Hims & Hers Health, Inc 8-K/A, filed Mar 22, 2021
Hims & Hers Health, Inc. (HIMS)
About this 8-K/A
Hims & Hers Health, Inc filed this 8-K/A on March 22, 2021, reporting on events of January 20, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 22, 2021 (January 20, 2021)
HIMS & HERS HEALTH, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 001-38986 | 98-1482650 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
| 2269 Chestnut Street, #523 San Francisco, California |
94123 | |||
| (Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (415) 851-0195
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbol |
Name of each exchange on which registered | ||
| Class A Common Stock, $0.0001 par value | HIMS | New York Stock Exchange | ||
| Redeemable Warrants, each whole warrant exercisable for one share of Class A common stock | HIMS WS | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company ☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
This Amendment No. 1 to the Form 8-K (the “Form 8-K”) originally filed by Him & Hers Health, Inc. (the “Company”) on January 20, 2021 is being filed solely for the purpose of amending the historical financial statements provided under Item 9.01(a) in the Form 8-K to include the audited consolidated financial statements of Hims, Inc. (“Hims”) as of December 31, 2020 and 2019 and for each of the years in the two-year period ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Hims. This Amendment No. 1 does not amend any other item of the Form 8-K or purport to provide an update or a discussion of any developments at the Company subsequent to the filing date of the Form 8-K.
Capitalized terms used but not defined herein have the meanings assigned to them in the Form 8-K.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
The audited consolidated financial statements of Hims as of December 31, 2020 and 2019 for each of the years in the two-year period ended December 31, 2020 are filed herewith as Exhibit 99.1.
Also included herewith as Exhibit 99.2 and incorporated by reference herein is the related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Hims.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HIMS & HERS HEALTH, INC. | ||||||
| DATE: March 22, 2021 | By: | /s/ Andrew Dudum | ||||
| Andrew Dudum | ||||||
| Chief Executive Officer | ||||||
Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS
Hims, Inc. and Subsidiaries
Years Ended December 31, 2020 and 2019
With Report of Independent Registered Public Accounting Firm
Hims, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Contents
| Report of Independent Registered Public Accounting Firm |
1 | |||
| Consolidated Financial Statements |
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| Consolidated Balance Sheets as of December 31, 2020 and 2019 |
2 | |||
| Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2020 and 2019 |
3 | |||
| Consolidated Statements of Mezzanine Equity and Stockholders’ Deficit for the Years Ended December 31, 2020 and 2019 |
4 | |||
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 |
5 | |||
| Notes to Consolidated Financial Statements |
6 | |||
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hims, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hims, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, mezzanine equity and stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ KPMG LLP |
| We have served as the Company’s auditor since 2019. |
| San Francisco, California |
| March 22, 2021 |
1
Hims, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, except Share Data)
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets |
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| Current assets: |
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| Cash and cash equivalents |
$ | 27,344 | $ | 22,647 | ||||
| Short-term investments |
72,864 | 37,721 | ||||||
| Inventory |
3,543 | 4,217 | ||||||
| Prepaid expenses and other current assets |
5,404 | 5,022 | ||||||
| Deferred transaction costs |
3,929 | — | ||||||
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| Total current assets |
113,084 | 69,607 | ||||||
| Restricted cash, noncurrent |
1,006 | 150 | ||||||
| Other long-term assets |
4,607 | 2,313 | ||||||
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| Total assets |
$ | 118,697 | $ | 72,070 | ||||
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| Liabilities, mezzanine equity, and stockholders’ equity |
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| Current liabilities: |
||||||||
| Accounts payable |
$ | 8,066 | $ | 7,231 | ||||
| Accrued liabilities |
4,984 | 2,026 | ||||||
| Deferred revenue |
1,272 | 753 | ||||||
| Term loan, current |
— | 1,515 | ||||||
| Warrant liabilities |
906 | 9,097 | ||||||
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| Total current liabilities |
15,228 | 20,622 | ||||||
| Deferred rent, noncurrent |
381 | — | ||||||
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| Total liabilities |
15,609 | 20,622 | ||||||
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| Commitments and contingencies (Note 11) |
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| Mezzanine equity: |
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| Redeemable convertible preferred stock – par value $0.000001; 211,924,602 and 192,870,448 shares authorized and 206,031,290 and 186,573,651 shares issued and outstanding as of December 31, 2020 and 2019, respectively; liquidation preference of $268,452 and $206,138 as of December 31, 2020 and 2019, respectively |
249,962 | 186,741 | ||||||
| Redeemable Class A common stock – par value $0.000001; nil and 1,627,132 shares issued and outstanding as of December 31, 2020 and 2019, respectively |
— | 4,500 | ||||||
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| Total mezzanine equity |
249,962 | 191,241 | ||||||
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| Stockholders’ deficit: |
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| Common stock – Class A shares, par value $0.000001; 368,000,000 and 333,000,000 shares authorized and 101,606,862 and 98,563,353 shares issued and outstanding as of December 31, 2020 and 2019, respectively; Class F shares, par value $0.000001; 15,323,740 shares authorized, issued, and outstanding as of December 31, 2020 and 2019 |
— | — | ||||||
| Additional paid-in capital |
24,429 | 13,383 | ||||||
| Accumulated other comprehensive (loss) income |
(11 | ) | 2 | |||||
| Accumulated deficit |
(171,292 | ) | (153,178 | ) | ||||
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| Total stockholders’ deficit |
(146,874 | ) | (139,793 | ) | ||||
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| Total liabilities, mezzanine equity, and stockholders’ deficit |
$ | 118,697 | $ | 72,070 | ||||
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See accompanying notes to consolidated financial statements.
2
Hims, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, except Share and Per Share Data)
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue |
$ | 148,757 | $ | 82,558 | ||||
| Cost of revenue |
39,307 | 37,953 | ||||||
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| Gross profit |
109,450 | 44,605 | ||||||
| Operating expenses: |
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| Marketing |
58,989 | 63,156 | ||||||
| Selling, general, and administrative |
65,605 | 55,863 | ||||||
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| Total operating expenses |
124,594 | 119,019 | ||||||
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| Loss from operations |
(15,144 | ) | (74,414 | ) | ||||
| Other income (expense): |
||||||||
| Interest expense |
(10 | ) | (369 | ) | ||||
| Other (expense) income, net |
(2,833 | ) | 2,809 | |||||
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| Loss before provision for income taxes |
(17,987 | ) | (71,974 | ) | ||||
| Provision for income taxes |
(127 | ) | (90 | ) | ||||
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| Net loss |
(18,114 | ) | (72,064 | ) | ||||
| Other comprehensive (loss) income |
(13 | ) | 4 | |||||
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| Total comprehensive loss |
$ | (18,127 | ) | $ | (72,060 | ) | ||
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| Net loss per share attributable to common stockholders: |
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| Basic and diluted |
$ | (0.23 | ) | $ | (0.94 | ) | ||
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| Weighted average shares outstanding: |
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| Basic and diluted |
78,047,120 | 76,545,970 | ||||||
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See accompanying notes to consolidated financial statements.
3
Hims, Inc. and Subsidiaries
Consolidated Statements of Mezzanine Equity and Stockholders’ Deficit
(In Thousands, except Share Data)
| Redeemable Convertible Preferred Stock |
Redeemable Class A Common Stock |
Class A and Class F Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Accumulated Deficit |
Total Stockholders’ Deficit |
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| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 |
156,950,448 | $ | 94,151 | — | — | 112,924,032 | — | $ | 9,759 | $ | (2) | $ | (81,114) | $ | (71,357) | |||||||||||||||||||||||||
| Issuance of redeemable convertible preferred stock, net of issuance costs, including warrants, of $10.2 million |
29,623,203 | 92,590 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of Class A common stock warrants |
— | — | — | — | — | — | 61 | — | — | 61 | ||||||||||||||||||||||||||||||
| Exercise of vested stock options |
— | — | — | — | 387,055 | — | 23 | — | — | 23 | ||||||||||||||||||||||||||||||
| Early exercise of unvested stock options |
— | — | — | — | 2,218,897 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | — | — | — | — | 12 | — | — | 12 | ||||||||||||||||||||||||||||||
| Forfeiture of unvested shares issued for early exercised stock options |
— | — | — | — | (15,759) | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | 8,028 | — | — | 8,028 | ||||||||||||||||||||||||||||||
| Reclassification associated with Class A common stock subject to redemption |
— | — | 1,627,132 | 4,500 | (1,627,132) | — | (4,500) | — | — | (4,500) | ||||||||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | — | 4 | — | 4 | ||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | (72,064) | (72,064) | ||||||||||||||||||||||||||||||
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| Balance as of December 31, 2019 |
186,573,651 | 186,741 | 1,627,132 | 4,500 | 113,887,093 | — | 13,383 | 2 | (153,178) | (139,793) | ||||||||||||||||||||||||||||||
| Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $0.1 million |
16,495,335 | 51,900 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Exercise of Series C redeemable convertible preferred stock warrants |
2,962,304 | 11,321 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Exercise of Class A common stock warrants |
— | — | 2,320,646 | — | 561 | — | — | 561 | ||||||||||||||||||||||||||||||||
| Exercise of vested stock options |
— | — | — | — | 370,117 | — | 123 | — | — | 123 | ||||||||||||||||||||||||||||||
| Early exercise of unvested stock options |
— | — | — | — | 39,573 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | — | — | — | — | 31 | — | — | 31 | ||||||||||||||||||||||||||||||
| Forfeiture of unvested early exercised shares |
— | — | — | — | (1,313,959) | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | 5,831 | — | — | 5,831 | ||||||||||||||||||||||||||||||
| Expiration of the Class A common stock redemption right |
— | — | (1,627,132) | (4,500) | 1,627,132 | — | 4,500 | — | — | 4,500 | ||||||||||||||||||||||||||||||
| Other comprehensive loss |
— | — | (13) | — | (13) | |||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | (18,114) | (18,114) | ||||||||||||||||||||||||||||||
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| Balance as of December 31, 2020 |
206,031,290 | $ | 249,962 | — | — | 116,930,602 | — | $ | 24,429 | $ | (11) | $ | (171,292) | $ | (146,874) | |||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
4
Hims, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Operating activities |
||||||||
| Net loss |
$ | (18,114 | ) | $ | (72,064 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
1,057 | 260 | ||||||
| Stock-based compensation |
5,831 | 8,028 | ||||||
| Change in fair value of warrant liability |
3,101 | (951 | ) | |||||
| Loss on lease termination |
754 | — | ||||||
| Amortization of debt issuance costs |
322 | 70 | ||||||
| Noncash other |
384 | (358 | ) | |||||
| Changes in operating assets and liabilities: |
||||||||
| Inventory |
674 | (522 | ) | |||||
| Prepaid expenses and other current assets |
(645 | ) | (2,436 | ) | ||||
| Other long-term assets |
8 | (755 | ) | |||||
| Accounts payable |
826 | (6,075 | ) | |||||
| Accrued liabilities |
2,423 | (276 | ) | |||||
| Deferred revenue |
519 | 212 | ||||||
| Deferred rent |
381 | — | ||||||
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| Net cash used in operating activities |
(2,479 | ) | (74,867 | ) | ||||
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| Investing activities |
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| Purchases of investments |
(95,008 | ) | (42,012 | ) | ||||
| Maturities of investments |
47,990 | 4,500 | ||||||
| Proceeds from sale of investments |
11,550 | — | ||||||
| Investment in website development, internal-use software, and intangible assets |
(2,496 | ) | (1,479 | ) | ||||
| Purchases of property, equipment, and intangible assets |
(1,737 | ) | (308 | ) | ||||
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| Net cash used in investing activities |
(39,701 | ) | (39,299 | ) | ||||
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| Financing activities |
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| Proceeds from issuance of redeemable convertible preferred stock |
52,034 | 102,793 | ||||||
| Payments for issuance costs of redeemable convertible preferred stock |
(134 | ) | (227 | ) | ||||
| Proceeds from exercise of Series C preferred stock warrants |
29 | — | ||||||
| Proceeds from exercise of Class A common stock warrants |
561 | — | ||||||
| Proceeds from exercise of vested and unvested stock options, net of repurchases of unvested shares |
123 | 44 | ||||||
| Borrowings of principal on term loan |
— | 2,136 | ||||||
| Repayments of principal on term loan |
(1,515 | ) | (9,051 | ) | ||||
| Payments for debt issuance costs |
— | (377 | ) | |||||
| Payments for transaction costs |
(3,356 | ) | — | |||||
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| Net cash provided by financing activities |
47,742 | 95,318 | ||||||
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| Foreign currency effect on cash and cash equivalents |
(9 | ) | (5 | ) | ||||
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| Increase (decrease) in cash, cash equivalents, and restricted cash |
5,553 | (18,853 | ) | |||||
| Cash, cash equivalents, and restricted cash at beginning of year |
22,797 | 41,650 | ||||||
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| Cash, cash equivalents, and restricted cash at end of year |
$ | 28,350 | $ | 22,797 | ||||
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| Supplemental disclosures of cash flow information |
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| Cash paid for taxes |
$ | 221 | $ | 139 | ||||
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| Cash paid for interest |
$ | 10 | $ | 361 | ||||
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| Noncash investing and financing activities |
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| Exercise of preferred stock warrants |
$ | 11,292 | $ | — | ||||
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| Expiration of Class A common stock redemption right |
$ | 4,500 | $ | — | ||||
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| Redeemable Class A common stock reclassification |
$ | — | $ | 4,500 | ||||
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| Deferred transaction costs payable |
$ | 573 | $ | — | ||||
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| Warrants issued for debt issuance costs |
$ | — | $ | 133 | ||||
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| Vesting of early exercised stock options |
$ | 31 | $ | 12 | ||||
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See accompanying notes to consolidated financial statements.
5
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of the Business
Hims, Inc. (the “Company” or “Hims”) was incorporated in Delaware on December 30, 2013. Our mission is to make healthcare accessible, affordable, and convenient for everyone. We designed and built our digitally native, cloud-based technology centered around the consumer, and design everything with the consumer in mind. Our proprietary mobile app, websites, telehealth platform, electronic medical records system, and pharmacy integration combine to provide consumers with a seamless, easy-to-use, mobile-first experience. The Company is leading the transformation in healthcare by becoming the digital front door for healthcare consumers.
We believe the future of healthcare will be driven by consumer brands that empower people and give them full control over their healthcare. We have endeavored to build a healthcare system that squarely focuses on the needs of the healthcare consumer. To enable our mission of making healthcare accessible, affordable, and convenient for everyone, we offer a range of health and wellness products and services available for purchase on our websites directly by customers and through wholesale partners.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities in which it holds a controlling financial interest. All intercompany transactions and balances have been eliminated in the consolidated financial statements herein. For the years ended December 31, 2020 and 2019, the Company had operations primarily in the United States and immaterial operations in the United Kingdom.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant estimates and assumptions by management include, among others, valuation of inventory, valuation and recognition of stock-based compensation expense, valuation and recognition of warrants, and estimates in capitalization
6
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
of website development and internal-use software costs. Management believes that the estimates, and judgments upon which it relies, are reasonable based upon information available to it at the time that these estimates and judgments were made. Actual results experienced by the Company may differ from management’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.
Risks and Uncertainties
The Company’s business, operations, and financial results are subject to various risks and uncertainties, including adverse United States economic conditions, legal restrictions, changing laws for medical services and prescription products, or decisions to outsource or modify portions of its supply chain, and competition in its industry could adversely affect its business, financial condition, results of operations, and cash flows. These significant factors, among others, could cause the Company’s future results to differ materially from the consolidated financial statements.
Concentration Risk
The Company’s financial instruments that are potentially exposed to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable.
The Company maintains its cash, cash equivalents, short-term investments and restricted cash with high-quality financial institutions with investment-grade ratings. The majority of the cash balances are with U.S. banks and are insured to the extent defined by the Federal Deposit Insurance Corporation.
The prescription products ordered on the Company’s e-commerce online platform have historically been fulfilled by two pharmacies. If either of the pharmacies were to stop fulfilling orders, it could significantly slow prescription product sales until a new supplier is found. The Company maintains agreements with these pharmacies and is investing in new pharmacy fulfillment capabilities to mitigate any such risk.
As of and for the years ended December 31, 2020 and 2019, a single wholesale customer represented more than 10% of accounts receivable and no single customer represented more than 10% of revenue. In addition, the Company had an immaterial amount of revenue related to sales in foreign countries.
7
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Foreign Currency Translation
The Company’s consolidated financial statements are presented in U.S. dollars. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are presented as foreign currency translation adjustments, a component of other comprehensive income on the consolidated statements of operations and comprehensive loss.
Segment Reporting
For the years ended December 31, 2020 and 2019, the Company was managed as a single operating segment on a consolidated basis. Furthermore, the Company determined that the Chief Executive Officer (“CEO”) is the Chief Operating Decision Maker as he is responsible for making decisions regarding the allocation of resources and assessing performance as well as for strategic operational decisions and managing the organization at a consolidated level.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company deposits its cash and cash equivalents with financial institutions.
The restricted cash balance is comprised of the cash collateral that is held by the Company’s primary financial institution for (i) use of the institution’s cash management services and (ii) a letter of credit issued as a security deposit for the Company’s warehouse facility in New Albany, Ohio. Refer to Note 9 – Borrowing Arrangements for further details.
Total cash, cash equivalents, and restricted cash are summarized as follows (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash and cash equivalents |
$ | 27,344 | $ | 22,647 | ||||
| Restricted cash |
1,006 | 150 | ||||||
|
|
|
|
|
|||||
| Total cash, cash equivalents, and restricted cash |
$ | 28,350 | $ | 22,797 | ||||
|
|
|
|
|
|||||
Short-term and Long-term Investments
Available-for-sale debt instruments with original maturities at the date of purchase greater than three months and remaining maturities of less than one year are classified as short-term investments. Available-for-sale debt instruments with original maturities at the date of purchase and remaining maturities of greater than one year are classified as long-term investments. The Company intends to sell such investments at or close to maturity.
