Coupang, Inc. (CPNG) FY 2022 MD&A

Overview

We are a leading e-commerce retailer in Korea with operations in the United States, Japan, Taiwan, Singapore and China. We believe that we are the preeminent online destination in the market because of our broad selection, low prices, and exceptional delivery and customer experience across our owned inventory selection as well as products offered by third-party merchants. Our unique end-to-end integrated fulfillment, logistics, and technology network enables Rocket Delivery, which provides free, next-day delivery for orders placed anytime of the day, even seconds before midnight—across millions of products. Our structural advantages from complete end-to-end integration, investments in technology, and scale economies generate higher efficiencies that allow us to pass savings to customers in the form of lower prices. The capabilities we have built provide us with opportunities to expand into other offerings and geographies.

We believe the true measure of our success will be shareholder value created over the long term. Our long-term investments in building a differentiated technology-orchestrated network and customer-facing functionality have helped build a business that we expect will deliver significant growth and cash flows at scale. We have in turn successfully reinvested to expand into new offerings, such as with our owned-inventory selection, Rocket WOW membership, Rocket Fresh, Coupang Eats, and Coupang Play, among others. We will continue to reinvest cash flows generated by our established offerings into new initiatives and innovations for our customers. We plan to invest and maximize value for customers and shareholders in the long term over optimizing our short-term results.

Beginning in the first quarter of 2022, we organized our operations into two segments: Product Commerce and Developing Offerings. These segments reflect the way management evaluates its business performance and manages its operations. See Note 3 — "Segment Reporting" to the consolidated financial statements included elsewhere in Part II, Item 8 of this Annual Report on Form 10-K.

Product Commerce primarily includes core retail (owned inventory) and marketplace offerings (third-party merchants) and Rocket Fresh, our fresh grocery offering, as well as advertising products associated with these offerings. Revenues from Product Commerce are derived primarily from online product sales of owned inventory to customers in Korea and from commissions earned from merchants that sell products through our mobile application and website.

Developing Offerings primarily includes more nascent offerings and services, including Coupang Eats, our restaurant ordering and delivery service, Coupang Play, our online content streaming service, fintech, certain international initiatives, as well as advertising products associated with these offerings. Revenues from Developing Offerings are primarily generated from online restaurant ordering and delivery services provided on our mobile applications and websites.

Initial Public Offering

On March 15, 2021, we completed our initial public offering (“IPO”) in which we issued and sold 100,000,000 shares of our Class A common stock at an IPO price of $35.00 per share. We received net proceeds of $3.4 billion after deducting underwriting discounts of $69 million and other offering costs.

Immediately prior to effectiveness of our IPO registration statement on Form S-1, Coupang, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed our name to Coupang, Inc. (“Corporate Conversion”).

As a result of the Corporate Conversion and IPO, our redeemable convertible preferred units (“preferred units”) and common units (which included common units designated as profits interests (“PIUs”)), in each case, automatically converted into an equal number of shares of Class A or Class B common stock, except with respect to a conversion adjustment to certain PIUs, which reduced the outstanding common units designated as PIUs that converted into the shares of Class A common stock. Also, our convertible notes were automatically converted into 171,750,446 shares of our Class A common stock. For additional information related to the Corporate Conversion and IPO, see Note 14 — "Redeemable Convertible Preferred Units and Stockholders'/Members' Equity (Deficit)" and Note 15 — "Convertible Notes and Derivative Instrument" in Part II, Item 8 - “Financial Statements and Supplementary Data” in our consolidated financial statements.

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Fulfillment Center Fire

In June 2021, a fire extensively damaged our Deokpyeong fulfillment center (“FC Fire”) resulting in a loss of the inventory, building, equipment, and other assets at the site. Inventory and property and equipment losses from the FC Fire of $158 million and $138 million were recognized in “Cost of sales” and “Operating, general and administrative”, respectively, in 2021.

While we are insured on property losses from the FC Fire, investigations surrounding the fire continue. In December 2022, we received a refundable insurance cash advance payment of $79 million, which is included within other current liabilities and reflected as an inflow for operating cash flows. We have not recognized any insurance benefit in our consolidated statements of operations to date. Whether and to what extent the advance will become non-refundable or additional proceeds will be received is currently unknown.

