Hims & Hers Health, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 ended December 31, 2022 (our “2022 Annual Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of Part II of our 2022 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 could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should not rely on forward-looking statements as predictions of future events. 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 to Hims & 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 help the world feel great through the power of better health. We believe that we have the technical platform, distributed provider network, and access to clinical capabilities to lead the migration of routine office visits to a digital format. The Hims & Hers platform includes access to a highly-qualified and technologically-capable provider network, a clinically-focused electronic medical records system, digital prescriptions, and cloud-enabled pharmacy fulfillment. 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 professionals who 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. In addition, we offer access to a range of health and wellness products designed to meet individual needs, which can include curated prescription and non-prescription products. Our products and services are available for purchase directly by customers on our websites and mobile applications. Additionally, Hims & Hers non-prescription 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 19 Table of Contents operations and support caption includes costs related to our supply chain, fulfillment, and customer support functions. The 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. We also monitor the additional key business metrics set forth below to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. Increases or decreases in these key business metrics may not correspond with increases or decreases in our revenue. The limitations our key business metrics have as an analytical tool include: (i) they might not accurately predict our future financial results pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”); and (ii) other companies, including companies in our industry, may calculate our key business metrics or similarly titled measures differently, which reduces their usefulness as comparative measures. As our business grows and evolves, we continually and strategically review our key metrics. Beginning with our 2022 Annual Report, we commenced reporting “Subscribers” and “Monthly Online Revenue Per Average Subscriber” as additional key business metrics (as defined below). As a result of broadening the number of health and wellness categories we serve, we believe it is important to measure the holistic relationship that we have with our customers. Additionally, the recurring nature of our revenue necessitates the need for metrics that provide greater visibility into both the breadth and engagement of users on our platform. We believe Subscribers represent a more accurate reflection of the number of distinct users that we have on our platform relative to the number of subscriptions, and beginning with the three months ending March 31, 2023, we are no longer reporting “Subscriptions” as a key business metric. Monthly Online Revenue per Average Subscriber reflects how users’ engagement with products across our platform is evolving. These changes are intended to better align our key business metrics with our internal priorities and business plans. Brief descriptions of our key business metrics are provided below. “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 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. “Subscribers” are customers who have one or more “Subscriptions”, which are agreements pursuant to which they have agreed to be automatically billed on a recurring basis at a defined cadence. The Subscription billing cadence is typically defined as a number of months (for example, billed every month or every three months), which are excluded from our reporting when payment has not occurred at the contracted billing cadence. Subscribers 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. “Monthly Online Revenue per Average Subscriber” is defined as Online Revenue divided by “Average Subscribers”, which amount is then further divided by the number of months in a period. “Average Subscribers” are calculated as the sum of the Subscribers at the beginning and end of a given period divided by 2. “Net Orders” are defined as the number of online customer orders minus transactions related to refunds, credits, chargebacks, and other negative adjustments. Net Orders represent transactions made on our platform during a defined period of time and exclude revenue recognition adjustments recorded pursuant to U.S. GAAP. 20 Table of Contents Average Order Value (“AOV”) is defined as Online Revenue divided by Net Orders. The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, for the three months ended March 31, 2023 and 2022, as well as key metrics that drive Online Revenue (i.e., Subscribers, Monthly Online Revenue per Average Subscriber, Net Orders, and AOV) and the dollar and percentage change between such periods (in thousands, except for Monthly Online Revenue per Average Subscriber and AOV): Three Months Ended March 31, 2023 2022 Change % Change Online Revenue $ 184,175 $ 94,102 $ 90,073 96 % Wholesale Revenue 6,595 7,212 (617) (9) % Total revenue $ 190,770 $ 101,314 $ 89,456 88 % Subscribers (end of period) 1,209 646 563 87 % Monthly Online Revenue per Average Subscriber $ 55 $ 52 $ 3 6 % Net Orders 2,047 1,207 840 70 % AOV $ 90 $ 78 $ 12 15 % We generated $184.2 million in Online Revenue for the three months ended March 31, 2023, an increase of $90.1 million, or 96%, as compared to $94.1 million for the three months ended March 31, 2022. Growth in Online Revenue for the three months ended March 31, 2023 was primarily driven by growth in Subscribers, from whom we generated recurring and stable Monthly Online Revenue per Average Subscriber, as well as growth in AOV and Net Orders. We generated $6.6 million in Wholesale Revenue for the three