7 million for the three months ended June 30, 2021, an increase of $52.9 million, or 87%.

Revenue was $214.9 million for the six months ended June 30, 2022, compared to $113.0 million for the six months ended June 30, 2021, an increase of $101.9 million, or 90%.

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 $26.4 million for the three months ended June 30, 2022, compared to $13.4 million for the three months ended June 30, 2021, an increase of $13.0 million, or 97%.

This increase was due to increased costs associated with medical consultation services of 118%, increased product and packaging costs of 98%, and increased shipping costs of 69% compared to the three months ended June 30, 2021.

Cost of revenue was $52.9 million for six months ended June 30, 2022, compared to $25.5 million for six months ended June 30, 2021, an increase of $27.5 million, or 108%.

This increase was primarily due to increased product and packaging costs of approximately 126%, increased costs associated with medical consultation services of 95%, and increased shipping costs of 77% compared to the six months ended June 30, 2021.

These increases were due to overall increased business activity and growth of Net Orders, as well as the inclusion of the operations of Apostrophe and a full period of the operations of HHL for both the three and six months ended June 30, 2022.

Gross profit was $87.2 million for the three months ended June 30, 2022, compared to $47.3 million for the three months ended June 30, 2021, an increase of $39.9 million, or 84%.

Correspondingly, gross margin was 77% for the three months ended June 30, 2022, compared to 78% for the three months ended June 30, 2021.

Gross profit was $161.9 million for the six months ended June 30, 2022, compared to $87.5 million for the six months ended June 30, 2021, an increase of $74.4 million, or 85%.

Correspondingly, gross margin was 75% for the six months ended June 30, 2022, compared to 77% for the six months ended June 30, 2021.

The decreases in gross margin for the three and six months ended June 30, 2022 were primarily a result of

Wholesale Revenue comprising a larger proportion of total revenue, as well as the inclusion of the operations of Apostrophe and a full period of the operations of HHL for both the three and six months ended June 30, 2022.

Cost of revenue was $30.4 million for the three months ended September 30, 2022, compared to $19.3 million for the three months ended September 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 ended September 30, 2021.

Cost of revenue was $83.3 million for nine months ended September 30, 2022, compared to $44.8 million for nine months ended September 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 ended September 30, 2021.

These increases were due to overall increased business activity and growth of Net Orders, as well as a full nine months of operations for both HHL and Apostrophe.

Gross profit was $114.5 million for the three months ended September 30, 2022, compared to $54.9 million for the three months ended September 30, 2021, an increase of $59.6 million, or 109%.

Correspondingly, gross margin was 79% for the three months ended September 30, 2022, compared to 74% for the three months ended September 30, 2021.

Gross profit was $276.4 million for the nine months ended September 30, 2022, compared to $142.4 million for the nine months ended September 30, 2021, an increase of $134.0 million, or 94%.

Correspondingly, gross margin was 77% for the nine months ended September 30, 2022, compared to 76% for the nine months ended September 30, 2021.

The increases in gross margin for the three and nine months ended September 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 $60.5 million for the three months ended June 30, 2022, compared to $27.9 million for the three months ended June 30, 2021, an increase of $32.5 million, or 116%.

The most significant component of marketing expenses is customer acquisition costs, which increased to $51.0 million in the three months ended June 30, 2022, compared to $22.1 million for the three months ended June 30, 2021, an increase of 131%.

Marketing expenses were $108.6 million for the six months ended June 30, 2022, compared to $54.9 million for the six months ended June 30, 2021, an increase of $53.7 million, or 98%.

Customer acquisition costs increased to $90.1 million in the six months ended June 30, 2022, compared to $42.4 million for the six months ended June 30, 2021, an increase of 113%.

The increases in customer acquisition costs were a result of management’s decision to increase investment in display, search, and television marketing, as we continue to identify opportunities to drive new customer growth, as well as the customer acquisition costs associated with the inclusion of the operations of Apostrophe and a full period of the operations of HHL for both the three and six months ended June 30, 2022.

Selling, general, and administrative expenses

SG&A expenses were $46.9 million for the three months ended June 30, 2022, compared to $36.7 million for the three months ended June 30, 2021, an increase of $10.1 million, or 28%.

