# Hims & Hers Health, Inc. (HIMS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hims & Hers Health, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1773751/000177375124000025/hims-20231231.htm
Accession: 0001773751-24-000025
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HIMS/
All MD&A years: /company/HIMS/mda/
Previous year: /company/HIMS/mda/fy2022/ (FY 2022)
Next year: /company/HIMS/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K. This section of the Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. 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 in the section entitled “Risk Factors” in this Form 10-K.

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 weight loss. 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

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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.

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.

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. Wholesale Revenue also includes non-prescription product sales to third-party platforms through consignment arrangements. In addition to being revenue generative and profitable, wholesale partnerships and consignment arrangements have the added benefit of generating brand awareness with new customers in physical and online environments.

“Subscribers” are customers who have one or more “Subscriptions” 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 days (for example, billed every 30 days or every 90 days), 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/or services and can reactivate Subscriptions to continue receiving additional products and/or 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.

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

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The table below provides a breakdown of total revenue between Online Revenue and Wholesale Revenue, for the years ended December 31, 2023, 2022, and 2021, 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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","Change","","% Change","","2022","","Change","","% Change","","2021"],["Online Revenue","$","842,381","","","$","339,874","","","68","%","","$","502,507","","","$","243,337","","","94","%","","$","259,170"],["Wholesale Revenue","29,619","","","5,210","","","21","%","","24,409","","","11,701","","","92","%","","12,708"],["Total revenue","$","872,000","","","$","345,084","","","65","%","","$","526,916","","","$","255,038","","","94","%","","$","271,878"],["Subscribers (end of period)","1,537","","","497","","","48","%","","1,040","","486","","88","%","","554"],["Monthly Online Revenue per Average Subscriber","$","54","","","$","1","","","2","%","","$","53","","","$","2","","","4","%","","$","51"],["Net Orders","8,676","","","2,554","","","42","%","","6,122","","","2,618","","","75","%","","3,504"],["AOV","$","97","","","$","15","","","18","%","","$","82","","","$","8","","","11","%","","$","74"]]
[[/GREPCENT_TABLE]]

We generated $842.4 million in Online Revenue for the year ended December 31, 2023, an increase of $339.9 million, or 68%, as compared to $502.5 million for the year ended December 31, 2022. Growth in Online Revenue for the year ended December 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 $29.6 million in Wholesale Revenue for the year ended December 31, 2023, an increase of $5.2 million, or 21%, as compared to $24.4 million for the year ended December 31, 2022. Wholesale Revenue can fluctuate on a period-to-period 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 48% to approximately 1,537,000 as of December 31, 2023 as compared to approximately 1,040,000 Subscribers as of December 31, 2022. Growth in Subscribers for the year ended December 31, 2023 was driven by increased traffic to our platform (through our websites and mobile applications) as a result of our marketing activities, increased customer conversion rates from improved onsite and customer onboarding experiences, and new product offerings. Monthly Online Revenue per Average Subscriber grew 2% to $54 for the year ended December 31, 2023 as compared to $53 for the year ended December 31, 2022, primarily due to product mix shifting between conditions and longer duration Subscriptions. Monthly Online Revenue per Average Subscriber has remained relatively stable as a result of generally recurring and predictable uptake of our offerings by Subscribers, but can fluctuate on a period-to-period basis due to various factors, including price changes, product mix, and duration of Subscriptions.

As a result of growth in Subscribers, we generated approximately 8.7 million Net Orders for the year ended December 31, 2023, an increase of 42% as compared to approximately 6.1 million Net Orders for the year ended December 31, 2022. For the year ended December 31, 2023, AOV was $97, an increase of 18% compared to $82 for the year ended December 31, 2022. AOV growth for the year ended December 31, 2023 was driven by product mixes shifting towards longer duration Subscriptions as well as new product offerings.

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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 30-day cadence, we offer Subscribers the ability to select from a range of Subscription shipment cadences, from every 60 days to 360 days, depending on the product. Subscriptions automatically renew on the applicable cadence selected by the Subscriber when purchasing or updating the Subscription. To ensure timely delivery of prescription medications and in accordance with our terms and conditions, Subscribers may sometimes be charged, and products may sometimes be shipped, earlier than their regularly scheduled cadence to accommodate holidays or for other operational reasons to support continuity of treatment. 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 Subscribers have contributed to the generally 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 example, for longer term Subscriptions, we incur shipping and fulfillment expenses fewer times per year than for 30-day Subscriptions. The Subscriber uptake of longer term Subscriptions results in lower recurring costs and higher gross margins as compared to 30-day 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, healthcare, or other 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 relatively 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 significant majority of revenue from Subscribers who maintain 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 inflation or recessionary pressures 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 are making investments in the expansion of our current facilities, which are expected to continue for at least the next 12 months. Additionally, we expect to continue 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