months ended March 31, 2023, a decrease of $0.6 million, or 9%, as compared to $7.2 million for the three months ended March 31, 2022. In the first quarter of 2022, there were larger initial orders from new retail partners that were not repeated in the first quarter of 2023. Wholesale Revenue 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. Subscribers grew 87% to approximately 1,209,000 as of March 31, 2023 as compared to approximately 646,000 Subscribers as of March 31, 2022. Growth in Subscribers was driven by increased traffic to our platform (through our websites and mobile applications) as a result of our marketing activities, and by increased customer conversion rates from improved onsite and customer onboarding experiences. Monthly Online Revenue per Average Subscriber grew $3 to $55 for the three months ended March 31, 2023 as compared to $52 for the three months ended March 31, 2022. Monthly Online Revenue per Average Subscriber has remained relatively stable as a result of recurring and predictable uptake of our offerings by Subscribers. As a result of growth in Subscribers, we generated approximately 2.0 million Net Orders for the three months ended March 31, 2023, an increase of 70% as compared to approximately 1.2 million Net Orders for the three months ended March 31, 2022. For the three months ended March 31, 2023, AOV was $90, an increase of 15% as compared to $78 for the three months ended March 31, 2022. AOV growth for the three months ended March 31, 2023 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 stable and predictable nature of our Monthly Online Revenue per Average Subscriber. 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 21 Table of Contents 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. 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 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, including changes to privacy laws that could impact customer acquisition costs. 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 Subscribers 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 Subscriber behavior stays consistent in the future. In addition, the consistent uptake by Subscribers of our offerings has contributed to the stable and predictable nature of our Monthly Online Revenue per Average Subscriber. We expect to retain a majority or a higher percentage of revenue from Subscribers who 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 Subscriber retention decreases in the future, then future revenue will be negatively impacted. Macroeconomic factors including increasing inflation may affect the ability of our Subscribers to continue to pay for our products and services, which may 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 (as defined below) 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. For example, we expect to make investments in the expansion of our current facilities over the next two years. 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 investments in personalized product offerings, including in our compounding capabilities. This also includes further investments in and development of mobile phone technology, including our mobile applications, in order to improve the customer experience on our platform. 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 continue to require financial investments in additional headcount, marketing and 22 Table of Contents 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 with U.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 corresponding U.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 with U.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 with U.S. GAAP. Investors are encouraged to review our U.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, acquisition-related costs (which includes 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), impairment of long-lived assets, income taxes, change in fair value of liabilities, and interest income. “Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by revenue. The following table reconciles net loss to Adjusted EBITDA for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Revenue $ 190,770 $ 101,314 Net loss (10,067) (16,252) Stock-based compensation 14,167 8,856 Depreciation and amortization 2,117 1,741 Acquisition-related costs 646 116 Impairment of long-lived assets 429 — Provision for income taxes 386 94 Change in fair value of liabilities 295 (441) Interest income (1,913) (175) Adjusted EBITDA $ 6,060 $ (6,061) Net loss as a % of revenue (5) % (16) % Adjusted EBITDA margin 3 % (6) % 23 Table of Contents 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 the U.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 other U.S. GAAP results. 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 condensed 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) “Affiliated Medical Groups,” which are professional corporations or other professional entities owned by licensed physicians and that engage licensed healthcare professionals (physicians, physician assistants, nurse practitioners, and mental health providers; collectively referred to as “Providers” or individually, a “Provider”) to provide consultation services; and (ii) XeCare, LLC (“XeCare”) and Apostrophe Pharmacy LLC (“Apostrophe Pharmacy”, and together with XeCare, the “Affiliated Pharmacies”), which are licensed mail order pharmacies providing prescription fulfillment solely to our customers. 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 and depreciation and amortization on property and equipment 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, volume of fulfillment through affiliated and internal fulfillment capabilities, and our ability to sell our inventory. We expect our gross margin to fluctuate from period to period depending on these and other factors. 24 Table of Contents 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, in part due to our expected execution of disciplined headcount growth, 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 (expense) Other income (expense) 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 (expense) includes non-operating and one-time charges classified outside of operating expenses. 