CONTEXTLOGIC INC. Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements that involve expectations,
plans or intentions (such as those relating to future business, future results
of operations or financial condition, new or planned features or services,
management strategies or timing and other expectations regarding our business).
You can identify these forward-looking statements by words such as "may,"
"will," "would," "should," "could," "expect," "anticipate," "believe,"
"estimate," "intend," "plan" and other similar expressions. These
forward-looking statements involve risks and uncertainties that could cause our
actual results to differ materially from those expressed or implied in our
forward-looking statements. Such risks and uncertainties include, among others,
those discussed in "Item 1A: Risk Factors" of this Annual Report on Form 10-K,
as well as in our consolidated financial statements, related notes, and the
other information appearing elsewhere in this report and our other filings with
the
Financial Results for the Year Ended
• Total revenue was$2.1 billion . • Total costs of revenue and operating expenses were$2.5 billion , including stock-based compensation expense of$141 million . • Loss from operations was$367 million . • Net loss was$361 million . • Cash and cash equivalents and marketable securities were$1.2 billion .
As of
In 2021, we faced the headwinds of reduced retention and new buyer conversion and a rise in digital advertising costs. In response to rising digital advertising costs, which contributed to lower marketing efficiency, starting in the third quarter of 2021, we decided to significantly reduce our digital advertising expenditures as we focused our resources on other strategic initiatives. As discussed below under "Key Financial and Performance Metrics," our monthly active users ("MAUs") and last twelve months ("LTM") active buyers were negatively impacted by our decision to significantly reduce our digital advertising expenditures. Starting in the third quarter of 2021, in response to these headwinds, we commenced a number of initiatives that we believe will improve the user experience and increase retention, including (i) enhancing our product quality and selection, (ii) providing an unmatched fun and entertaining shopping experience, and (iii) improving the performance of the app. We believe our continued strategy to enhance users' experience in our marketplace and provide a more differentiated and engaging user experience will position us for long-term sustainable growth.
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Impact of the COVID-19 Pandemic
As of the date of filing of this Annual Report, the outbreak of coronavirus disease 2019 ("COVID-19"), including recent and any future variants, has affected businesses worldwide, and continues to impact the major markets in which we operate. Our business, operations and financial condition and results have been and may continue to be impacted by the COVID-19 pandemic and a range of external factors related to the COVID-19 pandemic that are not within our control. The COVID-19 pandemic has resulted in significant governmental measures being implemented at various times and in various geographic areas over the course of the pandemic to control the spread of the virus. Our operations as well as the operations of our third-party merchants have been, and we expect will continue to be, disrupted by varying individual and governmental responses to COVID-19 around the world.
In addition, the COVID-19 pandemic has also disrupted the global supply chain,
which may interfere with the delivery of our merchants' products to our users.
Our MAUs, LTM Active Buyers and revenue may be negatively impacted due to a
combination of reasons including: (i) macroeconomic factors such as worldwide
retail businesses reopening; (ii) the disruption of the global supply chain;
(iii) increased consumer spending on travel and other discretionary items; and,
(iv) the waning impact of
In
The Restructuring Plan includes i) reducing our headcount by approximately 15%
(or approximately 190 positions), ii) exiting various facility leases, and iii)
reducing and realigning vendor expenditures. In connection with the
Restructuring Plan, we estimate that we will incur one-time charges of
Initial Public Offering
In
Our Financial Model
Our business benefits from powerful network effects, fueled by our data advantage and massive scale. As more users join Wish, attracted by our affordable value proposition and personalized shopping experiences, we are able to increase revenue potential for our merchants. The successes of our merchants attract more merchants and broaden the product selection on Wish's platform, which further improves user experiences. The growth in users and merchants generates more data, which, in turn, refines our algorithm and strengthens our data advantage. By focusing on users and merchants, we align their success with our own.