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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 specialties

We expect to continue to expand into new health and wellness specialties with our offerings. Specialty 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 specialties has required and will continue to 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 specialties, we may not recover the financial investments we make into new specialties 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), Adjusted EBITDA margin (which is a non-GAAP ratio), and Free Cash Flow (which is a non-GAAP financial measure) each as defined below. We use Adjusted EBITDA, Adjusted EBITDA margin, and Free Cash Flow to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that Adjusted EBITDA, Adjusted EBITDA margin, and Free Cash Flow, 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, Adjusted EBITDA margin, and Free Cash Flow 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, Adjusted EBITDA margin, and Free Cash Flow is helpful to our investors as they are used by management in assessing the health of our business, our operating performance, and our liquidity.

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, Adjusted EBITDA margin, and Free Cash Flow 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 (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, change in fair value of liabilities, impairment of long-lived assets, interest income, one-time Merger bonuses and warrant expense, and amortization of debt issuance costs. “Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by revenue.

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The following table reconciles net loss to Adjusted EBITDA for the years ended December 31, 2023, 2022, and 2021 (in thousands): 

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Revenue","","$","872,000","","","$","526,916","","","$","271,878"],["Net loss","","(23,546)","","","(65,678)","","","(107,659)"],["Stock-based compensation","","66,080","","","42,817","","","67,211"],["Depreciation and amortization","","9,515","","","7,474","","","4,075"],["Acquisition-related costs","","3,016","","","1,192","","","8,105"],["Provision (benefit) for income taxes","","1,975","","","(31)","","","(3,136)"],["Change in fair value of liabilities","","1,075","","","(70)","","","(3,802)"],["Impairment of long-lived assets","","429","","","1,127","","","\u2014"],["Interest income","","(9,029)","","","(2,610)","","","(390)"],["Merger bonuses","","\u2014","","","\u2014","","","5,219"],["Warrant expense in connection with Merger","","\u2014","","","\u2014","","","154"],["Amortization of debt issuance costs","","\u2014","","","\u2014","","","144"],["Adjusted EBITDA","","$","49,515","","","$","(15,779)","","","$","(30,079)"],["Net loss as a % of revenue","","(3)","%","","(12)","%","","(40)","%"],["Adjusted EBITDA margin","","6","%","","(3)","%","","(11)","%"]]
[[/GREPCENT_TABLE]]

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.

Free Cash Flow is a key performance measure that our management uses to assess our liquidity. Because Free Cash Flow facilitates internal comparisons of our historical liquidity on a more consistent basis, we use this measure for business planning purposes. “Free Cash Flow” is defined as net cash provided by (used in) operating activities, less purchases of property, equipment, and intangible assets and investment in website and mobile application development and internal-use software in investing activities.

The following table reconciles net cash provided by (used in) operating activities to Free Cash Flow for the years ended December 31, 2023, 2022, and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","","$","73,483","","","$","(26,531)","","","$","(34,412)"],["Less: purchases of property, equipment, and intangible assets in investing activities","","(17,220)","","","(2,714)","","","(832)"],["Less: investment in website and mobile application development and internal-use software in investing activities","","(9,272)","","","(4,533)","","","(4,175)"],["Free Cash Flow","","$","46,991","","","$","(33,778)","","","$","(39,419)"]]
[[/GREPCENT_TABLE]]

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Some of the limitations of Free Cash Flow include (i) Free Cash Flow does not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments, and (ii) Free Cash Flow includes capital expenditures, the benefits of which may be realized in periods subsequent to those in which the expenditures took place. In evaluating Free Cash Flow, you should be aware that in the future we will have cash outflows similar to the adjustments in this presentation. Our presentation of Free Cash Flow should not be construed as an inference that our future results will be unaffected by these cash outflows or any unusual or non-recurring items. When evaluating our performance, you should consider Free Cash Flow in addition to, and not as a substitute for, other financial performance measures, including our net cash provided by (used in) operating activities 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 a significant majority of our losses are attributable to, the United States of America. The 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 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 and post-consultation service support provided by Affiliated Medical Groups. Additionally, revenue is generated through wholesale arrangements.

