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.
Pioneer of the direct-to-consumer model,
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. 65
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 millionfor 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)
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.
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 66
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 millionand 4.6%, respectively, and for the year ended December 31, 2020, adjusted EBITDA and adjusted EBITDA margin were $7.7 millionand 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. 67
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
Provision for income taxes 263 190
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 $ 21,868Adjusted 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 Parkerglasses 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
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. 69
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 $ 370,463Cost 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
Loss from operations (143,661) (55,632)
Interest and other (loss) income, net (347) (97)
(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
Net Revenue Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Net revenue
$ 540,798 $ 393,719 $ 147,07937.4 % Net revenue increased $147.1 million, or 37.4%, for the year ended December 31, 2021compared 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. 70
Due to COVID-19, we temporarily closed our retail stores, which impacted our net revenues for the year ended
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 $ 61,26537.9 % 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, 2021compared 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, 2021compared 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, 2021compared 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, 2020due 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 $ 173,84360.5 % 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, 2021compared to the same period in 2020. This increase was primarily driven by a $64.5 millionincrease 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 millionof costs incurred with our Direct Listing, and charitable expenses of $7.8 millionfor the donation of stock to the Warby Parker Foundationin 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 millionprimarily associated with the sale of shares by employees to a third-party investor. 71
Table of Contents 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, 2021compared 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 $ 7338.4 % As a percentage of net revenue - % - % - % Provision for income taxes increased $0.1 million, or 38.4%, for the year ended December 31, 2021compared 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
Net Revenue Year Ended December 31, 2020 2019 $ Change % Change (in thousands) Net revenue
$ 393,719 $ 370,463 $ 23,2566.3 % Net revenue increased $23.3 million, or 6.3%, for the year ended December 31, 2020compared 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, 2020and 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 $ 14,4299.8 % 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, 2020compared 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 72
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, 2020compared 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, 2020compared 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 $ 62,79627.9 % 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, 2020compared to the same period in 2019. This increase was primarily driven by a $41.7 millionstock-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 millionor 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
$ (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, 2020compared 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
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 millionfor 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
There were no other borrowings outstanding under the Credit Facility other than letters of credit of
$4.0 millionand $3.7 millionas of December 31, 2021and 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
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
Cash flow from operating activities Net cash used in operating activities was
changes in operating assets and liabilities. Net loss includes
$28.3 millionof costs related to the Direct Listing. The non-cash charges included $107.1 millionof stock-based compensation, $21.9 millionof depreciation and amortization, and $7.8 millionof 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 millionfor the year ended December 31, 2020, consisting of a net loss of $55.9 million, adjusted for $63.3 millionof non-cash expenses and $25.4 millionof net cash provided as a result of changes in operating assets and liabilities. The non-cash charges included $44.9 millionof stock-based compensation and $18.4 millionof 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 millionfor the year ended December 31, 2019, consisting of break-even net income, adjusted for $23.0 millionof non-cash expenses and $1.6 millionof net cash used as a result of changes in operating assets and liabilities. The non-cash charges included $14.5 millionof depreciation and amortization and $8.5 millionof 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 millionrelated 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 millionrelated 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
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 millionof 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 millionof stock repurchases made during the year. 75
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 $ 39,132Total $ 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
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 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 76
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
For the year ended
December 31, 2021Risk-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. Treasurynotes 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, 2021was 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, 2020it 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 77
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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