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.
CONTEXTLOGIC INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. OVERVIEW, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ContextLogic Inc. (“Wish” or the “Company”) 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 additional operations in Canada, China and the Netherlands.
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”). 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 the Company’s quarterly results. The consolidated balance sheet as of December 31, 2021 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 14, 2022 (the “2021 Form 10-K”).
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, incremental borrowing rate applied to lease accounting, contingent liabilities, redemption probabilities associated with Wish Cash, allowances for refunds and chargebacks and uncertain tax positions. As of March 31, 2022, 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.
Segments
The Company manages its operations and allocates resources as a single operating segment. Further, the Company manages, monitors and reports its financial results as a single reporting segment. The Company’s chief operating decision-maker is its Chief Executive Officer (“CEO”) 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.
6
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 and marketable securities. 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, corporate bonds, and non-U.S. government securities. 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 15% of the Company’s total cash and cash equivalents as of March 31, 2022 and December 31, 2021.
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:
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
PSP 1 |
|
|
64 |
% |
|
|
62 |
% |
PSP 2 |
|
|
25 |
% |
|
|
32 |
% |
Services Risk — The Company serves all of 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 months ended March 31, 2022 and 2021.
Summary of Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in its 2021 Form 10-K, filed with the SEC on March 14, 2022, 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.
7
NOTE 2. DISAGGREGATION OF REVENUE
The Company generates revenue from marketplace and logistics services provided to its customers. 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 and 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
The Company provides a mix of marketplace services to its customers. The Company provides merchants access to its marketplace where merchants display and sell their products to users. The Company also provides ProductBoost services to help merchants promote their products within the Company’s marketplace.
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, 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 marketplace revenue, excluding ProductBoost revenue, as its core marketplace revenue.
Logistics 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 logistics 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 |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Core marketplace revenue |
|
$ |
90 |
|
|
$ |
477 |
|
ProductBoost revenue |
|
|
14 |
|
|
|
50 |
|
Marketplace revenue |
|
|
104 |
|
|
|
527 |
|
Logistics revenue |
|
|
85 |
|
|
|
245 |
|
Revenue |
|
$ |
189 |
|
|
$ |
772 |
|
Refer to Note 11 – Geographical Information for the disaggregated revenue by geographical location.
8
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 measurement date.
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:
|
|
March 31, 2022 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(in millions) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
— |
|
|
$ |
— |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
195 |
|
|
$ |
— |
|
|
$ |
195 |
|
|
$ |
— |
|
Commercial paper |
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
Corporate bonds |
|
|
41 |
|
|
|
— |
|
|
|
41 |
|
|
|
— |
|
Certificates of deposit |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Non-U.S. government |
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
Total marketable securities |
|
$ |
269 |
|
|
$ |
— |
|
|
$ |
269 |
|
|
$ |
— |
|
Prepaid and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
— |
|
Total financial assets |
|
$ |
283 |
|
|
$ |
10 |
|
|
$ |
273 |
|
|
$ |
— |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Total financial liabilities |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
9
|
|
December 31, 2021 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(in millions) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
— |
|
|
$ |
— |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills |
|
$ |
53 |
|
|
$ |
— |
|
|
$ |
53 |
|
|
$ |
— |
|
Commercial paper |
|
|
39 |
|
|
|
— |
|
|
|
39 |
|
|
|
— |
|
Corporate bonds |
|
|
57 |
|
|
|
— |
|
|
|
57 |
|
|
|
— |
|
Certificates of deposit |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
Non-U.S. government |
|
|
13 |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
Total marketable securities |
|
$ |
167 |
|
|
$ |
— |
|
|
$ |
167 |
|
|
$ |
— |
|
Prepaid and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
— |
|
Total financial assets |
|
$ |
184 |
|
|
$ |
13 |
|
|
$ |
171 |
|
|
$ |
— |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
Total financial liabilities |
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
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:
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Amortized
Cost |
|
|
Estimated
Fair Value |
|
|
Amortized
Cost |
|
|
Estimated
Fair Value |
|
|
|
(in millions) |
|
Due within one year |
|
$ |
260 |
|
|
$ |
260 |
|
|
$ |
150 |
|
|
$ |
150 |
|
Due after one year through five years |
|
|
9 |
|
|
|
9 |
|
|
|
17 |
|
|
|
17 |
|
Total marketable securities |
|
$ |
269 |
|
|
$ |
269 |
|
|
$ |
167 |
|
|
$ |
167 |
|
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 March 31, 2022 and December 31, 2021 were immaterial.