8
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The investments, if any, are designated as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in other comprehensive income on the consolidated statements of operations and comprehensive loss, except as noted in the Other-Than-Temporary Impairment section that follows. The Company determines the cost of the investment sold based on specific identification at the individual security level. The Company records the interest income and realized gains and losses on the sale of these instruments within other income (expense), net on the consolidated statements of operations and comprehensive loss.
Other-Than-Temporary Impairment
The Company’s investments are subject to a periodic impairment review. Investments are considered impaired when the fair value is below the investment’s adjusted cost basis. This would occur for marketable debt instruments when the fair value is below amortized cost and the Company intends to sell the instrument, or when it is more likely than not that the Company will be required to sell the instrument before recovery of its amortized cost basis, or when the Company does not expect to recover the entire amortized cost basis of the instrument (a credit loss exists). When the Company does not expect to recover the entire amortized cost basis of the instrument, it separates other-than-temporary impairments into amounts representing credit losses, which are recognized in other income (expense), net, and amounts related to all other factors, which are recognized in other comprehensive (loss) income on the consolidated statements of operations and comprehensive loss. The Company incurred no impairments for the years ended December 31, 2020 or 2019.
Fair Value of Financial Instruments
The fair value of a financial instrument is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities subject to ongoing fair value measurement are categorized and disclosed into one of the three categories depending on observable or unobservable inputs employed in the measurement. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities, are as follows:
| • | Level 1: Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
9
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
| • | Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. |
| • | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Inventory
Inventory primarily consists of finished goods and raw materials that are located at Company-managed and third-party fulfillment warehouses. Inventory is stated at the lower of cost or net realizable value and inventory cost is determined by the weighted average cost method. The Company reserves for expired, slow-moving, and excess inventory by estimating the net realizable value based on the potential future use of such inventory. Management monitors inventory to identify events that would require impairment due to slow-moving, expired, or obsolete inventory and adjusts the value of inventory when required. Obsolete inventory balances are written-off against the inventory allowance after management determines that the inventory cannot be sold. For the years ended December 31, 2020 and 2019, the Company recorded write-offs of $0.2 million and $1.4 million, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of balances related to prepayments or vendor deposits for inventory, software, insurance, marketing and other operating costs, and trade and other accounts receivables. Prepaid expenses are recorded when payment has been made in advance for goods and services. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Receivables are stated at amounts estimated by management to be equal to their net realizable values. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses and it is recorded when it is probable that amounts will not be collected based on historical collection trends, age of outstanding receivables, specific customer circumstances, and existing economic conditions. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2020 and 2019, accounts receivable was $1.1 million and
10
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
$0.9 million, respectively, and included within prepaid expenses and other current assets on the consolidated balance sheets. There were no write-offs of accounts receivable for the years ended December 31, 2020 or 2019. As of December 31, 2020 and 2019, the Company had no allowances for doubtful accounts.
The Company does not have any off-balance sheet credit exposure related to its customers.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Maintenance and repair costs are charged to expense as incurred, and expenditures that extend the useful lives of assets are capitalized. Property and equipment are depreciated or amortized using the straight-line method over the estimated useful lives ranging from two to five years and consist primarily of facility equipment, computers, equipment, furniture, and fixtures. Property and equipment, net was $1.7 million and $0.2 million as of December 31, 2020 and 2019, respectively, and is classified within other long-term assets on the consolidated balance sheets.
Intangibles
Intangibles with finite lives are amortized over their useful life in accordance with Accounting Standards Codification (“ASC”) 350-30, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. Amortization is provided by utilizing a straight-line method over the estimated useful lives of the intangibles.
The Company accounts for website development costs in accordance with ASC 350-50, Intangibles – Goodwill and Other – Website Development Costs. The costs incurred during the website application and infrastructure stages as well as costs incurred during the graphics and content development stages are capitalized; all other costs are expensed as incurred. In addition, the Company incurs costs to develop software for internal use, which are accounted for under ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software. The costs incurred during the application development phase are capitalized until the project is completed and the asset is ready for intended use. The Company expenses all costs that relate to the preliminary project and post-implementation operation phases of development as selling, general, and administrative expense on the consolidated statement of operations and comprehensive loss.
As of December 31, 2020 and 2019, website development and internal-use software costs of $2.9 million and $1.3 million, net of amortization of $1.0 million and $0.2 million, respectively, were classified within other long-term assets on the consolidated balance sheets and had useful lives of 2 to 3 years.
11
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table summarizes the estimated amortization of intangibles for the five years subsequent to December 31, 2020, and thereafter (in thousands):
| 2021 |
$ | 1,157 | ||
| 2022 |
1,052 | |||
| 2023 |
586 | |||
| 2024 |
128 | |||
| 2025 and thereafter |
18 | |||
|
|
|
|||
| Total |
$ | 2,941 | ||
|
|
|
Impairment of Long-Lived Assets
Long-lived assets include property and equipment and intangible assets subject to amortization. Long-lived assets are reviewed for 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 cash flows (undiscounted and 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. Assets to be disposed of by sale are reported at the lower of their carrying amount or estimated fair value less costs to sell. As of December 31, 2020 and 2019, the Company determined that no events or changes in circumstances existed that would otherwise indicate any impairment of its long-lived assets.
Warrant Liability
The Company classifies warrants to purchase shares of Series C and Series D redeemable convertible preferred stock that are contingently puttable or redeemable as liabilities. Such warrants are measured and recognized at fair value and are subject to remeasurement at each balance sheet date. At the end of each reporting period, changes in fair value during the period are recognized as a component of other income (expense), net within the consolidated statements of operations and comprehensive loss. The Company will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) the completion of a liquidation event, including completion of an initial public offering, at which time all outstanding preferred stock warrants will be converted into warrants to purchase shares of common stock and the liability will be reclassified to additional paid-in capital. As of December 31, 2020, all Series C preferred stock warrants were exercised.
12
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company’s consolidated revenue primarily comprises online sales of health and wellness products through the Company’s website, including prescription and nonprescription products. In contracts that contain prescription products, revenue also includes medical consultation services. Additionally, starting in March 2020, the Company began selling its products to a new wholesale partner, leading to an increase in revenue generated from wholesale arrangements for the year ended December 31, 2020.
Revenue consists of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Online |
$ | 140,728 | $ | 82,286 | ||||
| Wholesale |
8,029 | 272 | ||||||
|
|
|
|
|
|||||
| Total revenue |
$ | 148,757 | $ | 82,558 | ||||
|
|
|
|
|
|||||
For online revenue, the Company defines its customer as an individual who purchases products or services through the website. For wholesale revenue, Company defines its customer as a wholesale partner. The transaction price in the Company’s contracts with customers is the total amount of consideration to which the Company expects to be entitled in exchange for transferring products or services to the customer.
The Company’s contracts that contain prescription products include two performance obligations: access to (i) products and (ii) consultation services. The Company’s contracts that do not contain prescription products have a single performance obligation. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product to the customer and, in contracts that contain services, by the provision of consultation services to the customer. The Company satisfies its performance obligation for products at a point in time, which is upon delivery of the products to a third-party carrier. The Company satisfies its performance obligation for services over the period of the consultation service, which is typically a few days. The customer obtains control of the products and services upon the Company’s completion of its performance obligations.
13
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling price is based on the prices at which the Company separately sells the products and services, as well as market and cost-plus margin-based estimates. For the years ended December 31, 2020 and 2019, service revenue represents less than 10% of consolidated revenues.
To fulfill its promise to customers for contracts that include professional medical consultations, the Company maintains relationships with various “Affiliated Medical Groups,” which are professional corporations or other professional entities owned by licensed physicians and other professional entities that engage licensed medical professionals (medical doctors, physician assistants, and nurse practitioners; collectively referred to as “Providers”) to provide consultation services. Refer to Note 7 – Variable Interest Entities. The Company accounts for service revenue as a principal in the arrangement with its customers. This conclusion is reached because (i) the Company determines which Affiliated Medical Group and Provider provides the consultation to the customer; (ii) the Company is primarily responsible for the satisfactory fulfillment and acceptability of the services; (iii) the Company incurs costs for consultation services even for visits that do not result in a prescription and the sale of products; and (iv) the Company, at its sole discretion, sets all listed prices charged on its websites for products and services.
Additionally, to fulfill its promise to customers for contracts that include professional medical consultations, the Company maintains relationships with third-party pharmacies (“Partner Pharmacies”) to fill prescriptions that are ordered by the Company’s customers. The Company accounts for prescription product revenue as a principal in the arrangement with its customers. This conclusion is reached because (i) the Company has sole discretion in determining which Partner Pharmacy fills a customer’s prescription; (ii) Partner Pharmacies fill the prescription based on fulfillment instructions provided by the Company including using Company’s branded packaging for generic products; (iii) the Company is primarily responsible to the customer for the satisfactory fulfillment and acceptability of the order; (iv) the Company is responsible for refunds of the prescription medication after transfer of control to the customer; and (v) the Company, at its sole discretion, sets all listed prices charged on its website for products and services.
The Company estimates refunds using the expected value method based on historical refunds granted to customers. The Company updates its estimate at the end of each reporting period and recognizes the estimated amount as contra-revenue with a corresponding refund liability. Sales, value-added, and other taxes are excluded from the transaction price and, therefore, from revenue.
The Company has made an accounting policy election to account for shipping and handling activities performed after the control of a product has been transferred to the customer as fulfillment costs, with direct costs to ship products to customers included in cost of revenue. The Company’s contracts with customers do not contain costs to obtain or costs to fulfill contracts with customers in accordance with ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers.
14
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
For online sales, payment for prescription medication and nonprescription products is typically collected from the customer a few days in advance of product shipment. Contract liabilities are recorded when payments have been received from the customer for undelivered products or services and are recognized as revenue when the performance obligations are later satisfied. Contract liabilities consisting of balances related to customer prepayments are recognized as current deferred revenue on the consolidated balance sheets of which substantially all of the balance is recognized in the following month. For wholesale arrangements, payments are collected in accordance with contract terms.
Cost of Revenue
Cost of revenue consists of costs directly attributable to the products shipped and services rendered, including product costs, packaging materials, shipping costs, and labor costs directly related to revenue generating activities. Costs related to free products where there is no expectation of future purchases from a customer are considered to be selling, general, or administrative expenses and are excluded from cost of revenue.
Income Taxes
The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based upon differences between the financial reporting and tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence, including its operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis, to ascertain whether it is more likely than not that deferred tax assets will be realized. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.
In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes potential liabilities based on an estimate of whether, and the extent to which, additional taxes will be due. The Company accounts for uncertain tax positions in accordance with the relevant guidance, which prescribes a two-step approach to
15
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
recognize and measure uncertain tax positions taken or expected to be taken in the income tax return, and also provides guidance on recognition, classification, interest and penalties, disclosure, and transition. The first step is to evaluate the tax position taken or expected to be taken by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation process. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Stock-Based Compensation
The fair value of stock options, equity-classified warrants issued to vendors, and restricted stock units (“RSUs”), are measured at the grant date fair value. The fair value of employee stock options and vendor warrants are generally determined using the Black-Scholes Merton (“BSM”) option-pricing model using various inputs, including estimates of expected volatility, term, risk-free rate, and future dividends. Stock options that were granted to the Company’s CEO with performance conditions were valued using the Monte Carlo simulation model. The Company recognizes compensation costs on a straight-line basis over the requisite service period of the employee and vendor, which is generally the option vesting term of four years for options and warrants that do not have performance conditions. Stock options and RSUs with performance conditions are recognized when it is probable that performance criteria will be achieved and compensation cost is recognized using the accelerated attribution method. The Company accounts for forfeitures as they occur.
Fair Value of Common Stock – Given the absence of a public trading market, the Board of Directors of the Company considers numerous objective and subjective factors to determine the fair value of common stock at each meeting at which awards are approved. These factors include, but are not limited to, (i) contemporaneous valuations of common stock performed by an independent valuation specialist; (ii) developments in the Company’s business and stage of development; (iii) the Company’s operational and financial performance and condition; (iv) issuances of preferred stock and the rights and preferences of preferred stock relative to common stock; (v) current condition of capital markets and the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company; and (vi) the lack of marketability of the Company’s common stock. For financial reporting purposes, the Company considers the amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation or a straight-line interpolation between the two valuation dates. The determination includes an evaluation of whether the subsequent valuation indicates that any significant change in valuation had occurred between the previous valuation and the grant date.
Expected Term – The Company calculates the expected term using the simplified method based on the options’ vesting term and contractual terms as the Company does not have sufficient relevant historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
16
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Expected Volatility – The volatility is derived from the average historical stock volatilities of a peer group of public companies that the Company considers to be comparable to its business over a period equivalent to the expected term of the share-based grants.
Risk-free Interest Rate – The Company derives the risk-free interest rate assumption from the United States Treasury’s rates for the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued.
Dividend Yield – The Company bases the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. Consequently, the expected dividend yield used is zero.
The Company issues shares for the early exercise of common stock options. The unvested shares are subject to the Company’s repurchase right at the lower of the fair market value of the shares of common stock on the date of repurchase or their original purchase price. The proceeds initially are recorded as a liability from the early exercise of stock options and recorded within accrued liabilities on the consolidated balance sheets. These amounts are reclassified to common stock and additional paid-in capital as the Company’s repurchase right lapses.
Leases
The Company leases a facility under a noncancelable lease agreement that is accounted for as an operating lease. Rent expense is recorded on a straight-line basis over the lease term. For rent abatement and rent escalation provisions, the Company recognizes the related rent expense on a straight-line basis over the lease term. The difference between cash rent payments and the recognition of straight-line rent expense is recorded as deferred rent and amortized over the lease term.
Employee Benefit Plan
In 2018, the Company adopted a 401(k) Profit Sharing Plan covering substantially all of its U.S. employees. In 2020, the Company adopted a new 401(k) Profit Sharing Plan upon transferring 401(k) administration to a new service provider. The Company has not contributed to the plans since their inception.
17
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Advertising
For the years ended December 31, 2020 and 2019, customer acquisition costs were $44.0 million and $51.6 million, respectively. These customer acquisition expenses are charged to expense as incurred and recorded within marketing expense on the consolidated statements of operations and comprehensive loss.
Other Comprehensive Income
The Company’s other comprehensive income is impacted by foreign currency translation and available-for-sale investment fair value adjustments. The impact of foreign currency translation is affected by the translation of assets and liabilities of the Company’s United Kingdom foreign subsidiary, which is denominated in pounds sterling. The primary assets and liabilities affecting the adjustments are cash and cash equivalents, other assets, and accounts payable. The impact of available-for-sale securities is primarily affected by unrecognized gains and losses related to fluctuations in the fair market value of the securities.
Liquidity
The Company’s operations have been financed primarily through the issuance of common and preferred stock. Since inception, the Company has incurred negative cash flows as it is expending significant resources in expanding its activities. This has resulted in losses from operations, which are expected to continue for the foreseeable future years, and an accumulated deficit. The Company may require additional financing to fund operations to meet its business plan.
During the year ended December 31, 2020, the Company incurred a net loss of $18.1 million and had negative cash flows from operating activities of $2.5 million. As of December 31, 2020, the Company had an accumulated deficit of $171.3 million, cash and cash equivalents of $27.3 million, and short-term investments of $72.9 million.
The Company believes that its existing cash and investment balances and availability under borrowing agreements are sufficient for the Company to meet its obligations through at least March 31, 2022. Management considers that there are no conditions or events in the aggregate, including the impact of the COVID-19 pandemic, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of at least one year from the date the consolidated financial statements are issued. Refer to Note 17 – Subsequent Events for transactions occurring subsequent to year-end resulting in increased liquidity.
18
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. The Company adopted ASU 2016-18 as of January 1, 2019, using a retrospective transition method to each period presented.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The standard is effective for public companies for fiscal years beginning after December 15, 2019, with early adoption permitted for removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The Company adopted this disclosure requirement for the year ended December 31, 2020.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for public companies for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-15 as of January 1, 2019, which did not have an impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize leases on their balance sheets and disclose key information about leasing arrangements. The ASU establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition on the income statement. The standard is effective for smaller reporting companies for fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
19
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to require the measurement of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on such debt security is a credit loss. In November 2018, ASU 2018-19 aligns the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in ASU 2016-13 to clarify that receivables arising from operating leases are not within the scope of Credit Losses (Topic 326) and should be accounted for in accordance with Leases (Topic 842). In April 2019, the FASB issued ASU 2019-04, which, among other amendments, allows for certain policy elections and practical expedients related to accrued interest on financial instruments. In November 2019, the FASB issued ASU 2019-10 and ASU 2019-11, which addressed certain aspects of the guidance related to effective dates, expected recoveries, troubled debt restructurings, accrued interest receivables, and financial assets secured by collateral. In February and March 2020, the FASB also issued ASU 2020-02 and ASU 2020-03, respectively, which provide certain amendments and improvements to sections of ASU 2016-13. These standards are effective for smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to improve consistency and simplify several areas of existing guidance. ASU 2019-12 removes certain exceptions to the general principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020 for public entities, including interim periods within those fiscal years. The standard is effective for public companies for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
20
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Short-term Investments
Short-term investments as of December 31, 2020, consist of the following (in thousands):
| Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
| Corporate bonds |
$ | 55,224 | $ | 5 | $ | (2 | ) | $ | 55,227 | |||||||
| Government bonds |
14,121 | 2 | — | 14,123 | ||||||||||||
| Asset-backed bonds |
3,514 | — | — | 3,514 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
$ | 72,859 | $ | 7 | $ | (2 | ) | $ | 72,864 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
Short-term investments as of December 31, 2019, consist of the following (in thousands):
| Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
| Corporate bonds |
$ | 24,386 | $ | 3 | — | $ | 24,389 | |||||||||
| Government bonds |
3,515 | 2 | — | 3,517 | ||||||||||||
| Asset-backed bonds |
9,811 | 4 | — | 9,815 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
$ | 37,712 | $ | 9 | — | $ | 37,721 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Short-term investments mature within one year.