25 Table of Contents Benefit (provision) for income taxes Benefit (provision) for income taxes primarily consists of 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 months ended March 31, 2023 and 2022 The following table sets forth our unaudited condensed consolidated statement of operations for the three months ended March 31, 2023 and 2022, and the dollar and percentage change between the two periods (dollars in thousands): Three Months Ended March 31, 2023 2022 Change % Change Revenue $ 190,770 $ 101,314 $ 89,456 88 % Cost of revenue 37,345 26,558 10,787 41 % Gross profit 153,425 74,756 78,669 105 % Operating expenses: (1) Marketing 97,245 48,093 49,152 102 % Operations and support 26,182 15,683 10,499 67 % Technology and development 10,748 6,088 4,660 77 % General and administrative 30,513 21,811 8,702 40 % Total operating expenses 164,688 91,675 73,013 80 % Loss from operations (11,263) (16,919) 5,656 (33) % Other income: Change in fair value of liabilities (295) 441 (736) * Other income, net 1,877 320 1,557 487 % Total other income, net 1,582 761 821 108 % Loss before income taxes (9,681) (16,158) 6,477 (40) % Provision for income taxes (386) (94) (292) 311 % Net loss $ (10,067) $ (16,252) $ 6,185 (38) % ______________ * Not meaningful (1) Includes stock-based compensation expense as follows (in thousands): Three Months Ended March 31, 2023 2022 Marketing $ 996 $ 823 Operations and support 1,154 486 Technology and development 1,461 906 General and administrative 10,556 6,641 Total stock-based compensation expense $ 14,167 $ 8,856 26 Table of Contents The following table sets forth our results of operations as a percentage of our total revenue for the periods presented: Three Months Ended March 31, 2023 2022 Revenue 100 % 100 % Cost of revenue 20 % 26 % Gross profit 80 % 74 % Operating expenses: Marketing 51 % 47 % Operations and support 13 % 15 % Technology and development 6 % 6 % General and administrative 16 % 22 % Total operating expenses 86 % 90 % Loss from operations (6) % (16) % Other income: Change in fair value of liabilities — % — % Other income, net 1 % — % Total other income, net 1 % — % Loss before income taxes (5) % (16) % Provision for income taxes — % — % Net loss (5) % (16) % Revenue Revenue was $190.8 million for the three months ended March 31, 2023, compared to $101.3 million for the three months ended March 31, 2022, an increase of $89.5 million, or 88%. For a detailed discussion of this increase, refer to “—Revenue and Key Business Metrics.” Cost of revenue and gross profit Cost of revenue was $37.3 million for the three months ended March 31, 2023, compared to $26.6 million for the three months ended March 31, 2022, an increase of $10.8 million, or 41%. This increase was primarily due to increased costs associated with medical consultation services of 99%, increased shipping costs of 66%, and increased product and packaging costs of approximately 12%, compared to the three months ended March 31, 2022. These increases were due to overall increased business activity with the addition of new Subscribers. Gross profit was $153.4 million for the three months ended March 31, 2023, compared to $74.8 million for the three months ended March 31, 2022, an increase of $78.7 million, or 105%. Correspondingly, gross margin was 80% for the three months ended March 31, 2023, compared to 74% for the three months ended March 31, 2022. The increase in gross margin for the three months ended March 31, 2023 was 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, as well as Wholesale Revenue, which is lower margin than Online Revenue, comprising a smaller proportion of total revenue. Marketing expenses Marketing expenses were $97.2 million for the three months ended March 31, 2023, compared to $48.1 million for the three months ended March 31, 2022, an increase of $49.2 million, or 102%. Customer acquisition costs increased to $84.0 million in the three months ended March 31, 2023, compared to $39.1 million for the three months ended March 31, 2022, an increase of 115%. The increase in customer acquisition costs was 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. 27 Table of Contents Operations and support Operations and support expenses were $26.2 million for the three months ended March 31, 2023, compared to $15.7 million for the three months ended March 31, 2022, an increase of $10.5 million or 67%. The increase in operations and support was primarily driven by an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses, and excluding stock-based compensation) of $3.9 million, an increase in order fulfillment, transaction processing, and selling costs of $3.3 million, and an increase in professional services of $1.4 million. Technology and development Technology and development expenses were $10.7 million for the three months ended March 31, 2023, compared to $6.1 million for the three months ended March 31, 2022, an increase of $4.7 million or 77%. The increase in technology and development expenses were primarily driven by an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses, and excluding stock-based compensation) of $2.4 million, an increase in depreciation, amortization, and technology costs of $0.9 million, and an increase in stock-based compensation of $0.6 million. General and administrative General and administrative expenses were $30.5 million for the three months ended March 31, 2023, compared to $21.8 million for the three months ended March 31, 2022, an increase of $8.7 million, or 40%. The increase in general and administrative expenses was primarily driven by an increase in stock-based compensation of $3.9 million, and an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses, and excluding stock-based compensation) of $3.8 million. Other income Other income was $1.6 million for the three months ended March 31, 2023, compared to $0.8 million for the three months ended March 31, 2022, an increase of $0.8 million or 108%. This increase was driven primarily by interest income for the three months