The increase in SG&A was primarily driven by employee compensation expense (comprising salaries and wages, benefits, taxes, and performance bonuses and excluding stock-based compensation), which was $14.9 million for the three months ended June 30, 2022, compared to $9.2 million for the three months ended June 30, 2021, an increase of $5.7 million.

Furthermore, for the three months ended June 30, 2022, the increase in SG&A was also attributable to a $2.3 million increase in depreciation, amortization, and technology costs, a $1.7 million increase in professional services, a $1.5 million increase in order fulfillment, transaction processing, and selling costs, and a $1.2 million increase in stock-based compensation expense.

The increase in SG&A was partially offset by $2.8 million in acquisition fees incurred for the purchase of businesses during the three months ended June 30, 2021.

SG&A expenses were $90.5 million for the six months ended June 30, 2022, compared to $98.4 million for the six months ended June 30, 2021, a decrease of $8.0 million, or 8%.

The decrease in SG&A was primarily driven by a decrease in stock-based compensation expense to $17.6 million for the six months ended June 30, 2022, from $40.8 million for the six months ended June 30, 2021, a decrease of $23.2 million.

The decrease in stock-based compensation was primarily due to the expenses incurred during the six months ended June 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.

Marketing expenses were $78.5 million for the three months ended September 30, 2022, compared to $38.3 million for the three months ended September 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 ended September 30, 2022, compared to $28.4 million for the three months ended September 30, 2021, an increase of 137%.

Marketing expenses were $187.0 million for the nine months ended September 30, 2022, compared to $93.2 million for the nine months ended September 30, 2021, an increase of $93.9 million, or 101%.

Customer acquisition costs increased to $157.4 million in the nine months ended September 30, 2022, compared to $70.8 million for the nine months ended September 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 ended September 30, 2022.

Operations and support

Operations and support expenses were $21.8 million for the three months ended September 30, 2022, compared to $12.8 million for the three months ended September 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 ended September 30, 2022, compared to $33.7 million for the nine months ended September 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 ended September 30, 2022, compared to $6.2 million for the three months ended September 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 ended September 30, 2022, compared to $16.8 million for the nine months ended September 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

an increase in professional services of $0.4 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.

General and administrative

General and administrative expenses were $26.2 million for the three months ended September 30, 2022, compared to $25.2 million for the three months ended September 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 ended September 30, 2021.

General and administrative expenses were $70.6 million for the nine months ended September 30, 2022, compared to $92.1 million for the nine months ended September 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 ended September 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 six months ended June 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.

Excluding stock-based compensation, employee compensation expense was $29.8 million for the six months ended June 30, 2022, compared to $17.0 million for the six months ended June 30, 2021, an increase of $12.8 million.

Furthermore, for the six months ended June 30, 2022, the decrease in SG&A was partially offset by a $4.8 million increase in depreciation, amortization, and technology costs, a $2.7 million increase in order fulfillment, transaction processing, and selling costs, a $1.3 million increase in professional services costs, and a $0.7 million increase in insurance premiums.

These increases were partially offset by $2.8 million of fees incurred for the purchase of businesses during the six months ended June 30, 2021.

Other income was $0.5 million for the three months ended June 30, 2022, compared to $8.3 million for the three months ended June 30, 2021, a decrease of $7.8 million.

The decrease was driven primarily by a gain from the change in fair value of liabilities for the three months ended June 30, 2022 of $0.1 million related to earn-out liabilities, compared to a gain from the change in fair value of liabilities for the three months ended June 30, 2021 of $8.0 million related to warrant liabilities.

Other income was $1.3 million for the six months ended June 30, 2022, compared to $5.4 million for the six months ended June 30, 2021, a decrease of $4.1 million.

The decrease was driven primarily by a gain from the change in fair value of liabilities for the six months ended June 30, 2022 of $0.6 million related to earn-out liabilities, compared to a gain from the change in fair value of liabilities for the six months ended June 30, 2021 of $5.3 million related to warrant liabilities.

