BLUE APRON HOLDINGS A You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 18, 2020 . The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled "Risk Factors" under Part II, Item 1A, below. In this discussion, we use financial measures that are considered non-GAAP financial measures underSecurities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is included elsewhere in this Quarterly Report on Form 10-Q. Investors should not consider non-GAAP financial measures in isolation from or in substitution for financial information presented in compliance withU.S. generally accepted accounting principles. In the below discussion, we use the term basis points to refer to units of one-hundredth
of one percent. Overview
Blue Apron creates incredible experiences. Founded in 2012, we are building a consumer lifestyle brand that symbolizes the emotional human connections that are formed through the cooking experiences we create. Our core product is the meal experience we help our customers create. These experiences extend from discovering new recipes, ingredients, and cooking techniques to preparing meals with families and loved ones to sharing photos and stories of culinary triumphs. Central to these experiences are the original recipes we design and send along with fresh, seasonally inspired ingredients directly to our customers. We do this by employing technology and expertise across many disciplines - demand planning, recipe creation, recipe merchandising, and marketing - to drive our end-to-end value chain. We offer our customers two flexible plans-our 2-Serving Plan and our 4-Serving Plan. We also sell wine, which can be paired with our meals, through Blue Apron Wine, our direct-to-consumer wine delivery service. Through Blue Apron Market, our e-commerce market, we sell a curated selection of cooking tools, utensils, pantry items, and add-on products for different culinary occasions which are tested and recommended by our culinary team.
Key Financial and Operating Metrics
We use the following key financial and operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. You should read the key financial and operating metrics in conjunction with the following discussion of our results of operations and financial condition together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on
Form
10-Q.
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Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands)
Net revenue $ 112,253 $ 99,490 $ 345,150 $ 360,546
Adjusted EBITDA $ (4,706) $ (13,151) $ 631 $ (28)
Net cash from (used in) operating activities $ (7,121) $ (7,790) $ (4,052) $ (5,572)
Free cash flow $ (9,058) $ (8,866) $ (8,829) $ (9,472)
Three Months Ended
September 30, December 31, March 31, June 30, September 30,
2019 2019 2020 2020 2020
Orders (in thousands) 1,726 1,622 1,763 2,152 1,917
Customers (in thousands) 386 351 376 396 357
Average Order Value $ 57.60 $ 58.14 $ 57.68 $ 60.88 $ 58.56
Orders per Customer 4.5 4.6 4.7 5.4 5.4Average Revenue per Customer $ 258 $ 269 $
271$ 331 $ 314 Orders We define Orders as the number of paid orders by our Customers across our meal, wine, and market products sold on our e-commerce platforms in any reporting period, inclusive of orders that may have eventually been refunded or credited to customers. Orders, together with Average Order Value, is an indicator of the net revenue we expect to recognize in a given period. We view Orders delivered as a key indicator of our scale and financial performance. Orders has limitations as a financial and operating metric as it does not reflect the product mix chosen by our customers or the purchasing behavior of our customers. Because of these and other limitations, we consider, and you should consider, Orders in conjunction with our other metrics, including net revenue, net income (loss), adjusted EBITDA, net cash from (used in) operating activities, free cash flow, Average Order Value and Orders per Customer.
Customers
We determine our number of Customers by counting the total number of individual customers who have paid for at least one Order fromBlue Apron across our meal, wine, or market products sold on our e-commerce platforms in a given reporting period. For example, the number of Customers in the three months endedSeptember 30, 2020 was determined based on the total number of individual customers who paid for at least one Order across our meal, wine, or market products in the quarter endedSeptember 30, 2020 . We view the number of Customers as a key indicator of our scale and financial performance. Customers has limitations as a financial and operating metric as it does not reflect the product mix chosen by our customers, Order frequency, or the purchasing behavior of our customers. Because of these and other limitations, we consider, and you should consider, Customers in conjunction with our other metrics, including net revenue, net income (loss), adjusted EBITDA, net cash from (used in) operating activities, free cash flow, Orders per Customer and Average Revenue per Customer.
Average Order Value
We define Average Order Value as our net revenue from our meal, wine, and market products sold on our e-commerce platforms in a given reporting period divided by the number of Orders in that period. We view Average Order Value as a key indicator of the mix of our product offerings chosen by our customers, the mix of promotional discounts, and the purchasing behavior of our customers.
Orders per Customer
We define Orders per Customer as the number of Orders in a given reporting
period divided by the number of Customers in that period. We view Orders per
Customer as a key indicator of our customers' purchasing patterns, including
their repeat purchase behavior.
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Average Revenue per Customer
We define Average Revenue per Customer as our net revenue from our meal, wine, and market products sold on our e-commerce platforms in a given reporting period divided by the number of Customers in that period. We view Average Revenue per Customer as a key indicator of our customers' purchasing patterns, including their repeat purchase behavior.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined by us as net income (loss) before interest income (expense), net, other operating expense, other income (expense), net, benefit (provision) for income taxes, depreciation and amortization and share-based compensation expense. We have presented adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating adjusted EBITDA can produce a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA provides useful information in understanding and evaluating our operating results. Please see "Non-GAAP Financial Measures" for a discussion of the use of non-GAAP financial measures and for a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable measure calculated in accordance with GAAP.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that is calculated as net cash from (used in) operating activities less purchases of property and equipment. We have presented free cash flow in this Quarterly Report on Form 10-Q because it is used by our management and board of directors as an indicator of the amount of cash we generate or use and to evaluate our ability to satisfy current and future obligations and to fund future business opportunities. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our ability to satisfy our financial obligations and pursue business opportunities, and allowing for greater transparency with respect to a key financial metric used by our management in their financial and operational decision-making. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt repayments or capital lease obligations that are not deducted from the measure. Additionally, other companies, including companies in our industry, may calculate free cash flow differently, which reduces its usefulness as a comparative measure. Please see "Non-GAAP Financial Measures" for a discussion of the use of non-GAAP financial measures and for a reconciliation of free cash flow to net cash from (used in) operating activities, the most directly comparable measure calculated in accordance with GAAP.
Impact of COVID-19 on our Business
The COVID-19 pandemic had a material impact on our consolidated financial
statements for the three and nine months ended
Since lateMarch 2020 , we have experienced a significant increase in demand primarily as a result of changes to consumer behaviors resulting from the various restrictions that have been enacted throughout much ofthe United States in response to the COVID-19 pandemic, which continue to be in effect to varying levels acrossthe United States . This increased demand may not continue at current levels, if at all, depending on the duration and severity of the COVID-19 pandemic, the length of time that COVID-19 related restrictions continue to stay in effect to a significant extent and for economic and operating conditions, and consumer behaviors to resume to levels prior to the COVID-19 pandemic and numerous other uncertainties.
