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Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (“Form 10-K). This discussion and other parts of this Form 10-K contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, which involve risks and uncertainties. Our actual results could differ materially from those discussed in these 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 sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Form 10-K.

Overview

A pioneer of the direct-to-consumer model, Warby Parker is one of the fastest-growing brands at scale in the United States. We are a mission-driven, lifestyle brand that operates at the intersection of design, technology, healthcare, and social enterprise.

Since day one, our focus on delighting customers and doing good has created a foundation for continuous innovation:

•We aim to provide customers with the highest-quality product possible by designing glasses at our headquarters in New York City, using custom materials, and selling direct to the customer. By cutting out the middleman, we are able to sell our products at a lower price than many of our competitors and pass the savings on to our customers. In addition to lower prices, we introduced simple, unified pricing (glasses starting at $95, including prescription lenses) to the eyewear market.

•We’ve built a seamless shopping experience that meets customers where and how they want to shop, whether that’s on our website, on our mobile app, or in our more than 160 retail stores.

•We’ve crafted a holistic vision care offering that extends beyond glasses to include contacts, vision tests and eye exams, vision insurance, and beyond. We leverage leading (and in many cases proprietary) technology to enhance our customers’ experiences, whether it’s to help them find a better-fitting frame using our Virtual Try-On tool, or to update their prescription from home using Virtual Vision Test, our telehealth app.

•We recruit and retain highly engaged, motivated team members who are driven by our commitment to scaling a large, growing business while making an impact and are excited to connect their daily work back to our mission.

•We are a public benefit corporation focused on positively impacting all stakeholders, and hope to inspire other entrepreneurs and businesses to think along the same lines. Working closely with our nonprofit partners, we distribute glasses to people in need in more than 50 countries globally and many parts of the United States. Over 10 million more people now have the glasses they need to learn, work, and achieve better economic outcomes through our Buy a Pair, Give a Pair program.

We generate revenue through selling our wide array of prescription and non-prescription eyewear, including glasses, sunglasses, and contact lenses. We also generate revenue from providing eye exams and vision tests, and selling eyewear accessories. We maintain data across the entire customer journey that allows us to develop deep insights, informing our innovation priorities and enabling us to create a highly personalized, brand-enhancing experience for our customers. We have built an integrated, multichannel presence that we believe deepens our relationship with existing customers while broadening reach and accessibility. And while we have the ability to track where our customers transact, we’re channel agnostic to where the transaction takes place and find that many of our customers engage with us across both digital and physical channels; for example, many customers who check out online also visit a store throughout their customer journey, while others choose to browse online before visiting one of our stores.

Financial Highlights

For the years ended December 31, 2021, 2020, and 2019:

•we generated net revenue of $540.8 million $393.7 million, and $370.5 million, respectively;

•we generated gross profit of $317.7 million, $231.9 million, and $223.1 million, respectively, representing a gross profit margin of 59%, 59%, and 60%, respectively;

•we generated net (loss) income of $(144.3) million, $(55.9) million, and zero, respectively; and

•we generated adjusted EBITDA of $24.9 million, $7.7 million, and $21.9 million, respectively.

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For a definition of adjusted EBITDA, a non-GAAP measure, and a reconciliation to the most directly comparable GAAP measure, see the section titled “Key Business Metrics and Certain Non-GAAP Financial Measures.”

Direct Listing

On September 29, 2021, we completed a direct listing of our Class A common stock (the “Direct Listing”) on the New York Stock Exchange (“NYSE”). We incurred fees related to financial advisory service, audit, and legal services in connection with the Direct Listing and recorded general and administrative expenses of $28.3 million for the year ended December 31, 2021.

Key Business Metrics and Certain Non-GAAP Financial Measures

In addition to the measures presented in our consolidated financial statements, we use the following key business metrics and certain non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. The following table summarizes our key performance indicators and non-GAAP financial measures for the periods presented, which are unaudited.

Year Ended December 31,

Adjusted EBITDA margin(2) 4.6 % 1.9 % 5.9 %

__________________

(1)Store Count number at the end of the period indicated.

(2)Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of net loss, the most directly comparable GAAP measure, to adjusted EBITDA and adjusted EBITDA margin, see the section titled "Adjusted EBITDA and Adjusted EBITDA Margin”

Active Customers

The number of Active Customers is a key performance measure that we use to assess the reach of our physical retail stores and digital platform as well as our brand awareness. We define an Active Customer as a unique customer that has made at least one purchase in the preceding 12-month period. We determine our number of Active Customers by counting the total number of customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. Given our definition of a customer is a unique customer that has made at least one purchase, it can include either an individual person or a household of more than one person utilizing a single account.

Store Count

Store Count is a key performance measure that we use to reach consumers and generate incremental demand for our products. We define Store Count as the total number of retail stores open at the end of a given period. We believe our retail stores embody our brand, drive brand awareness, and serve as efficient customer acquisition vehicles. Our results of operations have been and will continue to be affected by the timing and number of retail stores that we operate.

We have thoughtfully expanded our retail store footprint over the past several years. During the years ended December 31, 2021, 2020, and 2019, we opened 35, 10, and 32 new retail stores. In 2020, we opened fewer retail stores than in years prior due to the COVID-19 pandemic-related operating challenges, including extended retail store closures and heightened safety measures.

As of December 31, 2021, 107 out of our 161 retail stores offered in-person eye exams.

Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted EBITDA as net income (loss) before interest and other income (loss), taxes, and depreciation and amortization as further adjusted for stock-based compensation expense and related employer payroll taxes, non-cash charitable donations, and non-recurring costs such as direct listing or other transaction costs. We define adjusted EBITDA margin as adjusted EBITDA divided by net revenue. We caution investors that amounts presented in accordance with our definitions of adjusted EBITDA and adjusted EBITDA margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate adjusted EBITDA and adjusted EBITDA margin in the same manner. We present adjusted EBITDA and adjusted EBITDA margin because we

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consider these metrics to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.

Management uses adjusted EBITDA and adjusted EBITDA margin:

•as a measurement of operating performance because they assist us in evaluating the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

•for planning purposes, including the preparation of our internal annual operating budget and financial projections;

•to evaluate the performance and effectiveness of our operational strategies; and

•to evaluate our capacity to expand our business.

By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA and adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net loss or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:

•such measures do not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;

•such measures do not reflect changes in, or cash requirements for, our working capital needs;

•such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

•such measures do not reflect our tax expense or the cash requirements to pay our taxes;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Due to these limitations, adjusted EBITDA and adjusted EBITDA margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. Each of the adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.

For the year ended December 31, 2021, adjusted EBITDA and adjusted EBITDA margin were $24.9 million and 4.6%, respectively, and for the year ended December 31, 2020, adjusted EBITDA and adjusted EBITDA margin were $7.7 million and 1.9%, respectively. In 2020, we experienced a significant decline in adjusted EBITDA due to the COVID-19 pandemic-related operating challenges, including extended retail store closures and heightened safety measures.

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The following table reconciles adjusted EBITDA and adjusted EBITDA margin to the most directly comparable GAAP measure, which is net loss:

Year Ended December 31,

Adjusted to exclude the following:

Interest and other (loss) income, net 347 97 (1,939)

Non-cash charitable donation 7,757 — —

Transaction costs 28,262 — —

Adjusted EBITDA margin 4.6 % 1.9 % 5.9 %

Impact of COVID-19 Pandemic

Throughout the pandemic, our team has remained committed to ensuring we could get our customers the glasses they needed to see and live their daily lives. We continue to invest both in our physical stores, adding 35 new stores in 2021, and in our at-home and digital offerings like Home Try-On, Virtual Try-On, and Virtual Vision Test. In addition, we have onboarded and continue to onboard new suppliers, as well as enhance inventory planning and monitoring capabilities. We believe these actions have positioned us favorably for now and the future, and despite the ongoing impact of new COVID-19 variants in 2021, we saw a return to growth with a 37.4% and 46.0% increase in net revenue in 2021 as compared to 2020 and 2019, respectively.

