Item 1. Financial Statements (Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. OVERVIEW, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ContextLogic Inc. and its consolidated subsidiaries (“Wish,” the “Company,” “we,” “us” and “its”) is an ecommerce company that provides a shopping experience that is mobile-first and discovery-based, which connects merchants’ products to users based on user preferences. The Company generates revenue from marketplace and logistics services provided to merchants.
The Company was incorporated in the state of Delaware in June 2010 and is headquartered in San Francisco, California, with significant operations in Canada, China and the Netherlands.
Initial Public Offering
In December 2020, the Company completed its initial public offering (“IPO”) of Class A common stock, in which it sold 46 million shares. The shares were sold at an IPO price of $24.00 per share for net proceeds of approximately $1.1 billion, after deducting underwriting discounts and commissions of approximately $52 million. Additionally, the Company incurred approximately $6 million of offering costs, net of reimbursements. Following the IPO, the Company has two classes of authorized common stock: Class A common stock, which entitles holders to one vote per share, and Class B common stock, which entitles holders to 20 votes per share.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements are unaudited but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results. In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the operating results of Wish and its subsidiaries, for the three and nine months ended September 30, 2021, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The consolidated balance sheet as of December 31, 2020 is derived from audited financial statements, however, it does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on March 25, 2021.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates form the basis for judgments the Company makes about the carrying values of its assets and liabilities that are not readily available from other sources. These estimates include, but are not limited to, fair value of financial instruments, useful lives of long-lived assets, fair value of derivative instruments, assumptions used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria related to performance stock units, incremental borrowing rate applied to lease accounting, contingent liabilities, redemption probabilities associated with Wish Cash, allowances for refunds and chargebacks and uncertain tax positions. Management bases estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. As of September 30, 2021, the effects of the ongoing COVID-19 pandemic on the Company’s business, results of operations, and financial condition continue to evolve. As a result, many of the Company’s estimates and assumptions required increased judgment and these estimates may change materially in future periods.
7
Segments
The Company manages its operations and allocates resources as a single operating segment. Further, the Company manages, monitors and reports its financials as a single reporting segment. The Company’s chief operating decision-maker is its Chief Executive Officer who makes operating decisions, assesses financial performance and allocates resources based on condensed consolidated financial information. As such, the Company has determined that it operates in one reportable segment.
Concentrations of Risk
Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, funds receivable, marketable securities and derivative financial instruments. The Company’s cash and cash equivalents are held on deposit with creditworthy institutions. Although the Company’s deposits exceed federally insured limits, the Company has not experienced any losses in such accounts. The Company invests its excess cash in money market accounts, U.S. Treasury notes, U.S. Treasury bills, commercial paper and corporate bonds. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities for the amounts reflected on the condensed consolidated balance sheets. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer.
The Company maintains certain bank accounts in China. The Company manages the counterparty risk associated with these funds through diversification with major financial institutions and monitors the concentration of this credit risk on a monthly basis. The total cash balance in these accounts represented approximately 10% and 7% of the Company’s total cash and cash equivalents as of September 30, 2021 and December 31, 2020, respectively.
The Company's derivative financial instruments expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. The Company seeks to mitigate such risk by limiting its counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on a monthly basis. The Company is not required to pledge, nor is it entitled to receive, collateral related to its foreign exchange derivative transactions.
The Company is exposed to credit risk in the event of a default by its Payment Service Providers (“PSPs”). The Company does not generate revenue from PSPs. Significant changes in the Company’s relationship with its PSPs could adversely affect users’ ability to process transactions on the Company’s marketplaces, thereby impacting the Company’s operating results.
The following PSPs each represented 10% or more of the Company’s funds receivable balance:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
PSP 1
|
|
|
67
|
%
|
|
|
56
|
%
|
PSP 2
|
|
|
25
|
%
|
|
|
27
|
%
|
Services Risk — The Company serves all its users using third-party data center and hosting providers. The Company has disaster recovery protocols at the third-party service providers. Even with these procedures for disaster recovery in place, access to the Company’s service could be significantly interrupted, resulting in an adverse effect on its operating results and financial position. No significant interruptions of service were known to have occurred during the three and nine months ended September 30, 2021 and 2020.