In response to the increased demand, we have taken action to increase capacity at our fulfillment centers, including continuing to hire new personnel and temporarily reducing variety in menu options, which limits the need to
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change production lines and allows for more time to pack meal kits. During the COVID-19 pandemic, we have also seen higher than normal rates of absenteeism among our fulfillment center workforce and, at times, we have experienced difficulty in hiring a sufficient number of employees to adequately staff our fulfillment centers. As a result, we have also closed, and may again in the future close, some weekly offering cycles early to cap orders as we continue to increase headcount to meet demand. At the same time, we have taken a variety of safety measures following federal, state and local guidelines at our fulfillment centers' operations. These safety measures include enhanced daily cleaning and disinfection policies, enhanced personal hygiene efforts and implementing social distancing efforts and awareness throughout the fulfillment centers. To date, while we have held production at times in order to implement some of our enhanced sanitation measures, we have not experienced significant disruptions in our fulfillment centers and we have not experienced any significant disruptions in our supply chain or any significant carrier interruptions or delays. Furthermore, in response to the increased demand, we intentionally slowed and adjusted our marketing spend in the short-term, but we increased our marketing spend at the end of the second quarter and we have reengaged, and expect to continue to reengage, in additional marketing spend as part of our previously announced growth strategy to retain existing and attract new customers. As a result of the challenges we have seen from time to time in hiring a sufficient workforce to adequately staff our fulfillment centers and in order to manage increased demand, we also made a decision to delay certain new product offerings that are part of our growth strategy, which may negatively impact net revenue in future periods. The impact of the COVID-19 pandemic may have other adverse impacts on our business, operations, and financial results and condition, including, among other things, as a result of adverse impacts on our management team, our employees, our fulfillment center operations, consumer behaviors and on the overall economy. Significant uncertainty exists regarding the magnitude and duration of the economic and social effects of the COVID-19 pandemic and therefore we cannot predict the full extent of the positive or negative impacts this will have on our business, operations, and financial results and condition in future periods. In particular, the positive trends on our operating results that we saw in the three and nine months endedSeptember 30, 2020 may not continue at current levels, if at all, and in future periods, trends may return to levels experienced in periods prior to the COVID-19 pandemic.
Please see "Risk Factors" under Part II, Item 1A for further discussion regarding risks associated with the COVID-19 pandemic.
Components of Our Results of Operations
Net Revenue
We generate net revenue primarily from the sale of meals to customers through our 2-Serving and 4-Serving Plans. We also generate net revenue through sales of Blue Apron Wine, which we began offering inSeptember 2015 , and through sales on Blue Apron Market, which we launched inNovember 2014 . For the three months and nine months endedSeptember 30, 2020 and 2019, we derived substantially all of our net revenue from sales of our meals through our direct-to-consumer platform. We deduct promotional discounts, actual customer credits and refunds as well as customer credits and refunds expected to be issued to determine net revenue. Customers who receive a damaged meal or wine order or are dissatisfied with a meal or wine order and contact us within seven days of receipt of the order may receive a full or partial refund, full or partial credit against future purchase, or replacement, at our sole discretion. Credits only remain available for customers who maintain a valid account with us. Customers who return an unused, undamaged Blue Apron Market product within 30 days of receipt receive a full refund. Our business is seasonal in nature and, as a result, our revenue and expenses and associated revenue trends fluctuate from quarter to quarter. For example, prior to the economic and social impact of the COVID-19 pandemic in 2020, we historically anticipated that the first quarter of each year will generally represent our strongest quarter in terms of customer engagement. Conversely, during the summer months and the end of year holidays, when people are vacationing more often or have less predictable weekly routines, we historically anticipated lower customer engagement. We cannot predict the ongoing impact that the COVID-19 pandemic may have on seasonality, although even with the continued expected year-over-year positive impact on our business from the COVID-19 pandemic in the fourth quarter of 2020, we currently anticipate that we will see lower quarterly sequential net revenue in the fourth quarter of 2020 than we saw in the third quarter of 2020. In addition, our net revenue is impacted by our marketing strategies, including the timing and amount of paid advertising and promotional activity. For example, prior to the impact of the COVID-19 27
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pandemic on demand for our product, our deliberate reduction in marketing expenses to focus on the marketing channels we believe to be the most efficient and target consumers that we believe will exhibit higher affinity and retention has negatively impacted our net revenue. In addition, in order to manage heightened demand, we made a decision to temporarily cut back on certain existing product offerings and delay certain future new product offerings to meet increased demand relating to the COVID-19 pandemic, which may impact net revenue in future periods. Credit card charges are recorded in deferred revenue until the criteria for revenue recognition have been met. Because we generally charge credit cards in advance of shipment and, historically, customers have most frequently requested delivery of their meals earlier in the week, our deferred revenue balance at the end of a financial reporting period may fluctuate significantly based on the day of the week on which that period ends. Consequently, large changes in deferred revenue at any particular time are not meaningful indicators of our financial results or future revenue trends.
Cost of Goods Sold, excluding Depreciation and Amortization
Cost of goods sold, excluding depreciation and amortization, consists of product and fulfillment costs. Product costs include the cost of food, packaging for food that is portioned prior to delivery to customers, labor and related personnel costs incurred to portion food for our meals, inbound shipping costs, and cost of products sold through Blue Apron Wine andBlue Apron Market. Fulfillment costs consist of costs incurred in the shipping and handling of inventory, including the shipping costs to our customers, labor and related personnel costs related to receiving, inspecting, warehousing, picking inventory, and preparing customer orders for shipment, and the cost of packaging materials and shipping supplies. In the near-term we expect that these expenses will be higher because of the various actions taken to increase capacity and safety measures at our fulfillment centers in response to the COVID-19 pandemic. Over time, we expect such expenses to decrease as a percentage of net revenue as we continue to focus on operational improvements and optimizing our fulfillment center operations. Marketing Our marketing expenses consist primarily of costs incurred to acquire new customers, retain existing customers, and build our brand awareness through various online and offline paid channels, including digital and social media, television, direct mail, radio and podcasts, email, brand activations, and certain variable and fixed payments to strategic brand partnerships. Also included in marketing expenses are the costs of orders through our customer referral program, in which certain existing customers may invite others to receive a complimentary meal delivery, as well as costs paid to third parties to market our products. The cost of the customer referral program is based on our costs incurred for fulfilling a complimentary meal delivery, including product and fulfillment costs. We expect marketing expenses to continue to comprise a significant portion of our operating expenses in support of our growth strategy, while also continuing to focus on efficiency and our customer acquisition strategy to target consumers that we believe will exhibit high affinity and retention through marketing channels we believe to be the most efficient. We anticipate that our marketing strategies, including the timing and extent of our marketing investments, will be informed by our strategic priorities, including our ability to implement our growth strategy, the sufficiency of our cash resources, the seasonal trends in our business, and the competitive landscape of our market, and will fluctuate from quarter-to-quarter and have a significant impact on our quarterly results of operations. We also anticipate that our near-term marketing strategies and investments will be impacted by the COVID-19 pandemic, and we may reduce or increase marketing expenditures in future periods to continue to help us manage demand to meet future capacity constraints. 28
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Product, Technology, General and Administrative
Product, technology, general and administrative expenses consist of costs related to the development of our products and technology, general and administrative expenses, and overhead expenses, which include: payroll and related expenses for employees involved in the application, production, and maintenance of our platform and other technology infrastructure costs; payroll and related expenses for employees performing corporate and other managerial functions; facilities' costs such as occupancy and rent costs for our corporate offices and fulfillment centers; and payment processing fees, professional fees, and other general corporate and administrative costs. Over time, we expect such expenses to decrease as a percentage of net revenue as we realize the savings from our closure of theArlington facility and we continue to focus on cost optimization.