4. Inventory
Inventory consists of the following (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Finished goods |
$ | 2,856 | $ | 3,936 | ||||
| Raw materials |
687 | 196 | ||||||
|
Work-in-process |
— | 85 | ||||||
|
|
|
|
|
|||||
| Total inventory |
$ | 3,543 | $ | 4,217 | ||||
|
|
|
|
|
|||||
21
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Trade and other receivables, net |
$ | 1,147 | $ | 859 | ||||
| Prepaid expenses |
2,691 | 1,946 | ||||||
| Vendor deposits |
1,395 | 1,737 | ||||||
| Other current assets |
171 | 480 | ||||||
|
|
|
|
|
|||||
| Total prepaid expenses and other current assets |
$ | 5,404 | $ | 5,022 | ||||
|
|
|
|
|
|||||
6. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Marketing expenses |
$ | 1,122 | $ | 600 | ||||
| Legal fees |
968 | 74 | ||||||
| Payroll costs |
919 | 322 | ||||||
| Tax payables |
651 | 597 | ||||||
| Warrant exercise deposit liability |
664 | – | ||||||
| Other accrued liabilities |
660 | 433 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities |
$ | 4,984 | $ | 2,026 | ||||
|
|
|
|
|
|||||
7. Variable Interest Entities
In order for customers to obtain a prescription product, customers must complete a consultation with a Provider on the Company’s website through one of the Affiliated Medical Groups and receive a written prescription by the applicable Provider.
The Affiliated Medical Groups and the Company do not have any shareholders in common. The Affiliated Medical Groups are 100% owned by licensed physicians. The Company is party to service agreements with the Affiliated Medical Groups pursuant to which the Company provides management and administrative services and collects the medical consultation fees from customers on behalf of the Affiliated Medical Groups.
22
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In October 2020, the Company also entered into service agreements with XeCare LLC (“XeCare”), a licensed mail order pharmacy which is expected to provide prescription fulfillment services solely to the Company’s customers.
The Affiliated Medical Groups and XeCare are legal entities that the Company has determined qualify as variable interest entities (“VIEs”). The Company determined that it is the primary beneficiary of these entities for accounting purposes because it has the ability to direct the activities that most significantly affect the entities’ economic performance and has the obligation to absorb losses. Under the VIE model, the Company presents the results of operations and the financial position of the Affiliated Medical Groups and XeCare as part of the consolidated financial statements of the Company as if the consolidated group were a single economic entity. There is no noncontrolling interest upon consolidation of the entities. The results of operations and cash flows of the Affiliated Medical Groups and XeCare are also included in the Company’s consolidated financial statements.
For the years ended December 31, 2020 and 2019, the Affiliated Medical Groups and XeCare combined charged the Company $12.0 million and $2.6 million, respectively for services rendered. For the years ended December 31, 2020 and 2019, the net losses generated by the Affiliated Medical Groups and XeCare combined were $1.9 million and $9.3 million, respectively, after elimination of intercompany transactions and balances.
23
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Fair Value Measurements
The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2020, is as follows (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents: |
||||||||||||||||
| Money market funds |
$ | 12,163 | $ | — | $ | — | $ | 12,163 | ||||||||
| Government bonds |
— | 12,693 | — | 12,693 | ||||||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds |
— | 55,227 | — | 55,227 | ||||||||||||
| Government bonds |
— | 14,123 | — | 14,123 | ||||||||||||
| Asset-backed bonds |
— | 3,514 | — | 3,514 | ||||||||||||
| Restricted cash: |
||||||||||||||||
| Money market funds |
1,006 | — | — | 1,006 | ||||||||||||
| Long-term investments: |
||||||||||||||||
| Corporate bonds |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 13,169 | $ | 85,557 | $ | — | $ | 98,726 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Warrant liability |
$ | — | $ | — | $ | 906 | $ | 906 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
$ | — | $ | — | $ | 906 | $ | 906 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019, is as follows (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents: |
||||||||||||||||
| Money market funds |
$ | 20,880 | $ | — | $ | — | $ | 20,880 | ||||||||
| Government bonds |
— | 479 | — | 479 | ||||||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds |
— | 24,389 | — | 24,389 | ||||||||||||
| Government bonds |
— | 3,517 | — | 3,517 | ||||||||||||
| Asset-backed bonds |
— | 9,815 | — | 9,815 | ||||||||||||
| Restricted cash: |
||||||||||||||||
| Money market funds |
150 | — | — | 150 | ||||||||||||
| Long-term investments: |
||||||||||||||||
| Corporate bonds |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 21,030 | $ | 38,200 | $ | — | $ | 59,230 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Warrant liability |
$ | — | $ | — | $ | 9,097 | $ | 9,097 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
$ | — | $ | — | $ | 9,097 | $ | 9,097 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
24
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The fair values of cash, accounts receivable, accounts payable, and accrued liabilities approximated their carrying values as of December 31, 2020 and 2019, due to their short-term nature. All other financial instruments except for the warrant liability are valued either based on recent trades of securities in active markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. The warrant liability contains significant unobservable inputs including the share exchange ratio in evaluating the fair value of underlying common stock, expected term, and exercise price. Therefore, the warrant liability was evaluated to be a Level 3 fair value measurement.
In prior periods, the fair value of the preferred stock warrant liability had been measured using the BSM option-pricing model and Monte Carlo simulation. The following assumptions were used in determining the fair value of the Series C preferred stock warrant liability related to 2,962,304 warrants at an exercise price of $0.01 and to 198,126 warrants at an exercise price of $3.47:
| Measurement Date |
December 31, 2019 |
|||
| Expected term (in years) |
3.41 | |||
| Expected volatility |
61.00 | % | ||
| Risk-free interest rate |
1.63 | % | ||
| Expected dividend yield |
0.00 | % | ||
The Company changed its valuation method as a result of increased probability that the Company’s common shares would be publicly listed in the near-term and began using a probability weighted expected returns methodology during 2020.
As of December 31, 2020, the Company reverted to using a BSM option-pricing model to determine the value of the outstanding Series D preferred stock warrants (that replaced the Series C preferred stock warrants as discussed in Note 9 – Borrowing Arrangements). This was a result of the Company expecting to close a Merger (defined in Note 17 – Subsequent Events) with Oaktree Acquisition Corp. (“OAC”), a publicly traded special purpose acquisition company (“SPAC”), after obtaining approval from the Securities Exchange Commission to file a proxy statement on December 29, 2020. Accordingly, the Company determined the value of the Company’s equity based on the 10-day weighted average trading price of OAC of $13.98, adjusted for the share exchange ratio of 0.4530 (as determined upon consummation of the Merger), and applied a discount for lack of marketability of 3%, for a fair value of $6.14.
25
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following assumptions and inputs were also used in the BSM calculation:
| Measurement Date |
December 31, 2020 |
|||
| Expected term (in years) |
5.91 | |||
| Expected volatility |
57.90 | % | ||
| Risk-free interest rate |
0.49 | % | ||
| Expected dividend yield |
0.00 | % | ||
| Exercise price (Series D preferred stock issuance price) |
$ | 3.15 | ||
Expected Term – The expected term is the contractual life of the warrants which is seven years from the warrant agreement date of November 27, 2019.
Expected Volatility – The volatility is derived from the average historical stock volatilities of a peer group of public companies that the Company considers to be comparable to its business over a period equivalent to the expected term of the warrants.
Risk-free Interest Rate – The Company derives the risk-free interest rate assumption from the United States Treasury’s rates for the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the warrants being valued.
Dividend Yield – The Company bases the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. Consequently, the expected dividend yield used is zero.
The change in the fair value of preferred stock warrant liabilities is as follows (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Beginning balance |
$ | 9,097 | $ | — | ||||
| Issuance of Series C preferred stock warrants |
— | 10,048 | ||||||
| Exercised warrants |
(11,292 | ) | — | |||||
| Change in fair value |
3,101 | (951 | ) | |||||
|
|
|
|
|
|||||
| Ending balance |
$ | 906 | $ | 9,097 | ||||
|
|
|
|
|
|||||
During the years ended December 31, 2020 and 2019, the Company had no transfers between levels of the fair value hierarchy of its assets or liabilities measured at fair value.
26
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Borrowing Arrangements
Silicon Valley Bank
On November 14, 2017, the Company entered into a Loan and Security Agreement (the “2017 Loan Agreement”) with Silicon Valley Bank (“SVB”) consisting of term loans of up to $2.0 million, with a maturity date of February 1, 2021. The Term Loan was effective August 31, 2018 and interest rate for the term loan is The Wall Street Journal’s prime rate (“Prime Rate”) plus 1.25%. In connection with the 2017 Loan Agreement, the Company issued a warrant to SVB to purchase 808,603 shares of the Company’s Class A common stock at an exercise price of $0.025 per share. The warrant expires November 14, 2027 and had an estimated fair value of $0.1 million at the time of issuance.
On May 16, 2018, the Company and SVB amended and restated the 2017 Loan Agreement (the “First Amended and Restated Loan Agreement”) to, among other things, make available an additional term loan amount of up to $11.25 million, which can be drawn over a total of three advances from SVB up to $3.75 million each. Additionally, the payment schedule was modified to 12 equal payments of principal, plus accrued and unpaid interest. In connection with the First Amended and Restated Loan Agreement, the Company issued a warrant to SVB to purchase 129,952 shares of the Company’s Class A common stock at an exercise price of $0.025 per share. The warrant expires May 16, 2028 and had an aggregate fair value of $0.1 million at the time of issuance. The issuance of the warrants was considered debt issuance cost and is amortized over the life of the loan.
On November 27, 2019, the Company and SVB amended and restated the Amended and Restated Loan Agreement, dated as of May 16, 2018 (the “Second Amended and Restated Loan Agreement”), which accelerated the repayment of the existing loan over a six-month period, to be paid in full by May 1, 2020 (the “Existing Term Loan”). The Company repaid the loan by May 1, 2020.
In the Second Amended and Restated Loan Agreement, SVB also provided a revolving debt facility for the Company (the “Revolving Line”), of up to $8.0 million, with a maturity date of December 31, 2020. Upon termination of the Revolving Line for any reason prior to its maturity date, the Company shall pay, in addition to any payments owed, a termination fee equal to 1.00% of the Revolving Line. The interest rate for the Revolving Line is equal to the Prime Rate plus 0.50%, with a floor of 5.75%. The Company did not draw down from this Revolving Line and therefore, no amounts were required to be repaid by December 31, 2020.
27
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Under the Second Amended and Restated Loan Agreement, upon the Company’s request, SVB will issue letters of credit (the “Letters of Credit”) for the Company’s account in an aggregate amount not to exceed $2.0 million, which is reduced by the amount otherwise available with respect to the cash management services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in SVB’s various agreements. On September 30, 2020, the Company entered into the First loan Modification Agreement (“Loan Modification Agreement”) and the aggregate amount of the Letters of Credit was amended to $3.5 million. As of December 31, 2020, SVB issued on the Company’s behalf, a letter of credit in the amount of $0.8 million as a security deposit for a warehouse space in New Albany, Ohio. SVB required the Company to maintain $0.8 million as a collateral for the outstanding letter of credit. The Company expects to continue to renew the letter of credit through the duration of the lease. As this is for longer than one year, the Company presents the $0.8 million within restricted cash, noncurrent on the consolidated balance sheet.
The Company also has a business credit card as part of the cash management services offered by SVB. The Company could request an amount not to exceed $2.0 million, in connection with SVB’s cash management services, which amount is reduced by the amount utilized for any issuances of Letters of Credit. This amount was also amended to $3.5 million by the Loan Modification Agreement. Any cash management services are treated as advances under the Revolving Line. For the Company to continue to use the credit card, SVB required the Company to maintain $0.2 million in a collateralized money market account and this was reflected within restricted cash on the consolidated balance sheet as of December 31, 2020.
In connection with the Second Amended and Restated Loan Agreement, the Company issued a warrant to SVB to purchase 82,220 shares of the Company’s Class A common stock at an exercise price of $0.79 per share. The warrant expires November 26, 2029 and had an aggregate fair value of $0.1 million at the time of issuance. The fair value of the warrant for shares of the Class A common stock, as well as costs to close the facility, were considered debt issuance costs and are recorded within prepaid expenses and other current assets on the consolidated balance sheets and amortized over the term of the loan.
As of December 31, 2020 and 2019, the Company was in compliance with all of its covenants under the Second Amended and Restated Loan Agreement. As collateral, the Company provided SVB a security interest in substantially all its assets.
TriplePoint Venture Growth
On November 27, 2019, the Company entered into a Plain English Capital Growth and Security Agreement (the “2019 Capital Agreement”) with TriplePoint Venture Growth (“TPC”) consisting of a term loan in the aggregate principal amount of up to $50.0 million, with $25.0 million being available immediately through December 31, 2020 (the “Part 1 Commitment Amount”), and an additional $25.0 million becoming available upon utilization of the Part 1 Commitment Amount
28
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
through December 31, 2020. There is no minimum advance amount. As collateral, the Company has provided a second lien security interest to TPC of substantially all its assets. As of December 31, 2020, the Company had not drawn down from this term loan and the facility expired. The costs associated with issuing the debt facility are recorded as debt issuance costs within prepaid expenses and other current assets on the consolidated balance sheet with amortization recorded over the available period of the facility.
In addition to the costs above and in connection with the 2019 Capital Agreement, the Company issued to TPC a warrant granting TPC the right to purchase 198,126 shares of the Company’s Series C preferred stock at an exercise price of $3.47 per share, subject to adjustment in regard to the preferred stock series, number of shares and exercise price if the per share price of subsequent preferred stock rounds is less than $3.47. The estimated fair value of the Company’s Series C preferred stock warrants at the time of issuance and as of December 31, 2019, was $0.1 million. The fair value of the warrants was considered debt issuance costs and is recorded within prepaid expenses and other current assets on the consolidated balance sheet with amortization recorded over the available period of the facility. The fair value was estimated using the BSM option-pricing model and has been recorded within warrant liability on the consolidated balance sheets. Refer to Note 8 – Fair Value Measurements for further discussion.
On March 12, 2020, the Company sold Series D preferred stock at an issuance price of $3.1545, which triggered an adjustment to the TPC warrant terms per the original agreement, resulting in conversion of the previously issued 198,126 Series C preferred stock warrants at an exercise price of $3.47 into 217,942 Series D preferred stock warrants at an exercise price of $3.15.
10. Income Taxes
For financial reporting purposes, loss before provision for income taxes includes the following (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Domestic |
$ | (16,934 | ) | $ | (71,644 | ) | ||
| Foreign |
(1,053 | ) | (330 | ) | ||||
|
|
|
|
|
|||||
| Loss before provision for income taxes |
$ | (17,987 | ) | $ | (71,974 | ) | ||
|
|
|
|
|
|||||
29
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of the provision for income taxes consisted of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Current: |
||||||||
| Federal |
$ | — | $ | — | ||||
| State |
127 | 90 | ||||||
| Foreign |
— | — | ||||||
|
|
|
|
|
|||||
| Total current provision |
127 | 90 | ||||||
|
|
|
|
|
|||||
| Deferred: |
||||||||
| Federal |
— | — | ||||||
| State |
— | — | ||||||
| Foreign |
— | — | ||||||
|
|
|
|
|
|||||
| Total deferred provision |
— | — | ||||||
|
|
|
|
|
|||||
| Total expense |
$ | 127 | $ | 90 | ||||
|
|
|
|
|
|||||
Income tax provision related to continuing operations differs from the amounts computed by applying the statutory income tax rate of 21% to pretax loss as follows (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Tax at statutory rate |
$ | (3,777 | ) | $ | (15,115 | ) | ||
| State taxes, net of federal benefits |
(364 | ) | (2,690 | ) | ||||
| Change in valuation allowance |
3,948 | 16,560 | ||||||
| Stock-based compensation |
698 | 1,471 | ||||||
| Warrant compensation |
(403 | ) | — | |||||
| Other, net |
25 | (136 | ) | |||||
|
|
|
|
|
|||||
| Total |
$ | 127 | $ | 90 | ||||
|
|
|
|
|
|||||
30
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of deferred tax assets and liabilities are as follows (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Deferred tax assets: |
||||||||
| Net operating loss carryforwards |
$ | 44,342 | $ | 39,990 | ||||
| Reserves and accruals |
68 | 163 | ||||||
| Stock-based compensation |
732 | 283 | ||||||
| Inventory |
211 | 315 | ||||||
| Other intangibles |
52 | — | ||||||
| Deferred revenue |
33 | — | ||||||
| Other deferred tax assets |
378 | 274 | ||||||
|
|
|
|
|
|||||
| Total gross deferred tax assets |
45,816 | 41,025 | ||||||
| Less valuation allowance |
(44,576 | ) | (40,496 | ) | ||||
|
|
|
|
|
|||||
| Total deferred tax assets |
1,240 | 529 | ||||||
| Deferred tax liabilities: |
||||||||
| Fixed assets |
(1,206 | ) | (321 | ) | ||||
| Other deferred tax liabilities |
(34 | ) | (208 | ) | ||||
|
|
|
|
|
|||||
| Total deferred tax liabilities |
(1,240 | ) | (529 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the Company’s history of losses, the Company believes that it is not more likely than not that all of the deferred tax assets can be realized as of December 31, 2020 and 2019. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. The valuation allowance increased by $4.1 million and $17.4 million, during the years ended December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company has $164.1 million, $119.8 million, and $1.6 million in federal, state, and foreign loss carryforwards (not tax effected), respectively, of which $157.9 million, $14.9 million, and $1.2 million in federal, state, and foreign loss carryforwards, respectively, do not expire. The remaining federal and state loss carryforwards begin to expire in 2037 and 2023, respectively.
