Hims & Hers Health, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. The January 20, 2021 merger with Oaktree Acquisition Corp. was accounted for as a reverse recapitalization, with Hims as the accounting acquirer. Historical comparisons therefore reflect Hims’ operations, not a combined-company comparison.
Business and operating performance
The company operates a direct-to-consumer telehealth platform selling health and wellness products and services online, with additional wholesale sales. Its affiliated medical groups and Ohio-based affiliated pharmacy are consolidated for accounting purposes as variable interest entities.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $52.3 million | $30.1 million | +74% |
| Online revenue | $50.7 million | $28.5 million | +78% |
| Wholesale revenue | $1.6 million | $1.5 million | +6% |
| Net orders | 687,000 | 546,000 | +26% |
| Average order value | $74 | $52 | +42% |
| Subscriptions at period end | 391,000 | 218,000 | +79% |
Management attributed online growth to higher order volume, larger product bundles and multi-month subscriptions, improved conversion and onboarding, marketing engagement, retention, and customer acquisition.
Financial results and liquidity
- Gross profit: $40.2 million, up 95%; gross margin expanded to 77% from 69%, as revenue grew faster than cost of revenue.
- Operating expenses: $88.7 million, up 230%. Marketing was $27.0 million, up 111%; selling, general and administrative expense was $61.7 million, up 339%.
- Operating loss: $48.4 million, compared with $6.2 million. Operating margin was approximately negative 93%, versus negative 21%.
- Net loss: $51.4 million, compared with $6.0 million; basic and diluted loss per share was $0.34, versus $0.17.
- Adjusted EBITDA: loss of $8.6 million, versus a loss of $4.6 million. This non-GAAP measure excludes, among other items, stock-based compensation, warrant fair-value changes and merger bonuses.
- Cash flows: $15.9 million used in operating activities; $163.3 million used in investing activities, primarily net purchases of investments; and $239.9 million provided by financing activities, primarily merger and PIPE proceeds. Cash, cash equivalents and restricted cash ended at $89.0 million.
- Balance sheet: Cash and cash equivalents were $88.2 million and short-term investments $235.1 million, totaling $323.3 million in those two categories. Current liabilities were $19.7 million. Total liabilities were $53.4 million, including $33.4 million of warrant liabilities; the company reported no term-loan borrowings.
Material changes, outlook and risks
- The merger and concurrent $75.0 million PIPE were completed in January 2021. The company reported $197.7 million of gross merger proceeds and $75.0 million of PIPE proceeds. Preferred stock converted into common stock.
- All merger earn-out thresholds were met in February 2021. Merger-related stock compensation and vesting catch-up were significant: stock-based compensation totaled $34.2 million, including $32.4 million in SG&A. SG&A also included approximately $5.1 million of merger-related bonuses. These items materially increased reported losses.
- Management expects operating losses to continue for at least the next 12 months while investing in marketing, product offerings, customer experience, fulfillment, the affiliated pharmacy, insurance capabilities and mobile applications. It believed available resources were sufficient for at least one year after issuance of the statements. The filing provides no specific revenue, earnings or cash-flow guidance.
- Key business risks include customer acquisition and retention, marketing costs, competition, dependence on subscription-based prescription sales, healthcare and telehealth regulation, privacy and cybersecurity, provider and pharmacy relationships, and uncertainty about sustained telehealth adoption after COVID-19.
- The affiliated pharmacy launched in Ohio during the quarter and was seeking licenses in additional geographies, adding regulatory and operating complexity. The company also disclosed $7.1 million of remaining minimum warehouse lease commitments after March 31, 2021 and $1.0 million of cloud-software purchase obligations.
- Disclosure controls were deemed ineffective as of March 31, 2021 because of a material weakness involving accounting for complex transactions, particularly SPAC warrants. Management described remediation efforts, including adding technical accounting resources, but gave no assurance they would be effective. Management nevertheless stated the interim financial statements fairly presented the company’s financial position and results.
- The filing identifies no legal proceeding that management believed would have a material adverse effect. COVID-19 had not adversely affected results to date, but future effects remained uncertain. The company also cautioned that its dual-class structure concentrates voting power with the CEO and that potential share resales and warrant dilution could affect Class A stockholders.
Investor verification points
- Assess whether online growth, order value, subscription growth and retention can continue, and whether higher marketing investment produces sustainable customer acquisition.
- Separate underlying operating trends from merger-related stock compensation, bonuses and warrant remeasurement when evaluating expenses and losses.
- Review the material weakness, prior-period warrant restatements and remediation progress, including whether disclosure controls become effective.
- Track cash burn, investment maturities, planned growth spending and management’s liquidity assessment; the stated runway depends on assumptions that may prove incorrect.
- Monitor pharmacy licensing and execution, healthcare regulatory developments, provider and pharmacy dependencies, and privacy and cybersecurity risks.
- Consider the effects of warrant liabilities and potential exercises, equity compensation, share resales, and the CEO’s concentrated voting control.