The economics of the Wish platform rely on cost-effectively adding new users, converting those users into buyers, and improving engagement and monetization of those buyers over time as well as acquiring new merchants and monetizing the end-to-end services that we provide to them.
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Key Financial and Performance Metrics
In addition to the measures presented in our consolidated financial statements,
we monitor the following key metrics and other financial information to measure
our performance, identify trends affecting our business, and make strategic
decisions.
Year Ended
December 31,
2021 2020 2019
(in millions)
MAU 74 107 90
LTM Active Buyers 38 64 62
Adjusted EBITDA $ (199 ) $ (217 ) $ (127 )
Adjusted EBITDA Margin (10 )% (9 )% (7 )%
Free Cash Flow $ (953 ) $ (2 ) $ (71 )
Monthly Active Users
We define MAUs as the number of unique users that visited the Wish platform, either on our mobile app, mobile web, or on a desktop, during the month. MAUs for a given reporting period equal the average of the MAUs for that period. An active user is identified by a unique email-address; a single person can have multiple user accounts via multiple email addresses. The change in MAUs in a reported period captures both the inflow of new users as well as the outflow of existing users who did not visit the platform in a given month. We view the number of MAUs as key driver of revenue growth as well as a key indicator of user engagement and brand awareness.
MAUs decreased approximately 31% from the year ended
LTM Active Buyers
As of the last date of each reported period, we determine our number of unique LTM active buyers by counting the total number of individual users who have placed at least one order on the Wish platform, either on our mobile app, mobile web, or on a desktop, during the preceding 12 months. We, however, exclude from the computation those buyers whose order is canceled before the item is shipped and the purchase price is refunded. The number of Active Buyers is an indicator of our ability to attract and monetize a large user base to our platform and of our ability to convert visits into purchases. We believe that increasing our Active Buyers will be a significant driver to our future revenue growth.
LTM Active Buyers decreased approximately 31% from the year ended
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Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
We provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income (loss) before interest and other income (expense), net (which includes foreign exchange gain or loss and gain or loss on one-time transactions recognized), income tax expense, and depreciation and amortization, adjusted to eliminate stock-based compensation expense, lease termination and impairment related expenses, and remeasurement of redeemable convertible preferred stock warrant liability, and to add back certain recurring other items. Additionally, we provide Adjusted EBITDA Margin, a non-GAAP financial measure that represents Adjusted EBITDA divided by revenue. Below is a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA and Adjusted EBITDA Margin in this report because they are key measures used by our management and board of directors to understand and evaluate our operating performance and trends and how we are allocating internal resources, to prepare and approve our annual budget and to develop short- and long-term operating plans. We also believe that the exclusion of certain items in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business as it removes the impact of non-cash items and certain variable charges.
Adjusted EBITDA has limitations as an analytical measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
Adjusted EBITDA does not reflect cash capital expenditure requirements for
such replacements or for new capital expenditure requirements;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• Adjusted EBITDA does not consider the impact of stock-based compensation
and related charges;
• Adjusted EBITDA does not reflect tax payments that may represent a
reduction in 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.
Because of these limitations, you should consider Adjusted EBITDA and Adjusted EBITDA Margin alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
The following table reflects the reconciliation of net loss to Adjusted EBITDA and net loss as a percentage of revenue to Adjusted EBITDA margin for each of the periods indicated:
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Year Ended
December 31,
2021 2020 2019
(in millions)
Revenue $ 2,085 $ 2,541 $ 1,901
Net loss (361 ) (745 ) (129 )
Net loss as a percentage of revenue (17 )% (29 )% (7 )%
Excluding:
Interest and other expense (income), net (16 ) 2 (19 ) Provision for income taxes 10 2 1 Depreciation and amortization 9 12 10 Stock-based compensation expense(1) 141 390 2 Employer payroll taxes related to stock-based compensation expense 9 8 - Remeasurement of redeemable convertible preferred stock warrant liability - 110 3 Lease termination and impairment related expenses 6 - - Recurring other items 3 4 5 Adjusted EBITDA (199 ) (217 )$ (127 ) Adjusted EBITDA margin (10 )% (9 )% (7 )% (1) Prior to our IPO, we granted restricted stock units ("RSUs") that contain both service-based and liquidity-based vesting conditions to our executives and employees. Vesting of these RSUs is subject to continuous service with the Company and satisfaction of a liquidity condition. The service condition for these RSUs is satisfied over four to five years. The liquidity condition was satisfied upon the completion of our IPO inDecember 2020 . As a result, we recognized in the fourth quarter of 2020 a cumulative stock-based compensation expense of approximately$379 million related to these RSUs for which both the service and liquidity vesting conditions were achieved as ofDecember 31, 2020 . Refer to Note 8 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information.