Internal Revenue Code Sections 382 and 383 place a limitation on the amount of taxable income that can be offset by carryforward tax attributes, such as net operating losses or tax credits, after a change in control. Generally, after a change in control, a loss corporation cannot deduct carryforward tax attributes in excess of the limitation prescribed by Sections 382 and 383. Therefore, certain of the Company’s carryforward tax attributes may be subject to an annual
31
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
limitation regarding their utilization against taxable income in future periods. As a result of issuances of different classes of preferred stock to investors in 2017, 2018, and 2019, the Company triggered “ownership change(s)” as defined in Section 382 and related provisions. The Company believes that some of its net operating losses may be limited by these ownership changes but that any limitation would not have a significant impact to the financial statements since there is no utilization of the net operating losses and a full valuation allowance exists against the net operating losses. Subsequent ownership changes may subject the Company to annual limitations of its net operating losses. Such annual limitation could result in the expiration of the net operating loss and credit carryforwards before utilization.
The Company has incurred net operating losses since inception, and it does not have any significant unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes on the consolidated statement of operations. Any adjustments to the Company’s uncertain tax positions would result in an adjustment of its net operating loss and valuation allowance rather than resulting in an impact to the effective tax rate. It is not expected that there will be any material change in the unrecognized tax benefits within the next 12 months.
The Company files income tax returns in the U.S., United Kingdom, and various state and local jurisdictions. Due to the net operating loss carryforward, the statute of limitations is open for 2017 and forward for all jurisdictions, none of which are currently under examination by any tax authorities.
11. Commitments and Contingencies
Leases
Total rent expense for the years ended December 31, 2020 and 2019, was $2.1 million and $1.5 million, respectively.
In January 2020, the Company entered into a 63-month noncancelable lease for 302,880 square feet of warehouse space in New Albany, Ohio. The lease commenced on June 1, 2020. Total minimum lease payments are $7.9 million, net of rent abatement for an initial three-month period and with annual escalation of 2.5%. The Company has the option to extend the lease term for a period of five years.
32
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Future minimum lease commitments subsequent to December 31, 2020 are as follows (in thousands):
| 2021 |
$ | 1,521 | ||
| 2022 |
1,559 | |||
| 2023 |
1,598 | |||
| 2024 |
1,638 | |||
| 2025 |
1,114 | |||
|
|
|
|||
| Total |
$ | 7,430 | ||
|
|
|
In July 2020, the Company ceased use of its headquarters office facility. In October 2020, the Company and the landlord agreed on a $1.4 million lease termination payment, which was settled by forfeiting security deposit of $0.7 million and cash payment of $0.7 million. This amount was recorded within selling, general and administrative expenses on the consolidated statements of operations and comprehensive loss in accordance with ASC 420, Exit or Disposal Cost Obligations.
Purchase Obligations
As of December 31, 2020, the Company had contractual obligations to make $0.8 million in purchases related to cloud-based software contracts used in operations.
Legal Proceedings
From time to time, the Company is a party to various litigation, claims and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits, and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, nonmonetary sanctions, or relief. Management is not currently aware of any matters that are reasonably likely to have a material adverse impact on the Company’s consolidated business, financial position, results of operations, or cash flows.
12. Stock-Based Compensation
2017 Stock Plan
In July 2017, the Company adopted the 2017 Stock Plan. Under the 2017 Stock Plan, the Board of Directors may grant awards, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSU awards, and other stock awards to employees, directors, and consultants. As of December 31, 2020 and 2019, the number of authorized shares of common stock the Company may issue under the 2017 Stock Plan is 83,472,660 and 65,257,501, respectively.
33
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Under the 2017 Stock Plan, stock options and stock appreciation rights are granted at exercise prices determined by the Board of Directors and may not be less than 100% of the estimated fair market value of the common stock on the grant date. Incentive stock options granted to any stockholders holding 10% or more of the Company’s equity cannot be granted with an exercise price of less than 110% of the estimated fair market value of the common stock on the grant date and such option is not exercisable after five years from the grant date.
Options and RSUs for new employees under the 2017 Stock Plan generally vest over four years, with 25% vesting one year after the vesting commencement date and then 1/48th of the total grant vesting monthly thereafter. Additional options and RSUs granted to current employees generally vest 1/48th of the total grant monthly over four years. Options granted are exercisable within a period not exceeding ten years from the grant date. Under the 2017 Stock Plan, an option may include a provision whereby the option holder may elect to exercise the option prior to the full vesting of the option.
As of December 31, 2020 and 2019, there were 2,045,707 and 7,167,094 shares, respectively, available for the Company to grant under the 2017 Stock Plan.
Stock Options
On June 17, 2020, the Board of Directors approved three grants for a total of 14,332,364 stock options to the CEO of the Company, under the 2017 Stock Plan. The stock options under the three grants have an exercise price of $1.10 per share of Class A common stock and are equity classified. The first grant of 3,583,091 stock options will vest ratably on a monthly basis over the four-year service period following the vesting commencement date of March 13, 2020 and has a contractual expiration term ten years from the date of grant. The grant-date fair value of $4.0 million was measured using the BSM option-pricing model and stock-based compensation expense is recognized ratably over the service period. The second and third grants (collectively, the performance stock options) for 7,166,182 and 3,583,091 stock options, respectively, will vest, on a condition of continuous service, upon either (i) an acquisition of the Company with per share consideration equal to at least $10.41 and $17.35, respectively, or (ii) a per share price on a public stock exchange that is at least equal to $10.41 and $17.35, respectively. The performance stock options have a contractual expiration term ten years from the date of grant. The grant-date fair value of $16.6 million was measured using a Monte Carlo simulation model and this unrecognized stock-based compensation expense will be recognized when it is probable that either of the performance criteria will be achieved. As of December 31, 2020, no compensation expense was recognized for the performance stock options since the liquidity event performance condition was not met.
34
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The grant-date fair value of the Company’s stock options, excluding performance stock options, granted to employees and nonemployees, was estimated using the following weighted average assumptions:
| Year Ended December 31 | ||||||||
| 2020 | 2019 | |||||||
| Expected term (in years) |
5.94 | 5.98 | ||||||
| Expected volatility |
62.25 | % | 59.68 | % | ||||
| Risk-free interest rate |
0.45 | % | 2.23 | % | ||||
| Expected dividend yield |
0.00 | % | 0.00 | % | ||||
Option activity under the 2017 Stock Plan, excluding performance stock options described above, is as follows (in thousands, except for weighted average exercise price and weighted average contractual term in years):
| Shares | Weighted Average Exercise Price |
Weighted Average Contractual Period (in Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2019 |
25,532 | $ | 0.41 | |||||||||||||
| Granted |
11,298 | 2.11 | ||||||||||||||
| Exercised (including early exercised options vested during the period) |
(8,180 | ) | 0.24 | |||||||||||||
| Forfeited and expired |
(2,191 | ) | 0.79 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2020 |
26,459 | 1.16 | 8.50 | $ | 131,770 | |||||||||||
|
|
|
|||||||||||||||
| Vested as of December 31, 2020 |
10,119 | 0.51 | 7.82 | 56,952 | ||||||||||||
|
|
|
|||||||||||||||
| Exercisable as of December 31, 2020 |
25,152 | 1.16 | 8.52 | 125,347 | ||||||||||||
|
|
|
|||||||||||||||
The weighted average grant-date fair value of options granted for the years ended December 31, 2020 and 2019, was $1.58 per share and $0.50 per share, respectively. The intrinsic value of vested options exercised for the years ended December 31, 2020 and 2019, was $0.7 million and $0.3 million, respectively.
As of December 31, 2020 and 2019, there was $19.0 million and $7.2 million, respectively, of unrecognized stock-based compensation related to unvested stock options excluding performance awards, which is expected to be recognized over a weighted average period of 2.75 years and 2.15 years, respectively.
35
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) are classified as a cash flows from financing activities. Due to a full valuation allowance on deferred tax assets, the Company did not recognize any tax benefit from stock options exercises for the years ended December 31, 2020 or 2019.
Early Exercise of Common Stock Options – The Company issues shares upon the early exercise of common stock options. The unvested shares are subject to the Company’s repurchase right at the lower of the fair market value of the shares of common stock on the date of repurchase or their original purchase price. The proceeds from cash exercises prior to vesting are initially recorded as a deposit liability from the early exercise of stock options and recorded within accrued liabilities on the consolidated balance sheets and reclassified to additional paid-in capital as the Company’s repurchase right lapses.
Excluded from both shares exercised and exercisable are 1,006,042 and 10,090,426 unvested shares that relate to the early exercise of stock options as of December 31, 2020 and 2019, respectively. These unvested shares include 931,228 and 9,585,111 shares from early-exercised options through the issuance of related-party promissory notes as of December 31, 2020 and 2019, respectively, and 74,814 and 505,315 unvested shares from cash exercises as of December 31, 2020 and 2019, respectively. Refer to Note 15 – Related-Party Transactions for further details on the related-party promissory notes. For the years ended December 31, 2020 and 2019, 188,959 and 15,759 shares of unvested Class A common stock were repurchased for less than $0.1 million in each year, respectively.
36
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The options outstanding and exercisable as of December 31, 2020, have been aggregated into ranges for additional disclosure as follows (in thousands, except weighted average remaining contractual life and exercise price):
| Options Outstanding | Options Exercisable | |||||||||||||||
| Exercise Price |
Shares | Weighted Average Remaining Contractual Life (in Years) |
Shares | Weighted Average Remaining Contractual Life (in Years) |
||||||||||||
| $0.03 | 2,034 | 6.88 | 1,531 | 6.89 | ||||||||||||
| 0.18 | 5,591 | 7.24 | 5,565 | 7.24 | ||||||||||||
| 0.70 | 572 | 7.80 | 405 | 7.84 | ||||||||||||
| 0.79 | 7,296 | 8.38 | 6,994 | 8.36 | ||||||||||||
| 1.10 | 7,337 | 9.35 | 7,331 | 9.35 | ||||||||||||
| 4.03 | 259 | 9.80 | 4 | 9.80 | ||||||||||||
| 4.24 | 11 | 9.86 | — | — | ||||||||||||
| 4.26 | 3,359 | 9.97 | 3,322 | 9.97 | ||||||||||||
|
|
|
|
|
|||||||||||||
| 26,459 | 25,152 | |||||||||||||||
|
|
|
|
|
|||||||||||||
RSUs
RSU activity under the 2017 Stock Plan is as follows (in thousands, except for weighted average fair value):
| Shares | Weighted Average Fair Value |
|||||||
| Outstanding at December 31, 2019 |
— | — | ||||||
| Granted |
3,413 | $ | 5.09 | |||||
| Vested |
— | — | ||||||
| Forfeited and expired |
(33 | ) | 4.17 | |||||
|
|
|
|||||||
| Outstanding at December 31, 2020 |
3,380 | 5.10 | ||||||
|
|
|
|||||||
All RSUs are subject to achievement of a liquidity event which includes (i) an initial public offering, (ii) a business combination transaction or (iii) a sale event as defined by the 2017 Stock Plan. As of December 31, 2020, no compensation expense was recognized since the liquidity event performance condition was not met and $17.3 million of unrecognized stock-based compensation expense related to unvested RSUs is expected to be recognized over a weighted average period of 4.01 years.
37
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Excluded from the table above is a grant for 100,000 RSUs that were awarded to a non-executive officer on December 23, 2020. These RSUs have a grant-date fair value of $5.53 per share of Class A common stock and vest upon meeting certain revenue targets from the sale of specific products in addition to achieving a liquidity event. The non-executive officer is required to be employed at the time the revenue targets are achieved in order to receive the awards, but the awards are not subject to any other service condition.
Vendor Warrants
Included in stock-based compensation expense is expense for issuance of Class A common stock warrants to nonemployees in connection with vendor service arrangements. Warrant activity is as follows (in thousands, except for weighted average exercise price and weighted average contractual term in years):
| Shares | Weighted Average Exercise Price |
Weighted Average Contractual Term (in Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2019 |
3,163,393 | $ | 0.62 | |||||||||||||
| Exercised |
(1,302,202 | ) | 0.37 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2020 |
1,861,191 | 0.79 | 7.01 | $ | 9,957 | |||||||||||
|
|
|
|||||||||||||||
| Exercisable as of December 31, 2020 |
942,603 | 0.79 | 7.01 | 5,043 | ||||||||||||
|
|
|
|||||||||||||||
The weighted average grant-date fair value of vendor warrants for the years ended December 31, 2019, was $0.62 per share. There were no vendor warrant grants for year ended December 31, 2020.
As of December 31, 2020 and 2019, there was $0.6 million and $1.3 million, respectively, of unrecognized stock-based compensation related to unvested vendor warrants, which is expected to be recognized over a weighted average period of 0.73 years and 1.73 years, respectively.
38
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense for employees and nonemployees, by category, on the consolidated statements of operations and comprehensive loss (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Marketing |
$ | 1,172 | $ | 571 | ||||
| Selling, general, and administrative |
4,659 | 7,457 | ||||||
|
|
|
|
|
|||||
| Total stock-based compensation expense |
$ | 5,831 | $ | 8,028 | ||||
|
|
|
|
|
|||||
13. Redeemable Convertible Preferred Stock
As of December 31, 2020, the Company has authorized 211,924,602 million shares of redeemable convertible preferred stock, designated in series, with the rights and preferences of each designated series to be determined by the Board of Directors.
The following table is a summary of the redeemable convertible preferred stock as of December 31, 2020 (in thousands, except for share data):
| Series |
Shares Authorized |
Shares Issued and Outstanding |
Aggregate Liquidation Value |
Proceeds, Net of Issuance Costs |
Issue Price per Share |
|||||||||||||||
| Series Seed |
11,010,363 | 11,010,363 | $ | — | $ | — | $ | 0.0000 | ||||||||||||
| Series A |
52,590,567 | 52,590,567 | 6,621 | 5,106 | 0.1259 | |||||||||||||||
| Series A-1 |
12,676,074 | 12,676,074 | 753 | 740 | 0.0594 | |||||||||||||||
| Series B |
29,296,174 | 29,296,174 | 24,600 | 23,429 | 0.8397 | |||||||||||||||
| Series B-1 |
21,652,050 | 21,652,050 | 20,000 | 14,965 | 0.9237 | |||||||||||||||
| Series B-2 |
29,725,220 | 29,725,220 | 51,371 | 49,911 | 1.7282 | |||||||||||||||
| Series C |
32,783,633 | 32,585,507 | 113,072 | 92,590 | 3.4700 | |||||||||||||||
| Series D |
22,190,521 | 16,495,335 | 52,035 | 51,900 | 3.1545 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
211,924,602 | 206,031,290 | $ | 268,452 | $ | 238,641 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
39
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table is a summary of the redeemable convertible preferred stock as of December 31, 2019 (in thousands, except for share data):
| Series |
Shares Authorized |
Shares Issued and Outstanding |
Aggregate Liquidation Value |
Proceeds, Net of Issuance Costs |
Issue Price per Share |
|||||||||||||||
| Series Seed |
11,010,363 | 11,010,363 | $ | — | $ | — | $ | 0.0000 | ||||||||||||
| Series A |
52,590,567 | 52,590,567 | 6,621 | 5,106 | 0.1259 | |||||||||||||||
| Series A-1 |
12,676,074 | 12,676,074 | 753 | 740 | 0.0594 | |||||||||||||||
| Series B |
29,296,174 | 29,296,174 | 24,600 | 23,429 | 0.8397 | |||||||||||||||
| Series B-1 |
21,652,050 | 21,652,050 | 20,000 | 14,965 | 0.9237 | |||||||||||||||
| Series B-2 |
29,725,220 | 29,725,220 | 51,371 | 49,911 | 1.7282 | |||||||||||||||
| Series C |
35,920,000 | 29,623,203 | 102,793 | 92,590 | 3.4700 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
192,870,448 | 186,573,651 | 206,138 | 186,741 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
Transactions Related to Redeemable Convertible Preferred Stock
Between March and June 2019, the Company closed transactions with a group of investors to issue 29,623,203 shares of Series C redeemable convertible preferred stock and received $92.6 million in net proceeds.
From March to July 2020, a group of investors purchased 16,495,335 shares of Series D redeemable convertible preferred stock and the Company received $51.9 million in net proceeds.
Warrants for Series C Preferred Stock
In March 2019, the Company issued warrants to purchase the Company’s Series C redeemable convertible preferred stock at an exercise price of $0.01 per warrant to purchasers of the Company’s Series C redeemable convertible preferred stock. The number of warrants to be issued was variable, based on the Company’s revenue for the year ended December 31, 2019, whereby the number of warrants to be issued increased as revenue decreased. The Company considered whether the embedded feature should be accounted for as a derivative and considered that the feature has an underlying notional amount, required no initial net investment, and required net settlement. The Company, therefore, concluded that the feature would be accounted for as a derivative liability and would be recorded at fair value, with the change in the fair value of the liability recorded within other income (expense), net on the consolidated statements of operations and comprehensive loss.
