Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part I, Item 1A, above.
Overview
Allbirds is a global lifestyle brand that innovates with naturally derived materials to make better footwear and apparel products in a better way, while treading lighter on our planet.
We began our journey in 2015 with three fundamental beliefs about the emerging generation of consumers: first, these consumers recognize that climate change is an existential threat to the human race; second, these consumers connect their purchase decisions with their impact on the planet, demanding more from businesses; and third, these consumers do not want to compromise between looking good, feeling good, and doing good. We became a public benefit corporation, or PBC, under Delaware law and earned our B Corporation, or B Corp, certification in 2016, codifying how we take into account the impact our actions have on all of our stakeholders, including the environment, our flock of employees, communities, consumers, and investors. We have achieved our rapid growth through a digitally-led vertical retail
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distribution strategy. We market directly to consumers via our localized multilingual digital platform and our physical footprint of 58 retail stores as of December 31, 2022. By primarily serving consumers directly, we cut out the layers of costs associated with traditional wholesalers, creating a more efficient cost structure and higher gross margin. Our direct distribution model allows us to control our sales channels and build deep relationships with our customers by delivering high-quality products through a seamless and immersive brand experience, whether shopping on our website, on our app, or in one of our Allbirds stores. Designing and creating innovative, sustainable materials is a challenging process for both our internal R&D teams as well as our supply chain partners. We have invested time and resources to train our manufacturers to use our natural materials, which we believe makes it difficult to replicate our novel manufacturing processes at our product quality.
Recent Financial Performance
•Net revenue grew approximately 7.3% for the year ended December 31, 2022 compared to the same period in 2021 and 35.8% compared to the same period in 2020.
•Gross margin decreased to 43.5% for the year ended December 31, 2022 as compared to 52.9% for the same period in 2021.
•Net loss was $101.4 million for the year ended December 31, 2022 as compared to $45.4 million for the same period in 2021.
•Adjusted EBITDA loss was $60.4 million for the year ended December 31, 2022 as compared to a loss of $11.7 million for the same period in 2021.
Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States, or GAAP. See the section titled “Non-GAAP Financial Measures” below for the definition of adjusted EBITDA, as well as a reconciliation of adjusted financial measures to their most directly comparable GAAP financial measures.
Recent Developments
March 2023 Strategic Transformation
In March 2023, we announced the implementation a strategic transformation plan to reignite growth in the coming years, as well as improve capital efficiency, and drive profitability. The plan focuses on four key areas:
Our product and brand initiatives include increasing focus on core franchise management, through a concentration on comfort and quality and better commercialization of our innovative materials, as well as increased investments into brand marketing.
Our store-based distribution initiatives in the United States include optimizing our existing store fleet and selectively expanding our third party wholesale channel. Store optimization will include slowing the pace of new store openings and investing in corporate and retail store talent and store marketing.
Our international go-to-market strategy initiative encompasses evaluating ways to reduce complexity and grow internationally in a cost- and capital-efficient manner. We may potentially partner with distributors in certain markets in the future, which we expect would have impacts to both our short and long term results of operations, though the impact is uncertain this time.
Our cost savings and capital efficiency initiatives build upon cost and cash optimization work that we began in 2022, described in further detail in the “August 2022 Restructuring” section below. This includes plans to fully transition to a new footwear manufacturing partner by the end of 2023, which will potentially accelerate cost of revenue, SG&A and cash optimization savings over the next three years.
August 2022 Simplification Initiatives
In August 2022, we announced the implementation of simplification initiatives designed to generate cost of revenue savings, streamline workflows, and lower operating costs. These initiatives focus on reducing costs related to our supply chain and selling, general, and administrative expense. We expect these initiatives to result in estimated annualized selling,
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general, and administrative expense savings of approximately $13 million to $15 million. We substantially completed these simplification initiatives in the fourth quarter of 2022.
Our supply chain initiatives included reduction of logistics costs in the United States by transitioning to automated distribution centers and a dedicated returns processor, optimizing inventory to accelerate logistics cost savings, which included inventory write-downs and write-offs over certain products, and accelerating the scaling of our manufacturing base to reduce product carbon footprint and product costs over time. We recognized costs of $19.1 million primarily related to the write-down and liquidation of certain first generation apparel products in the year ended December 31, 2022, which are recorded within cost of revenue on the consolidated statement of operations and comprehensive loss. We also recognized revenue of $2.0 million primarily related to the liquidation of certain first generation apparel products in the year ended December 31, 2022, which is recorded within net revenue on the consolidated statement of operations and comprehensive loss.
Our selling, general, and administrative expense initiatives included slowing the pace of corporate new hires and backfills for departing employees, reducing our global corporate workforce, and reducing corporate office space to reflect a new hybrid working environment. Related to this, we recognized expenses of $0.8 million in the year ended December 31, 2022, which is recorded within restructuring expense on the consolidated statement of operations and comprehensive loss. These expenses are primarily related to severance and other employee termination-related costs, including the impact of stock-based compensation, resulting from the reduction of our global corporate workforce of approximately 8% in 2022. We ceased use of one of our corporate office leases in the United States in the third quarter of 2022 and began subleasing the space to another tenant in the fourth quarter of 2022.
Key Factors Affecting Our Performance
Our financial and operating conditions have been, and will continue to be affected by a number of factors, including:
Ability to Grow Brand Awareness and Drive Efficient Customer Acquisition
The ability to communicate our mission of making better things in a better way is integral to our success in engaging new customers and introducing them to our products and brand. Allbirds is still relatively unknown to consumers worldwide, underscoring a large opportunity to scale our customer base and drive future growth. Our continued focus on elevating our product offerings combined with our differentiated brand approach and authenticity is critical to attracting new customers and increasing closet share. Further, we must continue to emphasize our commitment to people, the planet, and our investors in order to further increase our reach and highlight the integrity of our brand. We believe our brand strength will enable us to continue to grow brand awareness, allowing us to deepen relationships with consumers and expand our access to global markets.
As we continue to scale and build our global brand awareness, our goal is to acquire new customers in a cost-effective way. We will continue to evaluate our go-to-market strategy, both in the U.S. and internationally, and invest in customer acquisition while the underlying customer unit economics indicate the return on investment is strong. The continued execution of our customer acquisition strategy is key to acquiring more customers and driving growth and profitability for our business. Our ability to acquire more customers depends significantly on a number of factors, including the level and pattern of consumer spending in the product categories in which we operate and our ability to expand our brand awareness. Starting in 2022, we began to selectively enter into retail partnerships with third parties, such as Nordstrom, REI, Dick’s Sporting Goods and Scheels, to distribute our products on a limited basis in an effort to build brand awareness and establish greater customer credibility in the market for our products. As part of our strategic transformation plan announced in March 2023, we intend to leverage these third-party partnerships further to increase brand awareness and reach new customers.
Continued Growth Within Existing Customer Base and Increasing Closet Share
In addition to seeking to acquire new customers, we continuously seek ways to engage with our large and growing base of existing customers. We aim to grow our closet share within our existing customer base by focusing and developing on our core franchises. We believe we must continue to both innovate with new products and focus on core products in order to drive consumer engagement and increase our closet share. While we continue to do this, we must constantly evaluate and improve our strategy to anticipate current and future consumer preferences and demands. At the same time, it is critical that we maintain our long-trusted commitment to offering the most comfortable, high performance, and sustainable products. In connection with our strategic transformation plan announced in March 2023, we intend to reconnect with our core customers by focusing our product strategy on our core franchise products. Our continued growth
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within our existing customer base will depend in part on our ability to focus our product strategy to appeal to our existing customers.
Execution of Our Vertical Retail Distribution Strategy and Optimization of Our Store Fleet
Our long-term growth strategy relies on our ability to grow across our digital and retail channels, while still maintaining our goal of medium to long-term profitability. We believe an omni-channel buying experience is important to meeting the needs of our growing customer base while also growing revenue. We expect net revenue and gross margin to benefit from a higher mix of sales through our physical retail channel, due to a lower return rate and decreased shipping costs.
Although we continue to view retail stores as key to reaching new customers and increasing penetration of omni-channel customers, we plan to try to optimize our store fleet and focus on ensuring that our retail stores are efficiently driving customer acquisition, as store traffic has not fully recovered to pre-pandemic levels. These optimization efforts may include a combination of efforts, including evaluating the number of new store openings and slowing the pace of new retail store openings, investing in store marketing, expanding our third-party partnerships, and exploring partnering with distributors in certain international markets.