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(in millions)
Cash provided by (used in):
Operating activities $ (951 ) $ - $ (60 )
Investing activities (3 ) 165 (40 )
Financing activities 7 1,046 132
Free Cash Flow
We also provide Free Cash Flow, a non-GAAP financial measure that represents net cash provided by (used in) operating activities less purchases of property and equipment and development of internal-use software. We believe that Free Cash Flow is an important measure since we use third parties to host our services and therefore, we do not incur significant capital expenditures to support revenue generating activities.
Free Cash Flow has limitations as an analytical measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• it is not a substitute for net cash provided by (used in) operating
activities;
• other companies may calculate Free Cash Flow or similarly
titled non-GAAP measures differently or may use other measures to evaluate
their performance, all of which could reduce the usefulness of free cash
flow as a tool for comparison; and
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• the utility of free cash flow is further limited as it does not reflect
our future contractual commitments and does not represent the total
increase or decrease in our cash balance for any given period.
Because of these limitations, you should consider Free Cash Flow alongside other financial performance measures, such as net cash provided by (used in) operating activities, net income (loss) and our other GAAP results.
The following table reflects the reconciliation of net cash provided by (used in) operating activities to Free Cash Flow for each of the periods indicated:
Year Ended
December 31,
2021 2020 2019
(in millions)
Cash used in operating activities $ (951 ) $ - $ (60 ) Less:
Purchases of property and equipment and development of internal-use software 2 2 11 Free Cash Flow$ (953 ) $ (2 )$ (71 )
See the "Liquidity and Capital Resources" section below for further discussion
on our cash position and future liquidity, including quarterly Free Cash Flow
for the year ended
Key Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled "Risk Factors."
Buyer Lifetime Value and Buyer Acquisition Cost Efficiency
Our success relies in part on our ability to engage users and convert them to buyers, while simultaneously optimizing our efficiency and marketing spend and efforts. Failure to effectively engage users and convert them to buyers on a cost-effective basis would adversely affect our revenue growth and operating results.
We are intently focused on optimizing the lifetime value ("LTV") of our buyers and we seek to improve the ratio of LTV to buyer acquisition cost ("BAC") in an effort to optimize the efficiency of our marketing spend.
We define LTV per buyer as the cumulative gross profit over a period of time attributable to new buyers acquired during a particular year (a "cohort") divided by the total number of new buyers acquired in that cohort. We define BAC as the total digital advertising expense targeting new installations of our app in a given period divided by the number of new buyers acquired during that same period.
We look at LTV per buyer to demonstrate the long-term value attributable to each buyer acquired. We see LTV of our buyers as an indicator of the success or challenges we have in engaging our buyers, and driving monetization on our platform over time.
Revenue from New Buyers and Existing Buyers
Our success also depends on our ability to increase engagement from existing buyers while simultaneously attracting and engaging new buyers. Therefore, we focus on increasing revenue from both new and existing buyers. If we are unable to increase engagement and revenue from existing buyers and attract new buyers to our platform, our revenue and results of operations will be negatively impacted.