10
NOTE 4. BALANCE SHEET COMPONENTS
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021(1) |
|
|
|
(in millions) |
|
Logistics costs(2) |
|
$ |
43 |
|
|
$ |
56 |
|
Deferred revenue and customer deposits |
|
|
22 |
|
|
|
25 |
|
Wish Cash liability(3) |
|
|
19 |
|
|
|
20 |
|
Sales and indirect taxes(4) |
|
|
20 |
|
|
|
26 |
|
Others |
|
|
46 |
|
|
|
47 |
|
Total accrued liabilities |
|
$ |
150 |
|
|
$ |
174 |
|
|
(1) |
The amounts previously disclosed in the Company’s 2021 Form 10-K were realigned to ensure consistency with the amounts reflected as of March 31, 2022. |
|
(2) |
Logistics costs decreased by $13 million or 23% primarily due to lower shipping volumes during the first quarter of 2022 compared to the fourth quarter of 2021. |
|
(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 $1 and $3 million of Wish Cash liability breakage in core marketplace revenue during the first quarter of 2022 and the fourth quarter of 2021, respectively. |
|
(4) |
Sales and indirect taxes decreased by $6 million or 23% primarily due to less taxes collected in connection with lower order volumes during the first quarter of 2022 compared to the fourth quarter of 2021. |
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 derivative contracts and foreign exchange forward 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:
|
|
March 31,
2022 |
|
|
December 31, 2021 |
|
|
|
(in millions) |
|
Cash flow hedges |
|
$ |
310 |
|
|
$ |
320 |
|
Non-designated hedges |
|
|
(26 |
) |
|
|
54 |
|
Total |
|
$ |
284 |
|
|
$ |
374 |
|
11
Fair Value of Derivative Financial Instruments
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Assets(1) |
|
|
Liabilities(2) |
|
|
Assets(1) |
|
|
Liabilities(2) |
|
|
|
(in millions) |
|
Derivative designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Derivative not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
1 |
|
Total derivatives |
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
1 |
|
(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:
|
|
March 31,
2022 |
|
|
December 31, 2021 |
|
|
|
(in millions) |
|
Balance at the beginning of the period |
|
$ |
2 |
|
|
$ |
2 |
|
Other comprehensive income before reclassifications |
|
|
2 |
|
|
|
22 |
|
Amounts recognized in core marketplace revenue and reclassified out of accumulated other comprehensive income |
|
|
(2) |
|
|
|
(22 |
) |
Balance at the end of the period |
|
$ |
2 |
|
|
$ |
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 months ended March 31, 2022 and 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 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 were approximately $1 and $4 million for the three months ended March 31, 2022 and 2021, respectively, and were recognized in other income, net in the condensed consolidated statements of operations.
The Company classifies cash flows related to its non-designated hedging instruments as operating activities in its condensed consolidated statements of cash flows.
12
NOTE 6. OPERATING LEASES
The Company leases its facilities and data center colocations under operating leases with various expiration dates through 2025.
Total operating lease cost was $2 million and $4 million for the three months ended March 31, 2022 and 2021, respectively. Short-term lease costs and variable lease costs and sublease income were not material.
In February 2022, the Company’s Board of Directors approved a restructuring plan, which included exiting various office leases. As a result, the Company ceased using certain office spaces. As the carrying value of the related right-of-use assets and leasehold improvements exceeded the estimated fair value, the Company recognized an impairment loss of $4 million, which is included as part of general and administrative expenses in its condensed consolidated financial statements for the three months ended March 31, 2022. Of the $4 million total impairment loss, approximately $2 million related to the impairment of operating right-of-use assets and approximately $2 million primarily relates to impairment of leasehold improvements. See Note 12. Restructuring Costs for more information about the Company’s restructuring plan.
As of March 31, 2022 and December 31, 2021, the Company’s condensed consolidated balance sheets included right-of-use assets in the amount of $14 million and $18 million, respectively, and current lease liabilities in the amount of $9 million in accrued liabilities as of both periods, and $14 million and $16 million in lease liabilities, non-current, respectively.
As of March 31, 2022 and December 31, 2021, the weighted-average remaining lease term was 3 years, and the weighted-average discount rate used to determine the net present value of the lease liabilities was 6% for both periods.