Depreciation and Amortization
Depreciation and amortization consists of depreciation expense for our property and equipment and amortization expense for capitalized software development costs.
Other Operating Expense
Other operating expense includes charges related to theArlington facility closure announced inFebruary 2020 , a non-cash gain, net of a termination fee, on theFairfield lease termination inMarch 2020 , a charge for an estimated legal settlement inAugust 2020 , charges related to theArlington facility downsizing announced inJanuary 2019 , and impairment losses on long-lived assets inSeptember 2019 .
Interest Income (Expense), Net
Interest income and expense consists primarily of interest expense associated with our revolving credit facility, capital lease financings, and build-to-suit lease financings offset by interest income on cash and cash equivalents balances.
Benefit (Provision) for Income Taxes
Our benefit (provision) for income taxes and our effective tax rates are affected by permanent differences between GAAP and statutory tax laws, certain one-time items, and the impact of valuation allowances. For the three months endedSeptember 30, 2020 and 2019, we recorded nominal tax expense, resulting in an effective tax rate of (0.1)% and (0.0)%, respectively. For the nine months endedSeptember 30, 2020 and 2019, we recorded nominal tax expense, resulting in an effective tax rate of (0.1)% and (0.1)%, respectively. We continue to maintain a valuation allowance for federal and certain state tax jurisdictions. Our tax provision results from state taxes in a jurisdiction in which net operating losses were not available to offset our tax obligation. As ofDecember 31, 2019 , we hadU.S. federal net operating loss carryforwards of$364.0 million and state net operating loss carryforwards of$136.1 million . Under the Tax Cuts and Jobs Act, or theU.S. Tax Act (as amended by the Coronavirus Aid, Relief, and Economic Security Act, or "CARES Act"), the use of the federal net operating loss carryforwards generated during the years endedDecember 31, 2019 and 2018 are limited to 80% of our taxable income in any future taxable year beginning afterDecember 31, 2020 , although such losses may be carried forward indefinitely. The state net operating loss carryforwards may be subject to limitations under applicable tax laws and will expire at various dates beginning in 2033, if not utilized. 29 Table of Contents Results of Operations The following sets forth our consolidated statements of operations data for each of the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands) Net revenue$ 112,253 $ 99,490 $ 345,150 $ 360,546 Operating expenses: Cost of goods sold, excluding depreciation and amortization 74,499 67,393 213,005 221,570 Marketing 10,862 12,127 37,455 36,074 Product, technology, general and administrative 33,687 35,333 100,397 109,599 Depreciation and amortization 5,871 7,303 18,799 24,279 Other operating expense 1,100 1,261 4,567 1,491 Total operating expenses 126,019 123,417 374,223 393,013 Income (loss) from operations (13,766) (23,927) (29,073) (32,467) Interest income (expense), net (1,482) (2,260) (5,178) (6,718) Income (loss) before income taxes (15,248) (26,187) (34,251) (39,185) Benefit (provision) for income taxes (14) (9) (42) (34) Net income (loss)$ (15,262) $ (26,196) $ (34,293) $ (39,219)
The following table sets forth our consolidated statements of operations data as a percentage of net revenue for each of the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of goods sold, excluding
depreciation and amortization 66.4 % 67.7 % 61.7 % 61.5 %
Marketing 9.7 % 12.2 % 10.9 % 10.0 %
Product, technology, general and
administrative 30.0 % 35.5 % 29.1 % 30.4 %
Depreciation and amortization 5.2 % 7.3 % 5.4 % 6.7 %
Other operating expense 1.0 % 1.3 % 1.3 % 0.4 %
Total operating expenses 112.3 % 124.0 % 108.4 % 109.0 %
Income (loss) from operations (12.3) % (24.0) % (8.4) % (9.0) %
Interest income (expense), net (1.3) % (2.3) % (1.5) % (1.9) %
Income (loss) before income taxes (13.6) % (26.3) % (9.9) % (10.9) %
Benefit (provision) for income taxes (0.0) % (0.0) % (0.0) % (0.0) %
Net income (loss) (13.6) % (26.3) % (9.9) % (10.9) %
Three Months Ended September 30, 2020 Compared to Three Months Ended September
30, 2019
Net Revenue
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)
Net revenue $ 112,253 $ 99,490 13 %
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Net revenue increased by $12.8 million , or 13%, to $112.3 million for the three
months ended September 30, 2020 from $99.5 million for the three months ended
September 30, 2019 . The increase in net revenue was primarily due to an increase
in Orders per Customer and Average Order Value during the three months ended
September 30, 2020 as customers chose to order more frequently and more meals
per order as a result of, in part, the COVID-19 related restrictions that
remained in effect to varying degrees during the third quarter of 2020
throughout much of the United States .
