Home Product listing FIGS, INC. Management’s discussion and analysis of financial condition and results of operations. (Form 10-Q)

FIGS, INC. Management’s discussion and analysis of financial condition and results of operations. (Form 10-Q)

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You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed financial statements and
related notes included elsewhere in this Quarterly Report on Form 10-Q, as well
as our audited financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2021, filed with the
Securities and Exchange Commission ("SEC") on March 10, 2022 (the "2021 Annual
Report on Form 10-K"). This discussion contains forward-looking statements based
upon current plans, expectations and beliefs involving risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in Part II, Item 1A. "Risk Factors" and other factors set forth in other
parts of this Quarterly Report on Form 10-Q.

Our mission is to celebrate, empower and serve those who serve others.

We are a founder-led, direct-to-consumer healthcare apparel and lifestyle brand
that seeks to celebrate, empower and serve current and future generations of
healthcare professionals. We are committed to helping this growing, global
community of professionals, whom we refer to as Awesome Humans, look, feel and
perform at their best-24/7, 365 days a year. We create technically advanced
apparel and products that feature an unmatched combination of comfort,
durability, function and style, all at an affordable price. In doing so, we have
redefined what scrubs are-giving rise to our tag-line: why wear scrubs, when you
can #wearFIGS?

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We have revolutionized the large and fragmented healthcare apparel market. We
branded a previously unbranded industry and de-commoditized a previously
commoditized product-elevating scrubs and creating premium products for
healthcare professionals. Most importantly, we built a community and lifestyle
around a profession. As a result, we have become the industry's
category-defining healthcare apparel and lifestyle brand.

We generate revenue by selling technically advanced apparel for the modern
healthcare professional. Our offerings include scrubwear, as well as lifestyle
apparel and other non-scrub offerings, such as lab coats, underscrubs,
outerwear, loungewear, compression socks and footwear. We design all of our
products in-house, leverage third-party suppliers and manufacturers to produce
our raw materials and finished products, and utilize generally shallow initial
buys and data-driven repurchasing decisions to test new products. We directly
and actively manage every step of our product development and production process
to ensure that our extremely high quality standards are met. We also have an
efficient merchandising model-due to the largely non-discretionary,
replenishment-driven nature of scrubwear, we maintain lessened inventory risk
driven by a relatively high volume of repeat purchases and a focus on our core
scrubs offerings. We primarily market and sell our products through our digital
platform, consisting of our website and mobile app, to a rapidly growing
community of loyal customers.

At September 30, 2022, we had approximately 2.2 million active customers. Our
customers come to us through word of mouth referrals, as well as through our
data-driven brand and performance marketing efforts. See the section titled "Key
Operating Metrics and Non-GAAP Financial Measures" for a definition of active
customers.

In the three and nine months ended September 30, 2022we had the following results compared to the same periods in 2021:

•Expanded our community of active customers by 23.6%, from approximately 1.7 million to September 30, 2021 to about 2.2 million to September 30, 2022;

•Net revenues increased from $102.7 million to $128.6 million for the three
months ended September 30, 2022, and from $290.9 million to $360.9 million for
the nine months ended September 30, 2022, representing 25.2% and 24.1%
year-over-year growth, respectively;

•Gross margin decreased 2.1 percentage points from 72.7% to 70.6% for the three
months ended September 30, 2022, and 1.8 percentage points from 72.6% to 70.8%
for the nine months ended September 30, 2022;

•Net income (loss) decreased from $7.0 million to $4.0 million for the three
months ended September 30, 2022, and increased from $(22.2) million to $17.8
million in the nine months ended September 30, 2022;

•Net income (loss) margin decreased 3.7 percentage points from 6.8% to 3.1% for
the three months ended September 30, 2022, and increased 12.5 percentage points
from (7.6)% to 4.9% for the nine months ended September 30, 2022;

•Adjusted EBITDA decreased from $22.2 million to $21.0 million for the three
months ended September 30, 2022, and from $73.3 million to $67.5 million for the
nine months ended September 30, 2022, representing an Adjusted EBITDA Margin of
16.4% and 18.7%, respectively;

• Cash flow from operating activities decreased by $52.5 million at ($39.9) million for the nine months ended September 30, 2022; and

• Free cash flow decreased by $50.5 million at ($44.1) million for the nine months ended September 30, 2022.