ended March 31, 2023 of $1.9 million, compared to $0.2 million for the three months ended March 31, 2022. The increase was partially offset by a loss from the change in fair value of liabilities for the three months ended March 31, 2023 of $0.3 million, compared to a gain of $0.4 million for the three months ended March 31, 2022. Provision for income taxes Provision for income taxes was $0.4 million for the three months ended March 31, 2023, compared to $0.1 million for the three months ended March 31, 2022. This change was primarily due to an increase in state income taxes. Liquidity and Capital Resources As of March 31, 2023, our principal sources of liquidity are cash and cash equivalents in the amount of $48.7 million, which are primarily invested in money market funds and government bonds, and investments in the amount of $135.6 million, which are invested in corporate bonds, as well as government and government agency securities. We have historically incurred negative cash flows from operating activities and significant losses from operations in the past. While we had positive cash flows from operating activities for the three months ended March 31, 2023, 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 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, t he continuing market acceptance of telehealth, and the timing and extent of spend to support the expansion of sales, marketing, development activities, and our facilities, which may be impacted by inflationary or other macroeconomic factors. We 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 28 Table of Contents sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise or access 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): Three Months Ended March 31, 2023 2022 Net cash provided by (used in) operating activities $ 9,483 $ (19,403) Net cash (used in) provided by investing activities (4,113) 18,453 Net cash used in financing activities (3,412) (22,527) 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 provided by operating activities was $9.5 million for the three months ended March 31, 2023. Net cash provided by operating activities included non-cash expense related to stock-based compensation of $14.2 million and depreciation and amortization of $2.1 million, partially offset by a net loss of $10.1 million and net accretion on securities of $1.0 million. In addition, a net cash inflow totaling $2.4 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in accounts payable and accrued liabilities of $5.6 million and an increase in deferred revenue of $1.4 million. This inflow was partially offset by an increase in prepaid expenses and other current assets of $5.0 million. Net cash used in operating activities was $19.4 million for the three months ended March 31, 2022. The most significant component of our cash used was a net loss of $16.3 million. This included non-cash expense related to stock-based compensation of $8.9 million, depreciation and amortization of $1.7 million, and net amortization on securities of $1.0 million. In addition, a net cash outflow totaling $14.4 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in prepaid expenses and other current assets of $7.7 million, a decrease in earn-out payable of $6.9 million, and a decrease in deferred revenue of $2.0 million. This inflow was partially offset by a decrease in inventory of $1.4 million and an increase in accounts payable and accrued 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 investment in website and mobile application development and internal-use software and purchases of property and equipment. Net cash used in investing activities for the three months ended March 31, 2023 was $4.1 million, which was primarily due to investments of $1.9 million in website development and internal-use software, including investment in our mobile technology, net investment cash outflows of $1.6 million, and $0.6 million in purchases of property and equipment. Net cash provided by investing activities for the three months ended March 31, 2022 was $18.5 million, which was primarily due to net investment cash inflows of $19.8 million. This cash inflow was partially offset by investments in website development and internal-use software, including investment in our mobile technology of $1.2 million. Cash flows from financing activities Net cash used in financing activities for the three months ended March 31, 2023 was $3.4 million, which was primarily due to payments for taxes related to net share settlement of equity awards of $3.7 million. This cash outflow was partially offset by proceeds from the exercise of stock options of $0.2 million. 29 Table of Contents Net cash used in financing activities for the three months ended March 31, 2022 was $22.5 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 $0.4 million. This cash outflow was partially offset by proceeds from the exercise of stock options of $0.9 million. Contractual Obligations and Commitments Our contractual obligations and commitments include earn-out liabilities related to an acquisition, operating leases, and non-cancelable purchase obligations primarily related to cloud-based software contracts used in operations. Total contractual obligations and commitments as of March 31, 2023 were $15.3 million, of which $5.1 million was payable within 12 months. Critical Accounting Estimates The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgements, and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant estimates, judgements, 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, estimates used in the capitalization of website and mobile application development and internal-use software costs, and judgements relating to impairment triggering events for long-lived assets. Management believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available at the time that these estimates, judgments, and assumptions 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 2022 Annual Report for the year ended December 31, 2022. Since December 31, 2022, there have been no material changes to our critical accounting estimates.