For information on our significant accounting policies, see Note 2 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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, equipment, and software 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.

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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. 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 interest income from our cash and cash equivalents and investment accounts, as well as the change in fair value of liabilities. Additionally, other income (expense) includes non-operating and one-time charges classified outside of operating expenses.

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(Provision) benefit for income taxes

The (provision) benefit for income taxes primarily consists of federal and state taxes, as well as 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 years ended December 31, 2023 and 2022

The following table sets forth our consolidated statement of operations for the years ended December 31, 2023, 2022, and 2021 and the dollar and percentage change between the three periods (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","Change","","% Change","","2022","","Change","","% Change","","2021"],["Revenue","","$","872,000","","","$","345,084","","","65","%","","$","526,916","","","$","255,038","","","94","%","","$","271,878"],["Cost of revenue","","157,051","","","38,857","","","33","%","","118,194","","","50,810","","","75","%","","67,384"],["Gross profit","","714,949","","","306,227","","","75","%","","408,722","","","204,228","","","100","%","","204,494"],["Operating expenses:(1)"],["Marketing","","446,435","","","173,848","","","64","%","","272,587","","","136,685","","","101","%","","135,902"],["Operations and support","","119,857","","","42,454","","","55","%","","77,403","","","29,810","","","63","%","","47,593"],["Technology and development","","48,227","","","18,990","","","65","%","","29,237","","","6,858","","","31","%","","22,379"],["General and administrative","","129,883","","","31,691","","","32","%","","98,192","","","(15,470)","","","(14)","%","","113,662"],["Total operating expenses","","744,402","","","266,983","","","56","%","","477,419","","","157,883","","","49","%","","319,536"],["Loss from operations","","(29,453)","","","39,244","","","(57)","%","","(68,697)","","","46,345","","","(40)","%","","(115,042)"],["Other income (expense):"],["Change in fair value of liabilities","","(1,075)","","","(1,145)","","","*","","70","","","(3,732)","","","(98)","%","","3,802"],["Other income, net","","8,957","","","6,039","","","207","%","","2,918","","","2,473","","","556","%","","445"],["Total other income, net","","7,882","","","4,894","","","164","%","","2,988","","","(1,259)","","","(30)","%","","4,247"],["Loss before income taxes","","(21,571)","","","44,138","","","(67)","%","","(65,709)","","","45,086","","","(41)","%","","(110,795)"],["(Provision) benefit for income taxes","","(1,975)","","","(2,006)","","","*","","31","","","(3,105)","","","(99)","%","","3,136"],["Net loss","","$","(23,546)","","","$","42,132","","","(64)","%","","$","(65,678)","","","$","41,981","","","(39)","%","","$","(107,659)"]]
[[/GREPCENT_TABLE]]
______________ 

(*)Not meaningful

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Marketing","","$","5,477","","","$","4,648","","","$","9,664"],["Operations and support","","6,815","","","2,684","","","2,735"],["Technology and development","","7,126","","","4,327","","","4,481"],["General and administrative","","46,662","","","31,158","","","50,331"],["Total stock-based compensation expense","","$","66,080","","","$","42,817","","","$","67,211"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Revenue","","100","%","","100","%","","100","%"],["Cost of revenue","","18","%","","22","%","","25","%"],["Gross profit","","82","%","","78","%","","75","%"],["Operating expenses:"],["Marketing","","51","%","","52","%","","50","%"],["Operations and support","","14","%","","15","%","","17","%"],["Technology and development","","6","%","","6","%","","8","%"],["General and administrative","","15","%","","18","%","","42","%"],["Total operating expenses","","86","%","","91","%","","117","%"],["Loss from operations","","(4)","%","","(13)","%","","(42)","%"],["Other income (expense):"],["Change in fair value of liabilities","","\u2014","%","","\u2014","%","","1","%"],["Other income, net","","1","%","","1","%","","\u2014","%"],["Total other income, net","","1","%","","1","%","","1","%"],["Loss before income taxes","","(3)","%","","(12)","%","","(41)","%"],["(Provision) benefit for income taxes","","\u2014","%","","\u2014","%","","1","%"],["Net loss","","(3)","%","","(12)","%","","(40)","%"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue was $872.0 million for the year ended December 31, 2023 compared to $526.9 million for the year ended December 31, 2022, an increase of $345.1 million, or 65%. For detailed discussion of this increase, refer to “Revenue and Key Business Metrics.”