Our store count by primary geographical market is presented in the table below, as of the dates presented:
Store Count by Primary Geographical Market
Growing Our Product Innovation Platform
Innovation has been core to the Allbirds brand since our inception in 2015. Our future innovation and product pipeline will depend, in part, on our ability to apply our expertise in materials science to source and commercialize materials that are sustainable, durable, and comfortable. Our success in leveraging these materials in our products is partially reliant on the ability of our manufacturing and supply chain partners to produce and distribute these materials at scale. It also takes months of testing before we commercialize new materials and products, which could cause delays in our existing growth plans. In addition, these initiatives may require ongoing investments which may lead to additional expenses that could delay our ability to achieve medium to long-term profitability. For example, in 2022, we debuted a new shoe within our lifestyle footwear offering, the Plant Pacer, which uses 100% plastic- and petroleum-free MIRUM plant leather from Natural Fiber Welding, Inc.
Ability to Scale Infrastructure for Profitable Growth
To grow our business, we intend to continue to improve our operational and capital efficiency and thoughtfully optimize our infrastructure. Our ability to scale relies upon our supply chain infrastructure. We believe our investments in direct and meaningful relationships with all of our partners, from raw materials suppliers to Tier 1 manufacturers and logistics providers, helps put us on a path of achieving profitable growth in the future. We will continue to make similar investments in developing partnerships across the full supply chain. Most importantly, we are firmly committed to reducing our carbon footprint and our environmental impact. This commitment may require current and future investments, which may result in higher expenses.
Macroeconomic Trends
Consumers are increasingly becoming more conscious of the products they purchase and are seeking brands that are responsible and purpose-driven. Consumers’ increasing care in the products and brands they trust have contributed to significant demand for our products. Our status as a PBC and a B Corp highlight our commitment to sustainability and our purpose while providing an objective reference point for consumers. As a purpose-native company, we believe we are well-positioned at the intersection of key macro trends impacting our industry. However, changes in macro-level consumer spending trends, including as a result of increases in inflation and interest rates, the strengthening of the U.S. dollar in
8 In the third quarter of 2022, we opened two new international stores and had three store leases expire, resulting in a net reduction of one lease.
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relation to foreign currencies, the crises in Ukraine, and the COVID-19 pandemic, could result in fluctuations in our results of operations. For example, during 2022, we utilized promotions to compete in a highly promotional environment and to drive sales. We expect to continue utilizing promotions, which may negatively impact our gross profit in the near term.
Seasonality
Our business is affected by general seasonal trends common to the retail footwear and apparel industry, with a larger percentage of our sales occurring during the end-of-year holiday period that typically falls within our fourth quarter. For example, we generated approximately 28%, 35% and 36% of our full year net revenue during the fourth quarters of 2022, 2021, and 2020, respectively.
Impact of COVID-19
The COVID-19 pandemic continues to impact the global economy and cause disruption and volatility. While the vast majority of our retail stores were open during the year ended December 31, 2022, certain locations in China and Europe were temporarily closed based on government and health authority guidance. To date, we have not permanently closed any of our retail stores due to COVID-19. Further, despite volatile sourcing and logistics headwinds, we were able to launch several new product styles during 2022, including the Tree Flyer and the Pacer in both canvas and plant leather.
We believe we will continue to experience varying levels of disruption and volatility in different markets, based on the possible sustained spread or resurgence of the pandemic. Any government response thereto increases the uncertainty regarding future economic conditions that will impact our business in the future. See the section titled “Risk Factors—Risks Related to Our Business, Brand, Products, and Industry—The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business” in Part I, Item 1A. Risk Factors, for further details.
Components of Results of Operations
Net Revenue
We generate net revenue primarily from sales of our products. We sell products directly through our own digital channels (including our websites and mobile app), our leased retail stores, and third-party wholesalers. As of December 31, 2022, the majority of our sales are through our digital channels and leased retail stores. Net revenue consists of sales of our products and shipping revenue, net of allowances for returns, discounts, and any taxes collected from customers. Revenue is recognized when we satisfy our performance obligations by transferring control of the promised goods to the customer. This occurs either upon shipment or upon receipt, depending on the terms of sale. We expect recent soft sales trends to continue into 2023, contributing to an overall decrease in net revenue from 2022.
Cost of Revenue
Cost of revenue consists primarily of the cost of purchased inventory, inbound and outbound shipping costs, import duties, distribution center and related equipment costs, and inventory write-downs or write-offs. Shipping costs to receive products from our suppliers are included in the cost of inventory and recognized as cost of revenue upon sale of products to our customers. We expect our cost of revenue to decrease or increase in absolute dollars in line with net revenue fluctuations.
Gross Profit and Gross Margin
Gross profit represents net revenue less the cost of revenue. Gross margin is gross profit expressed as a percentage of net revenue. Our gross margin may fluctuate from period to period based on a number of factors, including business outcomes, the mix of products we sell, the geographies and channels through which we sell our products, price increases or decreases, the innovation initiatives we undertake in each product category, cost drivers, such as commodity prices, transportation rates, manufacturing costs, and inventory write-downs or write-offs, among other factors. We expect that the combination of our strategy and growth initiatives in 2023 will result in a stronger gross margin profile.
Operating Expense
Selling, General, and Administrative expense
Selling, general, and administrative expense (“SG&A expense”), consists of salaries, stock-based compensation, benefits, payroll taxes, bonuses, and other related costs, which we refer to as personnel and related expenses (including for retail employees), as well as third-party consulting and contractor expenses, including non-employee stock-based
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compensation. Selling, general, and administrative expense also includes fixed and variable lease costs for corporate offices and retail stores, depreciation and amortization expense, software costs, third-party professional fees, public company operating costs, and costs related to other office functions. During 2022, we reduced our global corporate workforce by 8% and subleased one of our corporate offices in the United States as part of an effort to streamline workflows and lower operating cost, as well as executing on certain other cost control actions that will continue into 2023, including reducing our hiring and cutting discretionary spending. We expect these actions, together with our strategic transformation plan on cost and cash optimization, as announced in March 2023, to reduce costs included in SG&A expense, however, the changing prices of goods and services caused by inflation and other macroeconomic factors may cause fluctuations in SG&A expense, notwithstanding our cost control actions. Inclusive of these cost control actions, we still expect total SG&A expense to increase over time.
Marketing Expense
Marketing expense consists of advertising costs incurred to acquire new customers, retain existing customers, and build our brand awareness. We expect marketing expense to continue to increase in absolute dollars as we continue to expand our brand awareness, reignite our focused product strategy, introduce new products and iterations, and implement new marketing strategies.
Impairment Expense
Impairment expense consists of non-cash impairment charges relating to long-lived assets, which include property and equipment and operating lease right-of-use assets.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted net cash flows expected to be generated by the assets. If the carrying amount of an asset group exceeds its estimated undiscounted net future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value.
Restructuring Expense
Restructuring expense consists of severance and other personnel costs, including stock-based compensation, related to the reduction of our global corporate workforce by 8% in 2022. Restructuring expense also consists of professional service fees, and other costs associated with exit and disposal activities. We expect restructuring expense to increase in 2023 as a result of our March 2023 strategic transformation plan.
Interest Income (Expense)
Interest income (expense) primarily consists of interest income generated from our cash and cash equivalents, offset by interest expense associated with our credit agreement with JPMorgan Chase Bank, N.A. We expect interest income and expense to fluctuate based on our future bank balances, credit line utilization, and the interest rate environment.
Other Income (Expense)
Other income (expense) consists of gains or losses on foreign currency, gains or losses on sales of property and equipment, changes in the fair value of our equity investments, and changes in the fair value of our preferred stock warrant liability.
The change in fair value for our preferred stock warrant liability was related to mark to market accounting and fluctuated as the value of the underlying preferred equity increased or decreased. In November 2021, immediately prior to the completion of the IPO, and upon the issuance of shares of Class B common stock, pursuant to the terms of our outstanding convertible preferred stock warrants, our preferred stock warrants were automatically exchanged for Class B common stock on a one-to-one basis and the preferred stock warrant liability was reclassified to additional paid-in capital on the condensed consolidated balance sheet. Therefore, subsequent to November 2021, there is no longer an impact to other income (expense) as a result of changes in the fair value of the preferred stock warrant liability.
Income Tax (Provision) Benefit
Our provision for income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax
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rates and laws to taxable years in which such differences are expected to reverse. Because we have a recent history of pre-tax book losses and are expected to be in a pre-tax book loss position in the near term, a valuation allowance was maintained against the deferred tax assets in the United States, China, Hong Kong, and Vietnam as of December 31, 2022.
Results of Operations
The following table sets forth our consolidated statements of operations data for each of the periods indicated:
Year Ended December 31,
(in thousands)
Consolidated Statements of Operations Data:
Operating expense:
Impairment expense 3,286 — —
Restructuring expense 782 — —
Other comprehensive loss:
Foreign currency translation (loss) gain (4,277) (1,290) 2,245
________________
(1)Includes stock-based compensation expense of $19.0 million, $9.7 million, and $6.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.