We also evolved our do-good efforts to maximize impact during the pandemic by responding to the immediate needs of our longest-standing partner, VisionSpring, to protect healthcare workers and slow COVID-19 transmission in high risk communities where they work. Starting on April 1, 2020, for a portion of Warby Parker glasses purchased, we worked with VisionSpring to distribute personal protective equipment and prevention supplies to people in need. This temporary pivot continued through the end of 2020 and into 2021, at which point our partners were able to scale their distribution efforts again. Through our support, VisionSpring provided over four million units of PPE and preventative health supplies in 2021 and 2020.

The health and safety of our customers and employees remains our top priority, and to that end we will continue to monitor developments related to the COVID-19 pandemic and adjust policies and operations as needed. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the uncertainty, we cannot estimate the financial impact of the pandemic on our future results of operations, cash flows, or financial condition. For additional details, refer to the risks described elsewhere in this Annual Report on Form 10-K, including those described in Part I, Item 1A. “Risk Factors.”

Components of Results of Operations

Net Revenue

We primarily derive revenue from the sales of eyewear products, optical services, and accessories. We sell products and services through our retail stores, website, and mobile apps. Revenue generated from eyewear products includes

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the sales of prescription and non-prescription optical glasses and sunglasses, contact lenses, eyewear accessories, and expedited shipping charges, which are charged to the customer, associated with these purchases. Revenue is recognized when the customer takes possession of the product, either at the point of delivery or in-store pickup, and is recorded net of returns and discounts. Revenue generated from services consist of both in-person eye exams in cases where we directly employ the optometrist, and prescriptions issued through the Virtual Vision Test app. Revenue is recognized when the service is rendered and is recorded net of discounts.

Cost of Goods Sold

Cost of goods sold includes the costs incurred to acquire materials, assemble, and sell our finished products. Such costs include (i) product costs held at the lesser of cost and net realizable value, (ii) freight and import costs, (iii) optical laboratory costs, (iv) customer shipping, (v) occupancy and depreciation costs of retail stores, and (vi) employee-related costs associated with our prescription services and optical laboratories, which includes salaries, benefits, bonuses, and stock-based compensation. We expect our cost of goods sold to fluctuate as a percentage of net revenue primarily due to product mix, customer preferences and resulting demand, customer shipping costs, and management of our inventory and merchandise mix. Cost of goods sold also may change as we open or close retail stores because of the resulting change in related occupancy and depreciation costs. Over time we expect our cost of goods sold to increase with revenue due to an increased number of orders and with the opening of new retail stores driven by the resulting occupancy and depreciation costs and employee-related costs associated with prescription services offerings at our retail stores.

Gross Profit and Gross Margin

We define gross profit as net revenues less cost of goods sold. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin has remained steady historically, but may fluctuate in the future based on a number of factors, including the cost at which we can obtain, transport, and assemble our inventory, the rate at which we open new retail stores, and how effective we can be at controlling costs, in any given period.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses, or SG&A, primarily consist of employee-related costs including salaries, benefits, bonuses, and stock-based compensation for our corporate and retail employees, marketing, information technology, credit card processing fees, donations in connection with our Buy a Pair, Give a Pair program, facilities, legal, and other administrative costs associated with operating the business. Marketing costs, which consist of both online and offline advertising, include sponsored search, online advertising, marketing and retail events, and other initiatives. SG&A also includes administrative costs associated with our Home Try-On program, which provides customers the opportunity to sample eyewear at home prior to purchase. We expect SG&A to increase in absolute dollars over time and to fluctuate as a percentage of revenue due to the anticipated growth of our business, increased marketing investments, and changing prices of goods and services. SG&A is expensed in the period in which it is incurred.

Interest and Other (Loss) Income, Net

Interest and other (loss) income, net, consists primarily of interest generated from our cash and cash equivalents balances net of interest incurred on borrowings and fees on our undrawn line of credit, and are recognized as incurred. We expect our interest and other income costs to fluctuate based on our future bank balances and credit line utilization.

Provision for Income Taxes

Provision for income taxes consists of income taxes related to foreign and domestic federal and state jurisdictions in which we conduct business, adjusted for allowable credits, deductions, and valuation allowance against deferred tax assets.

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Results of Operations

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. The following tables set forth our results of operations for the periods presented in dollars and as a percentage of net revenue:

Year Ended December 31,

(in thousands)

Consolidated Statements of Operations Data:

Interest and other (loss) income, net (347) (97) 1,939

Year Ended December 31,

% of Net Revenue

Consolidated Statements of Operations Data:

Selling, general, and administrative expenses 85.3 % 73.0 % 60.7 %

Loss from operations (26.5) % (14.1) % (0.4) %

Interest and other (loss) income, net (0.1) % — % 0.5 %

(Loss) income before income taxes (26.6) % (14.1) % 0.1 %

Provision for income taxes — % — % 0.1 %

Net (loss) income (26.6) % (14.1) % — %

Comparison of the Years Ended December 31, 2021 and 2020

Net Revenue

Year Ended December 31,

(in thousands)

Net revenue increased $147.1 million, or 37.4%, for the year ended December 31, 2021 compared to the same period in 2020. The increase in net revenue was primarily driven by an increase in our Active Customer base to 2.20 million customers, or a 21.7% increase, as well as an increase in AOV that elevated average revenue per customer to $246, or a 12.8% increase. AOV increased primarily due to a higher mix of purchases of glasses with progressive lenses which increased our total average price per unit sold, while our average units per order increased moderately year-over-year.

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Due to COVID-19, we temporarily closed our retail stores, which impacted our net revenue for the year ended December 31, 2020 and also led to a shift in purchases through our e-commerce channel.

Cost of Goods Sold, Gross Profit, and Gross Margin

Year Ended December 31,

(in thousands)

Cost of goods sold increased by $61.3 million, or 37.9%, for the year ended December 31, 2021 compared to the same period in 2020, and increased as a percentage of revenue over the same period by 10 basis points, from 41.1% of revenue to 41.2% of revenue. The increase in cost of goods sold was primarily driven by increased product and fulfillment costs associated with the growth in net revenue, as well as an increase in store occupancy and depreciation expense due to new retail stores opened in 2021 and a full-year of expense from new retail stores opened throughout 2020.

Gross profit, calculated as net revenue less cost of goods sold, increased by $85.8 million, or 37.0%, for the year ended December 31, 2021 compared to the same period in 2020, primarily due to the increase in revenue in 2021 as compared to 2020.

Gross margin, expressed as a percentage and calculated as gross profit divided by net revenue, decreased by 10 basis points for the year ended December 31, 2021 compared to the same period in 2020. The decrease in gross margin was primarily a result of the growth in our contact lens offering, which is sold at a lower margin than our other eyewear, and a prior year benefit generated from retroactive tariff refunds. These decreases were partially offset by the impact of the temporary closure of our retail stores in the year ended December 31, 2020 due to COVID-19. During 2020, we continued to incur retail store occupancy and depreciation costs while stores were closed which negatively impacted gross margin in the prior year period.

Selling, General, and Administrative Expenses

Year Ended December 31,

(in thousands)

As a percentage of net revenue 85.3 % 73.0 % 12.3 %

Selling, general, and administrative expenses increased $173.8 million, or 60.5%, for the year ended December 31, 2021 compared to the same period in 2020. This increase was primarily driven by a $64.5 million increase in stock-based compensation charges and related employer payroll taxes, higher compensation costs from growth in our workforce, increased marketing costs as we continued to invest in performance marketing and our Home Try-On program, $28.3 million of costs incurred with our Direct Listing, and charitable expenses of $7.8 million for the donation of stock to the Warby Parker Foundation in August 2021. The stock-based compensation charges incurred in 2021 primarily related to the satisfaction of the performance based vesting condition for RSUs and PSUs in connection with our Direct Listing. The same period in the prior year included elevated stock-based compensation of $41.7 million primarily associated with the sale of shares by employees to a third-party investor.

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Interest and Other Loss, Net

Year Ended December 31,

(in thousands)

As a percentage of net revenue (0.1) % — % (0.1) %

Interest and other loss, net decreased by $0.3 million, or 257.7%, for the year ended December 31, 2021 compared to the same period in 2020. This decrease was primarily driven by fair value adjustments to outstanding warrants that were exercised in 2021 and a reduction in interest income due to a lower interest rate environment, partially offset by lower interest expense due to the repayment of borrowings under the Credit Facility in August 2020.