Supplemental cash flow information for the Company’s operating leases were as follows:
|
|
Three months ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
3 |
|
|
$ |
4 |
|
The maturities of the Company’s operating lease liabilities are as follows:
|
|
March 31, |
|
|
|
2022 |
|
Year ending December 31, |
|
(in millions) |
|
2022 (remaining nine months) |
|
|
7 |
|
2023 |
|
|
8 |
|
2024 |
|
|
7 |
|
2025 |
|
|
3 |
|
Total lease payments |
|
|
25 |
|
Less: imputed interest |
|
|
(2) |
|
Present value of lease liabilities |
|
$ |
23 |
|
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”). If the Company is able to secure additional lender commitments and satisfy certain other conditions, the aggregate facility commitments can be increased by up to $100 million through an accordion option. The Company also enters into letters of credit from time to time, which reduces its borrowing capacity under the Revolving Credit Facility. 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.
13
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 $7 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 March 31, 2022, the Company had not made any borrowings under the Revolving Credit Facility and it was in compliance with the related covenants. Fees incurred under the Revolving Credit Facility were insignificant for the three months ended March 31, 2022 and 2021.
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 March 31, 2022, the remaining commitment under this amended agreement was approximately $7 million and is payable within the current year.
Legal Contingencies
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 initial public offering (“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.
In August 2021, a shareholder derivative action purportedly brought on behalf of the Company, Patel v. Szulczewski, 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 Exchange Act, and for contribution under Sections 10(b) and 21D of the Exchange Act and is seeking monetary damages.
In November 2021, a shareholder derivative action purportedly brought on behalf of the Company, Aviv v. Szulczewski, was filed in the U.S. District Court for the Northern District of California alleging that the Company’s directors breached their fiduciary duties and caused the Company to make misstatements relating to a leased property that allegedly was used for commercial purposes in violation of zoning ordinances. Plaintiff asserts claims for breach of fiduciary duties, unjust enrichment, and violations of Section 14(a) of the Exchange Act, and is seeking monetary damages and restitution. Given that this, and the above described matters, are in the early stages of the litigation process, the Company 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 our business, and harm the Company’s business and financial results.
In November 2021, France’s Directorate General for Competition, Consumer Affairs and Repression of Fraud (“DGCCRF”) issued an injunction delisting the Wish “App” from Google Play and the Apple App Store, and blocking Wish from appearing in Google, Bing and Qwant search results on the premise that unsafe products or products of poor quality are available for purchase on Wish. The injunction could expose Wish to civil and criminal penalties. The Company has taken immediate measures to challenge the injunction, and to suspend and lift it. In December 2021, the French Administrative Court upheld the injunction, but in so doing noted that the injunction is not permanent and encouraged the Company and DGCCRF to engage with one another directly to develop a timeline and/or plan for the lifting of the injunction. While that decision is the subject of appeals currently pending in French Court, the Company has been in direct contact with DGCCRF as well. In addition to the appeal, the Company has filed other administrative challenges to the injunction and the agency’s interpretation enforcement thereof.
14
In December 2021, the Company became aware that authorities in France charged Wish with legal violations relating to the Company’s former practice and use of strikethrough pricing in France, the Company’s previous failure to translate into French listings and product details on the Company’s app and website, and the Company’s anti-counterfeiting policies and practices. The Company disputes the charges and is preparing to defend itself at a hearing scheduled for June 2022. Any adverse outcome could result in payment of substantial fines, payments to allegedly impacted consumer groups, harm to the Company’s reputation, loss of rights, or adverse changes to the Company’s offerings or business practices in France. Any of these results could adversely affect the Company’s business. In addition, defending claims may be costly and may impose a significant burden on the Company’s management.
As of March 31, 2022, 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 will reassess the potential liability and may revise the estimate.
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, 2021(1) |
|
|
45 |
|
|
$ |
0.254 |
|
|
2.5 |
|
|
|
48 |
|
Granted |
|
|
6 |
|
|
$ |
2.860 |
|
|
|
|
|
|
|
52 |
|
Vested |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
(4 |
) |
Exercised |
|
|
(1 |
) |
|
$ |
0.138 |
|
|
|
|
|
|
|
— |
|
Forfeited or cancelled |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
(16 |
) |
Balances at March 31, 2022 |
|
|
50 |
|
|
$ |
0.593 |
|
|
|
3.3 |
|
|
|
80 |
|
|
(1) |
Outstanding restricted stock units (“RSUs”) as of December 31, 2021 include 11 million performance stock units (“PSUs”), which were cancelled in February 2022. |
The weighted-average grant date fair value of RSUs granted during the three months ended March 31, 2022 and 2021 was $1.86 and $22.01 per share, respectively. As of March 31, 2022, 13 million shares remained available for grant under the Company’s equity incentive plans.