Operating Expenses
Cost of Goods Sold, excluding Depreciation and Amortization
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)
Cost of goods sold, excluding depreciation and
amortization $ 74,499 $ 67,393 11 %
% of net revenue 66.4 % 67.7 %
Cost of goods sold, excluding depreciation and amortization, increased by
$7.1 million , or 11%, to $74.5 million for the three months ended September 30,
2020 from $67.4 million for the three months ended September 30, 2019 . This
increase was primarily driven by an increase in Orders. As a percentage of net
revenue, cost of goods sold, excluding depreciation and amortization, decreased
to 66.4% for the three months ended September 30, 2020 from 67.7% for the three
months ended September 30, 2019 . The decrease in cost of goods sold, excluding
depreciation and amortization, as a percentage of net revenue, was primarily due
to:
a decrease of 320 basis points in shipping and fulfillment packaging costs
? largely driven by operational and pricing improvements and increased use of
more cost-effective fulfillment packaging; partially offset by
an increase of 100 basis points in labor costs largely due to increased usage
of higher-priced temporary labor, as well as wage increases and attendance
? bonuses put in place as incentives for frontline employees to increase capacity
at our fulfillment centers to meet increased demand resulting from the COVID-19
pandemic; and
an increase of 90 basis points in food and product packaging primarily due to
? the increased usage of higher-priced pre-packaged fresh produce to facilitate
and improve capacity at our fulfillment centers.
Marketing
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)
Marketing $ 10,862 $ 12,127 (10) %
% of net revenue 9.7 % 12.2 %
Marketing expenses decreased by$1.2 million , or 10%, to$10.9 million for the three months endedSeptember 30, 2020 from$12.1 million for the three months endedSeptember 30, 2019 . The decrease was seen across all marketing channels. As a percentage of net revenue, marketing expenses decreased to 9.7% for the three months endedSeptember 30, 2020 from 12.2% for the three months endedSeptember 30, 2019 . This decrease as a percentage of net revenue included a decrease of 140 basis points in online paid channels, a decrease of 70 basis points in offline paid channels and a decrease of 40 basis points in our customer referral program primarily driven by a decrease in the mix of customer referral orders versus total Orders. 31
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Product, Technology, General and Administrative
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)Product, technology, general and administrative$ 33,687 $ 35,333 (5) % % of net revenue 30.0 % 35.5 %
Product, technology, general and administrative expenses decreased by
? a decrease of
? a decrease of
fulfillment centers, including occupancy and rent; partially offset by
? an increase of
bonuses.
As a percentage of net revenue, product, technology, general and administrative
expenses decreased 550 basis points to 30.0% for the three months ended
Depreciation and Amortization
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)
Depreciation and amortization
5.2 % 7.3 %
Depreciation and amortization decreased by $1.4 million , or 20%, to $5.9 million
for the three months ended September 30, 2020 from $7.3 million for the three
months ended September 30, 2019 . This decrease was primarily driven by
impairment charges and write-offs on long-lived assets. As a percentage of net
revenue, depreciation and amortization decreased to 5.2% for the three months
ended September 30, 2020 from 7.3% for the three months ended September 30,
2019 .
Other Operating Expense
Other operating expense for the three months endedSeptember 30, 2020 and 2019 was$1.1 million and$1.3 million , respectively. Other operating expense for the three months endedSeptember 30, 2020 represents a$1.1 million charge related to an estimated legal settlement. Other operating expense for the three months endedSeptember 30, 2019 represents non-cash impairment charges on long-lived assets primarily related to the reprioritization of initiatives to support our growth strategy, respectively. 32
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Income (Loss) from Operations
Three Months Ended
September 30,
2020 2019 % Change
(In thousands)
Income (loss) from operations
(12.3) % (24.0) %
Income (loss) from operations for the three months ended September 30, 2020 and
2019 was $(13.8) million and $(23.9) million , respectively. This change was due
to an increase in net revenue of $12.8 million , which was partially offset by an
increase in operating expenses of $2.6 million . As a percentage of net revenue,
income (loss) from operations was (12.3)% and (24.0)% for the three months ended
September 30, 2020 and 2019, respectively. This improvement was primarily driven
by decreases as a percentage of net revenue across all operating expenses for
the reasons set forth above.
Interest Income (Expense), Net
Interest income (expense), net for the three months endedSeptember 30, 2020 and 2019 was$(1.5) million and$(2.3) million , respectively. This decrease in interest income (expense), net was primarily due to a decrease in interest expense associated with build-to-suit lease financings of$0.6 million as a result of theFairfield lease termination and a decrease of$0.6 million of interest expense incurred on outstanding borrowings under our revolving credit facility, partially offset by decreased interest income on cash and cash equivalents of$0.4 million in the three months endedSeptember 30, 2020 .
Benefit (Provision) for Income Taxes
The provision for income taxes recorded in the three months endedSeptember 30, 2020 and 2019, respectively, reflects state income taxes in a jurisdiction in which net operating losses were not available to offset our tax obligation. Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Net Revenue Nine Months Ended September 30, 2020 2019 % Change (In thousands) Net revenue$ 345,150 $ 360,546 (4) % 33 Table of Contents Net revenue decreased by$15.3 million , or 4%, to$345.2 million for the nine months endedSeptember 30, 2020 from$360.5 million for the nine months endedSeptember 30, 2019 . The decrease in net revenue was primarily due to a decrease in Customers during the nine months endedSeptember 30, 2020 as a result of the continuing impact of the deliberate reduction in marketing spend in prior periods while we continue to strategically invest in the marketing channels we believe to be the most efficient and target consumers that we believe will exhibit higher affinity and retention.
Operating Expenses
Cost of Goods Sold, excluding Depreciation and Amortization
Nine Months Ended
September 30,
2020 2019 % Change
(In thousands)
Cost of goods sold, excluding depreciation and
amortization $ 213,005 $ 221,570 (4) %
% of net revenue 61.7 % 61.5 %
Cost of goods sold, excluding depreciation and amortization, decreased by
$8.6 million , or 4%, to $213.0 million for the nine months ended September 30,
2020 from $221.6 million for the nine months ended September 30, 2019 . This
decrease was primarily driven by a decrease in Orders. As a percentage of net
revenue, cost of goods sold, excluding depreciation and amortization, increased
to 61.7% for the nine months ended September 30, 2020 from 61.5% for the nine
months ended September 30, 2019 . The increase in cost of goods sold, excluding
depreciation and amortization, as a percentage of net revenue, was primarily due
to:
an increase of 100 basis points in labor costs largely due to increased usage
of higher-priced temporary labor, as well as wage increases and attendance
? bonuses put in place as incentives for frontline employees to increase capacity
at our fulfillment centers to meet increased demand resulting from the COVID-19
pandemic; partially offset by
a decrease of 80 basis points in shipping and fulfillment packaging largely
? driven by operational and pricing improvements and increased usage of more
cost-effective fulfillment packaging.