See the section titled "Key Operating Metrics and Non-GAAP Financial Measures"
for information regarding Adjusted EBITDA, Adjusted EBITDA Margin and free cash
flow, including reconciliations to the most directly comparable financial
measures prepared in accordance with U.S. generally accepted accounting
principles ("GAAP").

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COVID-19 and macroeconomic update

During the quarter ended September 30, 2022, while the ongoing COVID-19 pandemic
and the global macroeconomic environment have continued to negatively impact
global supply chains and cause challenges to logistics, including elevated ocean
freight transit times and elevated ocean and air freight rates, we began to see
some improvements in ocean freight rates, transit times and reliability, as well
as increased ocean freight capacity, compared to the first half of 2022.

To date, we believe we have generally managed effectively through COVID-19
supply chain challenges, including as a result of the largely non-discretionary,
replenishment-driven nature of scrubwear. As we continued to seek to timely and
cost effectively fulfill orders and ship products to our customers, in the
quarter ended September 30, 2022 we continued to take measures to mitigate the
impact of global supply chain challenges on our business. For example, to meet
our customers' expectations, we continued to ship goods earlier from our
manufacturers and suppliers when possible to largely mitigate delays. We have
also continued to use more expensive air freight, which, along with continued
elevated ocean freight rates, increased our cost of goods sold. We expect we
will continue to contend with elevated ocean and air freight rates and COVID-19
related supply chain challenges, and we intend to continue to use air freight
and incur air freight expense from time to time and until supply chain
challenges further normalize.

In the quarter ended September 30, 2022, we also continued to see sales trends
soften due to adverse macroeconomic factors such as sustained inflationary
pressures on consumer spending, which impacted our customers more than expected
and resulted in sales below our expectations. While we believe our largely
non-discretionary, replenishment-driven business model is resilient in
challenging macroeconomic environments, we are not completely immune to current
macroeconomic pressures, which we expect to affect our results of operations in
the near term.

We also continued to experience higher than expected inventory receipts and
inventory on hand, as a result of unanticipated improvements in ocean transit
times and sales below our expectations, which in turn resulted in increased
costs associated with storing such inventory. As a general matter, our inventory
investments will fluctuate with the needs of our business. For example, entering
new locations and expanding to new categories require additional investments in
inventory. Shifts in inventory levels may result in fluctuations in the
percentage of full price sales, levels of markdowns, merchandise mix, as well as
gross margin. We plan to address our increased inventory by better coordinating
shipments from our manufacturers where possible, accounting for improving
transit days in our launch calendar, managing future inventory purchases and
through promotional strategies. Nevertheless, because more than 85% of our
production utilizes our main scrubwear fabric technology FIONx and a substantial
amount of our revenue is generated by our core scrubwear styles in core colors,
which are in demand year-round, we can hold greater inventory without
significant risk of obsolescence or exposure to seasonality, and are generally
able to time the sourcing of our raw materials and manufacture of our core
scrubwear styles in core colors without being solely dependent on cyclical
demand trends.

We continue to monitor the impacts of current macroeconomic conditions. An
economic slowdown or recession, financial market volatility, changes in the
labor market, geopolitical tensions, continuing supply chain disruptions, a
reduction in consumer spending or an inability for our suppliers, vendors or
other parties with whom we do business to meet their contractual obligations,
could negatively impact our business and results of operations.

Key factors affecting our performance

We believe that our performance and future success depend on a number of factors
that present significant opportunities for us. There have been no material
changes to such factors from those described in our 2021 Annual Report on Form
10-K under the heading "Key Factors Affecting Our Performance." Those factors
also pose risks and challenges, including those discussed in Part II, Item 1A.
"Risk Factors" of this Quarterly Report on Form 10-Q.

Components of our operating results

Net income

Net revenues consist of sales of healthcare apparel, footwear and other products
primarily through our digital platform. We recognize product sales at the time
control is transferred to the customer, which is when the product is shipped to
the customer. Net revenues represent the sale of these items and shipping
revenue, net of estimated returns and discounts. Net revenues are primarily
driven by the growth in the number of active customers, the frequency with which
customers purchase and the average order value ("AOV").