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Average Revenue per Active Buyer
Our success also relies on our ability to continue to improve our platform and maintain and increase engagement from our active buyers. Therefore, we use average revenue per active buyer in a given cohort as an indicator of the level of engagement, the success of our discovery-based and personalized user experience, the quality of our products listed, and the overall scale and growth of our business. If we are unable to improve our platform, including, among other things, creating a positive user experience, ensuring that quality products are listed for sale, and otherwise increasing or maintaining engagement, then average revenue per active buyer may decline, which could lead to decreased revenue, which would have an adverse effect on our results of operations.
Components of Results of Operations
Revenue
Our revenue consists of marketplace and logistics revenue.
Marketplace revenue
We provide a mix of marketplace services to our customers. We provide merchants access to our marketplace where merchants display and sell their products to users. We also provide ProductBoost services to help merchants promote their products within our 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. We recognize 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 fees for displaying a merchant's selected products in preferential locations within our marketplace. We recognize revenue when the merchants' selected products are displayed. We refer to our marketplace revenue, excluding ProductBoost revenue, as our core marketplace revenue.
Logistics revenue
Our logistics offering for merchants, introduced in 2018, is designed for direct end-to-end order shipments 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.
We recognize revenue over time as the merchant simultaneously receives and consumes the logistics services benefit as the services are performed. We use an output method of progress based on days in transit as it best depicts our progress toward complete satisfaction of the performance obligation.
Cost of Revenue and Operating Expenses
Cost of revenue
Cost of revenue includes colocation and data center charges, interchange and other fees for credit card processing services, fraud and chargeback prevention service charges, costs of refunds and chargebacks made to our users that we are not able to collect from our merchants, depreciation and amortization of property and equipment, shipping charges, tracking costs, warehouse fees, and employee-related costs, including salaries, benefits, and stock-based compensation expense for our infrastructure, merchant support, and logistics personnel. Cost of revenue also includes an allocation of general IT and facilities overhead expenses.
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Sales and marketing
Our sales and marketing expenses are primarily driven by the cost of acquiring and engaging users by targeting social media and search engine digital advertisements, outsourced user support services, sponsorships and local marketing campaigns. Other drivers consist of employee-related costs, including salaries, benefits, and stock-based compensation, for our employees involved in marketing, user support, and business development functions. Sales and marketing spend also includes an allocation of general IT and facilities overhead expenses as well as business development expenses for attracting merchants and conducting ongoing merchant education. We expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our expenses may fluctuate from period to period due to the timing of expenses related to our sales and marketing campaigns.
Product development
Our product development expenses consist primarily of employee-related costs, including salaries, benefits, and stock-based compensation for our engineers and other employees involved in product development activities. Product development costs have historically been expensed as incurred. Product development costs also include the cost of IT used by the product development team as well as an allocation of general IT and facilities overhead expenses. We expect our product development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our marketplace and merchant offerings.
General and administrative
Our general and administrative expenses consist primarily of employee-related costs, including salaries, benefits, and stock-based compensation for our executives, finance, legal, information technology, human resources, and other administrative teams. General and administrative expenses also include outside consulting, legal, tax, and accounting services, and facilities and other supporting overhead costs. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in our corporate infrastructure to support our revenue growth. Further, we expect to incur additional general and administrative expenses in connection with being a public company.
Remeasurement of Redeemable Convertible Preferred Stock Warrant Liability
Remeasurement of our redeemable convertible preferred stock warrant liability was as a result of the change to the underlying redeemable convertible preferred stock value at the end of each reporting period. After our IPO, we no longer incur expenses related to the change in fair value of our redeemable convertible preferred stock warrant liability as the related warrant was exercised upon our IPO and the redeemable convertible preferred warranty liability was reclassified to Class A common stock and additional paid-in capital as it is now considered permanent equity.
Interest and Other Income (expense), net
Interest and other income (expense), net consists primarily of interest income earned on our cash, cash equivalents and marketable securities, interest expense, foreign exchange gain or loss and gain or loss from our foreign currency forward contracts.