40
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In February 2020, in accordance with the terms outlined in March 2019, the Company issued 2,962,304 Series C preferred stock warrants based on 2019 revenue. The fair market value of the Series C preferred stock warrants was estimated using the BSM option-pricing model, and at the issuance date, fair value of the liability was $10.0 million. The original liability was recorded as an issuance cost for the Series C redeemable convertible preferred stock, reducing the value of the Series C proceeds within mezzanine equity on the consolidated balance sheets. Subsequent adjustments to the fair value of the Series C preferred stock warrants were recorded within other income (expense), net on the consolidated statements of operations and comprehensive loss.
The holders of the Series C preferred stock warrants exercised all their warrants and purchased 2,962,304 shares of Series C redeemable convertible preferred stock from the Company in 2020 resulting in settlement of the Series C preferred stock warrant liability. The Company received less than $0.1 million in net proceeds. Upon exercise, the warrant liability at an estimated fair market value of $11.3 million was reclassified into redeemable convertible preferred stock on the consolidated balance sheet.
In November 2019, the Company issued 198,126 Series C preferred stock warrants to TPC in connection with the 2019 Capital Agreement. The fair value of the warrants was considered debt issuance cost and recorded within prepaid and other current assets on the consolidated balance sheet. On March 12, 2020, the Company sold Series D redeemable convertible preferred stock at an issuance price of $3.1545, which triggered an adjustment to the TPC warrant terms per the original agreement, resulting in conversion of the previously issued 198,126 Series C preferred stock warrants into 217,942 Series D preferred stock warrants. Refer to Note 9 – Borrowing Arrangements for further discussion.
Rights, Preferences, and Privileges of the Redeemable Convertible Preferred Stock
Dividends – The holders of the redeemable convertible preferred stock are entitled to receive noncumulative cash dividends in preference to any dividend on the common stock, at the rate of 8% of the applicable original issue price per annum, when and as declared by the Board of Directors. In the event that dividends are paid on any share of common stock, then, after payment of the preferential dividends, the Company will pay an additional dividend on all outstanding shares of redeemable convertible preferred stock in a per share amount equal to the amount paid or set aside for each share of common stock. No dividends on redeemable convertible preferred stock have been declared by the Board of Directors since inception.
Liquidation Preference – In the event of a liquidation event, the holders of the redeemable convertible preferred stock are entitled to receive, in preference to the holders of the common stock, a per share amount equal to the greater of (1) the respective original issue price plus any declared but unpaid dividends or (2) the amount per share had all redeemable convertible preferred stock been converted into common stock (the “Liquidation Preference”). If the assets of the Company are insufficient to make payment in full to all holders of the convertible preferred stock, then the entire proceeds will be distributed ratably among the holders of redeemable convertible preferred stock in proportion to the full preferential amount above. After the payment of the Liquidation Preference, the remaining assets will be distributed ratably to the holders of common stock.
41
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Conversion Rights – Each share of redeemable convertible preferred stock is convertible into shares of Class A common stock, at any time, at the option of the holder. The conversion price is the original issue price (“Conversion Price”) and is subject to anti-dilution adjustments as described below, none of which occurred as of December 31, 2020 or 2019.
The Conversion Price is subject to down-round protection via an anti-dilution adjustment to reduce dilution in the event that the Company issues additional common stock at a purchase price less than the Conversion Price. The Conversion Price is also subject to proportional adjustment for stock splits, stock dividends, and the like.
Additionally, the redeemable convertible preferred stock will be automatically converted into common stock at the then-applicable Conversion Price (i) in the event that the holders of the majority of the outstanding redeemable convertible preferred stock consent to such conversion or (ii) upon the closing of a firmly underwritten public offering of shares of common stock of the Company in which the gross cash proceeds are at least $30.0 million.
Voting Rights – The holder of each share of redeemable convertible preferred stock has voting rights equal to the number of shares of Class A common stock into which it is convertible and votes together as a single class with the common stockholders. Each share of common stock is entitled to one vote. Series B preferred holders are entitled to elect one director, and all holders of redeemable convertible preferred stock together are entitled to elect one director. Class F common stockholders are entitled to elect up to two directors. Additionally, the holders of outstanding shares of Class A common stock and Class F common stock, and holders of redeemable convertible preferred stock, voting on an as-converted basis, are entitled to elect the remaining directors. Any board vacancies may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the chosen director will serve until the next annual election and their successors are duly elected.
As long as shares of redeemable convertible preferred stock are outstanding, the Company must obtain approval from a majority of the holders of the then-outstanding shares of redeemable convertible preferred stock in order to alter or change the rights, preferences, and privileges of redeemable convertible preferred stock; change the authorized number of shares of redeemable convertible preferred stock and common stock; create a new class or series of shares having any rights, preferences, or privileges superior to or on parity with any outstanding shares of redeemable convertible preferred stock; declare or pay any distribution other than dividends payable solely in common stock; sell, lease, transfer, exclusively license, or otherwise dispose of all or substantially
42
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
all of the Company’s assets; voluntarily dissolve or liquidate the Company; increase or decrease the authorized size of the Board of Directors; effect a redemption or repurchase of shares of redeemable convertible preferred stock or common stock; or create or hold capital stock in any subsidiary that is not wholly owned by the Company.
Contingent Redemption – The holders of the preferred stock have no voluntary rights to redeem shares. A liquidation or winding-up of the Company, a greater than 50% change in control, or a sale of substantially all its assets would constitute a redemption event. Although the preferred stock is not mandatorily or currently redeemable, a liquidation or winding-up of the Company would constitute a redemption event outside its control. As such, the Company presents all shares of preferred stock within mezzanine equity on the consolidated balance sheets.
14. Class A and Class F Common Stock
The Company has two classes of authorized common stock, Class A common stock and Class F common stock. Shares issued on early exercise are not considered outstanding for accounting purposes because the employees are not entitled to the rewards of stock ownership.
The rights of the holders of Class A and Class F common stock are identical, except with respect to (i) electing members of the Board of Directors and (ii) voting rights. The Class F common stockholders, voting as a group, are entitled to elect up to two directors. Series B preferred holders are entitled to elect one director, and all preferred holders together are entitled to elect one director. The holders of outstanding shares of Class A and Class F common stock, and holders of redeemable convertible preferred stock, voting on an as-converted basis, are entitled to elect the remaining directors. The Class F common stockholders receive 10:1 voting rights as compared with Class A common stockholders.
As long as shares of Class F common stock are outstanding, the Company must obtain approval from a majority of the holders of the then-outstanding shares of Class F common stock in order to increase or decrease the authorized number of shares of Class F common stock, or to effect any action that adversely impacts the voting or other powers, preferences, or other special rights, privileges, or restrictions of the Class F common stock.
The outstanding shares of Class A and Class F common stock presented on the consolidated balance sheets and on the consolidated statements of mezzanine equity and stockholders’ deficit for the years ended December 31, 2020 and 2019, are the legally outstanding shares, including the shares issued in exchange for related-party promissory notes.
Class A and Class F common stock is referred to as common stock throughout the notes to the consolidated financial statements, unless otherwise noted.
43
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Transactions Related to Class A and Class F Common Stock
During 2020, the Company repurchased 188,959 of unvested shares of Class A common stock for a cash payment of less than $0.1 million, which resulted in a reduction of deposit liability from the early exercise of stock options. In addition, in May 2020, an executive officer departed the Company, which resulted in the repurchase of 1,125,000 unvested shares of Class A common stock in exchange for the cancellation of the principal payable of $0.9 million under an associated promissory note.
Warrants for Class A Common Stock
As discussed above, Class A common stock warrants have been issued in connection with vendor service agreements, debt agreements, and issuance of preferred stock. All of the warrants for shares of Class A common stock are classified within stockholders’ equity on the consolidated balance sheets. In July 2020, Class A common stock warrants were exercised to purchase from the Company 316,686 shares of Class A common stock at an exercise price of $0.025 per share. In November 2020, Class A common stock warrants were exercised to purchase from the Company 938,555 and 82,220 shares of Class A common stock at an exercise price of $0.025 and $0.79 per share, respectively. In December 2020, Class A common stock warrants were exercised to purchase from the Company 394,809 and 588,376 shares of Class A common stock at an exercise price of $0.025 and $0.79 per share, respectively.
As of December 31, 2020, the Company had the following vendor warrants outstanding to purchase shares of Class A common stock (in thousands, except for share and per share amounts):
| Shares |
Exercise Price | Issued | Expiration | Fair Value at Issuance |
||||||||||||
| 1,861,191 |
$ | 0.79 | September 23, 2019 | September 23, 2026 | $ | 1,160 | ||||||||||
15. Related-Party Transactions
Atomic Labs, LLC (“Atomic Labs”) is a related-party venture capital startup studio that launched the Company, providing initial capital and governance. The Company utilized operational support from Atomic Labs, primarily consisting of providing office space, conducting back-office professional services, and administering operating expenses. Additionally, an affiliated company of Atomic Labs provides professional services to the Company, primarily to support engineering and operations functions. All services were provided at cost. For the years ended December 31, 2020 and 2019, the Company recorded a total of $3.4 million and $3.2 million, respectively, for payments made to Atomic Labs and its affiliated company for services performed and costs
44
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
incurred on behalf of the Company. The Company recognized $0.5 million of these payments as intangible assets and vendor deposits as of December 31, 2020 and no expenses were capitalized as of December 31, 2019. Of the $2.9 million recognized as expenses, $0.1 million was recognized as marketing expense and the remaining $2.8 million as selling, general, and administrative expenses. There was no accounts payable balance with Atomic Labs and its affiliated company as of December 31, 2020 and less than $0.1 million as of December 31, 2019.
In addition, for the years ended December 31, 2020 and 2019, the Company recorded $0.1 million and less than $0.1 million, respectively, for payments made to Vouched, a related-party company that provides identity verification services. These expenses were recognized as selling, general, and administrative expenses. There was less than $0.1 million in accounts payable balances with Vouched as of December 31, 2020 and 2019.
Nonrecourse Related-Party Promissory Notes
For the years ended December 31, 2020 and 2019, the Company had promissory notes from certain of the Company’s executive officers, as well as a founding employee and an executive chairman. The promissory notes, which were issued to the Company by the related parties as consideration for the exercise of stock options, are considered nonrecourse notes for accounting purposes. The loans are secured by the shares of Class A common stock of the Company held by the individuals. There were 36,084,631 and 37,209,631 shares securing the related-party promissory notes as of December 31, 2020 and 2019, respectively. The notes bear interest between 2.21% and 3.02% per annum. The loans are due upon the earliest of (1) ten years from the debt issuance date, (2) a liquidation of the Company, or (3) six months following an initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended. Prepayment of principal and interest may be made at any time without penalty.
The nonrecourse related-party promissory notes are not given accounting effect until the notes are repaid in full as the underlying stock options are not considered exercised for accounting purposes. As of December 31, 2020 and 2019, the total outstanding balance under these nonrecourse related-party promissory notes was $7.2 million and $8.1 million, respectively, which will be recorded within additional paid-in capital on the consolidated balance sheets when repaid in full for the exercise price of the underlying stock options.
Redeemable Common Stock Transaction
On September 23, 2019, the Company’s CEO and a member of its Board of Directors, sold 1,627,132 shares of Class A common stock to third party purchasers at $2.7656 per share for aggregate consideration of $4.5 million pursuant to Class A Common Stock Purchase Agreements. Under the terms of the vendor service agreement with the third party, the purchasers were granted
45
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
a put right entitling them to sell the shares to the Company at $2.7656 per share for a period of six months. The put right expired on March 23, 2020 without the purchasers exercising their rights to sell the shares to the Company. The Company recorded stock-based compensation expense associated with the transaction of $3.0 million. Upon expiration of the redemption right, the Company reclassified the aggregate consideration of $4.5 million that was subject to redemption from mezzanine equity to stockholders’ equity on the consolidated balance sheets.
16. Basic and Diluted Net Loss per Share
The rights of the holders of Class A and Class F common stock are identical, including the liquidation and dividend rights, except with respect to electing members of the Board of Directors and voting rights. As the liquidation and dividend rights are identical, undistributed earnings and losses are allocated on a proportionate basis and the resulting net loss per share attributable to common stockholders is, therefore, the same for both Class A and Class F common stock on an individual and combined basis.
The Company uses the two-class method to calculate net loss per share. No dividends were declared or paid for the years ended December 31, 2020 or 2019. Undistributed earnings for each period are allocated to participating securities, including the redeemable convertible preferred stock, based on the contractual participation rights of the security to share in the current earnings as if all current period earnings had been distributed. As there is no contractual obligation for the redeemable convertible preferred stock to share in losses, the Company’s basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average shares of common stock outstanding during periods with undistributed losses.
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders for the years ended December 31 (in thousands, except share and per share amounts):
| 2020 | 2019 | |||||||||||||||
| Class A | Class F | Class A | Class F | |||||||||||||
| Numerator: |
||||||||||||||||
| Net loss attributable to common stockholders |
$ | (14,558 | ) | $ | (3,556 | ) | $ | (57,720 | ) | $ | (14,344 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Denominator: |
||||||||||||||||
| Weighted average shares outstanding, basic and diluted |
62,723,380 | 15,323,740 | 61,222,230 | 15,323,740 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic and diluted net loss per share |
$ | (0.23 | ) | $ | (0.23 | ) | $ | (0.94 | ) | $ | (0.94 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
46
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Basic and diluted net loss per share attributable to common stockholders is the same for the years ended December 31, 2020 and 2019, because the inclusion of potential shares of common stock would have been anti-dilutive for the periods presented. Weighted average Class A common shares presented in the table above for the year ended December 31, 2020 and December 31, 2019 exclude 364,549 and 441,332 shares of common shares, respectively, subject to redemption. These shares absorb no losses.
The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Common stock issued for exercise of stock options subject to nonrecourse promissory notes |
36,456,557 | 35,772,919 | ||||||
| Common stock issued for early exercise of stock options |
219,763 | 1,007,345 | ||||||
| Redeemable convertible preferred stock |
199,276,569 | 180,738,997 | ||||||
| Stock options |
25,407,677 | 13,420,985 | ||||||
| RSUs |
253,045 | — | ||||||
| Warrants to purchase Class A common stock |
3,901,829 | 2,331,379 | ||||||
| Warrants to purchase redeemable convertible preferred stock |
2,056,752 | 2,502,464 | ||||||
17. Subsequent Events
Warrant Exercises
On January 4, 2021, holders of Class A common stock vendor warrants exercised their warrants and purchased from the Company 840,537 shares of Class A common stock at an exercise price of $0.79 per share.
Pre-Closing Stock Repurchase
On January 20, 2021, the Company repurchased from its stockholders and cancelled 4,873,458 shares of Class A common stock, including certain stockholders who exercised outstanding stock options, for aggregate payment of $22.0 million.
Merger Transaction
On September 30, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company; OAC, a Cayman Islands exempted SPAC; and Rx Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of OAC (“Merger Sub”), providing for,
47
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
among other things, the combination of the Company and OAC pursuant to the merger of Merger Sub with and into the Company with the Company continuing as the surviving entity and as a wholly-owned subsidiary of OAC (the “Merger”). Immediately prior to the Merger, each outstanding share of the Company’s Class F common stock and preferred stock converted into Class A common stock at the then-effective conversion rate.
As a result of the Merger, each outstanding share of the Company’s capital stock was converted into the right to receive newly issued shares of OAC’s Class A common stock and certain other securities, other than the shares of the Company’s Class V common stock issued to its CEO immediately prior to the Closing, which were converted into the right to receive newly issued shares of OAC’s Class V common stock and certain other securities, in each case as described in and calculated pursuant to the terms of the Merger Agreement.
On January 20, 2021 (the “Closing Date”), the Company consummated the Merger. The transaction is accounted for as a reverse recapitalization with the Company being the accounting acquirer. The Company received gross proceeds of $197.7 million and paid closing costs of $11.5 million. In connection with the Merger, OAC changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware and changed its name to Hims & Hers Health, Inc. (“Hims & Hers”). As of December 31, 2020, the Company recorded $3.9 million of deferred transaction costs, which consist of legal, accounting, and other professional services directly related to the Merger. These costs are included in current assets on the consolidated balance sheet. The cash outflows related to these costs are presented as financing activities on the Company’s consolidated statement of cash flows. These costs will be offset against proceeds upon accounting for the consummation of the Merger.
On the Closing Date, each stockholder received approximately 0.4530 shares of Hims & Hers Class A common stock, par value $0.0001 per share, for each share of Class A common stock, par value $0.000001 per share, that such stockholder owned (with the CEO receiving 0.4530 shares of Hims & Hers Class V common stock, par value $0.0001 per share, for each share of Class V common stock, par value $0.000001 per share, that the CEO owned). Additionally, each stockholder also received 0.0028 warrants exercisable for Hims & Hers Class A common stock, for each share of the Company’s Class A or Class V common stock owned by such stockholder prior to the Merger.
All equity awards of the Company were assumed by OAC and converted into comparable equity awards that are settled or exercisable for shares of Hims & Hers Class A common stock. As a result, each stock option was converted into an option to purchase shares Hims & Hers Class A common stock based on an exchange ratio of 0.4530. Each award of the Company’s RSUs was converted into RSUs of Hims & Hers based on an exchange ratio of 0.4530. Subject to approval by the Board of Directors, holders of the Company’s options and RSUs also received approximately 35,000 Hims & Hers RSUs, which represented allocation of the Merger warrant consideration. Each such holder must remain in continuous service through the grant date to receive these RSUs.
48
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Each warrant that was unexercised at the time of the Merger was assumed by OAC and represents the right to receive an applicable portion of the Merger consideration upon exercise of such warrant as if such warrant was exercised prior to the closing of the Merger.