(2)Includes depreciation and amortization expense of $15.8 million, $9.8 million, and $7.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.
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The following table sets forth our consolidated results of operations as a percentage of net revenue, for the periods presented:
Year Ended December 31,
Consolidated Statements of Operations Data, as a Percentage of Net Revenue:
Operating expense:
Selling, general, and administrative expense 56.0 % 44.0 % 39.5 %
Impairment expense 1.1 % — % — %
Restructuring expense 0.3 % — % — %
Loss from operations (33.7) % (11.8) % (13.3) %
Interest income (expense) 0.0 % (0.1) % (0.1) %
Other income (expense) 0.0 % (4.1) % (0.2) %
Loss before provision for income taxes (33.6) % (16.1) % (13.7) %
Income tax (provision) benefit (0.4) % (0.3) % 1.9 %
Other comprehensive loss:
Foreign currency translation (loss) gain (1.4) % (0.5) % 1.0 %
Total comprehensive loss (35.5) % (16.8) % (10.8) %
Comparison of the Years Ended December 31, 2022 and 2021
Net Revenue
Year Ended December 31,
(dollars in thousands)
Net revenue increased by $20.3 million, or 7.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Our sales growth was driven by an 8.4% increase in the number of units sold. This was partially offset by unfavorable foreign exchange rates which had an estimated $8.0 million impact. In the U.S., retail store sales was the primary driver of the increase in number of units sold as a result of 19 new stores opened during the year. Outside of the U.S., net revenue was roughly flat, as the business was negatively impacted by external headwinds, including unfavorable foreign exchange rates, continuing COVID-19 restrictions in China, and a decrease in discretionary consumer spending as a result of macroeconomic conditions such as increasing inflation.
Cost of Revenue, Gross Profit, and Gross Margin
Year Ended December 31,
(dollars in thousands)
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Cost of revenue increased by $37.3 million, or 28.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by an increase in costs of $19.1 million related to inventory optimization, primarily inventory write-downs and liquidation of end of life inventory, an increase of 8.4% in the volume of units sold, and an increase of $11.8 million in freight and warehousing costs.
Gross profit decreased by $17.0 million, or 11.6%, in the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in gross profit was primarily driven by an impact of $17.1 million related to inventory optimization, primarily inventory write-downs and liquidation of end of life inventory, as well as the impact of promotions, partially offset by an 8.4% in the volume of units sold.
Gross margin declined from 52.9% to 43.5% for the year ended December 31, 2022 compared to the year ended December 31, 2021, as a result of costs related to our inventory optimization, primarily inventory write-downs and liquidation of end of life inventory, higher freight and warehousing costs, increased promotional activity, and unfavorable foreign exchange rates, partially offset by a higher mix of margin accretive retail store sales.
Operating Expenses
Year Ended December 31,
(dollars in thousands)
Operating expense:
Restructuring expense 782 — 782 N/A
Selling, general, and administrative expense
Selling, general, and administrative expense increased $44.5 million, or 36.4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by an increase of $9.5 million in personnel and related expenses as a result of higher headcount, an increase of $8.9 million in rent, utilities, and office expenses as a result of 23 new stores in operation, an increase of $8.6 million in stock-based compensation and common stock warrant expense, and an increase of $5.9 million of depreciation and amortization as a result of acquiring assets for the build out of new stores and new internally developed software projects during the year. The remaining $11.6 million increase was composed of other miscellaneous operating and third-party professional expenses and fees.
Marketing expense
Marketing expense increased $1.8 million, or 3.1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. As a percentage of net revenue, marketing expense improved from 20.7% to 19.9%, due to improvements in marketing efficiencies, partially offset by our sales decline in the fourth quarter.
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Impairment expense
Impairment expense increased by $3.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 as a result of impairment of certain operating lease right-of-use assets and property and equipment in China that were impacted by COVID-related closures.
Restructuring expense
Restructuring expense increased by $0.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, and consisted primarily of severance and related costs of $0.7 million as a result of the 8% reduction of our global corporate workforce in 2022.
Interest Income (Expense)
Year Ended December 31,
(dollars in thousands)
Interest income (expense) $ 19 $ (178) $ 197 NM9
Interest income increased by $0.2 million, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was driven by an increase in interest income on our cash and cash equivalents.
Other Income (Expense)
Year Ended December 31,
(dollars in thousands)
Other income increased $11.6 million, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to a decrease of $10.6 million of expense relating to the mark to market adjustment to reflect the fair value of our preferred stock warrant liability in 2021 that was not present in 2022 and an increase of $1.0 million related to a gain on foreign currency.
Income Tax Provision
Year Ended December 31,
(dollars in thousands)
Income tax provision increased by $0.4 million, or 51.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to a mix of taxable income in foreign jurisdictions that resulted in differences in the effective tax rates.
Comparison of the Years Ended December 31, 2021 and 2020
Net Revenue
Year Ended December 31,
(dollars in thousands)
Net revenue increased $58.2 million, or 26.5%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Our sales growth was driven by a $57.7 million increase in the volume of units sold as a result of
9 NM - Not meaningful.
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strong consumer demand across geographies and channels and a strong response to new product launches during the year, with the remaining $0.5 million due to an increase in our average selling price per unit driven by modest price increases in certain of our products and product mix.
Cost of Revenue, Gross Profit, and Gross Margin
Year Ended December 31,
(dollars in thousands)
Cost of revenue increased by $24.3 million, or 22.8%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by an increase in the volume of units sold. Gross profit increased by $33.9 million, or 30.1%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in gross profit was driven by a $29.9 million increase in the volume of units sold, with the remaining $4.0 million due to an increase in gross margin rate. Our gross margin improved from 51.4% to 52.9% for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to favorable channel and geography mix, sales of higher gross margin products such as apparel, cost savings through achieving economies of scale with manufacturers and key service providers, and a modest price increase in certain of our products, partially offset by higher distribution center and logistics costs.
Operating Expenses
Year Ended December 31,
(dollars in thousands)
Operating expense:
Selling, general, and administrative expense
Selling, general, and administrative expense increased $35.5 million, or 41.0%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by an increase of $13.3 million in personnel and related expenses as a result of higher headcount, an increase of $4.7 million in stock-based compensation and common stock warrant expense, an increase of $3.7 million in rent expense as a result of an increased number of stores in operation, and an increase of $2.7 million of depreciation and amortization. The remaining $11.1 million increase was composed of other miscellaneous operating and third-party professional expenses and fees, including $4.0 million in additional expenses as a result of becoming a public company.
Marketing expense
Marketing expense increased $2.1 million, or 3.7%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. As a percentage of net revenue, marketing expense improved from 25.2% to 20.7%, due to improvements in marketing efficiencies.
Interest Expense
Year Ended December 31,
(dollars in thousands)
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Interest expense decreased $0.1 million, or 40.1%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily driven by less borrowing under the Credit Agreement in 2021 as compared to 2020.
Other Expense
Year Ended December 31,
(dollars in thousands)
Other expense increased $11.1 million, or 2445.6%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by a mark to market adjustment to reflect the increase in fair value of our preferred stock warrant liability as a result of the increase in the value of the underlying preferred equity. As noted above, in connection with our IPO in November 2021, the preferred stock warrant liability was reclassified to additional paid-in capital. Therefore, subsequent to November 2021, there will no longer be an impact to other expense related to the preferred stock warrant liability.
Income Tax Benefit (Provision)
Year Ended December 31,
(dollars in thousands)
Income tax (provision) benefit decreased by $4.9 million, or 119.7%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, resulting in an income tax provision, primarily due to the fact that the 2020 tax benefit reflected the carryback of net operating losses under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which is nonrecurring. In the prior year ended December 31, 2020, we elected to carry back 2018 and 2019 net operating losses to prior tax years.
Non-GAAP Financial Measures
This Annual Report on Form 10-K and accompanying financial tables include references to adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance, and the adjustments we make to these non-GAAP financial measures provide investors further insight into our profitability and additional perspectives in comparing our performance to other companies and in comparing our performance over time on a consistent basis. These non-GAAP financial measures should not be considered as alternatives to net loss or net loss margin as calculated and presented in accordance with GAAP.
Adjusted EBITDA is defined as net loss before stock-based compensation expense, including common stock warrant expense, depreciation and amortization expense, impairment expense, restructuring expense, other income or expense (consisting of non-cash changes in the fair value of our equity investments, non-cash gains or losses on foreign currency, non-cash gains or losses on sales of property and equipment, and non-cash changes in fair value of our preferred stock warrant liability), interest income or expense, and income tax provision or benefit.
Adjusted EBITDA margin is defined as adjusted EBITDA divided by net revenue.