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Cost of Goods Sold

Cost of goods sold consists principally of the cost of purchased merchandise and
includes import duties and other taxes, freight-in, defective merchandise
returned by customers, inventory write-offs and other miscellaneous shrinkage.
Our cost of goods sold has and may continue to fluctuate with the cost of the
raw materials used in our products and freight costs.

Gross profit and gross margin

We define gross profit as net revenues less cost of goods sold. Gross margin is
gross profit expressed as a percentage of net revenues. Our gross margin has
fluctuated historically and may continue to fluctuate from period to period
based on a number of factors, including the timing and mix of the product
offerings we sell as well as our ability to reduce costs, in any given period.

Functionnary costs

Our operating expenses include selling, marketing, and general and administrative expenses.

Sale

Selling expenses represent the costs incurred for fulfillment, selling and
distribution. Fulfillment expenses consist of costs incurred in operating and
staffing a third-party fulfillment center, including costs associated with
inspecting and warehousing inventories and picking, packaging and preparing
customer orders for shipment. Selling and distribution expenses consist
primarily of shipping and other transportation costs incurred in delivering
merchandise to customers and from customers returning merchandise, merchant
processing fees and packaging. We expect fulfillment, selling and distribution
costs to increase in absolute dollars as we increase our net revenues.

Marketing

Marketing expenses consist primarily of online performance marketing costs, such
as retargeting, paid search and product listing advertisements, paid social
media advertisements, search engine optimization, personalized email and mobile
push notifications through our app. Marketing expenses also include our spend on
brand marketing channels, including billboards, podcasts, commercials, photo and
video shoot development, expenses associated with our Ambassador Program and
other forms of online and offline marketing. We expect our marketing expenses to
increase in absolute dollars as we continue to grow our business.

General and administrative

General and administrative expenses consist primarily of employee-related costs,
including salaries, bonuses, benefits, stock-based compensation, other related
costs and other general overhead, including certain third-party consulting and
contractor expenses, certain facilities costs, software expenses, legal expenses
and recruiting fees. We expect our general and administrative expenses to
increase in absolute dollars as we continue to grow our business. We also
anticipate that we will continue to incur significant additional legal,
accounting, insurance, investor relations and other expenses to support our
operations as a public company, including costs associated with our compliance
with the Sarbanes-Oxley Act.

Other Income (Loss), Net

Other income (loss), net consists of interest income or expense associated with
debt financing arrangements, amortization of debt issuance costs and interest
income earned on investments, as well as gain or loss on foreign currency,
primarily driven by payment to vendors for amounts not denominated in U.S.
dollars.

Provision for income taxes

Our provision for income taxes consists of an estimate of federal and state income taxes based on current federal and state tax rates, adjusted for credits, deductions and uncertain tax positions.

Seasonality

Unlike the traditional apparel industry, the healthcare apparel industry is
generally not seasonal in nature. However, we historically have generated a
greater proportion of net revenues, and incurred higher selling and marketing
expenses, during the fourth quarter of the year compared to other quarters, in
part due to our decision to conduct select promotions during the holiday season,
and we expect these trends to continue.

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Operating results

Three months completed September 30, 2022compared to the three months ended September 30, 2021

The following table sets forth information comparing the components of our results of operations for the periods indicated and our results of operations as a percentage of net revenues for the periods presented.

                                                    Three months ended                              Three months ended
                                                       September 30,                                  September 30,
                                                  2022               2021                      2022                        2021
                                                      (in thousands)                        (as a percentage of net revenues)
Net revenues                                  $ 128,589          $ 102,696                            100.0  %                100.0  %
Cost of goods sold                               37,756             27,991                                29.4                    27.3
Gross profit                                     90,833             74,705                                70.6                    72.7
Operating expenses
Selling                                          31,940             19,945                                24.8                    19.4
Marketing                                        20,031             15,779                                15.6                    15.4
General and administrative(1)                    27,652             28,430                                21.5                    27.7
Total operating expenses                         79,623             64,154                                61.9                    62.5
Net income from operations                       11,210             10,551                                 8.7                    10.3
Other income (loss), net                            605               (933)                                0.5                   (0.9)
Net income before provision for income taxes     11,815              9,618                                 9.2                     9.4
Provision for income taxes                        7,771              2,664                                 6.0                     2.6
Net income and comprehensive income           $   4,044          $   6,954                              3.1  %                  6.8  %


(1) Includes stock-based compensation expense of $9.0 million and $7.3 million
for the three months ended September 30, 2022 and 2021, respectively.