Provision for Income Taxes

Year Ended December 31,

(in thousands)

As a percentage of net revenue — % — % — %

Provision for income taxes increased $0.1 million, or 38.4%, for the year ended December 31, 2021 compared to the same period in 2020 primarily due to the change in pre-tax loss in addition to the tax effects of nondeductible officers’ stock-based compensation expense.

Comparison of the Years Ended December 31, 2020 and 2019

Net Revenue

Year Ended December 31,

(in thousands)

Net revenue increased $23.3 million, or 6.3%, for the year ended December 31, 2020 compared to the same period in 2019. This increase was driven by an increase of 1.5% in Active Customers from 1.78 million in 2019 to 1.81 million along with an increase in AOV as orders per Active Customer remained consistent from 2019 to 2020. The increase in AOV was driven by a higher mix of purchases of glasses with progressive lenses and with lens treatments (e.g., blue-light-filtering, light-responsive) which increased our total average price per unit sold, while our average units per order remained consistent year-over-year. Due to COVID-19, we temporarily closed our retail stores, which impacted our net revenue for the year ended December 31, 2020 and also led to a shift in purchases through our e-commerce channel.

Cost of Goods Sold, Gross Profit, and Gross Margin

Year Ended December 31,

(in thousands)

Cost of goods sold increased by $14.4 million, or 9.8%, for the year ended December 31, 2020 compared to the same period in 2019, and increased as a percentage of revenue over the same period by 130 basis points, from 39.8% of revenue to 41.1% of revenue. The increase in cost of goods sold was primarily driven by increased product and fulfillment costs associated with the growth in net revenue, as well as an increase in store occupancy and depreciation

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expense due to new retail stores opened in 2020 and a full-year of expense from new retail stores opened throughout 2019.

Gross profit, calculated as net revenue less cost of goods sold, increased by $8.8 million, or 4.0%, for the year ended December 31, 2020 compared to the same period in 2019, primarily due to the increase in revenue in 2020 as compared to 2019.

Gross margin, expressed as a percentage and calculated as gross profit divided by net revenue, decreased by 130 basis point for the year ended December 31, 2020 compared to the same period in 2019. The decrease in gross margin was primarily a result of an increase in costs that are not directly driven by products sold, including retail store occupancy and depreciation costs and employee-related costs associated with our prescription services. During 2020, we continued to incur retail store occupancy and depreciation costs while stores were closed which negatively impacted gross margin in the prior year period.

Selling, General, and Administrative Expenses

Year Ended December 31,

(in thousands)

As a percentage of net revenue 73.0 % 60.7 % 12.3 %

Selling, general, and administrative expenses increased $62.8 million, or 27.9%, for the year ended December 31, 2020 compared to the same period in 2019. This increase was primarily driven by a $41.7 million stock-based compensation charge, or 10.8% of net revenue, in connection with shares held by employees that were sold to a third-party investor at the same time as our Series G redeemable convertible preferred stock issuance. Excluding these costs, SG&A expenses increased $21.1 million or 9.4%. The increase in SG&A as a percentage of net revenue was primarily driven by an increase in marketing and Home Try-On costs to support and capitalize on increased demand for at-home shopping due to the impact of the COVID-19 pandemic. This increase as a percentage of net revenue was partially offset by a reduction in general corporate overhead expenses as a percentage of revenue.

Interest and Other (Loss) Income, Net

Year Ended December 31,

(in thousands)

Interest and other (loss) income, net $ (97) $ 1,939 $ (2,036) (105.0) %

As a percentage of net revenue — % 0.5 % (0.5) %

Interest and other (loss) income, net decreased by $2.0 million, or 105.0%, for the year ended December 31, 2020 compared to the same period in 2019. This decrease was primarily driven by a reduction in interest income due to a lower interest rate environment, interest expense on borrowings under the Credit Facility, and the timing and amounts of cash balances.

Provision for Income Taxes

Year Ended December 31,

(in thousands)

As a percentage of net revenue — % 0.1 % (0.1) %

Provision for income taxes decreased $0.1 million, or 31.2%, for the year ended December 31, 2020 compared to the same period in 2019 primarily driven by a reduction in state taxes.

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Liquidity and Capital Resources

Since inception, we have financed our operations primarily from net proceeds from the sale of redeemable convertible preferred stock and cash flows from operating activities. As of December 31, 2021, we had cash and cash equivalents of $256.4 million, which was primarily held for working capital purposes, and an accumulated deficit of $493.2 million.

We expect that operating losses could continue in the foreseeable future as we continue to invest in the expansion of our business and sales and marketing activities. We believe our existing cash and cash equivalents, funds available under our existing credit facility, and cash flows from operating activities will be sufficient to fund our operations for at least the next 12 months.

However, our future capital requirements will depend on many factors, including, but not limited to, growth in the number of retail stores, the needs of our optical laboratories and distribution network, expansion of our product offerings or service capabilities, and the timing of investments in technology and personnel to support the overall growth in our business. 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 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. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. In particular, the recent COVID-19 pandemic has caused disruption in the global financial markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.

Credit Facility

In August 2013, we entered into the Loan and Security Agreement with Comerica Bank, or the Credit Facility, as amended, that consists of a revolving credit line of up to $50.0 million. The revolving credit line has a sub-limit of up to $15.0 million for the issuance of letters of credit. Borrowings under the revolving credit line bear interest on the principal amount outstanding at a variable interest rate based on either LIBOR or the bank’s prime rate (as defined in the credit agreement), with no additional margin. We are charged fees on the uncommitted portion of the credit line of approximately 0.2% as long as total borrowings remain less than $15.0 million.

In February and March 2020, we borrowed a total of $30.9 million under the Credit Facility, which was fully repaid in August 2020.

There were no other borrowings outstanding under the Credit Facility other than letters of credit of $4.0 million and $3.7 million as of December 31, 2021 and 2020, respectively. We enter into standby letters of credit to secure certain leases in lieu of a cash security deposit.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Year Ended December 31,

(in thousands)

Net cash (used in) provided by operating activities $ (31,994) $ 32,758 $ 21,394

Effect of exchange rates on cash (161) 37 237

Cash Flows from Operating Activities

Net cash used in operating activities was $32.0 million for the year ended December 31, 2021, consisting of a net loss of $144.3 million, adjusted for $136.8 million of non-cash expenses and $24.5 million of net cash used as a result of

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changes in operating assets and liabilities. Net loss includes $28.3 million of costs related to the Direct Listing. The non-cash charges included $107.1 million of stock-based compensation, $21.9 million of depreciation and amortization, and $7.8 million of non-cash charitable contributions. The changes in operating assets and liabilities were primarily driven by an increase in net inventory to support the growth of our business and prepaid expenses and other assets, decreases in accounts payable, deferred revenue, partially offset by increases in accrued expenses and deferred rent.

Net cash provided by operating activities was $32.8 million for the year ended December 31, 2020, consisting of a net loss of $55.9 million, adjusted for $63.3 million of non-cash expenses and $25.4 million of net cash provided as a result of changes in operating assets and liabilities. The non-cash charges included $44.9 million of stock-based compensation and $18.4 million of depreciation and amortization. The changes in operating assets and liabilities were primarily driven by an increase in accrued expenses, accounts payable, deferred revenue, and deferred rent, partially offset by an increase in net inventory to support the growth of our business.

Net cash provided by operating activities was $21.4 million for the year ended December 31, 2019, consisting of break-even net income, adjusted for $23.0 million of non-cash expenses and $1.6 million of net cash used as a result of changes in operating assets and liabilities. The non-cash charges included $14.5 million of depreciation and amortization and $8.5 million of stock-based compensation. The changes in operating assets and liabilities were primarily driven by an increase in accounts payable, deferred rent, deferred revenue, and accrued expenses, partially offset by an increase in net inventory to support the growth of our business.

Cash Flows from Investing Activities

For the year ended December 31, 2021, net cash used in investing activities was $48.5 million related to purchases of property and equipment to support our growth, primarily related to the build-out of new retail stores, as well as investments in our supply chain infrastructure and capitalized software development costs.