There are a number of limitations related to the use of these non-GAAP financial measures. Some of these limitations are:
•adjusted EBITDA and adjusted EBITDA margin do not reflect stock-based compensation expense, including common stock warrant expense, and therefore do not include all of our compensation costs;
•adjusted EBITDA and adjusted EBITDA margin do not reflect depreciation and amortization expense and, although these are a non-cash expense, the assets being depreciated may have to be replaced in the future, increasing our cash requirements;
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•adjusted EBITDA and adjusted EBITDA margin do not reflect impairment expense for long-lived assets and, although these are a non-cash expense, the assets being impaired may not recover their fair value, increasing our cash requirements;
•adjusted EBITDA and adjusted EBITDA margin do not reflect severance, reorganization, exit, disposal and other costs associated with restructuring plans, which reduce cash available to us;
•adjusted EBITDA and adjusted EBITDA margin do not reflect other income or expense that may reduce cash available to us if the actual cash received is lower than the cash paid;
•adjusted EBITDA and adjusted EBITDA margin do not reflect interest income or expense, or the cash required to service interest on our debt, which reduces cash available to us; and
•adjusted EBITDA and adjusted EBITDA margin do not reflect income tax expense, or tax payments that may reduce cash available to us.
Further, other companies, including companies in our industry, may calculate these non-GAAP financial measures differently, which reduces their usefulness as comparative measures. Because of these limitations, we consider, and investors should consider, these non-GAAP financial measures together with other operating and financial performance measures presented in accordance with GAAP.
The following table presents a reconciliation of adjusted EBITDA to its most comparable GAAP measure, net loss:
Year Ended December 31,
(in thousands)(unaudited)
Add (deduct):
Impairment expense 3,286 — —
Restructuring expense 782 — —
(1) We are no longer excluding the revenue and cost of revenue impact associated with the inventory optimization related to the previously announced discontinuation of our first generation apparel business, the Simplification Initiatives, from Adjusted EBITDA. The impact of this change to our adjusted EBITDA for the year ended December 31, 2022 is an increase to Adjusted EBITDA loss of $17.1 million.
Adjusted EBITDA decreased by $48.8 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in adjusted EBITDA was primarily driven by the $56.0 million increase in net loss and $11.6 million decrease in other expense, which was partially offset by increases in stock-based compensation and depreciation and amortization.
Adjusted EBITDA increased by $3.8 million in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in adjusted EBITDA, despite the increase in net loss, was primarily driven by increases in stock-based compensation, depreciation and amortization, other expense, and income tax provision, partially offset by $4.0 million in additional expenses as a result of becoming a public company.
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We define adjusted EBITDA margin as adjusted EBITDA divided by net revenue. The following table presents net loss and adjusted EBITDA as percentages of net revenue:
Year Ended December 31,
(in thousands)(unaudited)
Net loss margin (34.0) % (11.8) % (7.5) %
Adjusted EBITDA margin (20.3) % (4.2) % (7.0) %
Adjusted EBITDA margin declined from (4.2)% to (20.3)% in the year ended December 31, 2022 compared to the year ended December 31, 2021 and improved from (7.0)% to (4.2)% in the year ended December 31, 2020 compared to the year ended December 31, 2019. The changes were primarily driven by the same factors as noted in the adjusted EBITDA discussion above.
Liquidity and Capital Resources
As of December 31, 2022, we had cash and cash equivalents of $167.1 million. Our operations have been funded primarily through cash flows from the sale of our products and net proceeds from private sales of equity securities. We completed our IPO in November 2021 and received aggregate proceeds of $237.0 million, net of the underwriting discounts and commissions of $15.8 million and before offering costs of $5.4 million.
We believe our existing cash and cash equivalent balances, cash flow from operations, and amounts available for borrowing under the Credit Agreement will be sufficient to meet our cash requirements over the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of our existing cash and cash equivalent balances, cash flow from operations, amounts available for borrowing under the Credit Agreement and issuances of equity securities or debt offerings.
Our material cash requirements for future capital expenditures, expected to be between $10 million and $15 million in 2023, may vary materially from those currently planned and will depend on many factors, including our revenue growth rate, the impact of our strategic transformation plan, our ability to scale across categories, geographies, and channels, our human capital costs which are not accurately estimable, our ability to execute on new marketing initiatives, the timing and extent of spending to support investments in growth and technology initiatives, the market adoption of new products, ESG initiatives to reduce and offset our carbon emissions, and overall market conditions. As we begin to execute on our strategic transformation plan announced in March 2023, we expect to see a decrease in future capital expenditures due to fewer store openings in the U.S. as well as in international markets if we transition our international go-to-market strategy to partnerships with distributors in certain markets. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital when needed or on terms acceptable to us. The inability to raise capital if needed would adversely affect our ability to achieve our business objectives.
Our material cash requirements include the following contractual and other obligations:
Debt
In February 2019, we entered into the Credit Agreement. The Credit Agreement is an asset-based loan with a revolving line of credit of up to $40.0 million and an optional accordion of up to $35.0 million. The Credit Agreement has a maturity date of February 20, 2024. As of December 31, 2022 and 2021, we had no outstanding balances under the Credit
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Agreement. See Note 9, Long-Term Debt, of our consolidated financial statements included in Part II, Item 8, for more information regarding the Credit Agreement.
Inventory Purchase Obligations
Inventory purchase obligations relate to a supplier agreement that requires us, through our manufacturers, to purchase a minimum quantity of materials per year. As of December 31, 2022, we had inventory purchase obligations of $17.7 million, with $2.3 million payable within 12 months. See Note 15, Commitments and Contingencies, of our consolidated financial statements included in Part II, Item 8, for more information regarding our inventory purchase obligations.
Operating Leases
We lease various office and retail spaces for our operations with lease terms ranging from 1 year to 12 years, certain of which contain renewal provisions. As of December 31, 2022, we had undiscounted operating lease commitments of $125.7 million, with $14.1 million payable within 12 months. See Note 16, Leases, of our consolidated financial statements included in Part II, Item 8, for more information regarding our operating lease commitments.
Cash Flows
Year Ended December 31,
(in thousands)
Operating Activities
Our largest sources of operating cash are cash payments received from customers for sales of our products. Our primary uses of cash from operating activities are for personnel and related expenses, selling and marketing expenses, and third-party professional fees. We have generated negative operating cash flows and have supplemented working capital through net proceeds from the sale of equity securities, including proceeds from our IPO in November 2021.
Net cash used in operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization of property and equipment, inventory write-offs and write-downs, and changes in operating assets and liabilities during each year.
During 2022, net cash used in operating activities was $90.6 million, which consisted of a net loss of $101.4 million and a net increase of $40.6 million in our operating assets and liabilities, partially offset by non-cash charges of $51.4 million added back to net loss. The change in operating assets and liabilities was primarily due to an increase of $24.7 million in inventory due to higher inventory on hand and higher inbound freight costs, as well as a decrease of $18.5 million in accounts payable due to timing of payments.
During 2021, net cash used in operating activities was $50.9 million, which consisted of a net loss of $45.4 million, partially offset by non-cash charges of $31.8 million and a net change of $37.3 million in our operating assets and liabilities. The change in operating assets and liabilities was primarily due to an increase of $48.5 million in inventory due to a combination of higher in-transit inventory, resulting from extended lead times and higher inbound freight costs. Additionally, the change in operating assets and liabilities was due to an increase in $11.5 million in prepaid and other current assets largely due to an increase in accounts and other receivables, offset by an increase of $25.2 million in accounts payable and accrued expenses due to timing of payments and an increase of other long-term liabilities of $5.3 million due to an increase in deferred rent liabilities.
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Investing Activities
Net cash used in investing activities primarily relates to capital expenditures to support our growth and investment in property and equipment for expansion of our business.
Net cash used in investing activities in 2022, 2021, and 2020 was $32.3 million, $25.6 million, and $16.3 million, respectively, and consisted primarily of cash outflows for the purchases of property and equipment to support the opening of retail stores across the U.S. and internationally.
Financing Activities
Net cash provided by financing activities in 2022 was $3.6 million, primarily due to net proceeds from the exercise of stock options, the issuance of common stock under the employee stock purchase plan, and the receipt of a repayment for a non-recourse promissory note, offset by payments of deferred offering costs and taxes withheld on employee stock awards.
Net cash provided by financing activities in 2021 and 2020 was $238.2 million and $102.2 million, respectively, primarily due to $237.0 million of offering proceeds from our IPO in November 2021 and net proceeds from issuances of our Series E preferred stock, respectively.
Critical Accounting Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the following accounting estimates involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations. See Note 2, Significant Accounting Policies, in the notes to our consolidated financial statements included in Part II, Item 8, for a description of our other significant accounting policies and estimates.