Net income

                   Three months ended
                     September 30,            Change
                  2022           2021           %
                     (in thousands)

Net income $128,589 $102,696 25.2%


Net revenues increased by $25.9 million, or 25.2%, for the three months ended
September 30, 2022, compared to the same period last year. The increase in net
revenues was driven primarily by an increase in orders from existing and new
customers and, to a lesser extent, an increase in AOV.

Cost of Goods Sold

                         Three months ended
                           September 30,             Change
                        2022           2021
                           (in thousands)
Cost of goods sold   $ 37,756       $ 27,991           34.9  %
Gross profit           90,833         74,705           21.6  %
Gross margin             70.6  %        72.7  %      (210) bps


Cost of goods sold increased by $9.8 million, or 34.9%, for the three months
ended September 30, 2022, compared to the same period last year. This increase
was primarily driven by an increase in the total number of orders in the third
quarter of 2022 as compared to the same period in 2021.

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Gross profit increased by $16.1 million, or 21.6%, for the three months ended
September 30, 2022, compared to the same period last year, primarily due to the
increase in the total number of orders, compared to the same period in 2021.

Gross margin decreased by 2.1 percentage points for the three months ended
September 30, 2022, compared to the same period last year. The decrease in gross
margin was primarily related to an increase in freight-in driven by increased
utilization of more expensive air freight and elevated ocean freight rates and,
to a lesser extent, a higher mix of promotional sales and product mix shift.

Operating Expenses

                                  Three months ended
                                    September 30,            Change
                                  2022           2021          %
                                    (in thousands)
Operating expenses:
Selling                       $   31,940      $ 19,945       60.1  %
Marketing                         20,031        15,779       26.9  %
General and administrative        27,652        28,430       (2.7) %
Total operating expenses          79,623        64,154       24.1  %


Operating expenses increased by $15.5 million, or 24.1%, for the three months
ended September 30, 2022, compared to the same period last year and, as a
percentage of net revenues, decreased by 0.6 percentage points, primarily driven
by a decrease in general and administrative expenses as described below.

Selling expense increased by $12.0 million, or 60.1%, for the three months ended
September 30, 2022, compared to the same period last year and, as a percentage
of net revenues, increased by 5.4 percentage points. The increase in selling
expense as a percentage of net revenues was primarily driven by higher
fulfillment expenses, including increased storage costs and, to a lesser extent,
higher shipping expense as a result of rate increases.

Marketing expense increased by $4.3 million, or 26.9%, for the three months
ended September 30, 2022, compared to the same period last year and, as a
percentage of net revenues, increased by 0.2 percentage points. The increase in
marketing expense as a percentage of net revenues was primarily due to increased
investment in digital marketing, particularly within our social media channels.
This increase was partially offset by leverage in brand marketing, particularly
asset creation, as compared to the same period last year.

General and administrative expense decreased by $0.8 million, or 2.7%, for the
three months ended September 30, 2022, compared to the same period last year
and, as a percentage of net revenues, decreased by 6.2 percentage points. The
decrease in general and administrative expense as a percentage of net revenues
was primarily due to an update to our accrual methodology for charitable
donations, reimbursements of legal fees, and the absence of payroll tax expense
associated with our follow-on offering in the prior year. This was partially
offset by increased public company costs.

Other Income (Loss), Net

                                 Three months ended
                                   September 30,               Change
                                  2022             2021          %
                                   (in thousands)
Other income (loss), net   $     605             $ (933)      (164.8) %

Other income (loss), net increase for the three months ended September 30, 2022compared to the same period last year, mainly due to an increase in our interest income due to higher interest rates.

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Provision for Income Taxes

                                   Three months ended
                                      September 30,             Change
                                    2022            2021           %
                                     (in thousands)
Provision for income taxes    $    7,771          $ 2,664       191.7  %


Provision for income taxes increased by $5.1 million, or 191.7% for the three
months ended September 30, 2022, compared to the same period last year,
primarily due to an increase in non-deductible stock-based compensation expense
and shortfall on the tax deductions related to stock-based compensation. The
non-deductible stock-based compensation expense and shortfall on the tax
deductions related to stock-based compensation resulted in an effective tax rate
of 65.8% for the quarter, up from the same period last year.


Nine month period ended September 30, 2022compared to the nine months ended September 30, 2021

The following table sets forth information comparing the components of our results of operations for the periods indicated and our results of operations as a percentage of net revenues for the periods presented.

                                                    Nine months ended                                     Nine months ended
                                                      September 30,                                         September 30,
                                                 2022               2021                            2022                         2021
                                                     (in thousands)                               (as a percentage of net revenues)
Net revenues                                 $ 360,937          $ 290,892                                   100.0  %                100.0  %
Cost of goods sold                             105,325             79,674                                       29.2                    27.4
Gross profit                                   255,612            211,218                                       70.8                    72.6
Operating expenses
Selling                                         80,801             56,282                                       22.4                    19.3
Marketing                                       56,263             42,107                                       15.6                    14.5
General and administrative(1)                   84,142            118,280                                       23.3                    40.7
Total operating expenses                       221,206            216,669                                       61.3                    74.5
Net income (loss) from operations               34,406             (5,451)                                       9.5                   (1.9)
Other income (loss), net                           683             (1,001)                                       0.2                   (0.3)
Net income (loss) before provision for
income taxes                                    35,089             (6,452)                                       9.7                   (2.2)
Provision for income taxes                      17,294             15,700                                        4.8                     5.4
Net income (loss) and comprehensive income
(loss)                                       $  17,795          $ (22,152)                                    4.9  %                 (7.6) %


(1) Includes stock-based compensation expense of $26.3 million and $68.3 million
for the nine months ended September 30, 2022 and 2021, respectively.

Net Revenues

                   Nine months ended
                     September 30,            Change
                  2022           2021           %
                     (in thousands)
Net revenues   $ 360,937      $ 290,892       24.1  %


Net revenues increased by $70.0 million, or 24.1%, for the nine months ended
September 30, 2022, compared to the same period last year. The increase in net
revenues was driven by both strong AOV growth and an increase in orders from
existing customers and new customers.

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Cost of Goods Sold

                          Nine months ended
                            September 30,             Change
                         2022           2021
                           (in thousands)
Cost of goods sold   $ 105,325       $ 79,674           32.2  %
Gross profit           255,612        211,218           21.0  %
Gross margin              70.8  %        72.6  %      (180) bps


Cost of goods sold increased by $25.7 million, or 32.2%, for the nine months
ended September 30, 2022, compared to the same period last year. This increase
was primarily driven by an increase in the total number of orders in the nine
months ended September 30, 2022 compared to the same period in 2021.

Gross profit increased by $44.4 million, or 21.0%, for the nine months ended
September 30, 2022, compared to the same period last year, primarily due to the
increase in the total number of orders, compared to the same period in 2021.

Gross margin decreased 1.8 percentage points for the nine months ended
September 30, 2022, compared to the same period last year. The decrease in gross
margin was primarily related to an increase in freight-in driven by higher
utilization of more expensive air freight and elevated ocean and air freight
rates.

Operating Expenses

                                  Nine months ended
                                    September 30,           Change
                                 2022           2021           %
                                   (in thousands)
Operating expenses:
Selling                       $  80,801      $ 56,282        43.6  %
Marketing                        56,263        42,107        33.6  %
General and administrative       84,142       118,280       (28.9) %
Total operating expenses        221,206       216,669         2.1  %


Operating expenses increased by $4.5 million, or 2.1%, for the nine months ended
September 30, 2022, compared to the same period last year and, as a percentage
of net revenues, decreased by 13.2 percentage points, primarily driven by a
decrease in general and administrative expenses as described below.

Selling expense increased by $24.5 million, or 43.6%, for the nine months ended
September 30, 2022, compared to the same period last year and, as a percentage
of net revenues, increased by 3.1 percentage points. The increase in selling
expense as a percentage of net revenues was primarily driven by higher
fulfillment expenses, including increased storage costs, and, to a lesser
extent, higher shipping expense as a result of rate increases.

Marketing expense increased by $14.2 million, or 33.6%, for the nine months
ended September 30, 2022, compared to the same period last year and, as a
percentage of net revenues, increased by 1.1 percentage points. The increase in
marketing expense as a percentage of net revenues was primarily due to increased
investment in brand marketing, including increased investments in our Ambassador
Program and offline marketing.

General and administrative expense decreased by $34.1 million, or 28.9%, for the
nine months ended September 30, 2022, compared to the same period last year and,
as a percentage of net revenues, decreased by 17.4 percentage points. The
decrease in general and administrative expense as a percentage of net revenues
was primarily due to a decrease in stock-based compensation expense.

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Other Income (Loss), Net

                                Nine months ended
                                  September 30,              Change
                                2022            2021           %
                                  (in thousands)
Other income (loss), net   $    683          $ (1,001)      (168.0) %


Other income (loss), net increased for the nine months ended September 30, 2022,
compared to the same period last year, primarily related to an increase in our
interest income driven by higher interest rates as well as a decrease in
interest expense related to our revolving credit commitment fee.

Provision for Income Taxes

                                  Nine months ended
                                    September 30,           Change
                                 2022           2021          %
                                   (in thousands)
Provision for income taxes    $  17,294      $ 15,700       10.2  %


Provision for income taxes increased by $1.6 million, or 10.2% for the nine
months ended September 30, 2022, compared to the same period last year,
primarily due to an increase in non-deductible stock-based compensation expense.
Our effective tax rate was 49.3% for the nine months ended September 30, 2022,
up from the same period last year primarily due to the impact of non-deductible
stock-based compensation.

Key Operating Parameters and Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. In addition to the
measures presented in our financial statements, we use the following key
operational and business metrics to evaluate our business, measure our
performance, develop financial forecasts and make strategic decisions. We
believe the non-GAAP financial measures, Adjusted EBITDA, Adjusted EBITDA Margin
and free cash flow, are useful in evaluating our performance. Our non-GAAP
financial measures should not be considered in isolation from, or as substitutes
for, financial information prepared in accordance with GAAP.

Active customers, net revenue per active customer and average order value

The number of active customers is an important indicator of our growth as it
reflects the reach of our digital platform, our brand awareness and overall
value proposition. We define an active customer as a unique customer account
that has made at least one purchase in the preceding 12-month period. In any
particular period, we determine our number of active customers by counting the
total number of customers who have made at least one purchase in the preceding
12-month period, measured from the last date of such period.

                              As of September 30,
                        2022                        2021
                                (in thousands)
Active customers      2,154                        1,743


We believe the growth in our net revenues per active customer demonstrates our
increased value proposition for our customer base. We define net revenues per
active customer as the sum of total net revenues in the preceding twelve month
period divided by the current period active customers.

                                          As of September 30,
                                            2022              2021
Net revenues per active customer    $      227               $ 219


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We define average order value ("AOV") as the sum of the total net revenues in a
given period divided by the total orders placed in that period. Total orders are
the summation of all completed individual purchase transactions in a given
period. We believe our relatively high average order value demonstrates the
premium nature of our product. As we expand into and increase our presence in
additional product categories and price points as well as expand
internationally, AOV may fluctuate.

                              Three months ended                 Nine months ended
                                 September 30,                     September 30,
                                2022             2021             2022            2021
Average order value     $      112              $ 102      $     112             $ 102

Adjusted EBITDA and Adjusted EBITDA margin

We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: other
income (loss), net; gain/loss on disposal of assets; provision for income taxes;
depreciation and amortization expense; stock-based compensation expense;
transaction costs; and expenses related to non-ordinary course disputes.
Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by net
revenues.

Management believes that excluding certain non-cash items and items that may
vary substantially in frequency and magnitude period-to-period from net income
provides useful supplemental measures that assist in evaluating our ability to
generate earnings, provide consistency and comparability with our past financial
performance and facilitate period-to-period comparisons of our core operating
results as well as the results of our peer companies.