Summary of Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 25, 2021, that have had a material impact on its condensed consolidated financial statements.
Accounting Pronouncements
The Company has reviewed recent accounting pronouncements and concluded they are either not applicable to the business or no material impact is expected on the condensed consolidated financial statements as a result of future adoption.
8
NOTE 2. DISAGGREGATION OF REVENUE
The Company generates revenue from marketplace and logistics services provided to merchants. Revenue is recognized as the Company transfers control of promised goods or services to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company considers both the merchant and the user to be customers. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk, has latitude in establishing pricing and selecting suppliers, among other factors. Based on these factors, marketplace revenue is generally recognized on a net basis and logistics revenue is generally recognized on a gross basis. Revenue excludes any amounts collected on behalf of third parties, including indirect taxes.
Marketplace revenue includes commission fees collected in connection with user purchases of the merchants’ products. The commission fees vary depending on factors such as user location, demand, product type, product location, and dynamic pricing. The Company recognizes revenue when a user’s order is processed and the related order information has been made available to the merchant. Commission fees are recognized net of estimated refunds and chargebacks. Marketplace revenue also includes ProductBoost revenue for displaying a merchant’s selected products in preferential locations within the Company’s marketplace. The Company recognizes revenue when the merchants’ selected products are displayed. The Company refers to its Core marketplace revenue as marketplace revenue excluding ProductBoost revenue.
The Company’s logistics offering for merchants is designed for direct end-to-end single order shipment from a merchant’s location to the user. Logistics services include transportation and delivery of the merchant’s products to the user. Merchants are required to prepay for logistics services on a per order basis. The Company recognizes revenue over time as the merchant simultaneously receives and consumes the logistics services benefit as the services are performed. The Company uses an output method of progress based on days in transit as it best depicts the Company’s progress toward complete satisfaction of the performance obligation.
The following table shows the disaggregated revenue for the applicable periods:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Core marketplace revenue
|
|
$
|
183
|
|
|
$
|
405
|
|
|
$
|
1,038
|
|
|
$
|
1,300
|
|
ProductBoost revenue
|
|
|
37
|
|
|
|
49
|
|
|
|
137
|
|
|
|
138
|
|
Marketplace revenue
|
|
|
220
|
|
|
|
454
|
|
|
|
1,175
|
|
|
|
1,438
|
|
Logistics revenue
|
|
|
148
|
|
|
|
152
|
|
|
|
621
|
|
|
|
309
|
|
Revenue
|
|
$
|
368
|
|
|
$
|
606
|
|
|
$
|
1,796
|
|
|
$
|
1,747
|
|
Refer to Note 11 – Geographical Information for the disaggregated revenue by geographical location.
Note 3. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT
The Company’s financial instruments consist of cash equivalents, marketable securities, funds receivable, derivative instruments, accounts payable, accrued liabilities and merchants payable. Cash equivalents’ carrying value approximates fair value at the balance sheet dates, due to the short period of time to maturity. Marketable securities and derivative instruments are recognized at fair value. Funds receivable, accounts payable, accrued liabilities and merchants payable carrying values approximate fair value due to the short time to the expected receipt or payment date.
Assets and liabilities recognized at fair value on a recurring basis in the condensed consolidated balance sheets consisting of cash equivalents, marketable securities and derivative instruments are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
9
measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value, in accordance with ASC 820, as follows:
●Level 1: inputs, which include quoted prices in active markets for identical assets or liabilities;
●Level 2: inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
●Level 3: inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2021 or 2020.
Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows:
|
|
September 30, 2021
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in millions)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
64
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
Commercial paper
|
|
|
70
|
|
|
|
—
|
|
|
|
70
|
|
|
|
—
|
|
Corporate bonds
|
|
|
56
|
|
|
|
—
|
|
|
|
56
|
|
|
|
—
|
|
Certificates of deposit
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
Non-U.S. government
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
Total marketable securities
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
—
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Total financial assets
|
|
$
|
220
|
|
|
$
|
64
|
|
|
$
|
156
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Total financial liabilities
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
10
|
|
December 31, 2020
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in millions)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury bills
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
Commercial paper
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
Total cash equivalents
|
|
$
|
74
|
|
|
$
|
35
|
|
|
$
|
39
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
Commercial paper
|
|
|
49
|
|
|
|
—
|
|
|
|
49
|
|
|
|
—
|
|
Corporate bonds
|
|
|
81
|
|
|
|
—
|
|
|
|
81
|
|
|
|
—
|
|
Total marketable securities
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
—
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Total financial assets
|
|
$
|
245
|
|
|
$
|
35
|
|
|
$
|
210
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Total financial liabilities
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
The Company classifies cash equivalents and marketable securities within Level 1 or Level 2 because the Company uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The derivative asset and liability related to the Company’s foreign currency derivative contracts are classified within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, including currency spot and forward rates.
The following table summarizes the contractual maturities of the Company’s marketable securities:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
(in millions)
|
|
Due within one year
|
|
$
|
143
|
|
|
$
|
143
|
|
|
$
|
164
|
|
|
$
|
164
|
|
Due after one year through five years
|
|
|
7
|
|
|
|
7
|
|
|
|
4
|
|
|
|
4
|
|
Total marketable securities
|
|
$
|
150
|
|
|
$
|
150
|
|
|
$
|
168
|
|
|
$
|
168
|
|
All of the Company’s available-for-sale marketable securities are subject to a periodic evaluation for a credit loss allowance and impairment review. The Company did not identify any of its available-for-sale marketable securities requiring an allowance for credit loss or as other-than-temporarily impaired in any of the periods presented. Additionally, the unrealized net gain and net loss on available-for-sale marketable securities as of September 30, 2021 and December 31, 2020 were immaterial.
11
NOTE 4. BALANCE SHEET COMPONENTS
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Vendor services(1)
|
|
$
|
44
|
|
|
$
|
121
|
|
Deferred revenue(2)
|
|
|
13
|
|
|
|
37
|
|
Wish Cash liability(3)
|
|
|
24
|
|
|
|
48
|
|
Sales and indirect taxes payable
|
|
|
34
|
|
|
|
31
|
|
Other
|
|
|
94
|
|
|
|
130
|
|
Total accrued liabilities
|
|
$
|
209
|
|
|
$
|
367
|
|
|
(1)
|
Vendor services decreased by $77 million or 64% primarily due to the Company’s decision to significantly reduce digital advertising expenditures as well as lower logistics related costs arising from lower shipping volumes during the third quarter of 2021 compared to the fourth quarter of 2020.
|
|
(2)
|
Deferred revenue decreased by $24 million or 65% primarily due to lower logistics volumes during the third quarter of 2021 compared to the fourth quarter of 2020.
|
|
(3)
|
While the Company will continue to honor all Wish Cash presented for payment, it may determine the likelihood of redemption to be remote for certain Wish Cash liability balances due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting Wish Cash balances to government agencies under unclaimed property laws, the portion of Wish Cash liability balances not expected to be redeemed are recognized in Core marketplace revenue. The Company recognized approximately $5 million and $26 million of Wish Cash liability breakage in Core marketplace revenue during the three and nine months ended September 30, 2021, respectively.
|
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company conducts business in certain foreign currencies throughout its worldwide operations, and various entities hold monetary assets or liabilities, earn revenues, or incur costs in currencies other than the entity’s functional currency. As a result, the Company is exposed to foreign exchange gains or losses which impact the Company’s operating results. The Company bills its users in their local currencies, primarily in U.S. dollars and Euros, and the Company makes payments to merchants for products sold on the Company’s platforms in various currencies through third party payment service providers, which creates exposure to currency rate fluctuations. The Company hedges these exposures to reduce the risk that its earnings and cash flows will be adversely affected by changes in exchange rates. As part of the Company’s foreign currency risk mitigation strategy, the Company enters into foreign exchange derivative contracts with up to twelve months in duration to hedge exposures for variability in U.S.-dollar equivalent of non-U.S.-dollar denominated cash flows associated with its forecasted revenue related transactions.