Marketing
Nine Months Ended
September 30,
2020 2019 % Change
(In thousands)
Marketing $ 37,455 $ 36,074 4 %% of net revenue 10.9 % 10.0 % Marketing expenses increased by$1.4 million , or 4%, to$37.5 million for the nine months endedSeptember 30, 2020 from$36.1 million for the nine months endedSeptember 30, 2019 . The increase was seen across various offline and online paid channels, partially offset by a decrease in our customer referral program. As a percentage of net revenue, marketing expenses increased to 10.9% for the nine months endedSeptember 30, 2020 from 10.0% for the nine months endedSeptember 30, 2019 . This increase as a percentage of net revenue included an increase of 90 basis points in online paid channels, an increase of 40 basis points in offline paid channels, partially offset by a decrease of 40 basis points in our customer referral program primarily driven by a decrease in the mix of customer referral orders versus total Orders. 34
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Product, Technology, General and Administrative
Nine Months Ended
September 30,
2020 2019 % Change
(In thousands)Product, technology, general and administrative$ 100,397 $ 109,599 (8) % % of net revenue 29.1 % 30.4 %
Product, technology, general and administrative expenses decreased by
a decrease of
? which includes a decrease of
lower net revenue;
? a decrease of
fulfillment centers, including occupancy and rent; and
? a decrease of
headcount in corporate and other managerial positions.
As a percentage of net revenue, product, technology, general and administrative expenses decreased 130 basis points to 29.1% for the nine months endedSeptember 30, 2020 from 30.4% for the nine months endedSeptember 30, 2019 primarily due to continued focus on expense management and optimization of our cost structure. InFebruary 2020 , we announced the closure of ourArlington, Texas fulfillment center and the consolidation of production volume from ourArlington, Texas fulfillment center to ourLinden, New Jersey andRichmond, California fulfillment centers. As a result, during the nine months endedSeptember 30, 2020 , we incurred charges of approximately$8.4 million , including$7.6 million of non-cash impairment charges on long-lived assets,$0.4 million of employee-related expenses, primarily consisting of severance payments, and$0.4 million of other exit costs, substantially all of which resulted in cash expenditures. We estimate annual savings of approximately$8.0 million .
Depreciation and Amortization
Nine Months Ended
September 30,
2020 2019 % Change
(In thousands)
Depreciation and amortization
5.4 % 6.7 %
Depreciation and amortization decreased by $5.5 million , or 23%, to
$18.8 million for the nine months ended September 30, 2020 from $24.3 million
for the nine months ended September 30, 2019 . This decrease was primarily driven
by impairment charges and write-offs on long-lived assets. As a percentage of
net revenue, depreciation and amortization decreased to 5.4% for the nine months
ended September 30, 2020 from 6.7% for the nine months ended September 30, 2019 .
Other Operating Expense
Other operating expense for the nine months endedSeptember 30, 2020 and 2019 was$4.6 million and$1.5 million , respectively. Other operating expense for the nine months endedSeptember 30, 2020 represents charges of$8.4 million related to theArlington facility closure announced inFebruary 2020 , including$7.6 million of non-cash impairment charges on long-lived assets,$0.4 million of employee-related expenses, primarily consisting of severance payments, and$0.4 million of other exit costs, partially offset by a$4.9 million non-cash gain, net of a$1.5 million termination fee, on theFairfield lease termination inMarch 2020 , as well as a$1.1 million charge for an estimated legal 35
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settlement. Other operating expense for the nine months endedSeptember 30, 2019 includes$1.3 million of non-cash impairment charges on long-lived assets primarily related to the reprioritization of initiatives to support our growth strategy and$0.2 million of employee-related expenses consisting of severance payments relating to theArlington facility downsizing announced inJanuary 2019 .
Income (Loss) from Operations
Nine Months Ended
September 30,
2020 2019 % Change
(In thousands)
Income (loss) from operations
(8.4) % (9.0) %
Income (loss) from operations for the nine months ended September 30, 2020 and
2019 was $(29.1) million and $(32.5) million , respectively. This change was due
to a decrease in net revenue of $15.4 million , which was partially offset by a
decrease in operating expenses of $18.8 million . As a percentage of net revenue,
income (loss) from operations was (8.4)% and (9.0)% for the nine months ended
September 30, 2020 and 2019, respectively. This decrease was primarily driven by
decreases as a percentage of net revenue in product, technology, general and
administrative expenses and depreciation and amortization, partially offset by
an increase in other operating expense, marketing expenses and cost of goods
sold, excluding depreciation and amortization as a percentage of net revenue for
the reasons set forth above.
Interest Income (Expense), Net
Interest income (expense), net for the nine months endedSeptember 30, 2020 and 2019 was$(5.2) million and$(6.7) million , respectively. This decrease in interest income (expense), net was primarily due to a decrease of$1.6 million in interest expense incurred on outstanding borrowings under our revolving credit facility, a decrease of$1.2 million associated with build-to-suit lease financings as a result of theFairfield lease termination, partially offset by decreased interest income on cash and cash equivalents of$1.3 million in the nine months endedSeptember 30, 2020 .
Benefit (Provision) for Income Taxes
The provision for income taxes recorded in the nine months endedSeptember 30, 2020 and 2019, respectively, reflects state income taxes in a jurisdiction in which net operating losses were not available to offset our tax obligation.
Non-GAAP Financial Measures
To provide additional information regarding our financial results, we monitor and have presented within this Quarterly Report on Form 10-Q adjusted EBITDA and free cash flow, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed byU.S. generally accepted accounting principles, or GAAP, and are not necessarily comparable to similarly-titled measures presented by other companies. We define adjusted EBITDA as net income (loss) before interest income (expense), net, other operating expense, other income (expense), net, benefit (provision) for income taxes, depreciation and amortization, and share-based compensation expense. We have presented adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating adjusted EBITDA can produce a useful measure for period-to-period comparisons of our business. We use adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that adjusted EBITDA provides useful information to investors 36 Table of Contents
and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making. Our adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the most directly comparable GAAP equivalent. Some of these limitations are:
adjusted EBITDA excludes share-based compensation expense, as share-based
? compensation expense has recently been, and will continue to be for the
foreseeable future, a significant recurring expense for our business and an
important part of our compensation strategy;
adjusted EBITDA excludes depreciation and amortization expense and, although
? these are non-cash expenses, the assets being depreciated may have to be
replaced in the future;
adjusted EBITDA excludes other operating expense, as other operating expense
? represents a charge for an estimated legal settlement, non-cash impairment
charges on long-lived assets, a non-cash gain, net of a termination fee, on
lease termination, and restructuring costs;
? adjusted EBITDA does not reflect interest expense, or the cash requirements
necessary to service interest, which reduces cash available to us;
? adjusted EBITDA does not reflect income tax payments that reduce cash available
to us; and
? other companies, including companies in our industry, may calculate adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
We define free cash flow as net cash from (used in) operating activities less purchases of property and equipment. We have presented free cash flow in this Quarterly Report on Form 10-Q because it is used by our management and board of directors as an indicator of the amount of cash we generate or use and to evaluate our ability to satisfy current and future obligations and to fund future business opportunities. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our ability to satisfy our financial obligations and pursue business opportunities, and allowing for greater transparency with respect to a key financial metric used by our management in their financial and operational decision-making. Our free cash flow is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of free cash flow rather than net cash from (used in) operating activities, which is the most directly comparable GAAP equivalent. Some of these limitations are:
free cash flow is not a measure of cash available for discretionary
? expenditures since we have certain non-discretionary obligations such as debt
repayments or capital lease obligations that are not deducted from the measure;
and
? other companies, including companies in our industry, may calculate free cash
flow differently, which reduces its usefulness as a comparative measure.