Provision for income taxes

Provision for income taxes was less than $0.1 million for each of the three months ended June 30, 2022 and 2021.

Provision for income taxes was $0.1 million for each of the six months ended June 30, 2022 and 2021.

In the nine months ended September 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 ended September 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 was $1.1 million for the three months ended September 30, 2022, compared to $8.5 million for the three months ended September 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 ended September 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 ended September 30, 2021 of $8.3 million related to warrant liabilities.

Other income was $2.4 million for the nine months ended September 30, 2022, compared to $13.9 million for the nine months ended September 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 ended September 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 ended September 30, 2021 of $13.6 million related to warrant liabilities.

The decrease was also driven by interest income for the nine months ended September 30, 2022 of $1.1 million, compared to $0.3 million for the nine months ended September 30, 2021.

Benefit (provision) for income taxes

Benefit for income taxes was less than $0.1 million for the three months ended September 30, 2022 and $3.2 million for the three months ended September 30, 2021.

Provision for income taxes was $0.1 million for the nine months ended September 30, 2022, while the benefit for income taxes was $3.0 million for the nine months ended September 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 of June 30, 2022, our principal sources of liquidity are cash and cash equivalents in the amount of $55.0 million, which are primarily invested in money market funds, and investments in the amount of $139.9 million, which are primarily invested in corporate, government, and asset-backed bonds.

During the six months ended June 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 2022, also based on the terms of the related acquisition agreement.

As of September 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 ended September 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

2022, also based on the terms of the related acquisition agreement.

The Apostrophe earn-out payment of $29.9 million is recorded:

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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 timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic.

Our future capital requirements will depend on many factors, including the number of orders we receive, the size of our customer base, t he 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.

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The following table provides a summary of cash flow data (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities $ (19,812) $ (31,307)

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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 $25.8 million for the six months ended June 30, 2022.

Net cash used in operating activities was $19.8 million for the nine months ended September 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 $19.5 million, depreciation and amortization of $3.6 million, net amortization on securities of $0.9 million, and non-cash operating lease cost of $0.8 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 $13.8 million was attributable to changes in operating assets and liabilities, primarily as a result of a decrease in earn-out payable of $6.9 million, an increase in prepaid expenses and other current assets of $6.8 million, an increase in inventory of $6.1 million, a decrease in deferred revenue of $0.9 million, and a decrease in operating lease liabilities of $0.8 million.

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 $15.3 million for the six months ended June 30, 2021.

Net cash used in operating activities was $31.3 million for the nine months ended September 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 $43.4 million, depreciation and amortization of $0.9 million, non-cash operating lease cost of $0.8 million, and net amortization on securities of $0.6 million.

Non-cash expense was partially offset by non-cash income of $5.3 million related to the change in fair value of liabilities.

In addition, a net cash inflow totaling $4.2 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in accounts payable and accrued liabilities of $12.9 million.

This inflow was partially offset by an increase in prepaid expenses and other current assets of $4.6 million, an increase in inventory of $3.0 million, and a decrease in operating lease liabilities of $0.8 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.

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 six months ended June 30, 2022 was $31.3 million, which was primarily due to net investment cash inflows of $34.4 million.

This cash inflow was partially offset by investments of $2.4 million in website development and internal-use software, including investment in our mobile technology.

Net cash used in investing activities for the six months ended June 30, 2021 was $140.6 million, which was primarily due to net investment cash outflows of $137.9 million, investment in website and mobile application development and internal-use software of $1.8 million, and acquisition of business, net of cash acquired of $0.7 million.

Net cash provided by investing activities for the nine months ended September 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 ended September 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 six months ended June 30, 2022 was $22.2 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 $1.2 million.

Net cash used in financing activities for the nine months ended September 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 six months ended June 30, 2021 was $235.6 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 the PIPE 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 $1.1 million.

Net cash provided by financing activities for the nine months ended September 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 the PIPE 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.

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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 of June 30, 2022 were $21.8 million, of which $16.4 million was payable within 12 months.

Total contractual obligations and commitments as of September 30, 2022 were $21.5 million, of which $16.2 million was payable within 12 months.

Critical Accounting Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis