WARBY PARKER INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

You should read the following discussion and analysis of our financial condition
and results of operations together with our audited consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K ("Form 10-K). This discussion and other parts of this Form 10-K contain
forward-looking statements, such as those relating to our plans, objectives,
expectations, intentions, and beliefs, which involve risks and uncertainties.
Our actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below and those
discussed in the sections titled "Special Note Regarding Forward-Looking
Statements" and "Risk Factors" included elsewhere in this Form 10-K.

Overview

Pioneer of the direct-to-consumer model, Warby Parker is one of the fastest growing brands at scale in United States. We are a mission-driven lifestyle brand that operates at the intersection of design, technology, health and social enterprise.

Since day one, our focus on satisfying our customers and doing good has created the foundation for continuous innovation:

•We aim to provide customers with the highest-quality product possible by
designing glasses at our headquarters in New York City, using custom materials,
and selling direct to the customer. By cutting out the middleman, we are able to
sell our products at a lower price than many of our competitors and pass the
savings on to our customers. In addition to lower prices, we introduced simple,
unified pricing (glasses starting at $95, including prescription lenses) to the
eyewear market.
•We've built a seamless shopping experience that meets customers where and how
they want to shop, whether that's on our website, on our mobile app, or in our
more than 160 retail stores.
•We've crafted a holistic vision care offering that extends beyond glasses to
include contacts, vision tests and eye exams, vision insurance, and beyond. We
leverage leading (and in many cases proprietary) technology to enhance our
customers' experiences, whether it's to help them find a better-fitting frame
using our Virtual Try-On tool, or to update their prescription from home using
Virtual Vision Test, our telehealth app.
•We recruit and retain highly engaged, motivated team members who are driven by
our commitment to scaling a large, growing business while making an impact and
are excited to connect their daily work back to our mission.
•We are a public benefit corporation focused on positively impacting all
stakeholders, and hope to inspire other entrepreneurs and businesses to think
along the same lines. Working closely with our nonprofit partners, we distribute
glasses to people in need in more than 50 countries globally and many parts of
the United States. Over 10 million more people now have the glasses they need to
learn, work, and achieve better economic outcomes through our Buy a Pair, Give a
Pair program.

We generate revenue through selling our wide array of prescription and
non-prescription eyewear, including glasses, sunglasses, and contact lenses. We
also generate revenue from providing eye exams and vision tests, and selling
eyewear accessories. We maintain data across the entire customer journey that
allows us to develop deep insights, informing our innovation priorities and
enabling us to create a highly personalized, brand-enhancing experience for our
customers. We have built an integrated, multichannel presence that we believe
deepens our relationship with existing customers while broadening reach and
accessibility. And while we have the ability to track where our customers
transact, we're channel agnostic to where the transaction takes place and find
that many of our customers engage with us across both digital and physical
channels; for example, many customers who check out online also visit a store
throughout their customer journey, while others choose to browse online before
visiting one of our stores.

Financial Highlights
For the years ended December 31, 2021, 2020, and 2019:

•we generated net revenue of $540.8 million $393.7 million, and $370.5 million,
respectively;
•we generated gross profit of $317.7 million, $231.9 million, and $223.1
million, respectively, representing a gross profit margin of 59%, 59%, and 60%,
respectively;
•we generated net (loss) income of $(144.3) million, $(55.9) million, and zero,
respectively; and
•we generated adjusted EBITDA of $24.9 million, $7.7 million, and $21.9 million,
respectively.

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For a definition of adjusted EBITDA, a non-GAAP measure, and a reconciliation to
the most directly comparable GAAP measure, see the section titled "Key Business
Metrics and Certain Non-GAAP Financial Measures."

Direct Listing
On September 29, 2021, we completed a direct listing of our Class A common stock
(the "Direct Listing") on the New York Stock Exchange ("NYSE"). We incurred fees
related to financial advisory service, audit, and legal services in connection
with the Direct Listing and recorded general and administrative expenses of
$28.3 million for the year ended December 31, 2021.

Key Business Metrics and Certain Non-GAAP Financial Measures
In addition to the measures presented in our consolidated financial statements,
we use the following key business metrics and certain non-GAAP financial
measures to evaluate our business, measure our performance, develop financial
forecasts, and make strategic decisions. The following table summarizes our key
performance indicators and non-GAAP financial measures for the periods
presented, which are unaudited.

                                            Year Ended December 31,
                                       2021           2020          2019
Active Customers (in millions)          2.20          1.81           1.78
Store Count(1)                           161           126            119

Adjusted EBITDA(2) (in thousands) $24,861 $7,658 $21,868
Adjusted EBITDA margin(2)

                4.6  %        1.9  %         5.9  %


__________________

(1)Store Count number at the end of the period indicated.
(2)Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures.
For more information regarding our use of these measures and a reconciliation of
net loss, the most directly comparable GAAP measure, to adjusted EBITDA and
adjusted EBITDA margin, see the section titled "Adjusted EBITDA and Adjusted
EBITDA Margin"

Active Customers
The number of Active Customers is a key performance measure that we use to
assess the reach of our physical retail stores and digital platform as well as
our brand awareness. We define an Active Customer as a unique customer that has
made at least one purchase in the preceding 12-month 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. Given our definition of a customer is a unique
customer that has made at least one purchase, it can include either an
individual person or a household of more than one person utilizing a single
account.

Store Count
Store Count is a key performance measure that we use to reach consumers and
generate incremental demand for our products. We define Store Count as the total
number of retail stores open at the end of a given period. We believe our retail
stores embody our brand, drive brand awareness, and serve as efficient customer
acquisition vehicles. Our results of operations have been and will continue to
be affected by the timing and number of retail stores that we operate.

We have thoughtfully expanded our retail store footprint over the past several
years. During the years ended December 31, 2021, 2020, and 2019, we opened 35,
10, and 32 new retail stores. In 2020, we opened fewer retail stores than in
years prior due to the COVID-19 pandemic-related operating challenges, including
extended retail store closures and heightened safety measures.

From December 31, 2021107 of our 161 retail stores offered in-person eye exams.

Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income (loss) before interest and other income
(loss), taxes, and depreciation and amortization as further adjusted for
stock-based compensation expense and related employer payroll taxes, non-cash
charitable donations, and non-recurring costs such as direct listing or other
transaction costs. We define adjusted EBITDA margin as adjusted EBITDA divided
by net revenue. We caution investors that amounts presented in accordance with
our definitions of adjusted EBITDA and adjusted EBITDA margin may not be
comparable to similar measures disclosed by our competitors, because not all
companies and analysts calculate adjusted EBITDA and adjusted EBITDA margin in
the same manner. We present adjusted EBITDA and adjusted EBITDA margin because
we

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consider these metrics to be important supplemental measures of our performance
and believe they are frequently used by securities analysts, investors, and
other interested parties in the evaluation of companies in our industry.
Management believes that investors' understanding of our performance is enhanced
by including these non-GAAP financial measures as a reasonable basis for
comparing our ongoing results of operations.

Management uses Adjusted EBITDA and Adjusted EBITDA margin:

•as a measurement of operating performance because they assist us in evaluating
the operating performance of our business on a consistent basis, as they remove
the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual
operating budget and financial projections;
•to evaluate the performance and effectiveness of our operational strategies;
and
•to evaluate our capacity to expand our business.

By providing these non-GAAP financial measures, together with a reconciliation
to the most directly comparable GAAP measure, we believe we are enhancing
investors' understanding of our business and our results of operations, as well
as assisting investors in evaluating how well we are executing our strategic
initiatives. Adjusted EBITDA and adjusted EBITDA margin have limitations as
analytical tools, and should not be considered in isolation, or as an
alternative to, or a substitute for net loss or other financial statement data
presented in our consolidated financial statements as indicators of financial
performance. Some of the limitations are:

•such measures do not reflect our cash expenditures, or future requirements for
capital expenditures, or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working
capital needs;
•such measures do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
•such measures do not reflect our tax expense or the cash requirements to pay
our taxes;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future and such
measures do not reflect any cash requirements for such replacements; and other
companies in our industry may calculate such measures differently than we do,
limiting their usefulness as comparative measures.

Due to these limitations, adjusted EBITDA and adjusted EBITDA margin should not
be considered as measures of discretionary cash available to us to invest in the
growth of our business. We compensate for these limitations by relying primarily
on our GAAP results and using these non-GAAP measures only supplementally. Each
of the adjustments and other adjustments described in this paragraph and in the
reconciliation table below help management with a measure of our core operating
performance over time by removing items that are not related to day-to-day
operations.

For the year ended December 31, 2021, adjusted EBITDA and adjusted EBITDA margin
were $24.9 million and 4.6%, respectively, and for the year ended December 31,
2020, adjusted EBITDA and adjusted EBITDA margin were $7.7 million and 1.9%,
respectively. In 2020, we experienced a significant decline in adjusted EBITDA
due to the COVID-19 pandemic-related operating challenges, including extended
retail store closures and heightened safety measures.

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The following table reconciles Adjusted EBITDA and Adjusted EBITDA margin to the most directly comparable GAAP measure, net loss:

                                                  Year Ended December 31,
                                            2021             2020           2019
Net (loss) income                       $ (144,271)      $ (55,919)      $      -
Adjusted to exclude the following:
Interest and other (loss) income, net          347              97         

(1,939)

Provision for income taxes                     263             190          

276

Amortization expense 21,960 18,377 15,032 Stock-based compensation expense

           110,543          44,913          8,499
Non-cash charitable donation                 7,757               -              -
Transaction costs                           28,262               -              -
Adjusted EBITDA                         $   24,861       $   7,658       $ 21,868
Adjusted EBITDA margin                         4.6  %          1.9  %         5.9  %


Impact of COVID-19 Pandemic
The COVID-19 pandemic caused personal and business disruption worldwide
beginning in January 2020, and continues to impact global economies and supply
chains. Early on in the pandemic, we temporarily closed our retail stores,
transitioned our Corporate and Customer Experience teams to remote work, and
implemented robust safety and sanitization protocols. In 2021, our business
continued to experience disruption caused by the pandemic, including changes to
consumer shopping patterns as well as varying levels of restrictions in our
physical locations implemented by national, state, and local authorities.

Throughout the pandemic, our team has remained committed to ensuring we could
get our customers the glasses they needed to see and live their daily lives. We
continue to invest both in our physical stores, adding 35 new stores in 2021,
and in our at-home and digital offerings like Home Try-On, Virtual Try-On, and
Virtual Vision Test. In addition, we have onboarded and continue to onboard new
suppliers, as well as enhance inventory planning and monitoring capabilities. We
believe these actions have positioned us favorably for now and the future, and
despite the ongoing impact of new COVID-19 variants in 2021, we saw a return to
growth with a 37.4% and 46.0% increase in net revenue in 2021 as compared to
2020 and 2019, respectively.

We also evolved our do-good efforts to maximize impact during the pandemic by
responding to the immediate needs of our longest-standing partner, VisionSpring,
to protect healthcare workers and slow COVID-19 transmission in high risk
communities where they work. Starting on April 1, 2020, for a portion of Warby
Parker glasses purchased, we worked with VisionSpring to distribute personal
protective equipment and prevention supplies to people in need. This temporary
pivot continued through the end of 2020 and into 2021, at which point our
partners were able to scale their distribution efforts again. Through our
support, VisionSpring provided over four million units of PPE and preventative
health supplies in 2021 and 2020.

The health and safety of our customers and employees remains our top priority,
and to that end we will continue to monitor developments related to the COVID-19
pandemic and adjust policies and operations as needed. The full extent to which
the COVID-19 pandemic will directly or indirectly impact our business,
operations, and financial condition will depend on future developments that are
highly uncertain and cannot be accurately predicted. Given the uncertainty, we
cannot estimate the financial impact of the pandemic on our future results of
operations, cash flows, or financial condition. For additional details, refer to
the risks described elsewhere in this Annual Report on Form 10-K, including
those described in Part I, Item 1A. "Risk Factors."

Components of operating results

Net income We mainly derive our income from the sale of eyewear products, optical services and accessories. We sell products and services through our retail stores, website and mobile applications. Revenues generated by eyewear products include

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the sales of prescription and non-prescription optical glasses and sunglasses,
contact lenses, eyewear accessories, and expedited shipping charges, which are
charged to the customer, associated with these purchases. Revenue is recognized
when the customer takes possession of the product, either at the point of
delivery or in-store pickup, and is recorded net of returns and discounts.
Revenue generated from services consist of both in-person eye exams in cases
where we directly employ the optometrist, and prescriptions issued through the
Virtual Vision Test app. Revenue is recognized when the service is rendered and
is recorded net of discounts.

Cost of Goods Sold
Cost of goods sold includes the costs incurred to acquire materials, assemble,
and sell our finished products. Such costs include (i) product costs held at the
lesser of cost and net realizable value, (ii) freight and import costs, (iii)
optical laboratory costs, (iv) customer shipping, (v) occupancy and depreciation
costs of retail stores, and (vi) employee-related costs associated with our
prescription services and optical laboratories, which includes salaries,
benefits, bonuses, and stock-based compensation. We expect our cost of goods
sold to fluctuate as a percentage of net revenue primarily due to product mix,
customer preferences and resulting demand, customer shipping costs, and
management of our inventory and merchandise mix. Cost of goods sold also may
change as we open or close retail stores because of the resulting change in
related occupancy and depreciation costs. Over time we expect our cost of goods
sold to increase with revenue due to an increased number of orders and with the
opening of new retail stores driven by the resulting occupancy and depreciation
costs and employee-related costs associated with prescription services offerings
at our retail stores.

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
remained steady historically, but may fluctuate in the future based on a number
of factors, including the cost at which we can obtain, transport, and assemble
our inventory, the rate at which we open new retail stores, and how effective we
can be at controlling costs, in any given period.

Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, or SG&A, primarily consist of
employee-related costs including salaries, benefits, bonuses, and stock-based
compensation for our corporate and retail employees, marketing, information
technology, credit card processing fees, donations in connection with our Buy a
Pair, Give a Pair program, facilities, legal, and other administrative costs
associated with operating the business. Marketing costs, which consist of both
online and offline advertising, include sponsored search, online advertising,
marketing and retail events, and other initiatives. SG&A also includes
administrative costs associated with our Home Try-On program, which provides
customers the opportunity to sample eyewear at home prior to purchase. We expect
SG&A to increase in absolute dollars over time and to fluctuate as a percentage
of revenue due to the anticipated growth of our business, increased marketing
investments, and changing prices of goods and services. SG&A is expensed in the
period in which it is incurred.

Interest and Other (Loss) Income, Net
Interest and other (loss) income, net, consists primarily of interest generated
from our cash and cash equivalents balances net of interest incurred on
borrowings and fees on our undrawn line of credit, and are recognized as
incurred. We expect our interest and other income costs to fluctuate based on
our future bank balances and credit line utilization.

Provision for Income Taxes
Provision for income taxes consists of income taxes related to foreign and
domestic federal and state jurisdictions in which we conduct business, adjusted
for allowable credits, deductions, and valuation allowance against deferred tax
assets.

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Results of Operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes included elsewhere in this
Annual Report on Form 10-K. The following tables set forth our results of
operations for the periods presented in dollars and as a percentage of net
revenue:

                                                         Year Ended December 31,
                                                    2021           2020           2019
                                                              (in thousands)
Consolidated Statements of Operations Data:
Net revenue                                     $  540,798      $ 393,719      $ 370,463
Cost of goods sold                                 223,049        161,784        147,355
Gross profit                                       317,749        231,935        223,108

Selling, general and administrative expenses 461,410 287,567

224,771

Loss from operations                              (143,661)       (55,632)  

(1,663)

Interest and other (loss) income, net                 (347)           (97)  

1,939

(Loss) income before income taxes                 (144,008)       (55,729)           276
Provision for income taxes                             263            190            276
Net (loss) income                               $ (144,271)     $ (55,919)     $       -


                                                                          Year Ended December 31,
                                                           2021                     2020                     2019
                                                                              % of Net Revenue
Consolidated Statements of Operations Data:
Net revenue                                                   100.0  %                 100.0  %                 100.0  %
Cost of goods sold                                             41.2  %                  41.1  %                  39.8  %
Gross profit                                                   58.8  %                  58.9  %                  60.2  %
Selling, general, and administrative expenses                  85.3  %                  73.0  %                  60.7  %
Loss from operations                                          (26.5) %                 (14.1) %                  (0.4) %
Interest and other (loss) income, net                          (0.1) %                     -  %                   0.5  %
(Loss) income before income taxes                             (26.6) %                 (14.1) %                   0.1  %
Provision for income taxes                                        -  %                     -  %                   0.1  %
Net (loss) income                                             (26.6) %                 (14.1) %                     -  %

Comparison of the years ended December 31, 2021 and 2020

Net Revenue
                     Year Ended December 31,
                       2021               2020         $ Change       % Change
                         (in thousands)
Net revenue    $     540,798           $ 393,719      $ 147,079         37.4  %


Net revenue increased $147.1 million, or 37.4%, for the year ended December 31,
2021 compared to the same period in 2020. The increase in net revenue was
primarily driven by an increase in our Active Customer base to 2.20 million
customers, or a 21.7% increase, as well as an increase in AOV that elevated
average revenue per customer to $246, or a 12.8% increase. AOV increased
primarily due to a higher mix of purchases of glasses with progressive lenses
which increased our total average price per unit sold, while our average units
per order increased moderately year-over-year.

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Due to COVID-19, we temporarily closed our retail stores, which impacted our net revenues for the year ended December 31, 2020 and also caused a shift in purchases through our e-commerce channel.

Cost of Goods Sold, Gross Profit and Gross Margin

                         Year Ended December 31,
                          2021              2020         $ Change      % Change
                             (in thousands)
Cost of goods sold   $    223,049       $ 161,784       $ 61,265         37.9  %
Gross profit              317,749         231,935         85,814         37.0  %
Gross margin                 58.8  %         58.9  %                     (0.1) %


Cost of goods sold increased by $61.3 million, or 37.9%, for the year ended
December 31, 2021 compared to the same period in 2020, and increased as a
percentage of revenue over the same period by 10 basis points, from 41.1% of
revenue to 41.2% of revenue. The increase in cost of goods sold was primarily
driven by increased product and fulfillment costs associated with the growth in
net revenue, as well as an increase in store occupancy and depreciation expense
due to new retail stores opened in 2021 and a full-year of expense from new
retail stores opened throughout 2020.

Gross profit, calculated as net revenue less cost of goods sold, increased by
$85.8 million, or 37.0%, for the year ended December 31, 2021 compared to the
same period in 2020, primarily due to the increase in revenue in 2021 as
compared to 2020.

Gross margin, expressed as a percentage and calculated as gross profit divided
by net revenue, decreased by 10 basis points for the year ended December 31,
2021 compared to the same period in 2020. The decrease in gross margin was
primarily a result of the growth in our contact lens offering, which is sold at
a lower margin than our other eyewear, and a prior year benefit generated from
retroactive tariff refunds. These decreases were partially offset by the impact
of the temporary closure of our retail stores in the year ended December 31,
2020 due to COVID-19. During 2020, we continued to incur retail store occupancy
and depreciation costs while stores were closed which negatively impacted gross
margin in the prior year period.

Selling, general and administrative expenses

                                               Year Ended December 31,
                                              2021                 2020              $ Change               % Change
                                                   (in thousands)
Selling, general, and administrative
expenses                                 $    461,410          $  287,567          $  173,843                      60.5  %
As a percentage of net revenue                   85.3  %             73.0  %                                       12.3  %


Selling, general, and administrative expenses increased $173.8 million, or
60.5%, for the year ended December 31, 2021 compared to the same period in 2020.
This increase was primarily driven by a $64.5 million increase in stock-based
compensation charges and related employer payroll taxes, higher compensation
costs from growth in our workforce, increased marketing costs as we continued to
invest in performance marketing and our Home Try-On program, $28.3 million of
costs incurred with our Direct Listing, and charitable expenses of $7.8 million
for the donation of stock to the Warby Parker Foundation in August 2021. The
stock-based compensation charges incurred in 2021 primarily related to the
satisfaction of the performance based vesting condition for RSUs and PSUs in
connection with our Direct Listing. The same period in the prior year included
elevated stock-based compensation of $41.7 million primarily associated with the
sale of shares by employees to a third-party investor.

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Interest and Other Loss, Net
                                        Year Ended December 31,
                                      2021                      2020       $ Change       % Change
                                            (in thousands)
Interest and other loss, net     $      (347)                 $ (97)      $    (250)       257.7  %
As a percentage of net revenue          (0.1)  %                  -  %                      (0.1) %


Interest and other loss, net decreased by $0.3 million, or 257.7%, for the year
ended December 31, 2021 compared to the same period in 2020. This decrease was
primarily driven by fair value adjustments to outstanding warrants that were
exercised in 2021 and a reduction in interest income due to a lower interest
rate environment, partially offset by lower interest expense due to the
repayment of borrowings under the Credit Facility in August 2020.

Provision for Income Taxes
                                        Year Ended December 31,
                                      2021                      2020       $ Change      % Change
                                            (in thousands)
Provision for income taxes       $      263                   $ 190       $     73         38.4  %
As a percentage of net revenue            -   %                   -  %                        -  %


Provision for income taxes increased $0.1 million, or 38.4%, for the year ended
December 31, 2021 compared to the same period in 2020 primarily due to the
change in pre-tax loss in addition to the tax effects of nondeductible officers'
stock-based compensation expense.

Comparison of the years ended December 31, 2020 and 2019

Net Revenue
                     Year Ended December 31,
                       2020               2019         $ Change      % Change
                         (in thousands)
Net revenue    $     393,719           $ 370,463      $ 23,256          6.3  %


Net revenue increased $23.3 million, or 6.3%, for the year ended December 31,
2020 compared to the same period in 2019. This increase was driven by an
increase of 1.5% in Active Customers from 1.78 million in 2019 to 1.81 million
along with an increase in AOV as orders per Active Customer remained consistent
from 2019 to 2020. The increase in AOV was driven by a higher mix of purchases
of glasses with progressive lenses and with lens treatments (e.g.,
blue-light-filtering, light-responsive) which increased our total average price
per unit sold, while our average units per order remained consistent
year-over-year. Due to COVID-19, we temporarily closed our retail stores, which
impacted our net revenue for the year ended December 31, 2020 and also led to a
shift in purchases through our e-commerce channel.

Cost of Goods Sold, Gross Profit and Gross Margin

                         Year Ended December 31,
                          2020              2019         $ Change      % Change
                             (in thousands)
Cost of goods sold   $    161,784       $ 147,355       $ 14,429          9.8  %
Gross profit              231,935         223,108         88,274          4.0  %
Gross margin                 58.9  %         60.2  %                     (1.3) %


Cost of goods sold increased by $14.4 million, or 9.8%, for the year ended
December 31, 2020 compared to the same period in 2019, and increased as a
percentage of revenue over the same period by 130 basis points, from 39.8% of
revenue to 41.1% of revenue. The increase in cost of goods sold was primarily
driven by increased product and fulfillment costs associated with the growth in
net revenue, as well as an increase in store occupancy and depreciation

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expenses due to new retail stores opened in 2020 and a full year of expenses related to new retail stores opened throughout 2019.

Gross profit, calculated as net revenue less cost of goods sold, increased by
$8.8 million, or 4.0%, for the year ended December 31, 2020 compared to the same
period in 2019, primarily due to the increase in revenue in 2020 as compared to
2019.

Gross margin, expressed as a percentage and calculated as gross profit divided
by net revenue, decreased by 130 basis point for the year ended December 31,
2020 compared to the same period in 2019. The decrease in gross margin was
primarily a result of an increase in costs that are not directly driven by
products sold, including retail store occupancy and depreciation costs and
employee-related costs associated with our prescription services. During 2020,
we continued to incur retail store occupancy and depreciation costs while stores
were closed which negatively impacted gross margin in the prior year period.

Selling, general and administrative expenses

                                               Year Ended December 31,
                                              2020                 2019              $ Change               % Change
                                                   (in thousands)
Selling, general, and administrative
expenses                                 $    287,567          $  224,771          $   62,796                      27.9  %
As a percentage of net revenue                   73.0  %             60.7  %                                       12.3  %


Selling, general, and administrative expenses increased $62.8 million, or 27.9%,
for the year ended December 31, 2020 compared to the same period in 2019. This
increase was primarily driven by a $41.7 million stock-based compensation
charge, or 10.8% of net revenue, in connection with shares held by employees
that were sold to a third-party investor at the same time as our Series G
redeemable convertible preferred stock issuance. Excluding these costs, SG&A
expenses increased $21.1 million or 9.4%. The increase in SG&A as a percentage
of net revenue was primarily driven by an increase in marketing and Home Try-On
costs to support and capitalize on increased demand for at-home shopping due to
the impact of the COVID-19 pandemic. This increase as a percentage of net
revenue was partially offset by a reduction in general corporate overhead
expenses as a percentage of revenue.

Interest and other (loss) income, net

                                            Year Ended December 31,
                                           2020                 2019              $ Change               % Change
                                                (in thousands)

Interest and other (loss) income, net ($97) $1,939

     $   (2,036)                   (105.0) %
As a percentage of net revenue                  -   %              0.5  %                                       (0.5) %


Interest and other (loss) income, net decreased by $2.0 million, or 105.0%, for
the year ended December 31, 2020 compared to the same period in 2019. This
decrease was primarily driven by a reduction in interest income due to a lower
interest rate environment, interest expense on borrowings under the Credit
Facility, and the timing and amounts of cash balances.

Provision for Income Taxes
                                        Year Ended December 31,
                                      2020                      2019       $ Change       % Change
                                            (in thousands)
Provision for income taxes       $      190                   $ 276       $     (86)        31.2  %
As a percentage of net revenue            -   %                 0.1  %                      (0.1) %


Provision for income taxes decreased $0.1 millionor 31.2%, for the year ended
December 31, 2020 compared to the same period in 2019, mainly due to a reduction in state taxes.

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Liquidity and Capital Resources
Since inception, we have financed our operations primarily from net proceeds
from the sale of redeemable convertible preferred stock and cash flows from
operating activities. As of December 31, 2021, we had cash and cash equivalents
of $256.4 million, which was primarily held for working capital purposes, and an
accumulated deficit of $493.2 million.

We expect that operating losses could continue in the foreseeable future as we
continue to invest in the expansion of our business and sales and marketing
activities. We believe our existing cash and cash equivalents, funds available
under our existing credit facility, and cash flows from operating activities
will be sufficient to fund our operations for at least the next 12 months.

However, our future capital requirements will depend on many factors, including,
but not limited to, growth in the number of retail stores, the needs of our
optical laboratories and distribution network, expansion of our product
offerings or service capabilities, and the timing of investments in technology
and personnel to support the overall growth in our business. To the extent that
current and anticipated future sources of liquidity are insufficient to fund our
future business activities and 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 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. In the event that additional financing is required from outside
sources, we may not be able to negotiate terms acceptable to us or at all. In
particular, the recent COVID-19 pandemic has caused disruption in the global
financial markets, which could reduce our ability to access capital and
negatively affect our liquidity in the future. If we are unable to raise
additional capital when required, or if we cannot expand our operations or
otherwise capitalize on our business opportunities because we lack sufficient
capital, our business, results of operations, financial condition, and cash
flows would be adversely affected.

Credit Facility
In August 2013, we entered into the Loan and Security Agreement with Comerica
Bank, or the Credit Facility, as amended, that consists of a revolving credit
line of up to $50.0 million. The revolving credit line has a sub-limit of up to
$15.0 million for the issuance of letters of credit. Borrowings under the
revolving credit line bear interest on the principal amount outstanding at a
variable interest rate based on either LIBOR or the bank's prime rate (as
defined in the credit agreement), with no additional margin. We are charged fees
on the uncommitted portion of the credit line of approximately 0.2% as long as
total borrowings remain less than $15.0 million.

In February and March 2020we borrowed a total of $30.9 million under the credit facility, which was fully repaid in August 2020.

There were no other borrowings outstanding under the Credit Facility other than
letters of credit of $4.0 million and $3.7 million as of December 31, 2021 and
2020, respectively. We enter into standby letters of credit to secure certain
leases in lieu of a cash security deposit.

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

                                                                Year Ended December 31,
                                                          2021           2020           2019
                                                                    (in thousands)

Net cash (used in) provided by operating activities ($31,994) $32,758 $21,394
Net cash used in investing activities

                    (48,513)       (20,070)       (32,632)
Net cash provided by (used in) financing activities       22,999        245,936        (83,362)
Effect of exchange rates on cash                            (161)            37            237

(Decrease) net increase in cash and cash equivalents ($57,669) $258,661 ($94,363)

Cash flow from operating activities Net cash used in operating activities was $32.0 million for the year ended
December 31, 2021consisting of a net loss of $144.3 millionadjusted for
$136.8 million non-cash expenses and $24.5 million net cash used as a result of

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changes in operating assets and liabilities. Net loss includes $28.3 million of
costs related to the Direct Listing. The non-cash charges included $107.1
million of stock-based compensation, $21.9 million of depreciation and
amortization, and $7.8 million of non-cash charitable contributions. The changes
in operating assets and liabilities were primarily driven by an increase in net
inventory to support the growth of our business and prepaid expenses and other
assets, decreases in accounts payable, deferred revenue, partially offset by
increases in accrued expenses and deferred rent.

Net cash provided by operating activities was $32.8 million for the year ended
December 31, 2020, consisting of a net loss of $55.9 million, adjusted for $63.3
million of non-cash expenses and $25.4 million of net cash provided as a result
of changes in operating assets and liabilities. The non-cash charges included
$44.9 million of stock-based compensation and $18.4 million of depreciation and
amortization. The changes in operating assets and liabilities were primarily
driven by an increase in accrued expenses, accounts payable, deferred revenue,
and deferred rent, partially offset by an increase in net inventory to support
the growth of our business.

Net cash provided by operating activities was $21.4 million for the year ended
December 31, 2019, consisting of break-even net income, adjusted for $23.0
million of non-cash expenses and $1.6 million of net cash used as a result of
changes in operating assets and liabilities. The non-cash charges included $14.5
million of depreciation and amortization and $8.5 million of stock-based
compensation. The changes in operating assets and liabilities were primarily
driven by an increase in accounts payable, deferred rent, deferred revenue, and
accrued expenses, partially offset by an increase in net inventory to support
the growth of our business.

Cash Flows from Investing Activities
For the year ended December 31, 2021, net cash used in investing activities was
$48.5 million related to purchases of property and equipment to support our
growth, primarily related to the build-out of new retail stores, as well as
investments in our supply chain infrastructure and capitalized software
development costs.

For the year ended December 31, 2020, net cash used in investing activities was
$20.1 million related to purchases of property and equipment to support our
growth, primarily related to the build-out of new retail stores, as well as
investments in our corporate facilities and capitalized software development
costs.

For the year ended December 31, 2019the net cash used in investing activities was
$32.6 million related to purchases of property, plant and equipment to support our growth, primarily related to the construction of new retail stores, as well as investments in capitalized software development costs.

Cash Flows from Financing Activities
For the year ended December 31, 2021, net cash provided by financing activities
was $23.0 million, which was primarily related to proceeds from repayments of
related party loans and proceeds from stock option exercises, partially offset
by repurchases of stock during the period, including shares repurchased in
connection with our Tender Offer and tax withholdings on exercises and releases
of employee equity awards.

For the year ended December 31, 2020, net cash provided by financing activities
was $245.9 million, which was primarily related to $243.6 million of net
proceeds from our Series F and Series G redeemable convertible preferred stock
issuances.

For the year ended December 31, 2019, net cash used in financing activities was
$83.4 million, which was primarily related to $79.5 million of stock repurchases
made during the year.

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Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
December 31, 2021:

                                                                       Payments Due by Period
                                                     Less than 1                                                       More than 5
                                    Total               year              1 to 3 years           3 to 5 years             years
                                                                           (in thousands)
Operating leases                 $ 173,341          $   28,520          $      61,409          $      44,280          $   39,132
Total                            $ 173,341          $  173,341          $     173,341          $     173,341          $  173,341

For more information about our operating lease obligations, see Note 9. “Commitments and Contingencies” in our consolidated financial statements included in Part II, Item 8 of this Form 10-K. After December 31, 2021we entered into 7 operating leases and extended the terms of 2 existing operating leases for commercial space in the we and Canada. The total commitments under the new agreements are approximately $4.8 million.

Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this
Form 10-K for a description of recently adopted accounting pronouncements and
recently issued accounting pronouncements not yet adopted.

Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of our financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements, as well as
the reported revenue generated and expenses incurred during the reporting
periods, as well as related disclosures. Our estimates are based on our
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities and the
amount of revenue and expenses that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions, and any such differences may be material. We believe that the
accounting policies discussed below are critical to understanding our historical
and future performance, as these policies relate to the more significant areas
involving management's judgments and estimates.

Inventory

Inventory is stated at the lower of cost or net realizable value, with cost
determined on a weighted average cost basis. We continuously evaluate the
composition of our inventory and make adjustments when the cost of inventory is
not expected to be fully recoverable. The estimated net realizable value of
inventory is determined based on an analysis of historical sales trends, the
impact of market trends and economic conditions, and a forecast of future
demand. Adjustments for damaged inventory are recorded primarily based on actual
damaged inventory. Adjustments for inventory shrink, representing the physical
loss of inventory, are estimated based on historical experience and are adjusted
based upon physical inventory counts. Actual results may differ from estimates
due to the quantity and mix of products in inventory, consumer preferences, and
economic and market conditions. Our historical estimates of these costs and the
related provisions have not differed materially from actual results. However,
unforeseen adverse future economic and market conditions, such as those
resulting from disease pandemics and other catastrophic events, could result in
our actual results differing materially from our estimates.

Stock-Based Compensation
We recognize compensation expense for stock-based awards based on the grant date
fair value, on a straight-line basis over the requisite service period of the
awards, which is generally the vesting term of the outstanding stock awards.
Compensation expense for performance awards is recognized when it is determined
that it is probable that the vesting conditions will be satisfied.

We estimate the fair value of options on the date of grant using the
Black-Scholes option-pricing model, which utilizes assumptions subject to
management estimate. These assumptions include estimating the expected term, or
the length of time employees will retain their vested stock options before
exercising them, the estimated volatility of our common stock price over the
expected term, the fair value of our stock, the risk-free interest rate, and the
expected dividend

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yield. Changes in these assumptions can have a significant impact on the estimate of the fair value of stock-based compensation. We track forfeitures as they occur.

The following range of assumptions were used for options granted during the year ended December 31, 2021 (no options were granted in 2020):

                            For the year ended December 31, 2021
Risk-free interest rates                               0.1 - 0.6%
Expected dividend yield                                      -
Expected term                                   0.25 - 6.25 years
Volatility                                                  60  %


Risk-free interest rates: The risk-free interest rates were estimated based on
the yield curve in effect at the time of grant for zero-coupon U.S. Treasury
notes with terms consistent with the expected term of the option awards.

Expected Dividend Yield: The expected dividend yield is nil as we have never declared or paid cash dividends and do not intend to do so in the foreseeable future.

Expected term: The expected term is calculated using the simplified method using
the vesting term of four years and the contractual term of ten years, resulting
in a holding period of 6.25 years. Stock options expire ten years from the date
of the grant.

Volatility: As we do not have sufficient trading history of our common stock,
the volatility rate for the year ended December 31, 2021 was determined based on
an analysis of comparable public company historical volatilities adjusted based
on our stage of development. We intend to continue utilizing similar comparable
companies to estimate volatility until sufficient historical information as to
the volatility of our Class A common stock is available.

The majority of RSUs issued by the Company prior to the Direct Listing vest upon
the satisfaction of both a service and a performance condition. The
service-based vesting condition is satisfied so long as the participant remains
in service and employed by the Company as of each of the vesting dates. The
performance condition was satisfied upon the Company's Direct Listing on
September 29, 2021, and 936,646 RSUs for which the service condition had
previously been satisfied vested and were released to holders. RSUs granted
subsequent to the Direct Listing vest upon the satisfaction of a service based
vesting condition only. The Company will deliver one share of either Class A or
Class B common stock, depending on the terms of the grant, for each vested RSU.

We had concluded that as of December 31, 2020 it was not probable that the
liquidity-event performance-based vesting condition would occur, and therefore
did not record any stock-based compensation expense for any RSUs. Upon our
Direct Listing the liquidity-event performance-based condition was satisfied and
we recorded a cumulative catch-up expense for the service period completed to
such date and began recording stock-based compensation expense using the
accelerated attribution method, net of actual forfeitures, based on the
grant-date fair value of the RSUs for awards where the service period is not
complete. Stock-based compensation expense for RSUs granted after our Direct
Listing is recognized using the straight-line method, net of actual forfeitures.

Common Stock Valuations
Prior to our Direct Listing our common stock was not publicly traded. Our board
of directors exercised significant judgment in determining the fair value of our
common stock on the date of each stock-based grant, with input from management,
based on several objective and subjective factors. In determining the fair value
of our common stock, our board of directors considered the prices of our
redeemable convertible preferred stock sold to outside investors in arms-length
transactions; the rights, preferences, and privileges of our redeemable
convertible preferred stock relative to our common stock; our operating and
financial performance; our stage of development and current business conditions
and projections affecting our business. Such conditions and projections included
the introduction of new products and services; the likelihood of achieving a
liquidity event for the shares of common stock underlying these stock options,
such as a qualified public offering or sale of our company, in light of
prevailing market conditions; any adjustment necessary to recognize a lack of a
liquid trading market for our common stock; the market performance of

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comparable publicly traded companies; and the overall U.S. economic, regulatory,
and capital market conditions. In addition, we also considered any secondary
transactions involving our common stock. In our evaluation of those
transactions, we considered the facts and circumstances of each transaction to
determine the extent to which they represented a fair value exchange. Factors
considered include transaction volume, timing, whether the transactions occurred
among willing and unrelated parties, and whether the transactions involved
investors with access to our financial information.

In valuing our common stock, we first determined the equity value using both the
income and market approach valuation methods. In addition, we also considered
values implied by sales of redeemable convertible preferred and common stock, if
applicable. We then allocated the equity value to our classes of stock using an
option-pricing model, or OPM, or Probability Weighted Expected Return Method, or
PWERM.

The income approach estimates equity value based on the expectation of future
cash flows that a company will generate. These future cash flows, and an assumed
terminal value, are discounted to their present values using a discount rate
based on a weighted-average cost of capital that reflects the risks inherent in
the cash flows. The market approach estimates equity value based on a comparison
of the subject company to comparable public companies in a similar line of
business. From the comparable companies, a representative market value multiple
is determined and then applied to the subject company's financial forecasts to
estimate the value of the subject company.

Once we determined an equity value, we used a combination of approaches to
allocate the equity value to each of our classes of stock. We historically had
used the OPM, and more recently used the OPM in combination with the PWERM. The
OPM allocated values to each equity class by creating a series of call options
on our equity value, with exercise prices based on the liquidation preferences,
participation rights, and strike prices of the equity instruments. Using the
PWERM, the value of our common stock was estimated based upon a
probability-weighted analysis of varying values for our common stock assuming
possible future events, which included an initial public offering, merger or
sale, dissolution, or continued operation as a private company. In determining
the estimated fair value of our common stock, we considered the fact that our
stockholders could not freely trade our common stock in the public markets.
Accordingly, we also applied a lack of marketability discount to the equity
value.

Following our Direct Listing, it is not necessary to estimate the fair value of
our common stock, as the shares are traded in the public market, and the fair
value of our common stock is based on the closing price as reported by the NYSE.

Income Taxes
Management makes estimates, assumptions, and judgments to determine our
provision for income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against deferred tax assets. We utilize the asset
and liability method of accounting for income taxes. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, as well as operating loss, capital loss,
and tax credit carryforwards. Valuation allowances are established against
deferred tax assets if it is more likely than not that they will not be
realized.

Our policy is to recognize interest expense and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

JOBS Act
We currently qualify as an "emerging growth company" under the Jumpstart Our
Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the
option to adopt new or revised accounting guidance either (i) within the same
periods as those otherwise applicable to non-emerging growth companies or (ii)
within the same time periods as private companies. We have elected to adopt new
or revised accounting guidance within the same time period as private companies,
unless management determines it is preferable to take advantage of early
adoption provisions offered within the applicable guidance. Our utilization of
these transition periods may make it difficult to compare our financial
statements to those of non-emerging growth companies and other emerging growth
companies that have opted out of the transition periods afforded under the JOBS
Act.

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