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Because of these limitations, we consider, and you should consider, adjusted
EBITDA and free cash flow together with other financial information presented in
accordance with GAAP.
The following tables present a reconciliation of these non-GAAP measures to the
most directly comparable measure calculated in accordance with GAAP, for each of
the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands)
Reconciliation of net income (loss) to adjusted
EBITDA
Net income (loss) $ (15,262) $ (26,196) $ (34,293) $ (39,219)
Share-based compensation 2,089 2,212 6,338 6,669Depreciation and amortization 5,871 7,303 18,799 24,279 Other operating expense 1,100 1,261 4,567 1,491 Interest (income) expense, net 1,482 2,260 5,178 6,718 Provision (benefit) for income taxes 14 9
42 34
Adjusted EBITDA $ (4,706) $ (13,151) $ 631 $ (28)
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands)
Reconciliation of net cash from (used in)
operating activities to free cash flow
Net cash from (used in) operating activities $ (7,121) $ (7,790) $ (4,052) $ (5,572)
Purchases of property and equipment (1,937) (1,076) (4,777) (3,900) Free cash flow$ (9,058) $ (8,866) $ (8,829) $ (9,472)
Liquidity and Capital Resources
Our cash requirements are principally for working capital and capital expenditures to support our business, including investments at our fulfillment centers. InAugust 2016 , we entered into a revolving credit and guaranty agreement (the "revolving credit facility") that would have matured inAugust 2021 . As discussed below, inOctober 2020 , we fully repaid and terminated the revolving credit facility with the proceeds of our senior secured term loan and cash on hand. We also finance our operations through payments received from customers. OnAugust 10, 2020 , we completed an underwritten public offering (the "offering"), pursuant to our universal shelf registration statement filed with theSecurities and Exchange Commission onApril 29, 2020 , of 4,000,000 shares of our Class A common stock, resulting in$32.9 million of proceeds, net of underwriting discounts and commissions and offering costs. The net proceeds from the offering were subject to the mandatory prepayment provisions of the revolving credit facility, and a portion of the proceeds was consequently used to make a repayment of$10.8 million of the borrowings outstanding under our revolving credit facility. Total outstanding debt, net of debt issuance costs, was$43.2 million as ofSeptember 30, 2020 and$53.5 million as ofDecember 31, 2019 . As ofSeptember 30, 2020 , we had$43.8 million in outstanding borrowings,$0.3 million in issued letters of credit under the revolving credit facility, and a remaining borrowing capacity on the revolving credit facility of$0.0 million . The revolving credit facility contained certain restrictive covenants, financial covenants, and affirmative and financial reporting covenants restricting our and our subsidiaries' activities. As ofSeptember 30, 2020 , andDecember 31, 2019 , we were in compliance with all of the covenants under the revolving credit facility. See "Revolving Credit Facility" below for further discussion on the revolving credit facility. Subsequent to the end of the third quarter, onOctober 16, 2020 , we entered into a financing agreement which provides for a senior secured term loan in the aggregate principal amount of$35.0 million that matures inMarch 2023 . The proceeds of the senior secured term loan were used, together with cash on hand, to repay in full the outstanding indebtedness under the revolving credit facility and to pay fees and expenses in connection with the transactions 38
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contemplated by the senior secured term loan. We terminated the revolving credit facility effective as of the same date. The senior secured term loan bears interest at a rate equal to LIBOR (subject to a 1.50% floor) plus 8.00% per annum. The principal amount of the senior secured term loan will be repayable in equal quarterly installments of$875,000 throughDecember 31, 2022 , with the remaining unpaid principal amount of the senior secured term loan repayable onMarch 31, 2023 . The senior secured term loan contains restrictive covenants, financial covenants, and affirmative and financial reporting covenants restricting our and our subsidiaries' activities. The financial covenants include a requirement to maintain a minimum aggregate liquidity balance of$20.0 million at all times and a minimum subscription count (defined in the senior secured term loan as the number of all active customers on our account list) of 300,000 on any determination date occurring between the effective date andDecember 31, 2021 , and 320,000 on any determination date occurring thereafter. Cash and cash equivalents consist of cash on hand, money market accounts, and amounts held by third party financial institutions for credit and debit card transactions, which generally settle within three business days. Because we generally charge credit cards in advance of shipment and, historically, customers have most frequently requested delivery of their meals earlier in the week, amounts due for credit and debit card transactions as of the end of a financial reporting period may fluctuate significantly based upon the day of the week on which that period ends. Total cash and cash equivalents was$58.7 million as ofSeptember 30, 2020 and$43.5 million as ofDecember 31, 2019 . Total restricted cash was$1.4 million as ofSeptember 30, 2020 and$2.9 million as ofDecember 31, 2019 , of which$1.1 million and$2.9 million , respectively, is classified as a long-term asset, and$0.3 million and$0.0 million , respectively, is classified as a short-term asset. Restricted cash reflects pledged cash deposited into savings accounts that is used as security primarily for fulfillment centers and office space leases, as well as cash held in escrow related to a pending legal judgment that was returned to us in the second quarter of 2020 following final resolution of the case.