Income Tax
Income taxes consist primarily of income taxes in certain
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Results of Operations
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended
December 31,
2021 2020 2019
(in millions)
Revenue $ 2,085 $ 2,541 $ 1,901
Cost of revenue(1) 977 947 443
Gross profit 1,108 1,594 1,458
Operating expenses:
Sales and marketing(1) 1,102 1,708 1,463
Product development(1) 208 222 74
General and administrative(1) 165 295 65
Total operating expenses 1,475 2,225 1,602
Loss from operations (367 ) (631 ) (144 )
Other income (expense), net
Interest and other income (expense), net 16 (2 ) 19
Remeasurement of convertible preferred stock
warrant liability - (110 ) (3 )
Loss before provision for income taxes (351 ) (743 ) (128 )
Provision for income taxes 10 2 1
Net loss $ (361 ) $ (745 ) $ (129 ) (1)Includes stock-based compensation expense as follows:
Year Ended
December 31,
2021 2020 2019
(in millions)
Cost of revenue $ 20 $ 35 $ -
Sales and marketing 12 23 -
Product development 59 118 -
General and administrative 50 214 2
Total stock-based compensation
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The following table presents the components of our consolidated statements of operations as a percentage of revenue:
Year Ended
December 31,
2021 2020 2019
Revenue 100 % 100 % 100 %
Cost of revenue 47 % 37 % 23 %
Gross profit 53 % 63 % 77 %
Operating expenses:
Sales and marketing 53 % 67 % 77 %
Product development 10 % 9 % 4 %
General and administrative 8 % 12 % 3 %
Total operating expenses 71 % 88 % 84 %
Loss from operations (18 )% (25 )% (8 )%
Other income (expense), net:
Interest and other income (expense), net 1 % - 1 %
Remeasurement of convertible preferred stock
warrant liability - (4 )% -
Loss before provision for income taxes (17 )% (29 )% (7 )%
Provision for income taxes - - -
Net loss (17 )% (29 )% (7 )%
Comparison of the Years Ended
Revenue
Year Ended December 31, Change
2021 2020 $ %
(in millions)
Core marketplace revenue(1) $ 1,177 $ 1,827 $ (650 ) (36 )%
ProductBoost revenue 165 200 (35 ) (18 )%
Marketplace revenue 1,342 2,027 (685 ) (34 )%
Logistics revenue 743 514 229 45 %
Revenue $ 2,085 $ 2,541 $ (456 ) (18 )%
(1) Core marketplace revenue for the year ended December 31, 2021 and 2020
included approximately $22 million and $7 million , respectively, net gains
from our cash flow hedging program. We did not have a hedging program
prior to 2020.
Revenue decreased
Marketplace revenue decreased
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Logistics revenue increased
Cost of Revenue and Gross Margin
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Cost of revenue $ 977 $ 947 $ 30 3 %
Percentage of revenue 47 % 37 %
Gross Margin 53 % 63 %
Cost of revenue increased
The gross margin decreased to 53% for the year ended
Sales and Marketing
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Sales and marketing $ 1,102 $ 1,708 $ (606 ) (35 )%
Percentage of revenue 53 % 67 %
Sales and marketing expense decreased
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Product Development
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Product development $ 208 $ 222 $ (14 ) (6 )%
Percentage of revenue 10 % 9 %
Product development expense decreased
General and Administrative
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
General and administrative $ 165 $ 295 $ (130 ) (44 )%
Percentage of revenue 8 % 12 %
General and administrative expense decreased
Interest and Other Income (Expense), net
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Interest and other income (expense), net
1 % -
Interest and other income (expense), net increased
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Remeasurement of Redeemable Convertible Preferred Stock Warrant Liability
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Remeasurement of redeemable convertible
preferred stock warrant liability $ -
- (4 )%
We recognized the
Provision for Income Taxes
Year Ended
December 31, Change
2021 2020 $ %
(in millions)
Provision for income taxes $ 10 $ 2 $ 8 400 %
Percentage of revenue - -
Provision for income taxes increased
Liquidity and Capital Resources
As of
Our material cash requirements include
Sources of Liquidity
Prior to our IPO, we satisfied our liquidity needs primarily through the sale of
redeemable convertible preferred stock and cash flows generated from operations.