For the year ended December 31, 2020, net cash used in investing activities was $20.1 million related to purchases of property and equipment to support our growth, primarily related to the build-out of new retail stores, as well as investments in our corporate facilities and capitalized software development costs.

For the year ended December 31, 2019, net cash used in investing activities was $32.6 million related to purchases of property and equipment to support our growth, primarily related to the build-out of new retail stores, as well as investments in capitalized software development costs.

Cash Flows from Financing Activities

For the year ended December 31, 2021, net cash provided by financing activities was $23.0 million, which was primarily related to proceeds from repayments of related party loans and proceeds from stock option exercises, partially offset by repurchases of stock during the period, including shares repurchased in connection with our Tender Offer and tax withholdings on exercises and releases of employee equity awards.

For the year ended December 31, 2020, net cash provided by financing activities was $245.9 million, which was primarily related to $243.6 million of net proceeds from our Series F and Series G redeemable convertible preferred stock issuances.

For the year ended December 31, 2019, net cash used in financing activities was $83.4 million, which was primarily related to $79.5 million of stock repurchases made during the year.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2021:

Payments Due by Period

Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years

(in thousands)

For additional discussion on our operating lease obligations, see Note 9. “Commitments and Contingencies” in our consolidated financial statements included in Part II, Item 8 of this Form 10-K. Subsequent to December 31, 2021, we entered into 7 operating lease agreements and extended the terms of 2 existing operating lease agreements for retail space in the U.S and Canada. Total commitments under the new agreements are approximately $4.8 million.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this Form 10-K for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Inventory

Inventory is stated at the lower of cost or net realizable value, with cost determined on a weighted average cost basis. We continuously evaluate the composition of our inventory and make adjustments when the cost of inventory is not expected to be fully recoverable. The estimated net realizable value of inventory is determined based on an analysis of historical sales trends, the impact of market trends and economic conditions, and a forecast of future demand. Adjustments for damaged inventory are recorded primarily based on actual damaged inventory. Adjustments for inventory shrink, representing the physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. Actual results may differ from estimates due to the quantity and mix of products in inventory, consumer preferences, and economic and market conditions. Our historical estimates of these costs and the related provisions have not differed materially from actual results. However, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could result in our actual results differing materially from our estimates.

Stock-Based Compensation

We recognize compensation expense for stock-based awards based on the grant date fair value, on a straight-line basis over the requisite service period of the awards, which is generally the vesting term of the outstanding stock awards. Compensation expense for performance awards is recognized when it is determined that it is probable that the vesting conditions will be satisfied.

We estimate the fair value of options on the date of grant using the Black-Scholes option-pricing model, which utilizes assumptions subject to management estimate. These assumptions include estimating the expected term, or the length of time employees will retain their vested stock options before exercising them, the estimated volatility of our common stock price over the expected term, the fair value of our stock, the risk-free interest rate, and the expected dividend

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yield. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation. We account for forfeitures as they occur.

The following range of assumptions was used for options granted during the year ended December 31, 2021 (no options were granted in 2020):

For the year ended December 31, 2021

Risk-free interest rates 0.1 - 0.6%

Expected dividend yield —

Expected term 0.25 - 6.25 years

Volatility 60 %

Risk-free interest rates: The risk-free interest rates were estimated based on the yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with terms consistent with the expected term of the option awards.

Expected dividend yield: The expected dividend yield is zero as we have never declared or paid cash dividends and do not have plans to do so in the foreseeable future.

Expected term: The expected term is calculated using the simplified method using the vesting term of four years and the contractual term of ten years, resulting in a holding period of 6.25 years. Stock options expire ten years from the date of the grant.

Volatility: As we do not have sufficient trading history of our common stock, the volatility rate for the year ended December 31, 2021 was determined based on an analysis of comparable public company historical volatilities adjusted based on our stage of development. We intend to continue utilizing similar comparable companies to estimate volatility until sufficient historical information as to the volatility of our Class A common stock is available.

The majority of RSUs issued by the Company prior to the Direct Listing vest upon the satisfaction of both a service and a performance condition. The service-based vesting condition is satisfied so long as the participant remains in service and employed by the Company as of each of the vesting dates. The performance condition was satisfied upon the Company’s Direct Listing on September 29, 2021, and 936,646 RSUs for which the service condition had previously been satisfied vested and were released to holders. RSUs granted subsequent to the Direct Listing vest upon the satisfaction of a service based vesting condition only. The Company will deliver one share of either Class A or Class B common stock, depending on the terms of the grant, for each vested RSU.

We had concluded that as of December 31, 2020 it was not probable that the liquidity-event performance-based vesting condition would occur, and therefore did not record any stock-based compensation expense for any RSUs. Upon our Direct Listing the liquidity-event performance-based condition was satisfied and we recorded a cumulative catch-up expense for the service period completed to such date and began recording stock-based compensation expense using the accelerated attribution method, net of actual forfeitures, based on the grant-date fair value of the RSUs for awards where the service period is not complete. Stock-based compensation expense for RSUs granted after our Direct Listing is recognized using the straight-line method, net of actual forfeitures.

Common Stock Valuations

Prior to our Direct Listing our common stock was not publicly traded. Our board of directors exercised significant judgment in determining the fair value of our common stock on the date of each stock-based grant, with input from management, based on several objective and subjective factors. In determining the fair value of our common stock, our board of directors considered the prices of our redeemable convertible preferred stock sold to outside investors in arms-length transactions; the rights, preferences, and privileges of our redeemable convertible preferred stock relative to our common stock; our operating and financial performance; our stage of development and current business conditions and projections affecting our business. Such conditions and projections included the introduction of new products and services; the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as a qualified public offering or sale of our company, in light of prevailing market conditions; any adjustment necessary to recognize a lack of a liquid trading market for our common stock; the market performance of

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comparable publicly traded companies; and the overall U.S. economic, regulatory, and capital market conditions. In addition, we also considered any secondary transactions involving our common 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.

In valuing our common stock, we first determined the equity value using both the income and market approach valuation methods. In addition, we also considered values implied by sales of redeemable convertible preferred and common stock, if applicable. We then allocated the equity value to our classes of stock using an option-pricing model, or OPM, or Probability Weighted Expected Return Method, or PWERM.

The income approach estimates equity value based on the expectation of future cash flows that a company will generate. These future cash flows, and an assumed terminal value, are discounted to their present values using a discount rate based on a weighted-average cost of capital that reflects the risks inherent in the cash flows. The market approach estimates equity value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial forecasts to estimate the value of the subject company.

Once we determined an equity value, we used a combination of approaches to allocate the equity value to each of our classes of stock. We historically had used the OPM, and more recently used the OPM in combination with the PWERM. The OPM allocated values to each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of the equity instruments. Using the PWERM, the value of our common stock was estimated based upon a probability-weighted analysis of varying values for our common stock assuming possible future events, which included an initial public offering, merger or sale, dissolution, or continued operation as a private company. In determining the estimated fair value of our common stock, we considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we also applied a lack of marketability discount to the equity value.

Following our Direct Listing, it is not necessary to estimate the fair value of our common stock, as the shares are traded in the public market, and the fair value of our common stock is based on the closing price as reported by the NYSE.

Income Taxes

Management makes estimates, assumptions, and judgments to determine our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We utilize the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss, capital loss, and tax credit carryforwards. Valuation allowances are established against deferred tax assets if it is more likely than not that they will not be realized.

Our policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense.

JOBS Act

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in currency rates, interest rates, or inflation.

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Foreign Exchange Risk

We are exposed to changes in foreign currency rates as a result of our foreign operations and international suppliers from whom we purchase in Japanese yen and euros. Revenue and income generated by our operations in Canada and our cost of goods sold will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. We do not believe that foreign exchange rates have a material effect on our business, financial condition or results of operations.

Interest Rate Risk

Our cash and cash equivalents as of December 31, 2021 consisted of $256.4 million in cash and money-market funds. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

Inflation Risk

Inflation may have an impact on raw materials, transportation, labor, construction, rent, and other costs which materially impact operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with increased pricing or other cost efficiency measures. Our inability or failure to do so could harm our business, financial condition, and results of operations.