Cost of revenue and gross profit

Cost of revenue was $157.1 million for the year ended December 31, 2023, compared to $118.2 million for the year ended December 31, 2022, an increase of $38.9 million, or 33%. This increase was primarily due to increased shipping costs of 49%, increased costs associated with Providers of 48%, and increased product and packaging costs of approximately 20%. These increases were due to overall increased business activity with the addition of new Subscribers.

Gross profit was $714.9 million for the year ended December 31, 2023 compared to $408.7 million for the year ended December 31, 2022, an increase of $306.2 million or 75%. Correspondingly, gross margin was 82% for the year ended December 31, 2023 compared to 78% for the year ended December 31, 2022. The increase in gross margin for the year ended December 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. This increase was also due to Wholesale Revenue, which is lower margin than Online Revenue, comprising a smaller proportion of total revenue.

Marketing expenses

Marketing expenses were $446.4 million for the year ended December 31, 2023, compared to $272.6 million for the year ended December 31, 2022, an increase of $173.8 million, or 64%. The most significant component of marketing expenses is customer acquisition costs, which increased to $379.7 million for the year ended December 31, 2023, compared to $230.4 million for the year ended December 31, 2022, an increase of $149.3 million, or 65%. The increase in customer acquisition costs was a result

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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.

Operations and support

Operations and support expenses were $119.9 million for the year ended December 31, 2023, compared to $77.4 million for the year ended December 31, 2022, an increase of $42.5 million, or 55%. 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 $22.7 million, an increase in order fulfillment, transaction processing, and selling costs of $9.1 million, an increase in stock-based compensation of $4.1 million, and an increase in depreciation, amortization, and technology costs of operations and support functions of $3.6 million.

Technology and development

Technology and development expenses were $48.2 million for the year ended December 31, 2023, compared to $29.2 million for the year ended December 31, 2022, an increase of $19.0 million, or 65%. The increase in technology and development expenses was primarily driven by an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses, and excluding stock-based compensation) of $9.5 million, an increase in depreciation, amortization, and technology costs of $4.9 million, and an increase in stock-based compensation of $2.8 million.

General and administrative

General and administrative expenses were $129.9 million for the year ended December 31, 2023, compared to $98.2 million for the year ended December 31, 2022, an increase of $31.7 million, or 32%. The increase in general and administrative expenses was primarily driven by an increase in stock-based compensation of $15.5 million, an increase in employee compensation (comprising salaries and wages, benefits, taxes, and performance bonuses, and excluding stock-based compensation) of $13.9 million, an increase in depreciation, amortization, and technology costs relating to general and administrative functions of $2.4 million, an increase in professional services of $2.1 million, and an increase in corporate events and travel costs of $1.5 million. The increase in general and administrative expenses was partially offset by a decrease in insurance premiums of $2.8 million.

Other income

Other income was $7.9 million for the year ended December 31, 2023, compared to $3.0 million for the year ended December 31, 2022, an increase of $4.9 million. The change was driven primarily by an increase in interest income of $6.4 million. The increase was partially offset by a loss from the change in fair value of liabilities of $1.1 million for the year ended December 31, 2023 compared to a gain of $0.1 million for the year ended December 31, 2022.

(Provision) benefit for income taxes

Provision for income taxes was $2.0 million for the year ended December 31, 2023, compared to a benefit of less than $0.1 million for the year ended December 31, 2022. The change was primarily due to an increase in current federal and state income taxes.

Liquidity and Capital Resources

As of December 31, 2023, our principal sources of liquidity are cash and cash equivalents in the amount of $96.7 million, which are primarily invested in interest-bearing cash accounts and money market funds, and investments in the amount of $124.3 million, which are invested in U.S. Treasury bills, corporate bonds, government and government agency securities, and asset-backed bonds.

We have historically incurred negative cash flows from operating activities and significant losses from operations. While we had positive cash flows from operating activities for the year ended December 31, 2023, we may continue to incur operating losses in the future due to continued investments 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 consolidated financial statements.