We raised a total of
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In
Cash Flows
Year Ended December 31,
2021 2020 2019
(in millions)
Cash provided by (used in):
Operating activities $ (951 ) $ - $ (60 )
Investing activities (3 ) 165 (40 )
Financing activities 7 1,046 132
Our cash flows from operations are largely dependent on the amount of revenue we generate. Net cash provided by operating activities in each period presented has been influenced by changes in funds receivable, prepaid expenses, and other current and noncurrent assets, accounts payable, merchants payable, accrued and refund liabilities, lease liabilities, and other current and noncurrent liabilities.
Net cash used in our operating activities for the year ended
We did not generate or use any cash in our operating activities for the year
ended
Net Cash Provided by (Used in) Investing Activities
Our primary investing activities have consisted of investing excess cash balances in marketable securities and also have consisted of capital expenditures which are primarily purchases of property and equipment.
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Net cash used by investing activities was
Net cash provided by investing activities was
Net Cash Provided by Financing Activities
Net cash provided by our financing activities was
Net cash provided by financing activities was
Quarterly Free Cash Flow
Q1'21 Q2'21 Q3'21 Q4'21
(in millions)
Cash provided by (used in) operating $ (354 ) $ (204 ) $ (344 ) $ (49 )
activities
Less:
Purchases of property and equipment and
development of internal-use software - 1 - 1
Free Cash Flow $ (354 ) $ (205 ) $ (344 ) $ (50 ) Cash used in our operating activities and capital expenditures decreased to
Off Balance Sheet Arrangements
For the years ended
Contingencies
We are involved in claims, lawsuits, government investigations, and proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
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Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, operating lease obligations, impairment of long-lived assets, stock-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 2 to our consolidated financial statements.
Revenue Recognition
We generate revenue from marketplace and logistics services provided to our customers. Revenue is recognized as we transfer control of promised goods or services to our customers, in an amount that reflects consideration we expect to be entitled to in exchange for those goods or services. We consider both the merchant and the user to be customers. We evaluate whether it is appropriate to recognize revenue on a gross or net basis based upon our evaluation of whether we obtain control of the specified goods or services by considering if we are primarily responsible for fulfillment of the promise, have inventory risk and have 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
We provide a mix of marketplace services to our customers. We provide users access to our marketplace where merchants display and sell their products to users. We also provide ProductBoost services to help merchants promote their products within our 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. We recognize 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 our marketplace. We recognize revenue when the merchants' selected products are displayed. We refer to our marketplace revenue, excluding ProductBoost revenue, as our core marketplace revenue.
Logistics Revenue
Our logistics offering for merchants, introduced in 2018, 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.
We recognize revenue over time as the merchant simultaneously receives and consumes the logistics services benefit as the services are performed. We use an output method of progress based on days in transit as it best depicts our progress toward complete satisfaction of the performance obligation.
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Deferred Revenue
Deferred revenue consists of amounts received, primarily related to unsatisfied performance obligations of logistics services, at the end of the period. Due to the short-term duration of contracts, all of the performance obligations will be satisfied in the following reporting period.
Refunds and Chargebacks
Refunds and chargebacks are associated with marketplace revenue. Returns are not material to our business. Estimated refunds and chargebacks are recognized on the consolidated balance sheets as refunds liability. The merchants' share of the refunds are recognized as a reduction to the amount due to merchants. The revenue recognized on transactions subject to refunds and chargebacks is reversed. We estimate future refunds and chargebacks using a model that incorporates historical experience and considering recent business trends and market activity.