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Item 8. Financial Statements and Supplementary Data

Warby Parker Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 81

Consolidated Balance Sheets 82

Consolidated Statements of Operations and Comprehensive (Loss) Income 83

Consolidated Statements of Cash Flows 85

Notes to Consolidated Financial Statements 86

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Warby Parker Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Warby Parker Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive (loss) income, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

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 and in accordance with auditing standards generally accepted in the United States of America. 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/ Ernst & Young LLP

We have served as the Company’s auditor since 2014.

New York, New York

March 18, 2022

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Warby Parker Inc. and Subsidiaries

Consolidated Balance Sheets

(Amounts in thousands, except share data)

December 31,

ASSETS

Current assets:

Accounts receivable, net 992 601

Prepaid expenses and other current assets 13,477 6,779

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT

Current liabilities:

Other liabilities — 3,011

Commitments and contingencies (see Note 9)

Stockholders’ deficit:

Accumulated other comprehensive income 16 109

The accompanying notes are an integral part of these consolidated financial statements.

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Warby Parker Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Amounts in thousands, except share and per share data)

Year Ended December 31,

Interest and other (loss) income, net (347) (97) 1,939

Other comprehensive income

Foreign currency translation adjustment $ (93) $ 87 $ 104

The accompanying notes are an integral part of these consolidated financial statements.

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Warby Parker Inc. and Subsidiaries

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(Amounts in thousands)

Shares Amount Shares Amount Shares Amount

Stock option exercises — — 321 — — — 297 — — 297

Cancellation of options for consideration — — — — — — (1,375) — (3,400) (4,775)

Repayment of related party loans — — 202 — — — 590 — — 590

Stock-based compensation — — — — — — 8,499 — — 8,499

Other comprehensive income — — — — — — — 104 — 104

Net income — — — — — — — — — —

Repayment of related party loans — — 342 — — — 945 — — 945

Stock-based compensation — — — — — — 44,913 — — 44,913

Other comprehensive income — — — — — — — 87 — 87

Restricted stock unit releases — — 128 — 1,035 — — — — —

Non-cash charitable contributions — — 179 — — — 7,757 — — 7,757

Other comprehensive income — — — — — — — (93) — (93)

The accompanying notes are an integral part of these consolidated financial statements.

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Warby Parker Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Amounts in thousands)

Year Ended December 31,

Cash flows from operating activities

Non-cash charitable contribution 7,757 — —

Change in operating assets and liabilities:

Prepaid expenses and other assets (6,887) (67) (940)

Cash flows from investing activities

Cash flows from financing activities

Proceeds from stock option and warrant exercises 20,035 1,330 297

Cancellation of options for consideration — — (4,775)

Proceeds from repayment of related party loans 31,612 945 590

Payment for Tender Offer (18,031) — —

Borrowings from Credit Facility — 30,900 —

Repayment of Credit Facility — (30,900) —

Effect of exchange rates on cash (161) 37 237

Cash and cash equivalents

Supplemental disclosures

Non-cash investing and financing activities:

The accompanying notes are an integral part of these consolidated financial statements.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

1. Description of Business

Warby Parker Inc., a public benefit corporation founded in 2010 (together with its wholly owned subsidiaries, the “Company”), is a founder-led, mission-driven lifestyle brand that sits at the intersection of technology, design, healthcare, and social enterprise. The Company offers holistic vision care by selling eyewear products and providing optical services directly to consumers through its retail stores and e-commerce platform. For every pair of glasses or sunglasses sold, the Company helps distribute a pair of glasses to someone in need through its Buy a Pair, Give a Pair program. The Company is headquartered in New York, New York.

Direct Listing

On September 29, 2021, the Company completed a direct listing of its Class A common stock (the “Direct Listing”) on the New York Stock Exchange (“NYSE”). The Company incurred fees related to financial advisory services, audit, and legal expenses in connection with the Direct Listing which are recorded in selling, general, and administrative expenses of $28.3 million for the year ended December 31, 2021.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements have been prepared and are presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

Principles of Consolidation

The consolidated financial statements include the financial statements of Warby Parker Inc., and its wholly owned subsidiaries. The Company has consolidated certain entities meeting the definition of a variable interest entity (“VIE”) as the Company concluded that it is the primary beneficiary of the entities. The inclusion of these entities does not have a material impact on the Company’s consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The Company prepares its consolidated financial statements in conformity with U.S. GAAP. These principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Management’s estimates are based on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Significant estimates underlying the accompanying consolidated financial statements include, but are not limited to (i) the valuation of inventory, including the determination of the net realizable value, (ii) reserves for sales returns, (iii) the useful lives and recoverability of long-lived assets, (iv) shipment times included in the calculation of deferred revenue, (v) the determination of deferred income taxes, including related valuation allowances, (vi) allowances for doubtful accounts, and (vii) assumptions related to the valuation of common stock and determination of stock-based compensation.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. As a result, the Company’s consolidated financial statements may not be comparable to financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards based on public company effective dates.

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), who makes decisions about allocating resources and assessing performance. The Company defines its CODM as its co-Chief Executive Officers. The

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

Company has identified one operating segment. When evaluating the Company’s performance and allocating resources, the CODM relies on financial information prepared on a consolidated basis.

Concentration of Credit Risk and Major Suppliers

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and cash equivalents in various accounts, which, at times, may exceed the limits insured by the Federal Deposit Insurance Corporation of $250 per institution and the Canada Deposit Insurance Corporation of $100 Canadian dollars. At December 31, 2021 and 2020, uninsured cash balances were approximately $255.0 million and $312.8 million, respectively. The Company has not experienced any concentration losses related to its cash and cash equivalents to date. The Company seeks to minimize its credit risk by maintaining its cash and cash equivalents with high-quality financial institutions and monitoring the credit standing of such institutions.

The Company’s top five inventory suppliers accounted for approximately 23% of cost of goods sold for each of the years ended December 31, 2021, 2020, and 2019.

Interest Rate and Foreign Currency Risk

The Company’s cash and cash equivalents as of December 31, 2021 consisted of cash and money-market funds. Such interest-earning instruments carry a degree of interest rate risk. The goals of the Company’s investment policy are liquidity and capital preservation. The Company does not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage its interest rate exposure.

The Company is exposed to changes in foreign currency rates as a result of its foreign operations and international suppliers from whom it purchases in Japanese Yen and Euros. Revenue and income generated by the Company’s operations in Canada as well as the Company’s cost of goods sold will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with an original maturity of three months or less to be a cash equivalent. Cash and cash equivalents include both deposits with banks and financial institutions and receivables from credit card issuers, which are typically converted into cash within two to four days of capture. As such, these receivables are recorded as a deposit in transit as a component of cash and cash equivalents on the consolidated balance sheets. At December 31, 2021 and 2020, the balance of cash and cash equivalents for these items was $6.3 million and $7.1 million, respectively.

Accounts Receivable, Net

The Company primarily sells directly to U.S. and Canadian consumers where payment is processed upon order approval or product shipment. In some instances, customers can utilize vision insurance benefits to cover the cost of their purchase. For these orders, the Company submits claims directly to the vision insurance carrier and receives reimbursement directly from the carrier. Accounts receivable primarily represents amounts due from insurance carriers. Receivables from customers and insurance carriers are typically collected within 30 days of the transaction and have been reflected in the balance of accounts receivable, net on the consolidated balance sheets at December 31, 2021 and 2020. The accounts receivable are net of an allowance for doubtful accounts, which is established based on management’s best estimate of probable credit losses. The Company’s allowance for doubtful accounts was $0.5 million at both December 31, 2021 and 2020, respectively.

Inventory

Inventory consists of approximately $14.1 million and $8.9 million of finished goods, including ready-to-wear sun frames, contact lenses, and eyeglass cases, as of December 31, 2021 and 2020, respectively, and approximately $43.0 million and $29.6 million of component parts, including optical frames and prescription optical lenses, as of December 31, 2021 and 2020, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a weighted average cost basis.