PIPE Investment
On September 30, 2020, concurrently with the execution of the Merger Agreement, OAC entered into subscription agreements with certain investors pursuant to which such investors collectively subscribed for 7,500,000 shares of Hims & Hers Class A common stock at $10.00 per share for aggregate gross proceeds of $75,000,000 (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the closing of the Merger.
Earn Out Shares
Following the closing of the Merger, holders of the Company’s legacy common stock and outstanding equity awards (including warrant, stock option and RSU holders) had the right to receive up to an aggregate amount of 16,000,000 Hims & Hers Class A common stock (or equivalent equity award) that would vest (in part) in equal thirds if the trading price of Hims & Hers Class A common stock is greater than or equal to $15.00, $17.50 and $20.00 for any 10 trading days within any 20-trading day period on or prior to the date that is five years following the Closing Date. The Hims & Hers common stock and equivalent equity awards will also vest in connection with an acquisition of Hims & Hers if the applicable thresholds are met in any Company sale (as defined in the Merger Agreement) but subject to the same five-year deadline. In February 2021, Hims & Hers met all earn out thresholds. Earn out awards related to option holders are subject to final approval by the Board of Directors.
Performance Stock Options and RSUs
As a result of the Merger, the liquidity event condition on the Company’s stock options granted to the CEO and RSUs granted to employees were met which resulted in recognition of $4.6 million of stock-based compensation expense upon the Closing Date.
49
Hims, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Settlement of Nonrecourse Related-Party Promissory Notes
In connection with the Merger, the obligations due under all nonrecourse related-party promissory notes were satisfied through the payment of $1.2 million and the forfeiture of 370,734 shares of Hims & Hers Class A common stock.
Transaction Bonus
Upon Board of Director approval, the Company paid $5.2 million of transaction bonuses in February 2021 and, subject to registration of the Company’s stock plan, granted $4.6 million RSUs to management and employees that made significant contributions to the Merger in accordance with the Merger Agreement.
Termination of Borrowing Arrangements
In January 2021, the Company terminated the Second Amended and Restated Loan Agreement with SVB resulting in the release of restricted cash of $0.2 million under the arrangement. However, the Company continues to use SVB’s cash management services and increased its credit card limit to $5.0 million in January 2021.
50
Exhibit 99.2
HIMS’ 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 Hims’ consolidated results of operations and financial condition. You should read the following discussion and analysis of Hims’ financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto contained in Exhibit 99.1 to this Amendment No. 1 to the Form 8-K. This discussion includes forward-looking statements that involve risks and uncertainties as a result of many factors, including those factors set forth in, or incorporated by reference into, the section entitled “Risk Factors” in the Form 8-K or Hims & Hers Health, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020. Hims’ 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.
Unless otherwise indicated or the context otherwise requires, references in this Hims’ Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “we,” “us,” “our,” and “Hims & Hers” refer to Hims & Hers Health, Inc., and references to “Hims” refer to Hims, Inc. and its subsidiaries.
Overview
Following the Merger (as defined below), we offer a range of health and wellness products and services available for purchase on our websites directly by customers. Most of the offerings on the Hims & Hers websites are sold to customers on a subscription basis. Subscription plans provide an easy and convenient way for customers to get the ongoing treatment they need while simultaneously providing the company with predictability through a recurring revenue stream.
Hims was incorporated in Delaware on December 30, 2013 and first launched services in 2017. Our mission is to make healthcare accessible, affordable, and convenient for everyone. We designed and built our digitally native, cloud-based technology centered around the consumer, and design everything with the consumer in mind. Our proprietary websites, telehealth platform, electronic medical records system, pharmacy integration, and mobile accessibility combine to provide consumers with a seamless, easy-to-use, mobile-first experience. We are leading the transformation in healthcare by becoming the digital front door for healthcare consumers.
We believe the future of healthcare will be driven by consumer brands that empower people and give them full control over their healthcare. We have endeavored to build a healthcare model that squarely focuses on the needs of the healthcare consumer. To enable our mission of making healthcare accessible, affordable, and convenient for everyone, we offer a range of health and wellness products and services available for purchase on our websites directly by customers and through wholesale partners.
Our financial goal is to build an enduring high-growth, high-margin, and long-term profitable business. Financial metrics we track against our financial goals include: revenue and year-over-year revenue growth, gross profit and gross margin, and Adjusted EBITDA (as defined below).
Recent Developments
Warrant Exercises
On January 4, 2021, holders of Class A common stock vendor warrants exercised their warrants and purchased from Hims 840,537 shares of Class A common stock at an exercise price of $0.79 per share.
Pre-Closing Stock Repurchase
On January 20, 2021, Hims repurchased from its stockholders and cancelled 4,873,458 shares of Class A common stock, including certain stockholders who exercised outstanding stock options, for aggregate payment of $22.0 million.
Merger Transaction
In accordance with the Merger Agreement by and among Hims; OAC, a publicly traded special purpose acquisition company (“SPAC”) and Cayman Islands exempted entity; and Rx Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of OAC (“Merger Sub”), providing for, among other things, the combination of Hims and OAC pursuant to the merger of Merger Sub with and into Hims with Hims continuing as the surviving entity and as a wholly-owned subsidiary of OAC (the “Merger”). Immediately prior to the Merger, each outstanding share of Hims’ Class F common stock and preferred stock converted into Class A common stock at the then-effective conversion rate.
As a result of the Merger, each outstanding share of Hims’ capital stock was converted into the right to receive newly issued shares of OAC’s Class A common stock and certain other securities, other than the shares of Hims’ Class V common stock issued to its Chief Executive Officer (“CEO”) immediately prior to the Closing, which were converted into the right to receive newly issued shares of OAC’s Class V common stock and certain other securities, in each case as described in and calculated pursuant to the terms of the Merger Agreement.
On January 20, 2021 (the “Closing Date”), Hims consummated the Merger. The transaction is accounted for as a reverse recapitalization with Hims being the accounting acquirer. Hims received gross proceeds of $197.7 million and paid closing costs of $11.5 million. In connection with the Merger, OAC changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware and changed its name to Hims & Hers Health, Inc. As of December 31, 2020, Hims recorded $3.9 million of deferred transaction costs, which consist of legal, accounting, and other professional services directly related to the Merger. These costs are included in current assets on the consolidated balance sheet. The cash outflows related to these costs are presented as financing activities on Hims’ consolidated statement of cash flows. These costs will be offset against proceeds upon accounting for the consummation of the Merger.
On the Closing Date, each stockholder received approximately 0.4530 shares of Hims & Hers Class A common stock, par value $0.0001 per share, for each share of Class A common stock, par value $0.000001 per share, that such stockholder owned (with the CEO receiving 0.4530 shares of Hims & Hers Class V common stock, par value $0.0001 per share). Additionally, each stockholder also received 0.0028 warrants exercisable for Hims & Hers Class A common stock, for each share of Hims’ Class A or Class V common stock owned by such stockholder prior to the Merger.
All equity awards of Hims were assumed by OAC and converted into comparable equity awards that are settled or exercisable for shares of Hims & Hers Class A common stock. As a result, each stock option was converted into an option to purchase shares Hims & Hers Class A common stock based on an exchange ratio of 0.4530. Each award of Hims’ restricted stock units (“RSUs”) was converted into RSUs of Hims & Hers based on an exchange ratio of 0.4530. Subject to approval by the Board of Directors, holders of Hims’ options and RSUs also received approximately 35,000 Hims & Hers RSUs, which represented allocation of the Merger warrant consideration. Each such holder must remain in continuous service through the grant date to receive these RSUs.
Each warrant that was unexercised at the time of the Merger was assumed by OAC and represents the right to receive an applicable portion of the Merger consideration upon exercise of such warrant as if such warrant was exercised prior to the closing of the Merger.
PIPE Investment
On September 30, 2020, concurrently with the execution of the Merger Agreement, OAC entered into subscription agreements with certain investors pursuant to which such investors collectively subscribed for 7,500,000 shares of Hims & Hers Class A common stock at $10.00 per share for aggregate gross proceeds of $75,000,000 (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the closing of the Merger.
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Earnout Shares
Following the closing of the Merger, holders of Hims’ legacy common stock and outstanding equity awards (including warrant, stock option and RSU holders) receive up to an aggregate amount of 16,000,000 Hims & Hers Class A common stock (or equivalent equity award) that will vest (in part) in equal thirds if the trading price of Hims & Hers Class A common stock is greater than or equal to $15.00, $17.50 and $20.00 for any 10 trading days within any 20-trading day period on or prior to the date that is five years following the Closing Date. The Hims & Hers common stock and equivalent equity awards will also vest in connection with an acquisition of Hims & Hers if the applicable thresholds are met in any Company sale (as defined in the Merger Agreement) but subject to the same five-year deadline. In February 2021, Hims & Hers met all earnout thresholds. Earnout awards related to option holders are subject to final approval by the Board of Directors.
Performance Stock Options and RSUs
As a result of the Merger, the liquidity event condition on Hims’ stock options granted to the CEO and RSUs granted to employees were met which resulted in recognition of $4.6 million of stock-based compensation expense upon the Closing Date.
Settlement of Nonrecourse Related-Party Promissory Notes
In connection with the Merger, the obligations due under all nonrecourse related-party promissory notes were satisfied through the payment of $1.2 million and the forfeiture of 370,734 shares of Hims & Hers Class A common stock.
Transaction Bonus
Upon Board of Director approval, the Company paid $5.2 million of transaction bonuses in February 2021 and, subject to registration of the Company’s stock plan, granted $4.6 million RSUs to management and employees that made significant contributions to the Merger in accordance with the Merger Agreement.
2020 Highlights
The table below reflects our year-over-year growth in revenue for the years ended December 31, 2020 and 2019, and the dollar and percentage change between such periods (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Online Revenue |
$ | 140,728 | $ | 82,286 | $ | 58,442 | 71 | % | ||||||||
| Wholesale Revenue |
8,029 | 272 | 7,757 | * | ||||||||||||
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| Total Revenue |
$ | 148,757 | $ | 82,558 | $ | 66,199 | 80 | % | ||||||||
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| * | Not meaningful |
The table below reflects Hims’ gross profit, gross margins, net loss, and Adjusted EBITDA for the years ended December 31, 2020 and 2019 (dollars in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Gross profit |
$ | 109,450 | $ | 44,605 | ||||
| Gross margin % |
74 | % | 54 | % | ||||
| Net loss |
(18,114 | ) | (72,064 | ) | ||||
| Adjusted EBITDA |
(8,114 | ) | (66,099 | ) | ||||
See “Non-GAAP Financial Measures” below for a reconciliation of Adjusted EBITDA to net loss.
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We achieved these financial results through a strategy of:
| 1) | Acquiring higher value online customers: Across the products and services available to customers online, we are able to analyze and determine which types of customers generate more revenue in their first purchase, generate more revenue over time and generate more gross profit from their purchases. This data helps us improve the products and services available online to better serve our customers and allows us to understand which marketing channels and campaigns are most effective at acquiring higher value customers. In the year ended December 31, 2020, we continued to implement strategies across our merchandising, online user experience and marketing functions that allowed us to target and acquire higher value customers. As a result, Hims’ Average Order Value (“AOV”, as defined below), was $62 in the year ended December 31, 2020 compared to $33 for the year ended December 31, 2019, a year-over-year increase of 88%. Our efforts to acquire higher value customers drove the expansion in AOVs. This directly contributed to Hims’ year-over-year total revenue growth of 80% for the year ended December 31, 2020. |
| 2) | Enhancing online customer experience and subscriptions options: We continuously test and optimize the online customer experience and offerings to improve the customer experience, maximize sales and improve gross margin. Recent examples of customer experience improvements and new offerings include the following: |
| • | Multi-month subscriptions—In our subscription arrangements, customers select a cadence at which they wish to receive product shipments. In addition to a monthly cadence, we now offer customers the ability to select from a range of shipment cadences, from every two to twelve months, depending on the product. The customer is billed upon each shipment. Customers can cancel subscriptions in between billing periods to stop receiving additional products and can reactivate subscriptions to continue receiving additional products. |
| • | New product bundle and kit options—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 new offerings and their uptake by customers have contributed to the expansion of AOVs over time. Additionally, the uptake of these offerings has resulted in higher gross profit and gross margin. For example, for multi-month subscriptions, we may incur shipping and fulfillment expenses two or four times per year (for six-month and three-month subscription cadences, respectively) versus twelve times per year for monthly subscriptions. The customer uptake of multi-month subscriptions results in lower recurring costs and higher gross margins as compared to monthly subscriptions. The introduction of the new offerings improved online customer experience and new subscription options contributed to the increase of Hims’ gross margins from 54% for the year ended December 31, 2019 to 74% for the year ended December 31, 2020.
| 3) | Improving marketing efficiency: As we shifted our strategy to acquiring higher value and higher AOV customers and introduced new customer offerings, we simultaneously refined our marketing strategy. As we recalibrated our marketing budgets to focus on different customer profiles and offerings, we also reduced our marketing expenses in order to learn what channels and campaigns would be most effective. As a result, for the year ended December 31, 2020, Hims’ total marketing expenses of $59.0 million represented a $4.2 million year-over-year decrease in marketing expenses as compared to $63.2 million for the year ended December 31, 2019. As Hims reduced marketing expenses year-over-year, Net Orders (as defined below) also declined. For the year ended December 31, 2020, Hims generated 2.3 million Net Orders as compared to 2.5 million Net Orders for the year ended December 31, 2019. However, this year-over-year decline in Net Orders was more than offset by the year-over-year increase in AOV, such that Online Revenue increased by 71% year-over-year for the year ended December 31, 2020 compared to the year ended December 31, 2019. Hims’ marketing expenses were more efficiently spent acquiring customers over time, as demonstrated by marketing expense as percentage of revenue, which was 40% for the year ended December 31, 2020, down from 76% for the year ended December 31, 2019. This improved marketing efficiency resulted in a year-over-year improvement in Hims’ net loss and Adjusted EBITDA to $(18.1) million and $(8.1) million, respectively, for the year ended December 31, 2020 as compared to $(72.1) million and $(66.1) million, respectively, for the year ended December 31, 2019. |
4
The table below reflects Hims’ revenue, gross profit, gross margin, AOV, Net Orders, marketing, marketing expressed as a percent of revenue, net loss, and Adjusted EBITDA for Hims the year ended December 31, 2020 and December 31, 2019, along with the dollar and percentage change between such years (dollars and Net Orders in thousands):
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | Change | % Change | |||||||||||||
| Revenue |
$ | 148,757 | $ | 82,558 | $ | 66,199 | 80 | % | ||||||||
| Gross profit |
$ | 109,450 | $ | 44,605 | $ | 64,845 | 145 | % | ||||||||
| Gross margin % |
74 | % | 54 | % | 20 | % | 37 | % | ||||||||
| AOV |
$ | 62 | $ | 33 | $ | 29 | 88 | % | ||||||||
| Net Orders |
2,279 | 2,498 | (219 | ) | (9 | )% | ||||||||||
| Marketing |
$ | 58,989 | $ | 63,156 | $ | (4,167 | ) | (7 | )% | |||||||
| Marketing as a % of revenue |
40 | % | 76 | % | (36 | )% | (47 | )% | ||||||||
| Net loss |
$ | (18,114 | ) | $ | (72,064 | ) | $ | 53,950 | (75 | )% | ||||||
| Adjusted EBITDA |
$ | (8,114 | ) | $ | (66,099 | ) | $ | 57,985 | (88 | )% | ||||||
Focused efforts during the year ended December 31, 2020 allowed Hims to deliver continued revenue growth, expanded gross margin, increased efficiency from marketing and reduced Adjusted EBITDA losses.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the 2019 novel coronavirus (“COVID-19”) a global pandemic. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. We have taken measures in response to the ongoing COVID-19 pandemic, including closing our offices and implementing a work from home policy for our worldwide workforce; implementing additional safety policies and procedures for employees working in our warehouse; suspending employee travel and in-person meetings; and actively managing our fulfillment operations and inventory levels. We may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and stockholders. Hims’ financial performance through the year ended December 31, 2020 was in-line with management’s expectations through this period.
While the COVID-19 pandemic has not had a material adverse impact on our financial condition and results of operations to date, the future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, vaccine availability, the continued and expanded use of telehealth solutions as the pandemic subsides, the impact on our customers and their spending habits, the impact on our marketing efforts, and the effect on our suppliers, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our third-party suppliers, along with the related global slowdown in economic activity, may result in decreased revenue and increased costs. Any such impact on our revenue and costs may continue through the duration of this crisis and the widespread availability of vaccines. It is possible that the COVID-19 pandemic, the measures taken by the federal, state, or local authorities and businesses affected, and the resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial positions as well as our customers, suppliers, and partners. Despite such recent events, there are no existing conditions or events which raise substantial doubt regarding Hims’ ability to continue as a going concern.
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.
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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 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.
Retention of Customers
Our ability to retain customers is a key factor in our ability to generate revenue. Most of our customers purchase products through subscription-based plans, where customers are billed and sent products on a recurring basis. The recurring nature of this revenue provides us with a certain amount of predictability for future revenue if past customer behavior stays consistent in the future. If customer behavior changes, and customer retention decreases in the future, then future revenue will be negatively impacted. The ability of our customers to continue to pay for our products and services will impact the future results of our operations.