Incentive Discount Offers
We provide incentive discount offers to our users to encourage purchases of goods through our marketplace. Such offers include current discount offers of a certain percentage off current purchases, and inducement offers, such as set percentage offers off future purchases subject to a minimum current purchase. We generally record the related discounts taken as a reduction of revenue when the offer is redeemed. We also offer free products to encourage users to make purchases on our marketplace. The resulting discount is recognized as a reduction of revenue when the offer for free product is redeemed.
Wish Cash Liability
We issue Wish Cash to end-users who opt to receive it for their refundable
transactions. We also offer Wish Cash as part of our various referral and
incentive programs. We accrue a liability for issued Wish Cash which is reduced
when Wish Cash is redeemed by our users. Based on historical experience, we
analyze the Wish Cash liability considering usage patterns to determine the
probability of redemption. While we will continue to honor all Wish Cash
presented for payment, management may determine the likelihood of redemption to
be remote for Wish Cash balances due to, among other things, long periods of
inactivity. In these circumstances, to the extent management determines there is
no requirement for remitting Wish Cash balances to government agencies under
unclaimed property laws, the portion of Wish Cash balances not expected to be
redeemed are recognized in
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Operating Lease Obligations
We lease facilities and data center colocations in multiple locations under non-cancelable lease agreements through 2025. We determine if an arrangement is a lease at inception. For leases where we are the lessee, right of use ("ROU") assets represent our right to use the underlying asset for the term of the lease and the lease liabilities represent an obligation to make lease payments arising from the lease. Certain lease agreements contain tenant improvement allowances, rent holidays and rent escalation provisions, all of which are considered in determining the ROU assets and lease liabilities. We begin recognizing rent expense when the lessor makes the underlying asset available for use by us. Lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term. The interest rate we use to determine the present value of future lease payments is our incremental borrowing rate, which is the estimated rate we would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. We estimate our incremental borrowing rate based on an analysis of publicly-traded debt securities of companies with credit and financial profiles similar to our own. The ROU asset is determined based on the lease liability initially established and adjusted for any prepaid lease payments and any lease incentives received. The lease term to calculate the ROU asset and related lease liability includes options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Certain leases contain variable costs, such as common area maintenance, real estate taxes, or other costs. Variable lease costs are expensed as incurred on the consolidated statements of operations.
Impairment of Long-Lived Assets
We review long-lived assets, including intangible and ROU assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, an impairment loss would be recognized based on the excess of the carrying amount of the asset above the fair value of the asset.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards, including RSUs, performance-based units ("PSUs"), and purchase rights issued to employees under our employee stock purchase plan ("ESPP"), based on the estimated fair value of the awards on the grant date. We use the Black-Scholes option pricing model to estimate the fair value of ESPP purchase rights and the Monte Carlo Simulation model to estimate the fair value of PSUs. The fair value of RSUs is based on the fair value of our Class A common stock on the date of the grant. The fair value of service-based RSUs is recognized as an expense on a straight-line basis over the requisite service period, which is generally four years. For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense under the accelerated attribution method over the requisite service period. The fair value of the ESPP purchase rights is recognized as an expense on a straight-line basis over the offering period.
The vesting requirements of RSUs that we granted to employees prior to our IPO
in
We account for forfeitures as they occur.
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Our use of the Black-Scholes option-pricing and Monte-Carlo Simulation models require the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in these valuation models represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
Income Taxes
We account for income taxes using the asset and liability method, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between consolidated financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
We determine whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of benefit attributable to the position is recognized. The tax benefit to be recognized for any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency.
It is our policy to include penalties and interest expense related to income taxes as a component of interest and other income (expense), net as necessary.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements in Item 8 of Part II,
"Financial Statements and Supplementary Data" for accounting pronouncements
recently adopted and recent accounting pronouncements not yet adopted as of
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