The Company continuously evaluates the composition of its inventory and makes adjustments when the cost of inventory is not expected to be fully recoverable. The estimated net realizable value of inventory is determined based on an analysis of historical sales trends, the impact of market trends and economic conditions, and a forecast of future demand. Adjustments for damaged inventory are recorded primarily based on actual damaged

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

inventory. Adjustments for inventory shrink, representing the physical loss of inventory, includes estimates based on historical experience, and are adjusted based upon physical inventory counts. However, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could result in actual results differing materially from estimates.

Property and Equipment, Net

Property and equipment, net is stated at cost less accumulated depreciation. Repairs and maintenance and any gains or losses on dispositions are recognized as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and a gain or loss on disposition is reflected in current operations.Depreciation is recorded on a straight-line basis over the following estimated useful lives:

Asset Category Depreciation Period

Computer equipment and capitalized software 3 years

Furniture and fixtures 7 years

Internal-use software 1 - 3 years

Equipment 5 - 7 years

Internal-Use Software

The Company capitalizes as property and equipment certain qualified costs incurred in connection with the development of internal-use software. Capitalization of internal-use software begins when the preliminary project stage is completed, management with relevant authority authorizes and commits to funding the software project, and it is probable that the project will be completed and software will be used to perform the function intended. Capitalized internal-use software is amortized on a straight-line basis over the estimated useful life of the software, not to exceed three years. Capitalized software costs, net of accumulated amortization, totaled $8.6 million and $3.6 million as of December 31, 2021 and 2020, respectively.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is evaluated by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.

Leases and Deferred Rent

The Company categorizes leases at their inception as either operating or capital leases. At December 31, 2021 and 2020, the Company had only entered into operating leases.

The Company leases retail, office, and laboratory space under operating leases from third parties. The leases generally contain renewal options and escalation clauses, and from time to time include contingent rent provisions and tenant improvement allowances. Tenant improvement allowances are capitalized within deferred rent and amortized as a reduction of rent expense over the term of the lease. The Company records retail and laboratory rent expense as a component of cost of goods sold and all other rent expense as a component of selling, general, and administrative expenses.

The recognition of rent expense for an operating lease commences on the date at which control and possession of the property is obtained. Rent expense is calculated by recognizing total minimum rental payments, net of any rental abatement, tenant improvement allowances, and other rental concessions, on a straight-line basis over the lease term. The difference between straight-line rent expense and rent paid is recorded as deferred rent, which is classified within short-term and long-term liabilities on the consolidated balance sheets. The short-term portion of deferred rent of $2.5 million and $1.9 million as of December 31, 2021 and 2020, respectively, is included in other

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

current liabilities on the consolidated balance sheets. Contingent rent based on sales volume is recorded as incurred or when the specific target has been achieved.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss, capital loss, and tax credit carryforwards. Valuation allowances are established against deferred tax assets if it is more likely than not that they will not be realized.

The Company assess its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company’s policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense.

The Company has elected to treat taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Taxed Income (“GILTI”) as a current period expense when incurred using the period cost method.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are classified in the following hierarchy:

•Level 1: Quoted prices in active markets for identical instruments.

•Level 2: Quoted prices in active markets for similar instruments or quoted prices for identical or similar instruments in markets that are not active or inputs other than quoted prices that are observable for the instrument.

•Level 3: Unobservable inputs for the instrument.

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s material financial instruments consists primarily of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, which are measured at fair value using Level 1 inputs. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are approximately equal to their carrying values based on the short-term nature of these items.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Foreign Currency

The Company’s foreign operations in Canada have a functional currency of Canadian dollars. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the consolidated balance sheets. Foreign currency impact on the consolidated statements of cash flows is translated to U.S. dollars using average exchange rates for the period, which approximates the timing of cash flows. Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured at period end using the period-end exchange rate. Gains and losses resulting from remeasurement are recorded in interest and other income (loss), net on the consolidated statements of operations and comprehensive income (loss).

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

COVID-19

The COVID-19 pandemic caused personal and business disruption worldwide beginning in January 2020, and continues to impact global economies and supply chains. Early on in the pandemic, we temporarily closed our retail stores, transitioned our Corporate and Customer Experience teams to remote work, and implemented robust safety and sanitization protocols. In 2021, our business continued to experience disruption caused by the pandemic, including changes to consumer shopping patterns as well as varying levels of restrictions in our physical locations implemented by national, state, and local authorities. Although the Company continues to monitor the situation and may adjust its current policies as more information and public health guidance become available, precautionary measures that have been adopted have and will negatively affect the Company’s ability to sell its products and fulfill customer orders and the operations of its suppliers and fulfillment partners. More generally, the outbreak of COVID-19 could adversely affect economies and financial markets globally, potentially leading to an economic downturn, which could decrease consumer spending and adversely affect demand for the Company’s products and services. It is not possible at this time to estimate the impact that COVID-19 could have on the Company’s business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.

Revenue Recognition

The Company primarily derives revenue from the sales of eyewear products, optical services and accessories. The Company sells products and services through its stores, website, and mobile apps. Revenue generated from eyewear products includes the sales of prescription and non-prescription optical glasses and sunglasses, contact lenses, eyewear accessories, and expedited shipping charges, which are charged to the customer, associated with these purchases. All revenue is reported net of sales taxes collected from customers on behalf of taxing authorities and variable consideration, including returns and discounts.

Revenue is recognized when performance obligations are satisfied through either the transfer of control of promised goods or the rendering of services to the Company's customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product, generally determined to be the point of delivery or upon rendering of the service in the case of eye exams. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. In the normal course of business, payment may be collected from the customer prior to recognizing revenue and such cash receipts are included in deferred revenue until the order is delivered to the customer.

The Company’s sales policy allows customers to return merchandise for any reason within 30 days of receipt, generally for an exchange or refund. An allowance is recorded within other current liabilities on the consolidated balance sheets for expected future customer returns which the Company estimates using historical return patterns and its expectation of future returns. Any difference between the actual return costs and previous estimates is adjusted in the period in which such returns occur. Historical return estimates have not materially differed from actual returns in any of the periods presented. The allowance for returns was $1.8 million and $1.9 million at December 31, 2021 and 2020, respectively, and is included in other current liabilities on the consolidated balance sheets.

The Company offers non-expiring gift cards to its customers. Proceeds from the sale of gift cards are initially deferred and recognized within deferred revenue on the consolidated balance sheets, and are recognized as revenue when the product is received by the customer after the gift card has been tendered for payment. Based on historical experience, and to the extent there is no requirement to remit unclaimed card balances to government agencies under unclaimed property laws, an estimate of the gift card balances that will never be redeemed is recognized as revenue in proportion to gift cards which have historically been redeemed. While the Company will continue to honor all gift cards presented for payment, management may determine the likelihood of redemption to be remote for certain card balances due to, among other things, long periods of inactivity. Gift card breakage revenue was $0.2 million, $0.4 million, and $0.3 million for the years ended December 31, 2021, 2020, and 2019, respectively.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

The following table disaggregates the Company’s revenue by product for the periods presented:

Year Ended December 31,

The following table disaggregates the Company’s revenue by channel for the periods presented:

Year Ended December 31,

Shipping and Handling Fees and Costs

The Company pays for shipping and handling costs which are generally not charged to the customer. These costs associated with shipping goods to customers are recorded as cost of goods sold. Only expedited shipments, upon customers’ requests, are charged to customers. Shipping and handling fees billed to customers related to expedited shipments are recorded as revenue. Shipping and handling fees included in revenue were $2.8 million, $2.1 million, and $2.0 million in the years ended December 31, 2021, 2020, and 2019, respectively, while shipping and handling costs included in cost of goods sold were $21.2 million, $14.7 million, and $14.7 million in the years ended December 31, 2021, 2020, and 2019, respectively.