The Company’s derivatives transactions are not collateralized and do not include collateralization agreements with counterparties. The Company does not use derivative financial instruments for speculative or trading purposes.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recognized at fair value) as of the end of period consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Cash flow hedges
|
|
$
|
200
|
|
|
$
|
600
|
|
Non-designated hedges
|
|
|
240
|
|
|
|
422
|
|
Total
|
|
$
|
440
|
|
|
$
|
1,022
|
|
12
Fair Value of Derivative Financial Instruments
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Assets(1)
|
|
|
Liabilities(2)
|
|
|
Assets(1)
|
|
|
Liabilities(2)
|
|
|
|
(in millions)
|
|
Derivative designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Derivative not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Total derivatives
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
(1)
|
Derivative assets are included in prepaid and other current assets in the condensed consolidated balance sheets.
|
|
(2)
|
Derivative liabilities are included in accrued liabilities in the condensed consolidated balance sheets.
|
Derivatives in Cash Flow Hedging Relationships
The changes in accumulated other comprehensive income resulting from cash flow hedging were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Balance at the beginning of the period
|
|
$
|
2
|
|
|
$
|
—
|
|
Other comprehensive income before reclassifications
|
|
|
18
|
|
|
|
9
|
|
Amounts recognized in Core marketplace revenue and reclassified out of
accumulated other comprehensive income
|
|
|
(19
|
)
|
|
|
(7
|
)
|
Balance at the end of the period
|
|
$
|
1
|
|
|
$
|
2
|
|
The Company recognizes changes in fair value of the cash flow hedges of foreign currency denominated merchants payable in accumulated other comprehensive loss in its condensed consolidated balance sheets until the forecasted transaction occurs. When the forecasted transaction affects earnings, the Company reclassifies the related gain or loss on the cash flow hedge to Core marketplace revenue. All amounts in other comprehensive income at period end are expected to be reclassified to earnings within 12 months. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company reclassifies the gain or loss on the related cash flow hedge from accumulated other comprehensive loss to Core marketplace revenue. For the three and nine months ended September 30, 2021, there were no net gains or losses recognized in Core marketplace revenue relating to hedges of forecasted transactions that did not occur. The Company did not have a hedging program during the three and nine months ended September 30, 2020.
The Company classifies cash flows related to its cash flow hedges as operating activities in its condensed consolidated statements of cash flows.
Derivatives Not Designated as Hedging Instruments
The net gains on the change in fair value of the Company’s foreign exchange forward contracts not designated as hedging instruments recognized in other income (expense), net in the condensed consolidated statements of operations were approximately $2 million and $13 million for the three and nine months ended September 30, 2021, respectively, and were approximately $1 million for each of the three and nine months ended September 30, 2020.
The Company classifies cash flows related to its non-designated hedging instruments as operating activities in its condensed consolidated statements of cash flows.
13
NOTE 6. OPERATING LEASES
The Company leases its facilities and data center co-locations under operating leases with various expiration dates through 2025.
Total operating lease cost was $3 million and $10 million for the three and nine months ended September 30, 2021, respectively, and $3 million and $9 million for the three and nine months ended September 30, 2020, respectively. Short-term lease costs, variable lease costs and sublease income were not material.
As of September 30, 2021 and December 31, 2020, the Company’s condensed consolidated balance sheets included right-of-use (ROU) assets in the amount of $20 million and $43 million, respectively, and lease liabilities in the amount of $8 million and $14 million in accrued liabilities and $18 million and $38 million in lease liabilities, non-current, respectively.
During the three months ended September 30, 2021, the Company adopted a hoteling model when it reopened its headquarters in San Francisco, California and as a result, it terminated certain office space. The Company also terminated an office space in Los Angeles, California. As a result of these terminations, the Company derecognized the related ROU assets and lease liabilities. The Company recognized impairment and termination related charges of approximately $6 million and included it as part of general and administrative expenses in its condensed consolidated statement of operations for the nine months ended September 30, 2021.