Revenue Recognition
Our primary source of revenue is from sales of shoes and apparel products. We determine revenue recognition in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Revenue is recognized when transfer of control to the customer has occurred, which is either upon shipment or upon receipt, depending on the terms of sale. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns from and discounts to customers. As customers may return products, we record a reserve for estimated product returns in each reporting period as a reduction of net revenue, which is based on historical return trends. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue. We believe revenue recognition is subject to uncertainty as actual return costs can differ from previous estimates based on the amount of customer returns or exchanges, which would result in adjustments to the amount of liability and corresponding revenue in the period in which such differences occur. In making such estimates, we analyze historical returns, current economic trends and changes in customer demand and acceptance of our products.
Inventory
Inventory consists of finished goods, stated at the lower of cost or net realizable value. We value our inventory using the weighted-average cost method and include product costs from our suppliers, freight, import duties and other landing costs. We periodically review inventory and make provisions as necessary to appropriately value end of life, slow-moving, damaged, and excess inventory. To determine if the value of inventory requires a write-down, we estimate the net realizable value of inventory by considering current and anticipated demand, customer preferences and buying trends, the age of the merchandise, and product quality. Inventory write-downs are recognized in cost of revenue in the condensed consolidated statements of operations and comprehensive loss. Our reserve estimates require us to make assumptions based on the current rate of sales, age of inventory, salability and profitability of inventory, all of which may be affected by changes in our product mix and consumer preferences. These adjustments are estimates which could vary significantly,
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either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations.
Impairment of Long-Lived Assets
We evaluate the recoverability of property and equipment, operating lease right-of-use assets, and other long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (asset group). The asset group is typically at the country-level for store assets and the corporate-level for corporate assets. The carrying amount of a country asset group includes stores’ operating lease right-of-use assets and property and equipment, primarily leasehold improvements. Recoverability of assets held and used is measured by comparing the carrying amount of an asset or an asset group to the estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds these estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group, based on estimated discounted net future cash flows. Assumptions used in these forecasts are consistent with internal planning, and include revenue growth rates, gross margins, and operating expense in relation to the current economic environment and our future expectations, competitive factors in its various markets, inflation, revenue trends and other relevant economic factors that may impact the asset group under evaluation.
There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis, which requires the use of estimates and assumptions. If our actual performance does not achieve our projections, or if the assumptions used change in the future, we may be required to recognize impairment charges in future periods, and any such charges could be material. We determine that triggering events, primarily related to a current-period and history of operating cash flow losses and the impact of COVID-related store closures, occurred during 2022 that required an impairment review of our long-lived assets. Based on the results of this analysis, we recorded non-cash impairment charges of $3.3 million.
Any material changes in the sum of our undiscounted cash flow estimates resulting from different assumptions used as of December 31, 2022 for those asset groups included in our evaluation could result in a material change in the long-lived asset impairment charge for fiscal year 2022. Our projections are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from our expectations.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards, including stock options and restricted stock units, or RSUs, granted to employees, directors, and non-employees, and stock purchase rights granted under the 2021 ESPP, or ESPP Rights, to employees, based on the estimated fair value of the awards on the date of grant. The fair value of each stock option and ESPP Right granted is estimated using the Black-Scholes option-pricing model. The fair value of each RSU award is based on the estimated fair value of our common stock on the date of grant.
The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the 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 to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment over the assumptions listed below. The related stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards. We account for forfeitures as they occur instead of estimating the number of awards expected to be forfeited.
These assumptions and estimates are as follows:
Fair value of common stock—As our common stock was not publicly traded prior to November 2021, the fair value was determined by our board of directors, with input from management and valuation reports prepared by third-party valuation specialists. Stock-based compensation for financial reporting purposes is measured based on updated estimates of fair value when appropriate, such as when additional relevant information related to the estimate becomes available in a valuation report issued as of a subsequent date. After our IPO, the fair value of our common stock is determined by the closing price, on the grant date, of our common stock, which is traded on Nasdaq.
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Expected dividend yield—We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used.
Expected volatility—As we did not have a trading history for our common stock prior to November 2021, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards.
Expected term—The expected term of options represents the period of time that options are expected to be outstanding. Our historical stock option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to a lack of sufficient data. For stock options granted to employees, we estimate the expected term by using the simplified method. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. For stock options granted to non-employees, the expected term equals the contractual term of the option.
Risk-free interest rate—The risk-free interest rate for the expected term of the options was based on the U.S. Treasury yield curve in effect at the time of the grant.
The assumptions for expected volatility and expected term are the two assumptions that most significantly affect the grant date fair value of stock options and ESPP Rights. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value and determining this input is not highly subjective.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimation process, which could materially impact our future stock-based compensation expense. Changes in these subjective assumptions can materially affect the estimate of the fair value of stock options and ESPP Rights and, consequently, the related amount of stock-based compensation expense recognized in our consolidated statements of operations and comprehensive loss.
Fair Value of Common Stock
Prior to our IPO in November 2021, given the absence of a public trading market of our common stock and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock, including:
•independent third-party valuations of our common stock;
•the prices at which our common and convertible preferred stock were sold to outside or existing investors;
•the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;
•our results of operations, financial position, and capital resources;
•industry outlook;
•the lack of marketability of our common stock;
•the fact that the option grants involve illiquid securities in a private company;
•the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given prevailing market conditions;
•the history and nature of our business, industry trends, and competitive environment; and
•general economic outlook including economic growth, inflation and unemployment, interest rate environment, and global economic trends.
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In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including the sale of preferred stock to unrelated third parties, combinations of income, and market approaches with input from management. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock using either the option pricing method, or OPM, or a hybrid method. The hybrid method is a hybrid of the probability weighted expected return method, or PWERM, and the OPM.
The OPM is based on a Black-Scholes option pricing model, which allows for the identification of a range of possible future outcomes, each with an associated probability. The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM include an initial public offering, as well as non-initial public offering market-based outcomes. Determining the fair value of the enterprise using the PWERM requires us to develop assumptions and estimates for both the probability of an initial public offering liquidity event and stay private outcomes, as well as the values we expect those outcomes could yield. Our common stock valuations prior to March 2021 were based on the OPM. Beginning in March 2021 and prior to our IPO in November 2021, we valued our common stock based on a hybrid method of the PWERM and the OPM.
In addition, we considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties, and whether the transactions involved investors with access to our financial information.
Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
For valuations after the completion of our IPO, our board of directors determines the fair value of each share of underlying common stock based on the closing price of our common stock on The Nasdaq Stock Market as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2, Significant Accounting Policies, in the notes to our consolidated financial statements included in Part II, Item 8.
Emerging Growth Company Status
We are currently an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and we 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 December 31, 2026, the last day of the fiscal year following the fifth anniversary of our initial public offering 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 $1.235 billion in annual gross revenue, we have more than $700.0 million in market value of our Class A stock held by non-affiliates or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, which arise during the ordinary course of business from changes in interest rates, foreign currency exchange rates, and inflationary factors. A discussion of our primary market risk exposures is presented below.
Interest Rate Risk
As of December 31, 2022, we had cash and cash equivalents of $167.1 million and a revolving line of credit of up to $40.0 million with JPMorgan Chase Bank, N.A., under which we had no amounts outstanding. Cash and cash equivalents consists primarily of cash held in financial institutions within the United States and internationally and cash in transit from third-party credit card providers. Borrowings under the revolving line of credit bear interest at variable rates.
We are exposed to market risk relating to changes in interest rates as they can affect the amount of interest income we earn on our cash and cash equivalents and the amount of interest payments we make on our debt borrowings. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of December 31, 2022, a hypothetical 10% change in interest rates would not have resulted in a material impact on our consolidated financial statements.
Foreign Currency Risk
Our consolidated financial statements are presented in U.S. dollars and the functional currency of our international subsidiaries is generally the applicable local currency. Accordingly, our results of operations are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Chinese yuan, British pound, Japanese yen, euro, Korean won, and Vietnamese dong. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of operations and comprehensive loss. Although we have not historically entered into derivative or hedging transactions, given the recent unfavorable foreign exchange rates and its impact to our revenue, we may do so in the future if our exposure to foreign currency becomes more significant. As of December 31, 2022, a hypothetical 10% change in the relative value of the U.S. dollar to other currencies would not have had a material effect on our results of operations.
Foreign currency exchange differences which arise on translation of our international subsidiaries' balance sheets into U.S. dollars are recorded in accumulated other comprehensive (loss) income within stockholders' equity on the consolidated balance sheet. As of December 31, 2022 and 2021, we had accumulated other comprehensive loss of $3.6 million and accumulated other comprehensive income of $0.7 million, respectively, as a result of foreign currency translation adjustments.