We define working capital as the difference between our current assets
(excluding cash and cash equivalents) and current liabilities (excluding current
portion of long-term debt). Our working capital was
We have a history of net losses and negative operating cash flows. In addition, we have experienced significant negative trends in our net revenue. While the year-over-year declines in net revenue have narrowed in more recent periods, and trends in net losses and operating cash flows have improved during the three and nine months endedSeptember 30, 2020 , that narrowing and improvement is, in part, due to heightened demand driven by the various restrictions on consumers that have been enacted, and remain in effect to varying degrees, throughout much ofthe United States in response to the COVID-19 pandemic. These positive trends on our operating results may not continue at current levels, if at all, depending on the duration and severity of the COVID-19 pandemic, and trends in future periods may return to levels experienced in periods prior to the COVID-19 pandemic. We are currently continuing to pursue our previously announced strategy to drive customer and revenue growth alongside managing heightened demand resulting from the COVID-19 pandemic. In light of the recent offering and the senior secured term loan subsequent to the third quarter, as well as improvements in our business from our growth strategy, our board of directors has concluded its review of a broad range of strategic alternatives that was announced earlier this year. Our board of directors will continue to evaluate and look for opportunities to maximize stockholder value as part of regular strategic reviews. Our ability, including the timing and extent, to successfully execute our growth strategy is inherently uncertain and is dependent on continued sufficiency of cash resources, and our ability to implement the initiatives and deliver the results as forecasted, among other factors. Due to this uncertainty, if we are unable to sufficiently deliver results from our strategy, manage liquidity, and/or to cost effectively attract new customers and retain existing customers, we may not be able to maintain compliance with our financial covenants in future periods. Failure to comply with those covenants, including the minimum liquidity and minimum subscription count, may result in an event of default under our senior secured term loan. In the event we do not have sufficient cash resources upon an event of default, if we were unable to obtain a waiver or successfully renegotiate the terms of our senior secured term loan with our lenders, and the lenders enforced one or more of their rights upon default, we could be unable to meet our current obligations. 39
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If we are unable to sufficiently execute our growth strategy, we believe we have plans to effectively manage liquidity and customer acquisition and retention in order to maintain compliance with our debt covenants. This includes potential significant expense reductions in areas that we have identified in product, technology, general and administrative costs to achieve savings and reinvest in the business and reaccelerate marketing investments to maintain the minimum subscription count. In addition, we have the ability to adjust our marketing strategies and further increase customer acquisition through promotional discounts, as needed, in order to maintain compliance with the minimum subscription count covenant. A significant portion of our costs is discretionary in nature and, if needed, we have the ability to reduce or delay spending in order to reduce expenses and improve liquidity. We have also previously demonstrated an ability to implement various cost reduction initiatives, including through workforce reductions and other cost optimizing initiatives. For example, inFebruary 2020 , we announced the closure of ourArlington, Texas fulfillment center and the consolidation of production volume from theArlington, Texas fulfillment center into ourLinden, New Jersey andRichmond, California fulfillment centers, which is estimated to generate annual savings of approximately$8.0 million . Based on the current facts and circumstances, the improved financial flexibility provided through the financing transactions discussed above, our financial planning process and our historical ability to implement cost reductions and adjust marketing strategies, we believe we can effectively manage liquidity and subscription count in order to maintain compliance with the financial covenants under our senior secured term loan for at least the next 12 months. As a result, we believe that our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements and the availability and accessibility to additional funds will depend on many factors, including our ability to remain compliant with the covenants of our term loan and those described in the section titled "Risk Factors" under Part II, Item 1A below. The following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the periods indicated: Nine Months Ended September 30, 2020 2019 (In thousands) Net cash from (used in) operating activities$ (4,052) $ (5,572) Net cash from (used in) investing activities (4,612) (3,522) Net cash from (used in) financing activities 22,332 (155)
Net increase (decrease) in cash, cash equivalents, and restricted cash
13,668 (9,249)
Cash, cash equivalents, and restricted cash-beginning of period
46,443 97,307
Cash, cash equivalents, and restricted cash-end of period $ 60,111 $ 88,058
Net cash from (used in) operating activities consists of net income (loss) adjusted for primarily non-cash items and changes in operating assets and liabilities.
For the nine months endedSeptember 30, 2020 , net cash from (used in) operating activities was$(4.1) million and consisted of net income (loss) of$(34.3) million , primarily non-cash items of$28.2 million , and a net change in operating assets and liabilities of$2.1 million . Changes in operating assets and liabilities were primarily driven by increases in accrued expenses and other current liabilities, accounts payable, and other noncurrent assets and liabilities of$9.9 million and decreases in receivables and inventory of$6.5 million , partially offset by an increase in prepaid expenses and other current assets of$14.0 million and a decrease in deferred revenue of$0.3 million . For the nine months endedSeptember 30, 2019 , net cash from (used in) operating activities was$(5.6) million and consisted of net income (loss) of$(39.2) million , non-cash items of$31.8 million and a net change in operating assets and liabilities of$1.9 million . Changes in operating assets and liabilities were primarily driven by decreases in inventory and prepaid expense and other current assets of$6.1 million and increase in accounts payable of$6.0 million , 40 Table of Contents partially offset by decreases in accrued expenses and other current liabilities and deferred revenue of$7.4 million and an increase in other noncurrent assets and liabilities of$2.8 million .
Net cash from (used in) investing activities primarily relates to capital expenditures to support our business initiatives and drive efficiency in fulfillment center operations and investment in software development.
For the nine months ended
For the nine months endedSeptember 30, 2019 , net cash from (used in) investing activities was$(3.5) million and consisted primarily of$(3.9) million for purchases of property and equipment, of which approximately$(2.2) million relates to capitalized software costs, to support business initiatives and ongoing product expansion. As ofSeptember 30, 2020 , our projected capital expenditures are expected to amount to approximately$8 million to$12 million in the aggregate over the next twelve months. The timing and amount of our projected expenditures is dependent upon a number of factors, including the anticipated and actual scale of our business, and may vary significantly from our estimates.
Net cash from (used in) financing activities primarily relates to proceeds from the public offering of Class A common stock, net, net borrowings and repayments under our revolving credit facility, proceeds from exercises of stock options, and principal payments on capital lease obligations. For the nine months endedSeptember 30, 2020 , net cash from (used in) financing activities was$22.3 million and consisted primarily of$32.9 million of proceeds from the public offering of Class A common stock, net of offering costs, a$10.8 million repayment of debt under our revolving credit facility, as well as proceeds from the exercise of stock options, partially offset by principal payments on capital lease obligations. For the nine months endedSeptember 30, 2019 , net cash from (used in) financing activities was$(0.2) million and consisted primarily of principal payments on capital lease obligations and payments of debt issuance costs, partially offset by proceeds from the exercise of stock options.
Free Cash Flow
We define free cash flow as net cash from (used in) operating activities less purchases of property and equipment.