Investments in Growth
We expect to continue to focus on long-term growth through investments in product offerings and customer experience. We are working to enhance our offerings and expand the breadth of products and services offered on our websites. We expect to make significant investments in marketing to acquire new customers. Additionally, we intend to continue to invest in our fulfillment and operating capabilities, including by opening our own affiliated pharmacy dedicated to our operations. 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 expand into new categories with our offerings. Category expansion allows us to increase the number of customers for whom we can provide products and services. It also allows us to offer access to treatment of additional conditions that may already affect our current customers. Expanding into new categories will require financial investments in additional headcount, marketing and customer acquisition expenses, additional operational capabilities and may require the purchase of new inventory. If we are unable to generate sufficient demand in new categories, we may not recover the financial investments we make into new categories and revenue may not increase in the future.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business. The table below reflects key business metrics for Hims for the years presented (in thousands, except for AOV):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| AOV |
$ | 62 | $ | 33 | ||||
| Net Orders |
2,279 | 2,498 | ||||||
| Online Revenue |
140,728 | 82,286 | ||||||
| Wholesale Revenue |
8,029 | 272 | ||||||
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| Total revenue |
$ | 148,757 | $ | 82,558 | ||||
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| • | Average Order Value (“AOV”) is defined as Online Revenue divided by Net Orders (each as defined below). Our Online Revenue is driven by a combination of AOV and Net Orders. Hims was historically able to increase AOV by making new offerings and subscription options available to customers. Hims has also increased AOV by more effectively acquiring higher AOV customers through marketing channels and campaigns. For the year ended December 31, 2020, Hims’ AOV was $62, up 88% year-over-year, compared to $33 for the year ended December 31, 2019. |
| • | Net Orders (“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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) as discussed below. We monitor the absolute number of Net Orders as a key indicator of our performance. Our Online Revenue is driven by a combination of AOV and Net Orders. Net Orders are driven primarily by the number of new customers acquired and the number of returning customers that make additional purchases. In the third quarter of 2019, Hims began implementing a strategy to acquire higher value and higher AOV customers and to enhance the customer experience with new offerings and subscription options. As Hims implemented this strategy, it reduced marketing expenses in the year ended December 31, 2020 as compared to the year ended December 31, 2019. As a result, Hims’ Net Orders declined in the year ended December 31, 2020, as compared to the year ended December 31, 2019. Despite the decline in Net Orders, as a result of the new offerings and subscription options, our total subscriptions have increased to approximately 312,000 as of December 31, 2020 as compared to approximately 190,000 as of December 31, 2019. The increase in subscriptions is driven by growth in new customers and growth in multi-month subscriptions. The increase in multi-month subscriptions (i.e., which allow customers to receive two to twelve months of product in one order), decreases Net Orders and increases AOV compared to monthly subscriptions. |
In order to reconcile the key business metrics described above to total revenue, Management tracks the following financial results:
| • | Online Revenue (“Online Revenue”) represents the sales of products and services on our platform, net of refunds, credits, chargebacks and includes revenue recognition adjustments recorded pursuant to U.S. GAAP, primarily relating to deferred revenue and returns reserve. |
| • | Wholesale Revenue (“Wholesale Revenue”) represents non-prescription product sales to retailers through wholesale purchasing agreements. For the year ended December 31, 2020, Hims’ Wholesale Revenue represented approximately 5% of Hims’ total revenue for such period. For the year ended December 31, 2020, Hims’ Wholesale Revenue was $8.0 million, an increase of $7.7 million compared to $0.3 million for the year ended December 31, 2019. This increase was primarily because Hims began selling products to a new wholesale partner in March 2020. |
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with U.S. GAAP, we present Adjusted EBITDA, a non-GAAP financial measure. We use Adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that Adjusted EBITDA, when taken together with the corresponding U.S. GAAP financial measure, provides 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 to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric 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 differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison. A reconciliation is provided below for Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review Adjusted EBITDA and the reconciliation of Adjusted EBITDA to net loss, and not to rely on any single financial measure to evaluate our business.
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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 depreciation and amortization, provision for income taxes, interest income, interest expense, amortization of debt issuance costs, stock-based compensation, and change in fair value of warrant liability.
The following table reconciles net loss to Adjusted EBITDA for Hims for the years ended December 31, 2020 and 2019, respectively (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net loss |
$ | (18,114 | ) | $ | (72,064 | ) | ||
| Depreciation and amortization |
1,057 | 260 | ||||||
| Provision for income taxes |
127 | 90 | ||||||
| Interest income |
(448 | ) | (1,901 | ) | ||||
| Interest expense |
10 | 369 | ||||||
| Amortization of debt issuance costs |
322 | 70 | ||||||
| Stock-based compensation |
5,831 | 8,028 | ||||||
| Change in fair value of warrant liability |
3,101 | (951 | ) | |||||
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| Adjusted EBITDA |
$ | (8,114 | ) | $ | (66,099 | ) | ||
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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 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. The consolidated financial statements include the accounts of Hims, its wholly owned subsidiaries, and variable interest entities in which it holds a controlling financial interest. The variable interest entities are professional corporations or other professional entities owned by licensed physicians that engage licensed medical professionals to provide consultation services (“Affiliated Medical Groups”) and XeCare, LLC (“XeCare”) (a licensed mail order pharmacy which is expected to provide prescription fulfillment services solely to the Company’s customers). We determined that Hims is the primary beneficiary of the Affiliated Medical Groups and XeCare for accounting purposes because it has the ability to direct the activities that most significantly affect these entities’ economic performance and has the obligation to absorb the entities’ losses. Under the variable interest entity model, Hims presents the results of operations and the financial position of the entities as part of the Hims’ condensed consolidated financial statements as if the consolidated group were a single economic entity. See Note 1 and Note 2 in the Hims’ consolidated financial statements for more information on basis of presentation and operating segments.
Components of Results of Operations
Revenue
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
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Our consolidated revenue primarily comprises of online sales of health and wellness products through our websites, including prescription and nonprescription products. In contracts that contain prescription products, revenue also includes fees related to medical consultation services. Additionally, revenue is generated through wholesale arrangements.
See “Critical Accounting Policies and Estimates” and “—Revenue Recognition” below for a more detailed discussion of our revenue recognition policy.
Cost of revenue
Cost of revenue consists of costs directly attributable to the products shipped and services rendered, including product costs, packaging materials, shipping costs, and labor costs directly related to revenue generating activities. Costs related to free products, where there is no expectation of future purchases from a customer, are considered to be SG&A (as defined below) 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, and our ability to sell our inventory. We expect our gross margin to increase over the long term, although gross margins may fluctuate from period to period depending on these and other factors.
Marketing expenses
The largest component of our marketing expenses consists of our discretionary customer acquisition expenses. Customer acquisition expenses 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 expenses 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. As a result, we expect our marketing expenses to increase in absolute dollars for the foreseeable future. However, we expect our marketing expenses to decrease as a percentage of revenue over the long term, although our marketing expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) include the salaries, benefits, taxes, and stock-based compensation for personnel for our executive, engineering, finance, operations, and other administrative functions. SG&A also includes general operating expenses for professional services, third-party software and hosting, facilities, warehousing and fulfillment, customer service, payment processing, and depreciation and amortization. We expect SG&A to increase for the foreseeable future as we increase headcount with the growth of our business. We also expect SG&A to increase in the near term as a result of operating as a public company, including expenses associated with compliance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and an increase in legal, audit, insurance, investor relations, professional services and other administrative expenses. However, we anticipate SG&A to 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.
We expect our stock-based compensation expense within marketing and SG&A to increase significantly, as a result of completing the Merger.
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Interest expense
Interest expense primarily includes expense related to our borrowing arrangements with a leading financial institution.
Other income (expense), net
Other income (expense), net primarily consists of investment and interest income from short-term and long-term investments and our cash and cash equivalents. Other expense includes non-operating expenses and one-time charges classified outside of operating expenses. The caption also includes the impact of the remeasurement of the liability associated with preferred stock warrants.
Provision for income taxes
The income tax provision is primarily due to state taxes. 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 years ended December 31, 2020 and 2019
The following table sets forth Hims’ consolidated statement of operations for the years ended December 31, 2020 and 2019 and the dollar and percentage change between the two years (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Revenue |
$ | 148,757 | $ | 82,558 | $ | 66,199 | 80 | % | ||||||||
| Cost of revenue |
39,307 | 37,953 | 1,354 | 4 | % | |||||||||||
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| Gross profit |
109,450 | 44,605 | 64,845 | 145 | % | |||||||||||
| Operating expenses: |
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| Marketing(1) |
58,989 | 63,156 | (4,167 | ) | (7 | )% | ||||||||||
| Selling, general, and administrative(1) |
65,605 | 55,863 | 9,742 | 17 | % | |||||||||||
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| Total operating expenses |
124,594 | 119,019 | 5,575 | 5 | % | |||||||||||
| Loss from operations |
(15,144 | ) | (74,414 | ) | 59,270 | (80 | )% | |||||||||
| Other income (expense): |
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| Interest expense |
(10 | ) | (369 | ) | (359 | ) | (97 | )% | ||||||||
| Other (expense) income, net |
(2,833 | ) | 2,809 | (5,642 | ) | (201 | )% | |||||||||
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| Loss before provision for income taxes |
(17,987 | ) | (71,974 | ) | 53,987 | (75 | )% | |||||||||
| Provision for income taxes |
(127 | ) | (90 | ) | (37 | ) | 41 | % | ||||||||
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| Net loss |
$ | (18,114 | ) | $ | (72,064 | ) | $ | 53,950 | (75 | )% | ||||||
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| (1) | Includes stock-based compensation expense as follows (in thousands): |
| Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Marketing |
$ | 1,172 | $ | 571 | ||||
| Selling, general and administrative |
4,659 | 7,457 | ||||||
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| Total stock-based compensation expense |
$ | 5,831 | $ | 8,028 | ||||
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The following table sets forth Hims’ results of operations as a percentage of total revenue for the years presented:
| Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue |
100 | % | 100 | % | ||||
| Cost of revenue |
26 | % | 46 | % | ||||
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| Gross margin |
74 | % | 54 | % | ||||
| Operating expenses: |
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| Marketing |
40 | % | 76 | % | ||||
| Selling, general, and administrative |
44 | % | 68 | % | ||||
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| Total operating expenses |
84 | % | 144 | % | ||||
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| Loss from operations |
(10 | )% | (90 | )% | ||||
| Other income (expense): |
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| Interest expense |
(0 | )% | (0 | )% | ||||
| Other (expense) income, net |
(2 | )% | 3 | % | ||||
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| Loss before provision for income taxes |
(12 | )% | (87 | )% | ||||
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| Provision for income taxes |
(0 | )% | (0 | )% | ||||
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| Net loss |
(12 | )% | (87 | )% | ||||
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Revenue
Revenue was $148.8 million for the year ended December 31, 2020 compared to $82.6 million for the year ended December 31, 2019, representing an increase of $66.2 million, or 80%. Starting in March 2020, Hims began selling its non-prescription products to a new wholesale partner, which contributed to $7.7 million of the year-over-year increase. Online Revenue was $140.7 million for the year ended December 31, 2020, compared to $82.3 million for year ended December 31, 2019, representing an increase of $58.4 million, or 71%. The year-over-year growth in Online Revenue was driven by an 88% year-over-year increase in AOV to $62 for the year ended December 31, 2020 as compared to $33 for the year ended December 31, 2019. The year-over-year increase in AOV was driven by an increased uptake of higher AOV offerings by customers, targeted acquisition of higher AOV new customers from marketing and a reduction in discounts offered to customers. AOV growth was partially offset by a decrease in Net Orders of 9% year-over-year, partially driven by a year-over-year decrease in marketing expenses.
Cost of revenue and gross profit
Cost of revenue was $39.3 million for the year ended December 31, 2020, compared to $38.0 million for the year ended December 31, 2019, representing an increase of $1.4 million, or 4%. Gross profit was $109.5 million for the year ended December 31, 2020 compared to $44.6 million for the year ended December 31, 2019, representing an increase of $64.8 million or 145%. Correspondingly, Hims’ gross margin was 74% for the year ended December 31, 2020 compared to 54% for the year ended December 31, 2019.
The year-over-year increase in cost of revenue consists of increases in Hims’ product and packaging costs of approximately 27% which were offset by a decrease in costs associated with medical consultation services of 18% and decrease in shipping costs of 5% year-over-year. Costs associated with medical consultations services are a product of the number of consultations and the cost per consultation, both of which declined year-over-year for the year ended December 31, 2020. The increase in gross margin for the year ended December 31, 2020 compared to the prior year was primarily the result of a proportionately lower increase in cost of revenue than the increase in revenue.
Marketing expenses
Marketing expenses were $59.0 million for the year ended December 31, 2020, compared to $63.2 million for the year ended December 31, 2019, representing a decrease of $4.2 million or 7%. The most significant component of marketing expenses is customer acquisition costs, which were $44.0 million for the year ended December 31, 2020, compared to $51.6 million for the year ended December 31, 2019, representing a decrease of $7.6 million or 15%.
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Management decided to reduce customer acquisition costs year-over-year in order to focus on acquiring higher AOV customers in the period. This decrease was partially offset by an increase in other marketing expenses such as salaries and wages, and related benefits due to an increase in marketing-related headcount.
Selling, general and administrative expenses
SG&A was $65.6 million for the year ended December 31, 2020 compared to $55.9 million for the year ended December 31, 2019, representing an increase of $9.7 million or 17%. The increase in SG&A was driven by an increase in salaries and wages, benefits, taxes, and stock-based compensation expense to $23.9 million for the year ended December 31, 2020, compared to $19.7 million for the year ended December 31, 2019. Additionally, in 2020, consulting expenses related to professional services increased to $5.3 million for the year ended December 31, 2020 compared to $2.3 million for the year ended December 31, 2019 as a result of the Merger. During the period, we ceased use of our headquarters office facility and other offices, recording a lease termination fee of $1.4 million. In January 2020, we also entered into a new operating lease arrangement for a warehouse space in New Albany, Ohio, which contributed to an increase in rent expense of $0.6 million for the year ended December 31, 2020, compared to the corresponding period in the prior year.
Interest expense
Interest expense was less than $0.1 million for the year ended December 31, 2020, compared to $0.4 million for the year ended December 31, 2019, representing a decrease of approximately $0.4 million. The decrease in the interest expense was attributable to the repayment of outstanding debt during the year ended December 31, 2020. The outstanding debt was paid off in full in the second quarter of 2020.
Other income (expense), net
Other income (expense), net, was a $2.8 million expense for the year ended December 31, 2020, compared to $2.8 million of income for the year ended December 31, 2019, representing a change of $5.6 million. The change was driven primarily by a 2020 increase in the fair value of the preferred stock warrant liability as compared to a 2019 decrease in the fair value of this liability.
Provision of income taxes
Provision for income taxes was $0.1 million for each of the years ended December 31, 2020 and 2019, primarily attributable to state taxes.
Liquidity and Capital Resources
Since inception, Hims has financed its operations primarily from the sales of redeemable convertible preferred stock. As of December 31, 2020, Hims’ principal sources of liquidity were cash and cash equivalents in the amount of $27.3 million, which were primarily invested in money market funds; and short-term investments in the amount of $72.9 million, which were primarily invested in corporate, government and asset backed bonds. Subsequent to December 31, 2020, Hims received gross proceeds of $197.7 million from the Merger and $75.0 million from private investors. In connection with the Merger, Hims paid $11.5 million of closing costs as well as $22.0 million for the repurchase of Class A common stock.
Hims has historically incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses at least for the next 12 months due to the investments that we intend to make in our business. We believe our existing cash resources and funds raised from the closing of the Merger subsequent to December 31, 2020 are sufficient to support planned operations for the next 12 months. As a result, management believes that its current financial resources are sufficient to continue operating activities for at least one year past the issuance date of the financial statements.
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We expect to purchase up to approximately $3 million in property and equipment for the purposes of building dedicated affiliated pharmacy operations and related facilities and capabilities, inclusive of $1.9 million invested as of December 31, 2020. We estimate initial annual selling, general, and administrative expenses of approximately $10 million to manage our own pharmacy, warehousing, and fulfillment operations. These expenses include labor for dispensing and fulfillment activities, facility and employee management, rent, utilities, maintenance, and other related overhead. These selling, general, and administrative expenses are expected to partially offset third-party pharmacy, warehousing, and fulfillment expenses that would have been otherwise incurred by Hims.
Our future capital requirements will depend on many factors, including the number of orders we receive, the size of our customer base, the timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed. In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.
Cash Flows
The following table provides a summary of Hims’ cash flow data (in thousands):
| Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net cash used in operating activities |
$ | (2,479 | ) | $ | (74,867 | ) | ||
| Net cash used in investing activities |
(39,701 | ) | (39,299 | ) | ||||
| Net cash provided by financing activities |
47,742 | 95,318 | ||||||
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 marketing expenses and personnel-related expenditures to support the growth of our business.
Net cash used in operating activities was $2.5 million for the year ended December 31, 2020. The most significant component of Hims’ cash used was a net loss of $18.1 million. This included non-cash expense related to stock-based compensation of $5.8 million, non-cash losses for change in fair value of preferred stock warrants totaling $3.1 million, lease termination costs of $1.5 million, depreciation and amortization totaling $1.1 million, amortization of debt issuance costs of $0.3 million, and other noncash changes for $0.4 million. In addition, a cash inflow totaling $3.5 million was attributable to changes in operating assets and liabilities, primarily as a result of an increase in accounts payable and accrued liabilities of $3.2 million, a decrease in inventory of $0.7 million, an increase in deferred revenue of $0.5 million, an increase in deferred rent of $0.4 million, offset by an increase in prepaid expenses and other current assets of $0.7 million and an increase in other long-term assets of $0.7 million.
Net cash used in operating activities was $74.9 million for the year ended December 31, 2019. The most significant component of Hims’ cash used during this period was a net loss of $72.1 million. This included non-cash expense related to stock-based compensation of $8.0 million, and depreciation and amortization totaling to $0.3 million. This was partially offset by non-cash gains for change in fair value of Series C preferred stock warrants totaling $1.0 million, net change in unrealized gain on cash equivalents and investments of $0.2 million, and non-cash other income totaling $0.2 million. In addition, a cash outflow totaling $9.9 million was attributable to changes in operating assets and liabilities, primarily as a result of a decrease in accounts payable of $6.1 million, an increase in prepaid expenses and other current assets of $2.4 million, an increase in other long-term assets of $0.8 million, an increase in inventory of $0.5 million and a decrease in accrued liabilities of $0.3 million. This outflow was partially offset by an increase in deferred revenue of $0.2 million.