Inflation Risk
Given the recent rise in inflation, there have been and may continue to be additional pressures on the ongoing increases in supply chain and logistics costs, materials costs, and labor costs. Although we do not believe that inflation has had a material impact on our business, financial condition or results of operations, our business could be more affected by inflation in the future which could have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of net revenue if we are unable to fully offset such higher costs through price increases and cost reductions. Additionally, because we purchase inventory from our suppliers, we may be adversely impacted by their inability to adequately mitigate inflationary, industry, or economic pressures.
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Item 8. Financial Statements and Supplementary Data
ALLBIRDS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID:34) 97
Financial Statements
Consolidated Balance Sheets 98
Consolidated Statements of Operations and Comprehensive Loss 99
Consolidated Statements of Cash Flows 101
Notes to Consolidated Financial Statements 103
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Allbirds, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Allbirds, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases effective January 1, 2022, due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
San Francisco, California
March 10, 2023
We have served as the Company’s auditor since 2016.
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ALLBIRDS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
Current assets:
Prepaid expenses and other current assets 15,796 37,938
Operating lease right-of-use assets 91,232 —
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other current liabilities 23,448 46,243
Current lease liabilities 10,263 —
Noncurrent liabilities:
Noncurrent lease liabilities 95,583 —
Other long-term liabilities — 10,269
Commitments and contingencies (Note 15)
Stockholders’ equity:
Accumulated other comprehensive (loss) income (3,611) 666
Total liabilities and stockholders’ equity $ 462,364 $ 488,429
See accompanying notes to consolidated financial statements.
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ALLBIRDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
Year Ended December 31,
Operating expense:
Impairment expense 3,286 — —
Restructuring expense 782 — —
Net loss per share data:
Other comprehensive loss:
Foreign currency translation (loss) gain (4,277) (1,290) 2,245
See accompanying notes to consolidated financial statements.
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ALLBIRDS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
Shares Amount Shares Amount Shares Amount
Repurchase of unvested common stock shares — — (499,480) — — — — — — —
Vesting of warrants — — — — 192 — — 192 — —
Stock-based compensation — — — — 6,594 — — 6,594 — —
Comprehensive income — — — — — 2,245 — 2,245 — —
Vesting of common stock warrants — — — — 1,476 — — 1,476 — —
Vesting of restricted stock units 204 — — — — — — — — —
Stock-based compensation — — — — 9,744 — — 9,744 — —
Comprehensive loss — — — — — (1,290) — (1,290) — —
Vesting of common stock warrants — — — — 843 — — 843 — —
Vesting of restricted stock units 770,791 — — — — — — — — —
Repayment of non-recourse promissory note — — — — 539 — — 539 — —
Stock-based compensation — — — — 20,230 — — 20,230 — —
Comprehensive loss — — — — — (4,277) — (4,277) — —
See accompanying notes to consolidated financial statements.
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ALLBIRDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt issuance costs 49 49 49
Inventory write-down 14,437 — —
Impairment expense 3,279 — —
Change in fair value of preferred stock warrant liability — 10,624 (749)
Changes in assets and liabilities:
Cash flows from investing activities:
Investment in equity securities — (250) (2,000)
Cash flows from financing activities:
Proceeds from the issuance of preferred stock, net of issuance costs — — 101,749
Proceeds from bank loans — — 18,294
Principal payments on bank loans — — (18,294)
Payments of deferred offering costs (744) (4,691) —
Repayment of non-recourse promissory note 539 — —
Proceeds from the exercise of common stock warrants — 395 —
Proceeds from the exercise of stock options 2,751 5,484 440
Taxes withheld and paid on employee stock awards (166) — —
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ALLBIRDS, INC.
Year Ended December 31,
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Repurchase of stock options $ — $ — $ 640
Non-cash exercise of common stock warrants $ 35 $ 39 $ —
Deferred offering costs included in accrued liabilities $ — $ 744 $ —
Reconciliation of cash, cash equivalents, and restricted cash:
Restricted cash included in prepaid expenses and other current assets 632 — 700
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
1. Description of Business
Allbirds, Inc. (“Allbirds” and, together with its wholly owned subsidiaries, the “Company,” “we,” or “our”) was incorporated in the state of Delaware on May 6, 2015. Headquartered in San Francisco, California, Allbirds is a global lifestyle brand that innovates with naturally derived materials to make better footwear and apparel products in a better way, while treading lighter on our planet. The majority of our revenue is from sales directly to consumers via our digital and retail channels.
2. Significant Accounting Policies
Basis of Preparation—The consolidated financial statements have been presented in U.S. dollars and prepared in accordance with United States generally accepted accounting principles (“GAAP”). Certain monetary amounts, percentages, and other figures included elsewhere in these consolidated financial statements and accompanying notes have been subject to rounding adjustments. As such, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Principles of Consolidation—The consolidated financial statements include the accounts of Allbirds, Inc. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Coronavirus (“COVID-19”) Pandemic—In December 2019, a novel strain of coronavirus (“COVID-19”) was reported, and during 2020 and 2021 expanded into a worldwide pandemic, leading to significant business and supply chain disruptions. During the year ended December 31, 2022, aspects of our business continued to be affected by COVID-19. During these periods, the vast majority of our retail stores around the world remained open. To date, we have not permanently closed any of our retail stores due to COVID-19. Our distribution centers and retail stores continue to operate with restrictive and precautionary measures in place, subject to national, state, and local rules and regulations. At times, our suppliers and logistical service providers have experienced disruptions that have affected our operations worldwide. Similar impacts or other disruptions could occur in the future. Given the uncertainty regarding the length, severity, and ability to combat the COVID-19 pandemic, we cannot reasonably estimate the future impact on our results of operations, cash flows, or financial condition.
Dual class Common Stock—In September 2021, we filed our Eighth Amended and Restated Certificate of Incorporation, which established a dual class common stock structure. In November 2021, in connection with the closing of our Initial Public Offering (IPO), we also filed our Ninth Amended and Restated Certificate of Incorporation, which authorized a total of 2,000,000,000 shares of Class A common stock, 200,000,000 shares of Class B common stock, and 20,000,000 shares of preferred stock.
Initial Public Offering—On November 3, 2021, our Class A common stock began trading on The Nasdaq Global Select Market. In connection with the closing of the IPO on November 5, 2021, we received aggregate proceeds of $237.0 million, net of the underwriting discounts and commissions of $15.8 million and before offering costs of $5.4 million. Immediately prior to the closing of the IPO, all 70,990,919 shares of our convertible preferred stock then outstanding were converted into an equivalent number of shares of Class B common stock and we reclassified $204.0 million of convertible preferred stock to additional paid-in-capital.
Segments—Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by our chief operating decision maker (“CODM”), in deciding how to allocate resources to an individual segment and in assessing performance. Our CODMs are the co-Chief Executive Officers. We operate in one operating segment and one reportable segment, as the CODMs review financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
The following table presents long-lived assets by geographic area, comprising property and equipment - net, definite-lived intangible assets, and operating lease right-of-use assets:
Long-lived assets:
Foreign Currency Transactions—Our reporting currency is the U.S. dollar. The functional currency for each subsidiary included in these consolidated financial statements that is domiciled outside of the United States is generally the applicable local currency of that country or the U.S. dollar. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenues and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included in stockholders’ equity or deficit as a component of accumulated other comprehensive income or loss. Adjustments that arise from foreign currency exchange rate changes on transactions denominated in a currency other than the functional currency are included in other income or expense on the consolidated statements of operations and comprehensive loss.
Cash, Cash Equivalents, and Restricted Cash—We consider all highly liquid investments with an original maturity date of three months or less as cash equivalents. Cash and cash equivalents are comprised primarily of domestic and foreign bank accounts and money market funds. These cash and cash equivalents are valued based on Level 1 inputs, which consist of quoted prices in active markets. We place our cash and cash equivalents with several high credit quality financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. We have not experienced any losses in such accounts and periodically evaluate the credit worthiness of the financial institutions. Our foreign bank accounts are not subject to FDIC insurance.
Restricted cash serves as collateral for a bond with the United States Customs and Border Protection (“CBP”), which allows us to take possession of our inventory before all formalities with the CBP are completed for imported products. Restricted cash is included in prepaid expenses and other current assets on the consolidated balance sheets.
Accounts Receivable—Accounts receivable consist primarily of amounts due from customers, which results from sales to customers including credit card deposits in transit at the balance sheet date, the majority of which are settled within two to three business days, and wholesale accounts receivable, which are settled per the terms of the sale. Wholesale accounts receivable was $6.3 million and $7.9 million as of December 31, 2022 and 2021, respectively. Credit card receivables were $2.1 million and $2.2 million as of December 31, 2022 and 2021, respectively.