Key Financial and Operating Highlights:

(1)Total net revenues, constant currency; total net revenues growth, constant currency; adjusted EBITDA; adjusted EBITDA margin; and free cash flow are non-GAAP measures. See “Non-GAAP Financial Measures” and “Reconciliation of GAAP to Non-GAAP Measures” below for the reconciliation of the Non-GAAP measures with their comparable amounts prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

(2)Gross profit is calculated as total net revenues minus cost of sales, and for 2021 includes $158 million related to inventory losses from the FC Fire.

(3)Non-meaningful.

(4)Net loss for 2021 includes $296 million in losses recognized during the second quarter of 2021 related to the FC Fire.

Key Business Metrics and Non-GAAP Financial Measures

Key Business Metrics

Active Customers

As of the last date of each reported period, we determine our number of Active Customers by counting the total number of individual customers who have ordered at least once directly from our apps or websites during the relevant period. A customer is anyone who has created an account on our apps or websites, identified by a unique email address. The change in Active Customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the period. We view the number of Active Customers as a key indicator of our potential for growth in total net revenues, the reach of our network, the awareness of our brand, and the engagement of our customers.

Net Revenues per Active Customer

Net revenues per Active Customer is the total net revenues generated in a period divided by the total number of Active Customers in that period. A key driver of growth is increasing the frequency and the level of spend of Active Customers who are shopping on our apps or websites. We therefore view net revenues per Active Customer as a key indicator of engagement and retention of our customers and our success in increasing the share of wallet.

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Non-GAAP Financial Measures

We report our financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures provide investors with additional useful information in evaluating our performance. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP. Non-GAAP measures have limitations in that they do not reflect all the amounts associated with our results of operations as determined in accordance with U.S. GAAP. These measures should only be used to evaluate our results of operations in conjunction with the corresponding U.S. GAAP measures.

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Reconciliation of GAAP to Non-GAAP Measures

Free Cash Flow

Adjusted EBITDA and Adjusted EBITDA Margin

Constant Currency Revenue and Constant Currency Revenue Growth

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Results of Operations

(1)Non-meaningful.

A discussion regarding our financial condition and results of operations for 2021 compared to 2020 can be found under Part II, Item 7 — “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for 2021.

Total Net Revenues

We categorize our total net revenues as (1) net retail sales and (2) net other revenue. Total net revenues incorporate reductions for estimated returns, promotional discounts, and earned loyalty rewards and exclude amounts collected on behalf of third parties, such as value added taxes. We periodically provide customers with promotional discounts to retail prices, such as percentage discounts and other similar offers, to incentivize increased customer spending and loyalty. These promotional discounts are discretionary and are reflected as reductions to the selling price and revenue recognized on each corresponding transaction. Loyalty rewards are offered as part of revenue transactions to all retail customers, whereby rewards are earned as a percentage of each purchase, for the customer to apply towards the purchase price of a future transaction. We defer a portion of revenue from each originating transaction, based on the estimated standalone selling price of the loyalty reward earned, and then recognize the revenue as the loyalty reward is redeemed in a future transaction, or when they expire. The amount of the deferred revenue related to these loyalty rewards is not material.

Net retail sales represent the majority of our total net revenues which we earn from online product sales of our owned inventory to customers. Net other revenue includes revenue from commissions earned from merchants that sell their products through our apps or websites. We are not the merchant of record in these transactions, nor do we take possession of the related inventory.

Net other revenue also includes consideration from online restaurant ordering and delivery services performed by us, as well as advertising services provided on our apps or websites. We also earn subscription revenue from memberships to our Rocket WOW membership program, which is also included in net other revenue.

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Net revenues by segment was as follows:

The increases in Product Commerce net revenues are primarily due to continued growth in our Active Customers and total net revenues per Active Customer, driven by increased product selection of our owned inventory, and increased customer engagement across more product categories.

The increase in Developing Offerings net revenues is primarily from an increase in the average spend from Active Customers using our Eats offering, partially offset by a decrease in those customers.