As of September 30, 2021 and December 31, 2020, the weighted-average remaining lease term was 3.3 years and 3.9 years, respectively, and the weighted-average discount rate used to determine the net present value of the lease liabilities was 6%.
Supplemental cash flow information for the Company’s operating leases were as follows:
|
|
Nine Months Ended,
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(in millions)
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
10
|
|
|
$
|
10
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
|
$
|
—
|
|
|
$
|
6
|
|
|
The maturities of the Company’s operating lease liabilities are as follows:
|
|
September 30,
|
|
|
|
2021
|
|
Year ending December 31,
|
|
(in millions)
|
|
2021 (remaining three months)
|
|
$
|
2
|
|
2022
|
|
|
9
|
|
2023
|
|
|
8
|
|
2024
|
|
|
7
|
|
2025
|
|
|
3
|
|
Total lease payments
|
|
|
29
|
|
Less: imputed interest
|
|
|
(3
|
)
|
Present value of lease liabilities
|
|
$
|
26
|
|
14
NOTE 7. COMMITMENTS AND CONTINGENCIES
Revolving Credit Facility
In November 2020, the Company entered into a five-year $280 million senior secured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility contains an accordion option which, if exercised and provided the Company is able to secure additional lender commitments and satisfy certain other conditions, would allow the Company to increase its aggregate commitments by up to $100 million. Interest on any borrowings under the Revolving Credit Facility accrues at either adjusted LIBOR plus 1.50% or at an alternative base rate plus 0.50%, at the Company’s election, and the Company is required to pay a commitment fee that accrues at 0.25% per annum on the unused portion of the aggregate commitments under the Revolving Credit Facility. The Company is required to pay a fee that accrues at 1.50% per annum on the average daily amount available to be drawn under any letters of credit outstanding under the Revolving Credit Facility.
The Revolving Credit Facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company’s ability (and the ability of certain of the Company’s subsidiaries) to incur indebtedness, grant liens, make certain fundamental changes and asset sales, make distributions to stockholders, make investments or engage in transactions with affiliates. It also contains a minimum liquidity financial covenant of $350 million, which includes unrestricted cash and any available borrowing capacity under the Revolving Credit Facility. The obligations under the Revolving Credit Facility are secured by liens on substantially all of the Company’s domestic assets and are guaranteed by any material domestic subsidiaries, subject to customary exceptions. A standby letter of credit in the amount of approximately $10 million has been issued under the Revolving Credit Facility in conjunction with the lease of the Company’s headquarters in San Francisco, California. As of September 30, 2021, the Company had not made any borrowings under the Revolving Credit Facility and it was in compliance with the related covenants.
Purchase Obligations
Effective September 1, 2019, the Company entered into an amendment to a colocation and cloud services arrangement committing the Company to make payments of $120 million for services over 3 years. As of September 30, 2021, the remaining commitment under this amended agreement was approximately $16 million and is payable within the next year.
Legal Contingencies and Proceedings
Beginning in May 2021, four putative class action lawsuits were filed in the U.S. District Court for the Northern District of California against the Company, its directors, certain of its officers and the underwriters named in its IPO registration statement alleging violations of securities laws based on statements made in its registration statement on Form S-1 filed with the SEC in connection with its IPO and seeking monetary damages. One of these cases has since been dismissed by the plaintiff. The Company believes these lawsuits are without merit and it intends to vigorously defend them. Based on the preliminary nature of the proceedings in these cases, the outcome of these matters remains uncertain. Given that the Company is in the early stages of the litigation process, it is unable to estimate the range of potential loss, if any.