During the fourth quarter of 2021, we made an accounting policy change to present customer accounts receivable that are not credit card receivables, within the accounts receivable line on the consolidated balance sheet to align with management’s reporting. These types of receivables were historically immaterial and are included in prepaid and other current assets within the consolidated financial statements and accompanying footnotes for periods presented prior to 2021.
Inventory—Inventory consists of finished goods, stated at the lower of cost or net realizable value. We value our inventory using the weighted-average cost method and include product costs from our suppliers, freight, import duties and other landing costs.
We periodically review inventory and record reserves as necessary to appropriately value slow-moving, damaged, and excess inventory. To determine if the value of inventory requires a write-down, we estimate the market value of inventory by considering current and anticipated demand, customer preferences and buying trends, and the age of the merchandise. As of December 31, 2022 and 2021, we recorded an inventory reserve to reduce the value of our inventory by $8.3 million and $1.7 million, respectively, within inventory on the consolidated balance sheets. Related to these inventory reserves, and also including actual shrinkage which is recorded throughout the year based on the results of physical inventory counts, we recorded $15.9 million, $0.4 million, and $2.3 million in cost of revenue in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022, 2021, and 2020, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
Property and Equipment—Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, which are generally three to five years. Leasehold improvements are amortized over the shorter of estimated useful lives of the assets or the term of the associated property lease. Expenditures for repairs and maintenance are expensed as incurred. Upon disposal, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss as other income or expense.
Useful lives by major asset classes are below:
Asset Class Estimated Useful Lives
Computers and equipment 3 years
Furniture and fixtures 3 years
Machinery and equipment 5 years
Internal-use software 3 years
Leasehold improvements Shorter of lease term or estimated useful life
Leases—We determine if an arrangement is or contains a lease at inception by evaluating various factors, including if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration and other facts and circumstances. Lease classification is determined at the lease commencement date. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives. Variable lease payments are expensed as incurred and include certain non-lease components, such as maintenance and other services provided by the lessor to the extent the charges are variable.
We use an estimate of our incremental borrowing rate (“IBR”) based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. The IBR is the company specific rate of interest that would have to be paid by us to borrow on a collateralized basis over a similar term of the lease in a similar economic environment as of the date of the lease. In determining the appropriate IBR, we consider various factors, including, but not limited to, the lease term, our credit rating, U.S Treasury rates, and the currency in which the arrangement is denominated. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We do not separate non-lease components from lease components for our leases. In addition, we do not recognize right-of-use assets and lease liabilities for short-term leases, which have a lease term of 12 months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Lease cost for short-term leases is recognized on a straight-line basis over the lease term.
Any impairment to the associated right-of-use assets is recognized in the period the impairment occurs and is recorded in the consolidated statements of operations and comprehensive loss.
Operating leases are included in operating lease right-of-use assets, current lease liabilities, and noncurrent lease liabilities on the consolidated balance sheets. We did not have any finance leases for any periods presented.
Capitalized Internal-Use Software—Costs of software developed for internal-use is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 350-40, Internal-Use Software. Capitalization of costs begins when the preliminary project stage is completed, management authorizes and commits to funding the computer software project, it is probable that the project will be completed, and the software will be used to perform the function intended. Such costs are capitalized in the period incurred. Capitalization ceases at the point when the project is substantially complete and ready for its intended use. The capitalized costs are amortized using the straight-line method over the estimated useful lives of the software, which is generally three years. For the years ended December 31, 2022, 2021, and 2020, we capitalized $8.9 million, $5.4 million, and $5.7 million, respectively, in internal-use software recorded within property and equipment in the consolidated balance sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
Impairment of Long-Lived Assets—We evaluate the recoverability of property and equipment, operating lease right-of-use assets, and other long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (asset group). The asset group is typically at the country-level for store assets and the corporate-level for corporate assets. The carrying amount of a country asset group includes stores’ operating lease right-of-use assets and property and equipment, primarily leasehold improvements. Recoverability of assets held and used is measured by comparing the carrying amount of an asset or an asset group to the estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds these estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group, based on estimated discounted net future cash flows. Assumptions used in these forecasts are consistent with internal planning, and include revenue growth rates, gross margins, and operating expense in relation to the current economic environment and our future expectations, competitive factors in its various markets, inflation, revenue trends and other relevant economic factors that may impact the asset group under evaluation.
There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis, which requires the use of estimates and assumptions. If our actual performance does not achieve our projections, or if the assumptions used change in the future, we may be required to recognize impairment charges in future periods, and any such charges could be material. We determine that triggering events, primarily related to a current-period and history of operating cash flow losses, occurred during 2022 that required an impairment review of our long-lived assets. Based on the results of this analysis, we recorded non-cash impairment charges of $3.3 million, recognized as impairment expense in our consolidated statements of operations and comprehensive loss. $2.4 million of the charge related to a reduction of the carrying value of our operating lease right-of-use assets, and $0.9 million related to a reduction of the carrying value of leasehold improvements included within property and equipment - net.
There were no impairment losses recorded for the years ended December 31, 2021 and 2020.
Restructuring—In the third quarter of 2022, we announced plans to streamline workflows and lower operating costs. As part of this effort, we reduced our global corporate workforce by terminating 24 individuals, representing approximately 8% of our global corporate workforce, resulting in severance and employee-related termination costs, including stock-based compensation, recognized as restructuring expense in the consolidated statements of operations and comprehensive loss. In addition, we vacated one of our corporate office leases in the United States and subleased the space to another lessee.
The following table presents a roll-forward of our severance and employee-related termination costs, which is included within accrued expenses and other current liabilities in the consolidated balance sheets:
(in thousands) Severance and employee-related termination costs
Balance as of December 31, 2021 $ —
Cash Payments (665)
Balance as of December 31, 2022 $ —
Revenue Recognition—Our primary source of revenue is from sales of shoes and apparel products. We account for revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers, for all periods presented.
We recognize revenue through the following steps:
1.identification of the contract, or contracts, with the customer;
2.identification of the performance obligations in the contract;
3.determination of the transaction price;
4.allocation of the transaction price to the performance obligations in the contract; and
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AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
5.recognition of revenue when, or as, we satisfy a performance obligation.
Revenue transactions associated with the sale of our inventory comprise a single performance obligation which consists of the sale of products to customers through our direct to consumer or wholesale channels. Payment is due either at the time of purchase or within a timeframe specified in the contract, without significant financing components. The consideration received from customers is not variable. We satisfy the performance obligation and record revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. Control is transferred to wholesale customers upon shipment. Control transfers to retail store customers at the time of sale and to digital customers upon shipment. This transfer of control represents a single deliverable and revenue is recognized at a point in time. We account for shipping and handling fees charged to customers as revenue and we account for shipping and handling costs as fulfillment costs. We recognize the revenue and cost associated with shipping and handling at the time the products are shipped to the customer. Discounts provided to customers are accounted for as a reduction of revenue. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
We have two types of contract liabilities: (i) cash collections of purchases, which are included in deferred revenue and are recognized as revenue upon shipment; and (ii) unredeemed gift cards and merchandise credits, which are included in deferred revenue and recognized as revenue upon redemption.
Gift cards sold to customers do not carry an expiration date and are recorded as deferred revenue until they are redeemed, at which point revenue is recognized. From historical experience, a majority of gift cards are redeemed within a 12-month period from the card issuance date.
We record a reserve for estimated product returns, based upon historical return trends, in each reporting period as an offsetting decrease of net revenue, with an increase to our sales-refund reserve in accrued expenses. We have also recorded a related inventory returns receivable in prepaid expenses and other current assets, with an offsetting decrease to cost of revenue, as of December 31, 2022 and 2021 in the consolidated balance sheets.
For the years ended December 31, 2022, 2021, and 2020, we recognized $4.2 million, $2.9 million, and $2.1 million respectively, of revenue that was deferred as of December 31, 2021, 2020, and 2019. As of December 31, 2022 and 2021, we had $0.4 million and $0.7 million, respectively, in cash collections of purchases via our digital channel which had not yet shipped, and $3.6 million and $3.5 million, respectively, in gift card liabilities included in deferred revenue in the consolidated balance sheets. The deferred revenue balance of $4.1 million at December 31, 2022 is expected to be recognized over the next 12 months.
The following table disaggregates our net revenue by geographic area, where no individual foreign country contributed in excess of 10% of net revenue for the years ended December 31, 2022, 2021, and 2020. We recognized the following net revenue by geographic area based on the primary shipping address of the customer when the sale was made in our digital or third party channel, and based on the physical store location when the sale was at a retail store:
Net revenue by primary geographical market:
Cost of Revenue—Cost of revenue primarily consists of the cost of purchased inventory, inbound and outbound shipping costs, import duties, distribution center and related equipment costs, and inventory write-offs and write-downs. Shipping costs to receive products from our suppliers are included in the cost of inventory and recognized as cost of revenue upon sale of products to our customers.