Cost of Sales

Cost of sales primarily consists of the purchase price of products sold directly to customers where we record revenue gross, and includes logistics costs. Inbound shipping and handling costs to receive products from suppliers are included in inventory and recognized in cost of sales as products are sold. Additionally, cost of sales includes outbound shipping and logistics related expenses, delivery service costs from our restaurant delivery business, and depreciation and amortization expense.

The increase in cost of sales was primarily attributable to increased volume resulting from increased sales and customer demand. Cost of sales as a percentage of revenue decreased from 84.0% for 2021 to 77.1% for 2022 primarily due to our efforts around supply chain optimization and increased volume in higher margin offerings. Cost of sales as a percentage of revenue for 2021 was also negatively impacted by $158 million in non-recurring inventory losses related to the FC Fire.

Operating, General and Administrative Expenses

Operating, general and administrative expenses include all our operating costs excluding cost of sales, as described above. More specifically, these expenses include costs incurred in operating and staffing our fulfillment centers (including costs attributed to receiving, inspecting, picking, packaging, and preparing customer orders), customer service related costs, payment processing fees, costs related to the design, execution, and maintenance of our technology infrastructure and online offerings, advertising costs, general corporate function costs, and depreciation and amortization expense.

The increase in operating, general and administrative expenses primarily reflects the growth we have achieved in our overall business. While our advertising expenses increased $172 million to support growth and expansion, this is primarily the result of lower advertising expenses we incurred in the prior two years due to COVID-related impacts. The increases in our operating, general and administrative expenses were partially offset by property, equipment and other non-recurring losses of $138 million recognized in 2021 related to the FC Fire.

Operating, general and administrative expenses as a percentage of revenue decreased from 24.1% for 2021 to 23.4% for 2022 primarily related to improved operating leverage as well as property, equipment and other non-recurring losses from the FC Fire recognized in 2021, partially offset by increases in advertising expenses.

Interest Expense

Interest expense primarily consists of interest on our short-term borrowings and long-term debt, and our convertible notes issued in our 2018 convertible note financing.

The decrease in interest expense was primarily attributable to the conversion of our convertible notes into shares of our Class A common stock as a result of the Corporate Conversion and our IPO during the first quarter of 2021.

Interest Income

Interest income primarily consists of interest earned on our deposits held with financial institutions.

The increase in interest income was primarily related to an increase in interest rates on our deposits with various financial institutions.

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Segment Adjusted EBITDA

The operating performance measure of each segment is segment adjusted EBITDA. Segment adjusted EBITDA is defined as loss before income taxes for a period before depreciation and amortization, interest expense, interest income, income tax expense (benefit), other income (expense), net, equity-based compensation, impairments, and other items that we do not believe are reflective of our ongoing operations associated with our segments.

(1)Non-meaningful.

The improvement in Product Commerce segment adjusted EBITDA was primarily due to an increase in net revenues, improved margins from supply chain optimization, an increased percentage of revenues earned from higher margin revenue offerings, and improved operating leverage.

The improved Developing Offerings segment adjusted EBITDA was the result of lower advertising and promotional costs as well as lower delivery costs per order associated with Coupang Eats, offset by continued investments in licensed content for Coupang Play as well as our international expansion.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our primary sources of liquidity are cash on hand, supplemented through various debt financing arrangements and sales of our equity securities. We had total cash and cash equivalents and restricted cash of $3.7 billion as of December 31, 2022, of which $2.0 billion was held by our foreign subsidiaries and may not be freely transferable to the U.S due to local laws or other restrictions. Additionally, we have over $1.0 billion available under our 2022 and 2021 revolving credit facilities as described below.

The ability of certain subsidiaries to transfer funds or pay dividends to Coupang, Inc. is restricted due to terms which require the subsidiaries to meet certain financial covenants, including requirements to maintain a positive net equity balance or having current period income.

As of December 31, 2022 and 2021, we had stockholders’ equity of $2.4 billion and $2.2 billion, respectively. We may incur losses in the future. We expect that our investment into our growth strategy will continue to be significant, particularly with respect to our Developing Offerings segment, which will continue to focus on our newer offerings and entrance into new geographies, as well as overall expansion of our fulfillment, logistics, and technology capabilities. As part of this expansion to fulfill anticipated future customer demand and continuation to expand services, we plan to build new fulfillment centers. We have entered into various new construction contracts for capital projects which are expected to be completed over the next three years. These contracts have remaining capital expenditures commitments of $466 million as of December 31, 2022. We expect that our future expenditures for both infrastructure and workforce-related costs will exceed several billion dollars over the next several years.