Our free cash flow was$(8.8) million and$(9.5) million for the nine months endedSeptember 30, 2020 and 2019, respectively. For the nine months endedSeptember 30, 2020 , free cash flow consisted of$(4.1) million of net cash from (used in) operating activities and$(4.8) million for purchases of property and equipment, of which approximately$(2.2) million relates to capitalized software costs. For the nine months endedSeptember 30, 2019 , free cash flow consisted of$(5.6) million of net cash from (used in) operating activities and$(3.9) million for purchases of property and equipment, of which approximately$(2.2) million relates to capitalized software costs. Please see "Non-GAAP Financial Measures" for a discussion of the use of non-GAAP financial measures and for a reconciliation of free cash flow to net cash from (used in) operating activities, the most directly comparable measure calculated in accordance with GAAP. Revolving Credit Facility
As discussed above, in
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the total commitments by$50.0 million , resulting in a total commitment of$200.0 million . In 2018, we amended and refinanced the revolving credit facility to, among other things, reduce the aggregate lender commitments to$85.0 million and extend the final maturity date. In 2019, we further amended and refinanced the revolving credit facility to, among other things, further reduce the aggregate lender commitments to$55.0 million and extend the final maturity date toAugust 26, 2021 . InOctober 2020 , the revolving credit facility was repaid in full with the proceeds of our senior secured term loan and cash on hand. See "Senior Secured Term Loan" below for further discussion of senior secured term loan. As ofSeptember 30, 2020 andDecember 31, 2019 , we had$43.8 million and$54.7 million in outstanding borrowings under the revolving credit facility, respectively, and$0.3 million in issued letters of credit under the revolving credit facility. Prior to repayment inOctober 2020 , the borrowings under the revolving credit facility bore interest, at our option, at (1) a base rate based on the highest of prime rate, the federal funds rate plus 0.50% and an adjusted LIBOR rate for a one-month interest period plus 1.00% (the "base rate"), plus in each case a margin of 3.25%, or (2) an adjusted LIBOR rate (the "eurodollar rate") plus a margin of 4.25%. The revolving credit facility contained certain restrictive covenants, financial covenants, and affirmative and financial reporting covenants restricting our and our subsidiaries' activities. As ofSeptember 30, 2020 andDecember 31, 2019 , financial covenants included a requirement to maintain a minimum aggregate liquidity balance of$20.0 million as of each quarter end and$10.0 million at any liquidity test date other than at quarter end and, in the event we had positive consolidated total net debt, maintain minimum quarterly consolidated adjusted EBITDA in excess of certain revised specified thresholds as defined in the revolving credit and guaranty agreement. As ofSeptember 30, 2020 andDecember 31, 2019 , we were in compliance with all of the covenants under the revolving credit facility. Failure to comply with any covenants under the revolving credit facility could have had a material adverse effect on our business, financial condition, and results of operations as described in the section titled "Risk Factors" under Part II, Item 1A below.
Senior Secured Term Loan
OnOctober 16, 2020 , we entered into a financing agreement which provides for a senior secured term loan in the aggregate principal amount of$35.0 million . The proceeds of the senior secured term loan were used, together with cash on hand, to repay in full all outstanding indebtedness under the revolving credit facility and to pay fees and expenses in connection with the transactions contemplated by the senior secured term loan. We terminated the revolving credit facility effective as of the same date. The senior secured term loan bears interest at a rate equal to LIBOR (subject to a 1.50% floor) plus 8.00% per annum. The principal amount of the senior secured term loan will be repayable in equal quarterly installments of$875,000 throughDecember 31, 2022 , with the remaining unpaid principal amount of the senior secured term loan repayable onMarch 31, 2023 . We are also obligated under the senior secured term loan to pay customary fees, including an anniversary fee equal to 1.00% of the average daily principal amount of the senior secured term loan outstanding over the past 12 months. The borrower under the senior secured term loan is our wholly-owned subsidiary,Blue Apron, LLC . The obligations under the senior secured term loan are guaranteed byBlue Apron Holdings, Inc. and its subsidiaries other than the borrower, and secured by substantially all of the assets of the borrower and the guarantors. The senior secured term loan contains certain restrictive covenants, financial covenants, and affirmative and financial reporting covenants restricting our and our subsidiaries' activities. Restrictive covenants include limitations on the incurrence of indebtedness and liens, restrictions on affiliate transactions, restrictions on the sale or other disposition of collateral, and limitations on dividends and stock repurchases. The financial covenants include a requirement to maintain a minimum aggregate liquidity balance of$20.0 million at all times and a minimum subscription count (defined in the senior secured term loan as the number of all active customers on our account list) of 300,000 on any determination date occurring between the effective date andDecember 31, 2021 , and 320,000 on any determination date occurring thereafter. Any such failure to comply with such covenants may result in an event of default under our senior secured new term loan, 42
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upon which the lenders could declare all outstanding principal and interest to be due and payable immediately and foreclose against the assets securing the borrowings. Failure to comply with any covenants under the senior secured term loan could have a material adverse effect on our business, financial condition, and results of operations as described in the section titled "Risk Factors" under Part II, Item 1A below.
Contractual Obligations
OnMarch 30, 2020 , we terminated the lease for ourFairfield facility. In connection with the lease termination, we paid a termination fee in the amount of$1.5 million in the second quarter of 2020, which released us from all future minimum lease payments related to this facility of$32.9 million , which otherwise would have expired in 2028. Other than the borrowings disclosed above in the "Revolving Credit Facility" and "Senior Secured Term Loan" sections and changes which occur in the normal course of business, as ofSeptember 30, 2020 , there were no other significant changes to the contractual obligations reported atDecember 31, 2019 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Off-Balance Sheet Arrangements
As ofSeptember 30, 2020 andDecember 31, 2019 , we did not have any off-balance sheet arrangements, except for operating leases and letters of credit entered into in the normal course of business as discussed above.
Critical Accounting Policies and Significant Estimates
In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs and expenses, and disclosure of contingent assets and liabilities that are reported in the Consolidated Financial Statements and accompanying disclosures. The accounting estimates that require the most difficult and subjective judgments include revenue recognition, inventory valuation, leases, recoverability of long-lived assets, and the recognition and measurement of contingencies. Therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates and assumptions. See Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for information about these critical accounting policies, as well as a description of our other accounting policies.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates, or we issue more than$1.0 billion of non-convertible debt securities over a three-year period.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements and Recently Adopted Accounting Pronouncements, included in Part I, Item 1, Notes to Consolidated Financial Statements, in this Quarterly Report on Form 10-Q, and Index to Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 43
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