There are several limitations associated with using Adjusted EBITDA and Adjusted EBITDA margin as analytical tools, including:

• other companies may calculate Adjusted EBITDA and Adjusted EBITDA margin differently, which reduces their usefulness as a comparative measure;

• Adjusted EBITDA and Adjusted EBITDA margin do not reflect other income (loss), net;

•Adjusted EBITDA and Adjusted EBITDA margin do not reflect any gain or loss on disposal of assets;

•Adjusted EBITDA and Adjusted EBITDA margin do not reflect our tax provision, which reduces the cash available to us;

•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect recurring, non-cash
expenses of depreciation and amortization of property and equipment and,
although these are non-cash expenses, the assets being depreciated and amortized
may have to be replaced in the future;

•Adjusted EBITDA and Adjusted EBITDA margin do not reflect the impact of stock-based compensation expense;

•Adjusted EBITDA and Adjusted EBITDA margin do not reflect transaction costs; and

•Adjusted EBITDA and Adjusted EBITDA margin do not reflect unusual course litigation expenses.

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The following table reflects a reconciliation of Adjusted EBITDA to Net income
(loss), the most directly comparable financial measure prepared in accordance
with GAAP and presents Adjusted EBITDA Margin with Net income (loss) margin, the
most directly comparable financial measure prepared in accordance with GAAP:

                                               Three months ended                           Nine months ended
                                                  September 30,                               September 30,
                                             2022               2021                     2022               2021
                                                                (in thousands, except margin)
Net income (loss)                        $   4,044          $   6,954                $  17,795          $ (22,152)
Add (deduct):
Other income (loss), net                      (605)               933                     (683)             1,001
Provision for income taxes                   7,771              2,664                   17,294             15,700
Depreciation and amortization expense(1)       479                365                    1,287              1,021
Stock-based compensation and related
expense(2)                                   9,082              8,683                   26,335             70,415
Transaction costs                                -                800                        -              1,139
Expenses related to non-ordinary course
disputes(3)                                    254              1,791                    5,458              6,207
Adjusted EBITDA                          $  21,025          $  22,190                $  67,486          $  73,331

Net revenues                             $ 128,589          $ 102,696                $ 360,937          $ 290,892
Net income (loss) margin(4)                    3.1  %             6.8  %                   4.9  %            (7.6) %
Adjusted EBITDA Margin                        16.4  %            21.6  %                  18.7  %            25.2  %

(1) Excludes amortization of debt issuance costs included in “Other income (loss), net”.

(2) Includes stock-based compensation expense and social charges related to the stock award activity.

(3) Represents certain legal fees incurred in connection with the litigation
claims described in the section titled "Legal   Proceedings" appearing in this
Quarterly Report on Form 10-Q.

(4) Net profit (loss) margin represents net profit (loss) as a percentage of net revenues.

Free Cash Flow

We calculate free cash flow as net cash provided by operating activities reduced
by capital expenditures, including purchases of property and equipment and
capitalized software development costs. We believe free cash flow is a useful
measure of liquidity and an additional basis for assessing our ability to
generate cash. There are limitations related to the use of free cash flow as an
analytical tool, including: other companies may calculate free cash flow
differently, which reduces its usefulness as a comparative measure; and free
cash flow does reflect our future contractual commitments and it does not
represent the total residual cash flow for a given period.

The following table provides a reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

                                                          Nine months ended
                                                            September 30,
                                                         2022           2021
                                                           (in thousands)
Net cash (used in) provided by operating activities   $ (39,881)     $ 52,504
Less: capital expenditures                               (4,256)       (2,008)
Free cash flow                                        $ (44,137)     $ 50,496


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Cash and capital resources

As of September 30, 2022 and December 31, 2021, we had $155.6 million and $195.4
million of cash and cash equivalents, respectively. Since inception, we have
financed operations primarily through cash flows from operating activities, the
sale of our capital stock and borrowings under credit facilities.

In December 2020, we entered into a credit agreement with J.P. Morgan Chase
Bank, N.A., providing for a revolving credit facility in an initial amount of up
to $50.0 million (the "2020 Facility"). On September 7, 2021, we terminated the
2020 Facility.

In September 2021, we entered into a credit agreement with Bank of America, N.A.
providing for a revolving credit facility in an amount of up to $100.0 million
(the "2021 Facility"). The 2021 Facility will mature in September 2026. As of
September 30, 2022, we had no outstanding borrowings under the 2021 Facility
(other than $4.4 million of outstanding letters of credit) and available
borrowings of $95.6 million.