Performance Stock Units
On January 31, 2022, Piotr Szulczewski stepped down from his position as CEO of the Company. Due to his resignation prior to the second anniversary of the Company’s IPO, Mr. Szulcewski is no longer eligible to vest in his PSUs, and as such, the PSUs were canceled. Consequently, the Company reversed $21 million of previously recognized stock-based compensation expense related to these PSUs in the first quarter of 2022.
In February 2022, Jacqueline Reses resigned from her position as Executive Chair. Upon her resignation, Ms. Reses entered into a consulting agreement with the Company and her PSU award was modified to eliminate the market condition, with only continued service until the expiration of the consulting agreement being the sole vesting condition. Consequently, the Company reversed $3 million of previously recognized stock-based compensation expense upon modification and will recognize the modified fair value of approximately $2 million from the modification date to the expiration date of the consulting agreement, which is May 16, 2023.
15
2022 Inducement Plan
In January 2022, the Company’s Board of Directors adopted and approved the 2022 Inducement Plan (“2022 Plan). The Company intends that the 2022 Plan be reserved for persons to whom the Company may issue securities without stockholder approval as an inducement of employment pursuant to Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, LLC. The 2022 Plan provides for the award of options, stock appreciation rights, restricted shares, and RSUs of the Company’s Class A common stock to the Company’s employees. Stock-based awards under the 2022 Plan that expire or are forfeited, cancelled, or repurchased generally are returned to the pool of shares of Class A common stock available for issuance under the 2022 Plan. The aggregate number of shares reserved for issuance under this plan shall not exceed the sum of 12 million shares plus additional common shares returned to the pool of shares available for issuance. As of March 31, 2022, 1 million shares under the 2022 Plan remained available for grant.
Stock Option Valuation
In January 2022, the Company entered into an employment agreement with Vijay Talwar, as the Company’s new CEO, with employment commencing on February 1, 2022. As an inducement of employment, Mr. Talwar was granted, i) 5 million RSUs with an aggregate grant date fair value of $13 million and ii) options to purchase 6 million shares of the Company’s Class A common stock at an exercise price of $2.86 per share with an aggregate grant date fair value of $12 million. These RSUs and options were granted under the 2022 Plan and will become vested and exercisable, respectively, in periodic installments over a 4-year term, subject to the CEO’s continued employment with the Company. The option award has a term of 10 years.
The fair value of options was estimated using the Black-Scholes option pricing model which takes into account inputs such as the exercise price, the value of the underlying shares as of the grant date, expected term, expected volatility, risk free interest rate, and dividend yield. The fair value of the options was determined using the methods and assumptions discussed below:
|
• |
The expected term of the options was determined using the “simplified” method as prescribed in the SEC’s Staff Accounting Bulletin No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data. |
|
• |
The risk-free interest rate was based on the interest rate payable on the U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. |
|
• |
The expected volatility was based on the historical volatility of the publicly traded common stock of peer group companies blended with the limited historical volatility of the Company’s own common stock weighted to reflect the short trading period of the Company’s stock since its IPO in December 2020. |
|
• |
The expected dividend yield was zero because the Company has not historically paid and does not expect to pay a dividend on its ordinary shares in the foreseeable future. |
A summary of the assumptions used in the Black-Scholes option pricing model to determine the fair value of the options is as follows:
|
|
Black-Scholes |
|
|
|
Assumptions |
|
Expected term (in years) |
|
|
6.10 |
|
Risk free interest rate |
|
|
1.70 |
% |
Volatility |
|
|
73.20 |
% |
Dividend yield |
|
|
— |
|
Estimated fair value per share |
|
$1.87 |
|
16
Stock-Based Compensation Expense
Total stock-based compensation expense included in the condensed consolidated statements of operations is as follows:
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Cost of revenue |
|
$ |
(1) |
|
|
$ |
5 |
|
Sales and marketing |
|
|
1 |
|
|
|
3 |
|
Product development |
|
|
14 |
|
|
|
15 |
|
General and administrative |
|
|
(16) |
|
|
|
14 |
|
Total stock-based compensation(1) |
|
$ |
(2) |
|
|
$ |
37 |
|
|
(1) |
Total stock-based compensation for the three months ended March 31, 2022 decreased by $39 million compared to the three months ended March 31, 2021 primarily due to forfeitures originating from the resignation of the Company’s former CEO, reductions to the Company’s workforce as part of the Company’s February 2022 Restructuring Plan, and modifications to the Company’s former Executive Chair’s equity awards. |
The Company will recognize the remaining $12 million and $300 million of unrecognized stock-based compensation expense over a weighted-average period of approximately 3.9 years and 2.8 years related to options and RSUs, respectively.