In August 2021, a shareholder derivative action purportedly brought on behalf of the Company, Patel v. Szulczewski, Case No. 3:21-cv-06281-TSH, was filed in the U.S. District Court for the Northern District of California alleging that the Company’s directors and officers made or caused the Company to make false and/or misleading statements about the Company’s business operations and financial prospects in various public filings. Plaintiff asserts claims for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, violations of Section 14(a) of the Securities Exchange Act of 1934, and for contribution under Sections 10(b) and 21D of the Exchange Act and is seeking monetary damages. Given that the Company is in the early stages of the litigation process, it is unable to estimate the range of potential loss, if any, but the litigation could subject the Company to substantial costs, divert resources and the attention of management from the Company’s business, and harm the Company’s business and financial results.
As of September 30, 2021 and December 31, 2020, in the opinion of management, there were no other legal contingency matters that arose in the ordinary course of business, either individually or in aggregate, that would have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the information available at the time of the assessment. As additional information becomes available, the Company reassesses the potential liability and may revise the estimate.
15
NOTE 8. EQUITY Award activity and STOCK-based compensation
Equity Award Activity
A summary of activity under the equity plans and related information is as follows:
|
|
Options Outstanding
|
|
|
RSUs Outstanding
|
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (In
Years)
|
|
|
Number of
RSUs
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balances at December 31, 2020
|
|
|
75
|
|
|
$
|
0.234
|
|
|
3.2
|
|
|
|
30
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
28
|
|
Vested(1)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
(7
|
)
|
Exercised
|
|
|
(10
|
)
|
|
$
|
0.241
|
|
|
|
|
|
|
|
—
|
|
Forfeited or cancelled
|
|
|
(1
|
)
|
|
$
|
0.032
|
|
|
|
|
|
|
|
(4
|
)
|
Balances at September 30, 2021(1)
|
|
|
64
|
|
|
$
|
0.236
|
|
|
|
2.0
|
|
|
|
47
|
|
|
(1)
|
Outstanding RSUs as of September 30, 2021 include 11 million performance-based RSUs.
|
The weighted-average grant date fair value of restricted stock units (“RSUs”) granted during the three and nine months ended September 30, 2021 was $7.75 and $11.15 per share, respectively.
Performance Stock Units
In May 2021, the Company’s Board of Directors granted its Executive Chair an equity incentive award in the form of performance-based RSUs (“PSUs”) consisting of approximately 1 million shares of the Company’s common stock, with a grant date fair value per unit of $9.94. The award vests only if the Executive Chair satisfies a service-based vesting condition and if the Company’s stock satisfies a market condition. The award will be eligible to vest if the Company’s average closing stock price over the 30-calendar day period immediately preceding May 15, 2023 (the “Performance Measurement Date”) equals or exceeds a threshold of 149% of the Company’s closing stock price of $12.07 on April 20, 2021, with a maximum level of vesting of 200% based on a maximum stock price achievement level of 298%. The Executive Chair must also remain employed as the Company’s Executive Chair or another senior executive-level position through the Performance Measurement Date.
The Company used a Monte Carlo simulation model to calculate the fair value of the PSUs on the grant date. The Monte Carlo simulation included the following assumptions, determined based on a term equal to the period of time from the grant date to the end of the performance period of two years: 75.00% stock price volatility, 0.16% risk-free rate and a 0% dividend yield. For the three and nine months ended September 30, 2021, the Company recognized approximately $1 million and $2 million of expense, respectively, related to these PSUs. As of September 30, 2021, 1 million of these PSUs remained outstanding and the Company will recognize the remaining $7 million of unrecognized stock-based compensation expense related to these PSUs over a period of 1.6 years.
Stock-Based Compensation Expense
Total stock-based compensation expense included in the condensed consolidated statements of operations is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Cost of revenue
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
Sales and marketing
|
|
|
4
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
Product development
|
|
|
17
|
|
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
General and administrative
|
|
|
4
|
|
|
|
9
|
|
|
|
33
|
|
|
|
9
|
|
Total stock-based compensation
|
|
$
|
30
|
|
|
$
|
9
|
|
|
$
|
104
|
|
|
$
|
9
|
|
|
(1)
|
General and administrative stock-based compensation for the third quarter of 2021 decreased by $11 million or 73% compared to the second quarter of 2021 due to employee departures, including the Company’s former CFO in July.