See Note 8 to our summary financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding the 2021 facility.

Our cash requirements have primarily been for working capital and capital
expenditures. We believe that existing cash and cash equivalents and available
borrowings under our 2021 Facility, if needed, will be sufficient to support our
working capital and capital expenditure requirements for at least the next 12
months. Our future capital requirements may vary materially from those currently
planned and will depend on many factors, including our rate of revenue growth,
the timing and extent of international expansion efforts and other growth
initiatives, the expansion of our marketing activities and overall economic
conditions. To the extent that current and anticipated future sources of
liquidity are insufficient to fund our future business activities and cash
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in additional dilution to our
stockholders. The incurrence of additional debt financing would result in debt
service obligations and the instruments governing such debt could provide for
operating and financing covenants that would restrict our operations. There can
be no assurances that we will be able to raise additional capital when needed or
on terms acceptable to us. The inability to raise capital, if needed, would
adversely affect our ability to achieve our business objectives.

Historical cash flows

The following table summarizes our cash flows for the periods presented:

                                                                         Nine months ended
                                                                           September 30,
                                                                     2022                2021
                                                                          (in thousands)
Net cash (used in) provided by operating activities              $  (39,881)         $   52,504
Net cash used in investing activities                                (4,756)             (2,008)
Net cash provided by financing activities                             2,789              75,325
Net (decrease) increase in cash, cash equivalents, and
restricted cash                                                  $  (41,848)         $  125,821


Operating Activities

Cash (used in) provided by operating activities consists primarily of net income
adjusted for certain items including depreciation and amortization, stock-based
compensation expense and the effect of changes in operating assets and
liabilities.

Cash (used in) provided by operating activities decreased by $92.4 million for
the nine months ended September 30, 2022, compared to the same period last year.
The decrease in operating cash flows was primarily due to a net change in
operating assets and liabilities of $92.8 million driven by higher inventory
purchases of $62.4 million, the timing of payments against accrued expenses of
$7.5 million, the timing of cash collections related to accounts receivable of
$6.9 million, and the timing of income tax payments of $6.9 million during the
comparable nine month period in 2021.

Investing activities

Cash flows used in investing activities relate to capital expenditures and other investing activities.

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Cash used in investing activities increased by $2.7 million for the nine months
ended September 30, 2022, compared to the same period last year. The change in
investing cash flows was primarily due to an increase in capital expenditures
and cash used for the purchase of held-to-maturity securities.

Capital expenditures during the nine months ended September 30, 2022 were primarily related to capitalized software development costs, hardware purchases and warehouse machinery purchases.

Capital expenditures during the nine months ended September 30, 2021 were primarily related to purchases of computer equipment, furniture and fixtures, and included capitalized software development costs.

Fundraising activities

Cash flows from financing activities consist primarily of proceeds and payments related to transactions involving our common shares, borrowings and fees associated with our existing line of credit.

Cash provided by financing activities of $2.8 million for the nine months ended
September 30, 2022 was primarily attributable to proceeds from the exercise of stock options and stock purchases by employees.

Cash provided by financing activities of $75.3 million for the nine months ended
September 30, 2021 was attributable to proceeds from our IPO, capital
contributions and proceeds from stock option exercises, partially offset by tax
payments related to net share settlements on restricted stock units and payments
of IPO issuance costs, net of reimbursements.

Contractual obligations and commitments

There have been no material changes in our contractual obligations from those described in our 2021 Annual Report on Form 10-K.

Refer to Note 9 to our condensed financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q for commitments entered into during the nine
months ended September 30, 2022.

Significant Accounting Policies and Estimates

Our condensed financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with
GAAP. The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
costs and expenses and related disclosures. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results could differ significantly from our
estimates. To the extent that there are differences between our estimates and
actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected.

Our critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates" in our 2021 Annual Report
on Form 10-K, and in Note 2 to our condensed financial statements appearing
elsewhere in this Quarterly Report on Form 10-Q.

Recent accounting pronouncements

Refer to Note 2 to our condensed financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q for a discussion of accounting pronouncements
recently adopted and their impact to our financial statements.

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