Cost of Goods Sold

Cost of goods sold includes the costs incurred to acquire materials, assemble, and sell finished products. Such costs include (i) product costs held at the lesser of cost and net realizable value, (ii) freight and import costs, (iii) optical laboratory costs, (iv) customer shipping, (v) occupancy and depreciation costs of retail stores, and (vi) employee-related costs associated with prescription services, which includes salaries, benefits, bonuses and stock-based compensation.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses primarily consists of employee-related costs including salaries, benefits, bonuses and stock-based compensation for corporate and retail employees, marketing, information technology, credit card processing fees, charitable donations in connection with the Company’s Buy A Pair, Give A Pair program, facilities, legal, and other administrative costs associated with operating the business. Marketing costs, which consist of both online and offline advertising, include sponsored search, online advertising, marketing and retail events, and other initiatives. Selling, general, and administrative expenses also include costs associated with the Company’s Home Try-On program that provides customers the opportunity to sample eyewear at home prior to purchase.

Advertising costs are expensed as incurred, and were approximately $87.0 million, $58.5 million, and $43.3 million in the years ended December 31, 2021, 2020, and 2019 respectively.

Stock-Based Compensation

Stock-based compensation is included in both cost of goods sold and selling, general, and administrative expenses and follows the classification of the related employee. The Company recognizes compensation expense for stock-based awards based on the grant date fair value, on either (i) a straight-line basis for awards with only a service condition, or (ii) an accelerated attribution basis for awards with a performance condition, over the requisite service period of the awards, which is generally the vesting term of the outstanding stock awards. Compensation expense for awards with a performance condition is recognized when it is determined that it is probable that the vesting conditions will be satisfied.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

The Company estimates the fair value of options on the date of grant using the Black-Scholes option-pricing model, which utilizes assumptions subject to management estimate. These assumptions include estimating the expected term, or the length of time employees will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, the fair value of the Company’s stock, the risk-free interest rate, and the expected dividend yield. Changes in these assumptions can materially affect the estimate of fair value of stock-based awards. The Company accounts for forfeitures as they occur.

Prior to the Direct Listing, the fair value of restricted stock units (“RSUs”) was determined by the board of directors with input from management and independent third-party valuation specialists, as there was no public market for the Company’s common stock. Subsequent to the Direct Listing, the grant date fair value is determined by the closing price of the Company’s Class A common stock as reported on the date of grant.

Stock-based compensation expense related to stock awards with market-based or performance-based vesting conditions are measured based on the fair value of the awards granted. The Company determines the grant date fair value using equity valuation models, such as the Monte Carlo simulation, using assumptions and judgements made by management and third-party valuation specialists. The Company recognizes stock-based compensation expense for performance-based awards using the accelerated attribution method over the derived service period.

Stock Repurchase

The Company may repurchase common stock which may be held as treasury stock or retired at the time of repurchase. The terms and conditions of these repurchase agreements are subject to approval by the Company’s board of directors. See Note 6, Redeemable Convertible Preferred Stock and Stockholders’ Deficit, for a discussion of stock repurchase activity.

Net Loss Per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Under the two-class method, net income (loss) is attributed to common stockholders and participating securities based on their participation rights. The holders of the redeemable convertible preferred stock do not have a contractual obligation to share in the losses of the Company. As such, the Company’s net losses attributable to common stockholders for the years ended December 31, 2021, 2020, and 2019 were not allocated to these participating securities.

Payment in excess of the carrying value upon the redemption of redeemable convertible preferred stock is accounted for as a deemed dividend to the redeemable convertible preferred stockholder whereby the difference between the amount paid upon redemption and the carrying value of the redeemable convertible preferred stock is deducted from net income (loss) to arrive at net loss available to common stockholders.

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding during a given period.

The diluted net loss attributable to common stockholders is computed by giving effect to all dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the resulting net loss attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding. The Company uses the if-converted method for its redeemable convertible preferred stock which requires assuming that the conversion occurred as of the later of the beginning of the period or the original date of issuance. During periods when there is a net loss attributable to common stockholders, potentially dilutive common stock equivalents are excluded as their effect is anti-dilutive. The Company uses the treasury stock method for its employee equity awards to determine if any incremental shares should be included in diluted net (loss) income attributable to common stockholders. If the effect of a conversion of an instrument is neutral to earnings per share, the Company considers the security to be dilutive. The Company excludes contingently exercisable instruments and unvested employee awards when the vesting is contingent on a performance or market condition that is not met as of the evaluation date.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASC No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheet. The Company elected the extended transition period available to emerging growth companies and as such, the guidance is effective for fiscal periods beginning after December 15, 2021.

The Company will adopt the new standard using a modified retrospective transition approach in the first quarter of 2022 and will apply the provisions at the effective date without adjusting the comparative periods presented. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2022.

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the practical expedients to not reassess its prior conclusions about lease identification under the new standard, to not reassess lease classification, and to not reassess initial direct costs. The Company does not expect to elect the practical expedient allowing the use-of-hindsight which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date and will not elect the practical expedient pertaining to land easements as this is not applicable to the current contract portfolio.

The new guidance also provides practical expedients for ongoing lease accounting. The Company expects to elect the recognition exemption for short-term lease for all leases that qualify. Under this exemption, the Company would not recognize ROU assets or lease liabilities for those leases that qualify as a short-term lease, which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company expects to elect the practical expedient to not separate lease and non-lease components for all equipment and real-estate leases.

The adoption of ASC 842 will have a material effect on the consolidated financial statements of the Company. The most significant impact will relate to the recognition of right-of-use assets and lease liabilities on the consolidated balance sheets for our retail stores, corporate offices, optical laboratories, and distribution center operating leases based on the present value of total fixed payments of approximately $140 million to $155 million. The Company does not believe the standard will materially affect the consolidated statements of operations or cash flows.

In January 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, and additional changes, modifications, clarifications or interpretations related to this guidance thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available for-sale debt securities at the amount expected to be collected. The guidance is effective for non-public companies for fiscal years beginning after December 15, 2022. The Company elected the extended transition period available to emerging growth companies and does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which amends ASC Topic 740, Income Taxes. This ASU simplifies the accounting for income taxes by modifying the treatment of intraperiod tax allocation in certain circumstances, eliminating an exception to recognizing deferred tax liabilities for outside basis differences for foreign equity method investments and foreign subsidiaries when ownership or control changes, and modifying interim period tax calculations when a loss is forecast. The Company completed its assessment and adopted this standard on January 1, 2021. The standard did not materially impact the Company's consolidated financial statements.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

3. Property and Equipment, Net

Property and equipment, net consists of the following:

December 31,

Less: accumulated depreciation and amortization (63,691) (45,491)

Depreciation and amortization expense consisted of the following for the periods presented:

Year Ended December 31,

Selling, general, and administrative expenses 6,371 4,892 4,115

4. Accrued Expenses

Accrued expenses consists of the following:

December 31,

Unvested early exercised stock options $ 14,396 $ —

Inventory and fulfillment costs 5,325 321

During the year ended December 31, 2021, certain executives repaid related party loans used to exercise stock options. At December 31, 2021, a total of $14.4 million of the amount repaid related to unvested early-exercised stock options and is included in accrued expenses.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

5. Income Taxes

Income (loss) before income taxes consists of the following:

December 31,

The provision for income taxes consists of the following:

December 31,

Current

Deferred

Federal — 0 1

Total provision for income taxes $ 263 $ 190 $ 276

The Company recorded a total provision for income taxes of $0.3 million, $0.2 million, and $0.3 million for the years ended December 31, 2021, 2020, and 2019 respectively.

A summary reconciliation of the effective tax rate is as follows:

December 31,

U.S. federal statutory rate 21 % 21 % 21 %

Non-deductible stock compensation (5) (12) (147)

Change in valuation allowance (16) (7) (126)

Deferred tax and other adjustments — (2) 96

Non-deductible meals, transportation, and entertainment — — 192

State tax, net of federal benefit — — 48

GILTI — — 9

Foreign rate differential — — 7

Effective tax rate — % — % 100 %

Deferred income taxes, included in other assets on the consolidated balance sheets, reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

the amounts used for income tax purposes. The approximate tax effect of the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020, are as follows:

December 31,

Deferred tax assets:

Charitable contribution carryforward 7,685 4,304

Deferred tax liabilities:

Deferred tax assets, net $ 273 $ 102

As of December 31, 2021, the Company had a net operating loss carryforward (“NOL”) of $348.9 million which represents the impact of current and historic operating losses available to reduce future income taxes. The NOL for federal income tax purposes of $200.2 million and state income tax purposes of $148.7 million will begin to expire at various points beginning in 2031, however, $108.9 million of the federal NOL is available for indefinite use.