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 insignificant and $2 million for the three months ended March 31, 2022 and 2021, respectively. The year-over-year decrease in provision for income taxes was primarily related to a decrease in pre-tax earnings of the Company’s 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 $1 million of unrecognized tax benefits as of March 31, 2022 and December 31, 2021. These unrecognized tax benefits, if recognized, would affect the effective tax rate. The interest and penalties associated with the unrecognized tax benefits for the three months ended March 31, 2022 and 2021 were immaterial.
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 computes net loss per share attributable to common stockholders using the two-class method required for multiple classes of common stock and participating securities. 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
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(60 |
) |
|
$ |
(128 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net loss per share, basic and diluted |
|
|
661 |
|
|
|
619 |
|
Net loss per share, basic and diluted |
|
$ |
(0.09 |
) |
|
$ |
(0.21 |
) |
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 March 31, |
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
(in millions) |
|
|
Warrant to purchase common stock |
|
|
— |
|
|
|
1 |
|
|
Common stock options outstanding |
|
|
50 |
|
|
|
73 |
|
|
Unvested restricted stock units outstanding(1) |
|
|
80 |
|
|
|
28 |
|
|
Employee Stock Purchase Plan |
|
|
3 |
|
|
|
1 |
|
|
Total |
|
|
133 |
|
|
|
103 |
|
|
|
(1) |
Unvested RSUs outstanding as of March 31, 2021 included 10 million PSUs, which were cancelled in February 2022. |
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 March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Europe |
|
$ |
34 |
|
|
|
38 |
% |
|
$ |
235 |
|
|
|
49 |
% |
North America(1) |
|
|
43 |
|
|
|
48 |
% |
|
|
186 |
|
|
|
39 |
% |
South America |
|
|
3 |
|
|
|
3 |
% |
|
|
18 |
|
|
|
4 |
% |
Other |
|
|
10 |
|
|
|
11 |
% |
|
|
38 |
|
|
|
8 |
% |
Core marketplace revenue(2) |
|
$ |
90 |
|
|
|
100 |
% |
|
$ |
477 |
|
|
|
100 |
% |
|
(1) |
The United States accounted for $35 million and $156 million of core marketplace revenue for the three months ended March 31, 2022 and 2021, respectively. |
China accounted for substantially all of marketplace and logistics revenue during the three months ended March 31, 2022 and 2021 based on the location of the merchants’ operations.
18
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 85% of the total long-lived tangible assets as of March 31, 2022 and December 31, 2021. The long-lived tangible assets outside the United States were located in China, Canada and the Netherlands.
NOTE 12. Restructuring Costs
In February 2022, the Company’s Board of Directors approved the February 2022 Restructuring Plan (“Restructuring Plan”) to refocus the Company’s operations to support sustainable long-term growth, better align resources, and improve operational efficiencies. The Restructuring Plan includes i) reducing the Company’s headcount by approximately 15% (or approximately 190 positions), ii) exiting various office leases, and iii) reducing and realigning vendor expenditures. The Company expects the Restructuring Plan to be substantially implemented by the end of fiscal year 2022.
During the three months ended March 31, 2022, the Company recorded charges of approximately $3 million in severance and other personnel reductions costs for terminated employees and $4 million in impairments of lease assets and property and equipment. The Company anticipates that related severance payments will continue to occur into the second quarter of 2022.
NOTE 13. SUBSEQUENT EVENTS
In May 2022, the Company filed a Form S-8 to register an additional 15 million shares towards its 2022 Plan. The Company intends the additional shares to be used exclusively for grants of equity as an inducement to individuals who were not previously employees or directors of the Company. As of the filing date of this Quarterly Report on Form 10-Q, 16 million shares under the 2022 Plan remained available for grant.
19