|
16
The Company will recognize the remaining $315 million and $68 million of unrecognized stock-based compensation expense over a weighted-average period of approximately 2.85 years and 3.20 years related to RSUs and PSUs, respectively.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 2,500 shares on any purchase date. The ESPP provides for 24-month offering periods, generally beginning in November and May of each year, and each offering period consists of four six-month purchase periods. The initial offering period began on January 1, 2021 and will end in November 2022. During the nine months ended September 30, 2021, fewer than 1 million shares of common stock were purchased under the ESPP for an aggregate amount of $3 million. No shares of common stock were purchased under the ESPP during the three months ended September 30, 2021.
On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock on (i) the first trading day of the applicable offering period, or (ii) the last trading day of each purchase period in the applicable offering period. If the stock price of the Company's Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period (ESPP reset). During the nine months ended September 30, 2021, there was an ESPP reset that resulted in an additional expense of approximately $7 million, which is being recognized over an offering period ending May 20, 2023.
The Company uses the Black-Scholes option pricing model to determine the fair value of shares to be purchased under the ESPP with the following assumptions on the date of grant:
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
Expected term (in years)
|
|
|
0.38 to 2.00
|
|
Risk free interest rate
|
|
|
0.02% to 0.17%
|
|
Volatility
|
|
|
46.45% to 96.88%
|
|
Dividend yield
|
|
|
|
0
|
%
|
Estimated fair value per share
|
|
|
$3.91 to $8.05
|
|
NOTE 9. INCOME TAXES
The Company’s tax provision for the interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company assesses its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in the period of change.
The Company’s quarterly tax provision and the estimate of the annual effective tax rate is subject to fluctuation due to several factors, including variability in pre-tax earnings, the geographic distribution of the pre-tax earnings, tax law changes, non-deductible expenses, such as stock-based compensation, and changes in the estimate of the valuation allowance.
The provision for income taxes was $4 million and $11 million for the three and nine months ended September 30, 2021 and was insignificant for the three and nine months ended September 30, 2020. The year-over-year increase in provision for income taxes was primarily related to international operations. The Company continues to maintain a valuation allowance on its domestic net deferred tax assets which is excluded from the annual effective tax rate estimate.
The Company had immaterial unrecognized tax benefits as of September 30, 2021 and December 31, 2020, fully offset by a valuation allowance. These unrecognized tax benefits, if recognized, would not affect the effective tax rate. No interest or penalties were incurred during the three and nine months ended September 30, 2021 and 2020.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. All tax returns will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credits. Certain tax years are subject to foreign income tax examinations by tax authorities until the statute of limitations expire.
17
NOTE 10. Net loss per share
The Company presents basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Prior to the completion of the IPO, all series of redeemable convertible preferred stock were considered participating securities. Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into shares of Class B common stock. The Company has not allocated net loss attributable to common stockholders to redeemable convertible preferred stock in any period presented because the holders of its redeemable convertible preferred stock were not contractually obligated to share in losses.
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by giving effect to potentially dilutive common stock equivalents outstanding during the period, as their effect would be dilutive. Potentially dilutive common shares include participating securities and shares issuable upon the exercise of stock options, the exercise of common stock warrants, the vesting of RSUs and each purchase under the 2020 ESPP, under the treasury stock method.
In loss periods, basic net loss per share and diluted net loss per share are the same, as the effect of potential common shares is anti-dilutive and therefore excluded.
The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the Company’s undistributed earnings or losses are allocated on a proportionate basis among the holders of both Class A and Class B common stock. As a result, the net income (loss) per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.