As of December 31, 2021 and 2020, the Company recorded a valuation allowance of $66.9 million and $44.3 million, respectively, against its domestic net deferred tax assets because it cannot be reasonably assured that deductible temporary differences and NOLs can be realized through future taxable income due to the Company’s history of losses. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward and assess the valuation allowance accordingly.

As of December 31, 2021 and 2020, there were no uncertain tax positions. As of December 31, 2021 and 2020, the Company was subject to federal, state, and provincial income taxes in the United States and Canada. The Company’s open tax years as a corporate taxpayer extend back to 2012. It is the Company’s policy to record interest and penalties as a component of income tax expense. No interest or penalties were recognized in the consolidated statements of operations and comprehensive (loss) income for the years ended December 31, 2021, 2020, or 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act provides relief to U.S. Corporations through financial assistance programs and modifications to certain income tax provisions. In connection with the CARES Act, the Company deferred $4.4 million of employer social security payroll taxes to be repaid equally in 2021 and 2022, claimed $3.3 million in employee retention tax credits, which is recorded as a reduction of selling, general, and administrative expenses on its consolidated statement of operations and comprehensive loss, and an increase in the Company’s deferred tax asset for NOLs of $3.2 million due to the technical correction for tax depreciation for qualified improvement property.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

6. Redeemable Convertible Preferred Stock and Stockholders’ Deficit

Common Stock

As of December 31, 2021, the Company’s Twelfth Amended and Restated Certificate of Incorporation authorizes the issuance of up to 1,050,000,000 shares of common stock, par value of $0.0001 per share, of which 750,000,000 shares are designated Class A common stock, 150,000,000 shares are designated Class B common stock, and 150,000,000 shares are designated Class C common stock. Common stock is not redeemable at the option of the holder.

As of December 31, 2020, the Company’s Tenth Amended and Restated Certificate of Incorporation authorized the issuance of up to 150,000,000 shares of common stock, par value of $0.0001 per share, of which 135,000,000 shares were designated Series A common stock, and 15,000,000 shares were designated Series B common stock. Both Series A and Series B common stock were not redeemable at the option of the holder.

Voting Rights

Holders of Class A common stock are entitled to one vote for each share held, holders of Class B common stock are entitled to ten votes for each share held at all meetings of stockholders, and holders of Class C common stock are not entitled to vote at stockholder meetings except as required by Delaware law. The number of authorized shares of Class A, B, or C common stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority of the voting power of the Company’s stock entitled to vote.

Dividends

The holders of Class A, B, and C common stock shall be entitled to receive dividends in any fiscal year, when, as, and if declared by the board of directors, out of any assets at the time legally available therefore, with the holders of common stock and and any then outstanding preferred stock sharing on a pari passu basis in such dividends. Through December 31, 2021, no dividends have been declared.

Liquidation

Upon the dissolution or liquidation of the Company, whether voluntary or involuntary, holders of common stock will be entitled to receive assets of the Company available for distribution to its stockholders ratably in proportion to the number of shares held by them, subject to the preferential rights of any then outstanding preferred stock.

Conversion of Class B Common Stock

During the year ended December 31, 2021 a total of 3,178,534 shares of Class B common stock were converted to Class A common stock. No conversions of Class B common stock to Class A common stock occurred prior to 2021.

Voluntary Conversion

Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder thereof with the prior written consent of the Company.

Automatic Conversion

Shares of Class B common stock are only held by Neil Blumenthal and Dave Gilboa, the Company’s co-CEOs, and their permitted ownership group (as defined in the Certificate of Incorporation). Such shares will automatically convert into shares of Class A common stock on a one-for-one basis upon the earlier of (i) October 1, 2031, (ii) transfer of shares to a person or entity that is not in the transferor’s permitted ownership group, (iii) the date the holder is (a) no longer a member of the Board of Directors, or (b) no longer an employee, officer, or consultant of the Company or its subsidiaries, or (iv) 12 months following the death or disability of the holder.

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

Outstanding Shares

As of December 31, 2021, outstanding shares of common stock as well as shares of common stock attributable to equity awards are as follows:

Class A Class B Class C

Performance stock units – outstanding — 4,397,688 —

Employee stock plans – available 13,629,151 — —

Redeemable Convertible Preferred Stock

All classes of redeemable convertible preferred stock were convertible by the holder into shares of Series A common stock at the then applicable conversion price. In the event of liquidation of the Company (including certain events outside of the Company’s control such as a change in control), the holders of redeemable convertible preferred stock were entitled to a liquidation preference equal to the respective original issue price plus declared and unpaid dividends ahead of the classes of common stock described above. The aggregate preferential amount for all classes of redeemable convertible preferred stock was $510.5 million as of December 31, 2020.

In September 2021, in connection with our Direct Listing, all outstanding shares of redeemable convertible preferred stock were converted to Class A common stock at a one-to-one ratio. As of December 31, 2021, 50,000,000 preferred shares were authorized and no shares were outstanding.

Stock Repurchases

In February and June of 2021, the Company repurchased shares of common stock and redeemable convertible preferred stock directly from investors as follows:

Number of Shares Repurchased Amount Paid

Series AA redeemable convertible preferred stock 160,136 3,928

Series D redeemable convertible preferred stock 60,137 1,475

Series E redeemable convertible preferred stock 45,507 1,116

The stock was considered constructively retired when repurchased. For the redeemable convertible preferred stock, the $5.0 million excess of repurchase price over carrying value was recorded to accumulated deficit on the consolidated balance sheets. For the common stock, the excess of repurchase price over par value of $1.6 million was recorded to accumulated deficit on the consolidated balance sheet.

In May 2021, the Company and Addition Two, L.P., a related party investor, commenced a cash tender offer (the “Tender Offer”) which was completed in June 2021. The Company authorized the repurchase up to $100 million in shares of common stock, including those issuable upon exercise of stock options, the vesting and settlement of RSUs, and redeemable convertible preferred stock, for a price of $24.5306 per share. The Company waived the performance based vesting condition for current and former employees who elected to tender RSUs for which the service-based vesting condition was satisfied. This was the first widely available tender offer made to

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Warby Parker Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts in thousands, except share data)

employees, former employees, and investors since the Company’s inception. The Company and Addition Two, L.P. each purchased half of the shares tendered.

Shareholders tendered a total of 1,676,534 shares, comprised of 335,847 Series A common shares, 387,163 Series B common shares, 54,484 Series A redeemable convertible preferred stock shares, 293,920 Series AA redeemable convertible preferred stock shares, 3,752 Series B redeemable convertible preferred stock shares, and 601,368 Series D redeemable convertible preferred stock shares, for total consideration of $41.1 million. The Company recorded $9.2 million as stock-based compensation expense related to the Tender Offer.

Addition Two, L.P. purchased 838,267 of the shares tendered for $20.6 million. The Company purchased 838,267 of the shares tendered for $20.6 million and the board of directors approved the immediate retirement of all shares purchased by the Company. The Company received $0.7 million related to the cost to exercise options tendered and $2.5 million related to income taxes withheld from employees and remitted to tax authorities. These items were included in “Tender Offer repurchase and share retirement” on the condensed consolidated statement of changes in redeemable convertible preferred stock and stockholders’ equity (deficit).

During the year ended December 31, 2020, the Company did not repurchase common stock or redeemable convertible preferred stock.

Stock Donation

In August 2021, the Company issued 178,572 shares of Series A common stock to the Warby Parker Impact Foundation, a Delaware exempt corporation. The board of directors also authorized up to an additional 1,071,432 shares of Series A common stock, or any shares into which the Series A common stock will be reclassified, for issuance in installments over time and from time to time, in each case, subject to the board of directors’ discretion and approval, to the Warby Parker Impact Foundation or such other nonprofit entity designated by the board of directors. During the year ended December 31, 2021, the Company recognized $7.8 million of charitable expense, which is recorded in selling, general, and administrative expenses, representing the fair market value of the shares on the date they were issued.

7. Stock-Based Compensation

Plans and Awards

The Company’s eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.

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WRBY · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

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WRBY · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

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