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Our future capital requirements will depend on many factors, including the number of orders we receive, the size of our customer base, the continuing market acceptance of telehealth, and the timing and extent of spend to support the expansion of sales, marketing, development activities, and our facilities, which may be impacted by inflationary, recessionary, or other macroeconomic factors. We expect to continue to pursue opportunities to expand our internal fulfillment capabilities and may acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may also use our cash and cash equivalents to repurchase up to an additional $48 million of our Class A common stock through the fourth quarter of 2025 at management’s discretion pursuant to our share repurchase program. We have based our estimate of our future capital requirements on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise 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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","$","73,483","","","$","(26,531)","","","$","(34,412)"],["Net cash (used in) provided by investing activities","(12,106)","","","34,699","","","(156,268)"],["Net cash (used in) provided by financing activities","(11,475)","","","(33,127)","","","235,043"]]
[[/GREPCENT_TABLE]]

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 $73.5 million for the year ended December 31, 2023. Net cash provided by operating activities included non-cash expense related to stock-based compensation of $66.1 million, depreciation and amortization of $9.5 million, non-cash acquisition-related costs of $2.7 million, and change in fair value of liabilities of $1.1 million, partially offset by a net loss of $23.5 million and net accretion on securities of $5.7 million. In addition, a net cash inflow totaling $20.8 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in accounts payable and accrued liabilities of $23.8 million and an increase in deferred revenue of $6.3 million. This inflow was partially offset by an increase in prepaid expenses of $6.4 million.

Net cash used in operating activities was $26.5 million for the year ended December 31, 2022. The most significant component of our cash used was a net loss of $65.7 million. This included non-cash expense related to stock-based compensation of $42.8 million, depreciation and amortization of $7.5 million, and impairment of long-lived assets of $1.1 million. In addition, a net cash outflow totaling $14.2 million was attributable to changes in operating assets and liabilities, primarily as a result of a decrease in earn-out payable of $10.2 million, an increase in inventory of $8.0 million, an increase in prepaid expenses of $6.3 million, and a decrease in deferred revenue of $1.7 million. This outflow was partially offset by an increase in accounts payable and accrued liabilities of $13.6 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, purchases of property, equipment, and intangible assets, and acquisitions.

Net cash used in investing activities for the year ended December 31, 2023 was $12.1 million, which was primarily due to purchases of property, equipment, and intangible assets of $17.2 million and investments of $9.3 million in website development and internal-use software, partially offset by net investment cash inflows of $14.4 million.

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Net cash provided by investing activities for the year ended December 31, 2022 was $34.7 million, which was primarily due to net investment cash inflows of $42.4 million, partially offset by investments of $4.5 million in website development and internal-use software, including investment in our mobile technology, and purchases of property, equipment, and intangible assets of $2.7 million.

Cash flows from financing activities

Net cash used in financing activities for the year ended December 31, 2023 was $11.5 million, which was due to payments for taxes related to net share settlement of equity awards of $14.1 million and repurchases of common stock of $2.0 million, partially offset by proceeds from the exercise of stock options of $2.3 million and proceeds from employee stock purchase plan of $2.3 million.

Net cash used in financing activities for the year ended December 31, 2022 was $33.1 million, which was due to payments for earn-out consideration for acquisitions of $32.7 million and payments for taxes related to net share settlement of equity awards of $3.9 million, partially offset by proceeds from the exercise of stock options of $2.2 million and proceeds from employee stock purchase plan of $1.2 million.

Contractual Obligations and Commitments

Our contractual obligations and commitments include earn-out payable 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 December 31, 2023 were $27.7 million, of which $14.4 million was payable within 12 months.

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in our financial statements and accompanying notes. Management believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to it 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 consolidated financial statements will be affected.

Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. These are the policies that we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Business combinations

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection with determination of fair values, we may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain assumed obligations.

Any acquired assets from a business combination including intangible assets subject to amortization are continuously monitored and reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, recoverability of assets to be held and used is assessed by comparing the carrying amount of assets with their future underlying net undiscounted cash flows without interest charges. If such assets are considered to be impaired, an impairment is recognized as the amount by which the carrying amount of the assets exceeds the estimated fair values of the assets.

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Performance restricted stock units

Determining the fair value of our performance restricted stock units (“Performance RSUs” or “PRSUs”) on the grant date and at the end of each reporting period requires management to use significant judgment and estimates. The grant date fair value is based on the probable level of achievement of performance targets and closing price of our Class A common stock on the grant date. We estimate the probable level of achievement on the grant date and at the end of each reporting period using a variety of factors, including primarily internal financial forecasts, our performance compared to such forecasts, and publicly disclosed financial guidance and our performance compared to such guidance.

If management determines that it is probable that the level of achievement has increased, we recognize a cumulative catch-up of stock-based compensation expense based on the level of achievement determined at period end in comparison to the prior period. If we determine it is no longer probable that any level of achievement will occur, we discontinue recognition of stock-based compensation expense. If we determine that it is improbable that any level of achievement will occur, we reverse previously recognized stock-based compensation expense.