The following table sets forth the computation of basic and diluted net loss per share:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64
|
)
|
|
$
|
(99
|
)
|
|
$
|
(303
|
)
|
|
$
|
(176
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net loss per share, basic and diluted
|
|
|
628
|
|
|
|
108
|
|
|
|
623
|
|
|
|
107
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(1.64
|
)
|
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share because including them would have had an anti-dilutive effect:
|
|
As of September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Redeemable convertible preferred stock, all series
|
|
|
—
|
|
|
|
422
|
|
Series B warrant
|
|
|
—
|
|
|
|
10
|
|
Warrant to purchase common stock
|
|
|
—
|
|
|
|
1
|
|
Common stock options outstanding
|
|
|
64
|
|
|
|
75
|
|
Unvested restricted stock units outstanding(1)
|
|
|
47
|
|
|
|
50
|
|
Employee Stock Purchase Plan
|
|
|
3
|
|
|
|
—
|
|
Total
|
|
|
114
|
|
|
|
558
|
|
|
(1)
|
Unvested restricted stock units outstanding as of September 30, 2021 include 11 million performance-based RSUs.
|
18
NOTE 11. GEOGRAPHICAL INFORMATION
The Company believes it is relevant to disclose geographical revenue information on both a demand basis, determined by the ship-to address of the user, and on a supply basis, determined by the location of the merchants’ operations.
Core marketplace revenue by geographic area based on the ship-to address of the user is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in millions)
|
|
Europe
|
|
$
|
70
|
|
|
|
38
|
%
|
|
$
|
181
|
|
|
|
45
|
%
|
|
$
|
483
|
|
|
|
47
|
%
|
|
$
|
564
|
|
|
|
43
|
%
|
North America(1)
|
|
|
78
|
|
|
|
43
|
%
|
|
|
158
|
|
|
|
39
|
%
|
|
|
413
|
|
|
|
40
|
%
|
|
|
548
|
|
|
|
42
|
%
|
South America
|
|
|
10
|
|
|
|
5
|
%
|
|
|
23
|
|
|
|
6
|
%
|
|
|
45
|
|
|
|
4
|
%
|
|
|
70
|
|
|
|
6
|
%
|
Other
|
|
|
25
|
|
|
|
14
|
%
|
|
|
43
|
|
|
|
10
|
%
|
|
|
97
|
|
|
|
9
|
%
|
|
|
118
|
|
|
|
9
|
%
|
Core marketplace revenue
|
|
$
|
183
|
|
|
|
100
|
%
|
|
$
|
405
|
|
|
|
100
|
%
|
|
$
|
1,038
|
|
|
|
100
|
%
|
|
$
|
1,300
|
|
|
|
100
|
%
|
|
(1)
|
United States accounted for $63 million and $343 million of Core marketplace revenue for the three and nine months ended September 30, 2021, respectively and $130 million and $460 million for the three and nine months ended September 30, 2020, respectively.
|
China accounted for substantially all of marketplace and logistics revenue during the three and nine months ended September 30, 2021 and 2020 based on the location of the merchants’ operations.
The Company’s long-lived tangible assets, which consist of property and equipment, net and operating lease right-of-use assets, net, located in the United States were 84% and 87% of the total long-lived tangible assets as of September 30, 2021 and December 31, 2020, respectively. The long-lived tangible assets outside the United States were located in China, Canada and the Netherlands.
NOTE 12. SUBSEQUENT EVENT
On November 8, 2021, Piotr Szulczewski informed the Board of Directors of the Company of his resignation from his position as Chief Executive Officer (“CEO”) of the Company, with such resignation to be effective the earlier of: (i) February 1, 2022; or (ii) the date the Board appoints a new CEO of the Company. Mr. Szulczewski will continue to serve on the Board.
In December 2020, the Company’s Board of Directors granted Mr. Szulczewski PSUs consisting of 10 million shares of the Company’s Class B common stock, with a weighted-average grant date fair value per unit of $7.76. To vest in the PSUs, Mr. Szulczewski must remain employed as the Company’s CEO through the second anniversary of its IPO in December 2020. As a result of Mr. Szulczewski’s resignation as the Company’s CEO before the second anniversary of its IPO, he is no longer expected to vest in the award, and as such, the PSUs are expected to be cancelled. Consequently, the Company expects to reverse during the fourth quarter of 2021 approximately $16 million of stock-based compensation that it recognized through September 30, 2021 related to these PSUs.
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