Selling, General, and Administrative Expense—Selling, general, and administrative expense consists of personnel and related expenses, including stock-based compensation, as well as third-party consulting and contractor expenses. It also includes fixed and variable lease costs, depreciation and amortization expense, software costs, third-party professional fees, payment processing fees, and other general expenses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
Marketing Expense—Marketing expense consists of advertising costs and is expensed as incurred.
Stock-Based Compensation—Stock-based compensation expense related to stock awards, including stock options and restricted stock units (“RSUs”), and stock purchase rights granted under the 2021 Employee Stock Purchase Plan (“ESPP Rights”), is recognized based on the estimated fair value of the awards on the date of the grant. The fair value of each stock option award and ESPP Right is valued on the grant date using the Black-Scholes option pricing model. The fair value of each RSU is based on the estimated fair value of our common stock on the date of grant. Stock-based compensation is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for in the period in which they occur.
The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the 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 to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment.
Prior to our IPO in November 2021 and the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock.
In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods, including the sale of preferred stock to unrelated third parties and combinations of income and market approaches, with input from management. In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties, and whether the transactions involved investors with access to our financial information.
Income Taxes—We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. We determine whether a valuation allowance is necessary in accordance with the provisions of the FASB ASC 740, Income Taxes. We recognize the benefits from our deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be realized.
Our estimate of the potential outcome of any uncertain tax position is subject to our assessment of relevant risks, facts, and circumstances existing at that time. Obtaining new information, settlements with tax authorities and the expiration of statutes of limitations may cause adjustments in income tax expense in the period this occurs.
Fair Value Measurements—FASB ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs, such as quoted prices in active markets
Level 2—Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3—Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions.
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We record cash and cash equivalents, accounts receivable, accounts payable, and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
accrued expenses at cost. The carrying values of these instruments approximate their fair value due to their short‐term maturities. We hold certain assets and liabilities that are required to be measured at fair value on both a recurring and non-recurring basis, which are outlined in Note 8, Fair Value Measurements.
Emerging Growth Company—As an “emerging growth company,” the Jumpstart Our Business Startups Act, or the JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. For certain pronouncements, we have elected to use the adoption dates applicable to private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC 842”), which requires recognition of lease assets and lease liabilities in the balance sheet by the lessees for lease contracts with a lease term of more than 12 months. We adopted ASC 842 as of January 1, 2022, under the modified retrospective transition approach. The new standard provides a number of optional practical expedients in transition. We elected practical expedients permitted under the standard, specifically to not reassess our prior conclusions about lease identification, to not reassess lease classification, and to not reassess whether any expired or existing contracts are or contain leases. We did not elect the practical expedient allowing the use of hindsight which would require us to reassess the lease term of its leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to our current contract portfolio.
Upon adopting ASC 842, we recognized operating lease right-of-use assets and current and noncurrent lease liabilities on our consolidated balance sheets for our retail stores and corporate offices. Upon adoption, we recorded operating lease right-of-use assets of $75.0 million, and current and noncurrent lease liabilities of $84.4 million. We reclassified $8.9 million of historical deferred rent, prepaid rent, and tenant improvement allowances to operating lease right-of-use assets. The adoption did not impact our consolidated statements of operations and comprehensive loss or opening balance of accumulated deficit. See Note 16, Leases, for more details over our operating leases.
In August 2018, the FASB issued ASU No. 2018-15, Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”). In discussing the topic of cloud computing accounting, ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 can be applied on a retrospective or prospective basis and is effective for financial statements issued for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. On January 1, 2021, we adopted ASU 2018-15 prospectively and cloud computing implementation costs incurred on or after January 1, 2021 are included in other assets in the consolidated balance sheet and are presented within operating cash flows. As of December 31, 2022, capitalized implementation costs for cloud computing arrangements were not material. The adoption did not have a material impact on our consolidated financial statements.
In December 2021, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. For emerging growth companies that have elected the extended transition period for adopting new or revised accounting standards, ASU 2019-12 is effective for the Company’s fiscal year beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade and account receivables, which may result in the earlier recognition of allowance for losses. In November 2019, the FASB issued Accounting Standards Update 2019-10, which deferred the effective date for nonpublic entities, including emerging growth companies,
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AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
that had not yet adopted ASU 2016-13. Under the amended guidance, the standard will be effective for our fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2016-13 is not expected to have a material impact on our consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective for fiscal years beginning after December 31, 2022. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The guidance is effective for our fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The adoption of ASU 2020-06 is not expected to have a material impact on our consolidated financial statements and related disclosures.
3. Inventory
Inventory consisted of the following as of December 31, 2022 and 2021:
Reserve to reduce inventories to net realizable value (8,269) (1,709)
4. Property and Equipment - Net
Property and equipment consisted of the following as of December 31, 2022 and 2021:
Machinery and equipment 884 780
Less: accumulated depreciation and amortization (36,167) (20,927)
Total property and equipment - net $ 54,340 $ 37,955
Depreciation and amortization expense for the years ended December 31, 2022, 2021, and 2020 was $15.8 million, $9.8 million, and $6.7 million, respectively, recognized as selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss. There were $0.0 million, $0.2 million, and $0.0 million assets disposed of in the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022 and 2021, unamortized capitalized internal-use software costs were $16.5 million and $10.6 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of December 31, 2022 and 2021:
Restricted cash 632 —
Total prepaid expenses and other current assets’ $ 15,796 $ 37,938
As part of the adoption of ASC 842, we reclassified $4.6 million of other receivables to operating lease right-of-use assets and current and noncurrent lease liabilities as of December 31, 2022. The other receivables being reclassified consisted of lease incentives for the construction of leasehold improvements for new retail store openings.
6. Other Assets
Other assets consisted of the following as of December 31, 2022 and 2021:
Investment in equity securities $ 2,250 $ 2,250
Debt issuance costs 57 107
Investments in equity securities
On November 20, 2020, we entered into an agreement to make a minority equity investment of $2.0 million in Natural Fiber Welding, Inc. in exchange for 201,207 shares of Series A-3 Preferred Stock. Our investment is carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Throughout the year, we assess whether impairment indicators exist to trigger the performance of an impairment analysis. There were no impairment charges or observable price changes for the years ended December 31, 2022 and 2021.
On November 22, 2021, we made a $0.3 million investment in NoHo ESG, Inc. via a simple agreement for future equity (“SAFE”). The SAFE provides that we will automatically receive shares of the entity based on the conversion rate of future equity rounds up to a valuation cap. If there is a liquidity event, such as a change in control or initial public offering, we will have the option of receiving a cash payment equal to the purchase amount or receiving a number of shares of common stock based on the purchase amount divided by the liquidity price, assuming we fail to select the cash option. Our investment is carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Throughout the year, we assess whether impairment indicators exist to trigger the performance of an impairment analysis. There were no impairment charges or observable price changes for the years ended December 31, 2022 and 2021.
Definite-lived intangible assets
Intangible assets include intellectual property purchased from West Harbor Technologies, LLC for $1.3 million, including transaction costs of $0.1 million, in January 2020. The intangible asset has an estimated useful life of 3 years and
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ALLBIRDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021 AND FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
amortization of $0.4 million, $0.4 million, and $0.4 million was recognized in selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022, 2021, and 2020, respectively.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following as of December 31, 2022 and 2021:
Total accrued expenses and other current liabilities $ 23,448 $ 46,243
8. Fair Value Measurements
Items Measured at Fair Value on a recurring basis
Money Market Funds—In December 2022, we transferred $82.0 million of cash to JPMorgan Chase Bank, N.A to invest in a U.S. treasury securities money market fund. The funds are classified as cash and cash equivalents on our consolidated balance sheet as of December 31, 2022 and represent Level 1 assets on the fair value hierarchy.
Warrant Liability—The fair value of our preferred stock warrant liability was based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the convertible preferred stock warrant liability, we used the probability weighted average values from (i) a Black-Scholes calculation and (ii) an option pricing model. We measure and report our preferred stock warrant liability at the estimated fair value on a recurring basis. As discussed further in Note 11, Warrants, the preferred stock warrant liability was estimated using assumptions related to the remaining contractual term of the warrants, the risk-free interest rate and volatility of comparable public companies over the remaining term, and the fair value of underlying shares. The significant unobservable inputs used in the fair value measurement of the preferred stock warrant liability were the fair value of the underlying stock at the valuation date and the estimated term of the warrants. The value from the Black-Scholes calculation reflects the value in an initial public offering scenario with the contractual term of the warrants, which was weighted by management’s estimated probability of a potential initial public offering at the applicable valuation date. The value from the option pricing model reflects the value in an alternative exit scenario at which point the warrants were expected to be exercised. Generally, increases or decreases in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.