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For the year ended December 31, 2020 compared to the year ended December 31, 2019, the decrease in cash used in operating activities primarily reflects the improving leverage, after excluding certain non-cash expenses, from increased revenues, while reducing cost of revenue and marketing expenses.
Cash Flows from Investing Activities
Cash flows from investing activities primarily relate to our treasury operations of investing in available-for-sale investments, investment in website development and internal-use software, as well as purchase of property and equipment.
Net cash used in investing activities for the year ended December 31, 2020 was $39.7 million, which was primarily due to net investment cash outflows of $35.5 million, investment in website development and internal-use software of $2.5 million and purchase of property, equipment, and intangibles of $1.7 million.
Net cash used in investing activities for the year ended December 31, 2019 was $39.3 million, which was primarily due to net investment cash outflows of $37.5 million, investment in website development and internal-use software of $1.5 million and purchase of property and equipment of $0.3 million.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $47.7 million, which was primarily due to the sale of Series D redeemable convertible preferred stock, net of cash paid for issuance costs, totaling $51.9 million. Proceeds from exercise of warrants and stock options provided cash inflow totaling $0.7 million. These cash inflows were partially offset by payments for transaction costs associated with the Merger of $3.4 million and term loan repayments totaling $1.5 million.
Net cash provided by financing activities for the year ended December 31, 2019 was $95.3 million, which was primarily due to the sale of Series C redeemable convertible preferred stock, net of cash paid for issuance costs, totaling $102.6 million and term loan borrowings of $2.1 million. These cash inflows were partially offset by term loan repayments totaling $9.1 million and a cash outflow attributable to debt issuance costs totaling $0.4 million.
Indebtedness
Silicon Valley Bank
On November 27, 2019, Hims and Silicon Valley Bank (“SVB”) amended and restated the Amended and Restated Loan Agreement, dated as of May 16, 2018, by and between Hims and SVB (the “Second Amended and Restated Loan Agreement”), which accelerated the repayment of the existing loan over a six-month period, to be paid in full by May 1, 2020. Hims repaid the loan by May 1, 2020.
In the Second Amended and Restated Loan Agreement, SVB also provided a revolving debt facility (the “Revolving Line”), of up to $8.0 million, with a maturity date of December 31, 2020. Upon termination of the Revolving Line for any reason prior to its maturity date, Hims would have been required to pay, in addition to any payments owed, a termination fee equal to 1.00% of the Revolving Line. The interest rate for the Revolving Line is equal to the Prime Rate plus 0.50%, with a floor of 5.75%. Hims did not draw down from this Revolving Line and therefore, no amounts were required to be repaid by December 31, 2020.
As of December 31, 2020, SVB issued on Hims’ behalf a letter of credit in the amount of $0.8 million as a security deposit for a warehouse space in New Albany, Ohio. SVB required Hims to maintain $0.8 million as a collateral for the outstanding letter of credit. We expect to continue to renew the letter of credit through the duration of the lease. As this is for longer than one year, the $0.8 million is presented within restricted cash, noncurrent on Hims’ consolidated balance sheet.
Upon Hims’ request, SVB will issue letters of credit (the “Letters of Credit”) for Hims’ account in an aggregate amount not to exceed $2.0 million, which is reduced by the amount otherwise available with respect to the cash management services, which may include merchant services, direct deposit of payroll, business credit card, and check
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cashing services identified in SVB’s various agreements. Hims also has a business credit card as part of the cash management services offered by SVB. Hims may request an amount not to exceed $2.0 million, in connection with SVB’s cash management services, which amount is reduced by the amount utilized for any issuances of Letters of Credit. Any cash management services are treated as advances under the Revolving Line. On September 30, 2020, Hims entered into the First loan Modification Agreement (the “Loan Modification Agreement”) and the aggregate amount of the Letters of Credit and limit on cash management services were both amended to $3.5 million.
For Hims to continue to use the business credit card, SVB requires it to maintain $0.2 million in a collateralized money market account. We expect to continue to use the cash management services beyond 2020 and $0.2 million is presented within restricted cash on Hims’ consolidated balance sheet.
As of December 31, 2020 and 2019, Hims was in compliance with all of its covenants under the Second Amended and Restated Loan Agreement. As collateral, Hims has granted SVB a security interest in substantially all of its assets. In January 2021, Hims terminated the Second Amended and Restated Loan Agreement with SVB.
TriplePoint Venture Growth
On November 27, 2019, Hims entered into a Plain English Capital Growth and Security Agreement (the “2019 Capital Agreement”) with TriplePoint Venture Growth (“TPC”) consisting of a term loan in the aggregate principal amount of up to $50.0 million, with $25.0 million being available immediately through December 31, 2020 (the “Part 1 Commitment Amount”), and an additional $25.0 million becoming available upon utilization of the Part 1 Commitment Amount through December 31, 2020. There is no minimum advance amount. As of December 31, 2020, Hims had not drawn down from this term loan and the facility expired. The costs associated with issuing the debt facility are recorded as debt issuance costs within prepaid expenses and other current assets on the consolidated balance sheet with amortization recorded over the available period of the facility.
As collateral, Hims granted to TPC a second lien security interest in substantially all of its assets.
Contractual Obligations and Commitments
In January 2020, Hims entered into a 63-month noncancelable lease for 302,880 square feet of warehouse space in New Albany, Ohio. The lease commenced on June 1, 2020. Total minimum lease payments are $7.9 million, net of rent abatement for an initial three-month period and with annual escalation of 2.5%. We have the option to extend the lease term for a period of five years.
As of December 31, 2020, Hims had contractual obligations to make $0.8 million in purchases related to cloud-based software contracts used in operations. These obligations are associated with multi-year agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the services. Obligations under contracts that we can cancel without a significant penalty or agreements with a term of one year or less are not considered.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our audited consolidated financial statements and accompanying notes. We base our estimates on historical experience, current business factors and various other assumptions that we believe are necessary to consider forming a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses and the disclosure of contingent assets and liabilities. Our company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our audited consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to our audited consolidated financial statements.
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On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
Hims’ significant accounting policies are described in Note 2 to Hims’ audited consolidated financial as of and for the year ending December 31, 2020. These are the policies that we believe are the most critical to aid in fully understanding and evaluating Hims’ consolidated financial condition and results of operations.
Revenue Recognition
Hims recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Hims adopted ASC 606 on January 1, 2017, at the inception of its operations.
For Online Revenue, Hims defines its customer as an individual who purchases products or services through the website. The transaction price in contracts with customers is the total amount of consideration to which Hims expects to be entitled in exchange for transferring products or access to services to the customer.
Contracts that contain prescription products include two performance obligations: access to (i) products and (ii) consultation services. Hims contracts that do not contain prescription products have a single performance obligation. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product to the customer and, in contracts that contain service, by the provision of consultation services to the customer. Hims satisfies its performance obligation for products at a point in time, which is upon delivery of the products to a third-party carrier. Hims satisfies its performance obligation for services over the period of the consultation service, which is typically a few days. The customer obtains control of the products and services upon the Hims’ completion of its performance obligations.
For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling price is based on the prices at which Hims separately sells the products and services, as well as market and cost-plus margin-based estimates. For the years ended December 31, 2020 and 2019, service revenue represents less than 10% of consolidated revenues.
To fulfill its promise to customers for contracts that include professional medical consultations, Hims maintains relationships with various Affiliated Medical Groups, which are professional corporations or other professional entities owned by licensed physicians that engage licensed medical professionals (medical doctors, physician assistants, and nurse practitioners; collectively referred to as “Providers”) to provide consultation services. Refer to Note 7 – Variable Interest Entities in Hims’ audited consolidated financial statements. Hims accounts for service revenue as a principal in the arrangement with its customers. This conclusion is reached because (i) Hims determines which Affiliated Medical Group and Provider provides the consultation to the customer; (ii) Hims is primarily responsible for the satisfactory fulfillment and acceptability of the services; (iii) Hims incurs costs for consultation services even for visits that do not result in a prescription and the sale of products; and (iv) Hims, at its sole discretion, sets all listed prices charged on its website for products and services.
Additionally, to fulfill its promise to customers for contracts that include professional medical consultations, Hims maintains relationships with third-party pharmacies to fill prescriptions that are ordered by the Hims’ customers. Hims made the judgement to account for prescription product revenue as a principal in the arrangement with its customers. This conclusion is reached because (i) it has sole discretion in determining which pharmacy fills a customer’s prescription; (ii) the pharmacy fills the prescription based on fulfillment instructions provided by Hims including using Hims branded packaging for generic products; (iii) Hims is primarily responsible to the customer for the satisfactory fulfillment and acceptability of the order; (iv) Hims is responsible for refunds of the prescription medication after transfer of control to the customer; and (v) Hims, at its sole discretion, sets all listed prices charged on its websites for products and services.
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Hims estimates refunds using the expected value method based on historical refunds granted to customers. Hims updates its estimate at the end of each reporting period and recognizes the estimated amount as contra-revenue with a corresponding refund liability. Sales, value-added, and other taxes are excluded from the transaction price and, therefore, from revenue.
Hims has made an accounting policy election to account for shipping and handling activities performed after the control of a product has been transferred to the customer as fulfillment costs, with direct costs to ship products to customers included in cost of revenue. Contracts with customers do not contain costs to obtain or costs to fulfill contracts with customers in accordance with ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers.
For online sales, payment for prescription medication and nonprescription products is typically collected from the customer a few days in advance of product shipment. Contract liabilities are recorded when payments have been received from the customer for undelivered products or services and are recognized as revenue when the performance obligations are later satisfied. Contract liabilities consisting of balances related to customer prepayments are recognized as current deferred revenue on the consolidated balance sheets of which substantially all of the balance is recognized in the following month. For wholesale arrangements, payments are collected in accordance with contract terms.
Warrant Liability
Hims classifies warrants to purchase shares of redeemable convertible preferred stock that are contingently puttable or redeemable as liabilities. Such warrants are measured and recognized at fair value and are subject to remeasurement at each balance sheet date.
As of December 31, 2020, the fair value of the preferred stock warrant liability is measured using a Black-Scholes-Merton (“BSM”) option-pricing model. Inputs to that model include the purchase right’s expected remaining term, expected volatility based on representative peer companies, the risk-free interest rate, and the estimated fair value of Hims’ common stock based on the publicly trading stock price of OAC. Changes to the fair value measurement are recognized within other income (expense), net on the consolidated statements of operations and comprehensive loss. In prior periods, fair value of the preferred stock warrant liability had been measured using the BSM option-pricing model, Monte Carlo simulation, and probability weighted expected return method (“PWERM”). The changes in valuation method prior to December 31, 2020 occurred as a result of the increased probability that Hims’ common shares would be publicly listed in the near-term. As of December 31, 2020, the valuation method changed as a result of Hims expecting to close the Merger after obtaining approval from the Securities Exchange Commission to file a proxy statement on December 29, 2020.
Hims adjusts the warrant liability for changes in the fair value until the earlier of the exercise or expiration of the warrants or the completion of a liquidation event, including completion of an initial public offering, at which time all such preferred stock warrants will be converted into warrants to purchase shares of common stock and the liability will be reclassified to additional paid-in capital.
Stock-Based Compensation
Hims accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of GAAP, which require compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period. Hims determines the fair value of stock-based awards granted or modified on the grant date or modification date using appropriate valuation techniques.
The fair value of employee and nonemployee stock options is determined using the BSM option-pricing model using various inputs, including estimates of expected term, volatility, risk-free rate, and future dividends. The fair value of the performance stock options granted to the CEO of Hims in June 2020 was measured using a Monte Carlo simulation model. Excluding performance-based stock options, Hims recognizes compensation costs on a straight-line basis over the requisite service period of the employee and nonemployee, which is generally the option vesting term of four years. For stock options with performance conditions, stock-based compensation expense will be recognized when it is probable that the performance criteria will be achieved. Hims accounts for forfeitures as they occur.
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The fair value of RSUs is determined based on the fair value of Hims’ common stock at the grant date. The RSUs generally have a vesting term of four years in addition to performance-based vesting condition contingent on to achievement of a liquidity event which includes (i) an initial public offering, (ii) a business combination transaction or (iii) a sale event as defined by the 2017 Stock Plan. As of December 31, 2020, no compensation expense was recognized since the liquidity event performance condition was not met. The performance-based vesting condition is expected to become probable upon the completion of liquidity event, at which point we will immediately record cumulative stock-based compensation expense using the accelerated attribution method for the awards that have met the service-based vesting condition.
Changes in the following assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. We continue to use judgment in evaluating the expected term and expected volatility utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected term and expected volatility, which could materially impact our future stock-based compensation expense.
Fair Value of Common Stock—Given the absence of a public trading market as of December 31, 2020, the board of directors of Hims considered numerous objective and subjective factors to determine the fair value of common stock at each meeting at which awards are approved. These factors include, but are not limited to, (i) contemporaneous valuations of common stock performed by an independent valuation specialist; (ii) developments in the business and stage of development; (iii) operational and financial performance and condition; (iv) issuances of preferred stock and the rights and preferences of preferred stock relative to common stock; (v) current condition of capital markets and the likelihood of achieving a liquidity event, such as an initial public offering or sale of Hims; and (vi) the lack of marketability of the common stock.
The grant date fair value of our common stock was determined using valuation methodologies which utilize certain assumptions, including probability weighting events, volatility, time to liquidation, a risk-free interest rate, and an assumption for a discount for lack of marketability.
In 2019 and during 2020, Hims used the market approach to determine the fair value of its common stock. This approach measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets and gives consideration to the financial condition and operating performance of an entity relative to those of public entities operating in the same or similar lines of business. Hims applied the market approach by utilizing the subject company transaction method which examines prior transactions in the same or related equity of Hims. For purposes of allocating the fair value of our common stock, Hims used the PWERM and applied a weighted average of two different approaches, implying a value derived from the recent price paid by investors for our preferred stock, and, as Hims contemplated the Merger transaction, the committed price to be paid upon the closing of the PIPE transaction.
At December 31, 2020, Hims revised the approach in determining the value of its common stock as a result of the expectation that Hims would close the Merger with OAC. Accordingly, Hims determined the value of the Company’s equity based on the 10-day weighted average trading price of OAC, adjusted for the share exchange ratio as determined upon consummation of the Merger, and applied a discount for lack of marketability.
For financial reporting purposes, Hims considers the amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation or a straight-line interpolation between the two valuation dates. The determination includes an evaluation of whether the subsequent valuation indicates that any significant change in valuation had occurred between the previous valuation and the grant date.
Expected Term—Hims calculates the expected term using the simplified method based on the options vesting term and contractual terms as it did not have sufficient relevant historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
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Expected Volatility—The volatility is derived from the average historical stock volatilities of a peer group of public companies that Hims considers to be comparable to its business over a period equivalent to the expected term of the share-based grants.
Risk-free Interest Rate—Hims derives the risk-free interest rate assumption from the United States Treasury’s rates for the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued.
Dividend Yield—Hims bases the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. Consequently, the expected dividend yield used is zero.
Consolidation of Variable Interest Entities
U.S. GAAP requires variable interest entities to be consolidated if an entity’s interest in the variable interest entity is a controlling financial interest. Under the variable interest model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the variable interest entity that most significantly impacts the variable interest entity’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the variable interest entity or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity.
Hims determined that it is the primary beneficiary of the Affiliated Medical Groups and XeCare for accounting purposes because it has the ability to direct the activities that most significantly affect the entities’ economic performance and has the obligation to absorb the entities’ losses.
We perform ongoing reassessments of whether changes in the facts and circumstances regarding our involvement with the Affiliated Medical Groups and XeCare would cause our consolidation conclusion to change. The consolidation status of the variable interest entities with which we are involved may change as a result of such reassessments. Changes in consolidation status are applied in accordance with applicable U.S. GAAP.
Emerging Growth Company Status
We are an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits companies with EGC status to take advantage of an extended transition period to comply with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period to enable Hims & Hers to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting standards as of public company effective dates.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an EGC, we intend to rely on such exemptions, we are not required to, among other things: (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board; and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.
We will remain an EGC under the JOBS Act until the earliest of (i) the last day of our first fiscal year following the fifth anniversary of the closing of the Merger, (ii) the last date of our fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three-years.
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Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.
Interest Rate Risk
Hims had cash and cash equivalents totaling $27.3 million and $22.6 million as of December 31, 2020 and 2019, respectively. This amount was invested primarily in money market funds. Cash and cash equivalents are held for working capital purposes.
Additionally, Hims had short-term investments totaling $72.9 million and $37.7 million as of December 31, 2020 and 2019, respectively. Short-term investments consist of available-for-sale securities, primarily invested in corporate bonds, government bonds and asset backed bonds. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars.
Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.
We do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our business, financial condition or results of operations. Fluctuations in the value of our money market funds caused by a change in interest rates (gains or losses on the carrying value) are recorded in other income and are realized only if we sell the underlying securities.
Foreign Currency Risk
There was no material foreign currency risk for the years ended December 31, 2020 and 2019 since Hims operates primarily in the United States of America. We have limited operations outside the United States. Our operations in the United Kingdom that are not considered significant. Accordingly, we believe we do not have a material exposure to foreign currency risk. We may choose to focus on international expansion in the future, which may increase our exposure to foreign currency exchange risk.
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