During the first quarter of 2021, we completed our IPO, in which we issued and sold 100,000,000 shares of our Class A common stock at a price of $35.00 per share. We received net proceeds of approximately $3.4 billion from the IPO after deducting underwriting discounts of $69 million and other offering costs.

Changes in our cash flows were as follows:

Operating Activities

The year-over-year change in operating cash flow was primarily driven by a $1.5 billion decrease in net loss partially offset by a $(125) million decrease in our non-cash expenses contributing to the net loss for 2022. Cash outflows from changes in operating assets and liabilities increased $(349) million, consisting primarily of:

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•a decrease in cash inflow in accounts payable of $(284) million as a result of slower growth than in 2021 and timing of purchases, partially offset by a decrease in cash outflow in inventory of $161 million;

•an increase in cash outflow in other assets of $(111) million as a result of additional advances made to vendors and suppliers;

•a decrease in cash inflow in accrued expenses of $(199) million impacted by lower employee accruals compared to the prior year due to slower headcount growth.

Investing Activities

The increase was mainly driven by a $151 million increase in purchases of property and equipment, primarily related to our fulfillment and logistics infrastructure, including purchases of buildings, land and equipment.

Financing Activities

The decrease was primarily driven by $3.4 billion of proceeds, net of underwriting discounts of $69 million and other offering costs, from the issuance of 100,000,000 shares of our Class A common stock upon the completion of our IPO in 2021, a $132 million increase in repayments of debt and short-term borrowings, all partially offset by a $267 million increase in proceeds from debt and short-term borrowings.

We believe that our sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, we may need additional cash resources in the future if we find and pursue opportunities for investment, acquisition, strategic cooperation, or other similar actions, which may include investing in technology, our logistics and fulfillment infrastructure, or related talent. If we determine that our cash requirements exceed our amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue additional debt or equity securities or obtain credit facilities or other sources of financing. This financing may not be available on favorable terms, or at all.

Capital Resources

We have entered into material unconditional purchase obligations. These contractual commitments primarily relate to technology related service contracts, fulfillment center construction contracts, and software licenses. We generally enter into term loan facility agreements to finance the construction of our fulfillment centers. These agreements may require that we provide for collateral equal to or greater than the amount borrowed under the arrangement. As we continue to build or purchase additional fulfillment centers, we expect our borrowings under debt financing arrangements to continue to increase. We also have material operating leases which expire over the next ten years as well as obligations for our debts. Total minimum contractual commitments due within the next 12 months were $814 million as of December 31, 2022. Additionally, we have:

•operating leases that have not commenced with future minimum lease payments of $308 million with non-cancellable lease terms of 1 to 10 years;

•expected defined severance benefits to be paid of $708 million; and

•open purchase orders for inventories that are primarily due in the next twelve months, and are generally cancellable, in full or in part, through the contractual provisions.

Refer to Note 13 — "Commitments and Contingencies", Note 5 — "Defined Severance Benefits", and Note 11 — "Leases" in Part II, Item 8 - “Financial Statements and Supplementary Data” for disclosure of our future commitments.

Our short-term and long-term borrowings generally include lines of credit with financial institutions available to be drawn upon for general operating purposes.

Term Loan Facilities

In September 2022, we entered into a $87 million one-year term loan agreement. We pledged $104 million of certain land as collateral. The loan bears interest at a fixed rate of 4.75%. Principal is to be paid at maturity and interest is paid on a monthly basis.

In March 2022, we entered into a new five-year loan agreement to borrow $316 million, which was partially used to extinguish the $149 million August 2020 term loan facility which matured in March 2022, and to finance infrastructure of a fulfillment center. We pledged up to $379 million of certain existing land and a building as collateral. The loan bears interest at a fixed rate of 4.26%.

2022 Revolving Credit Facility

In October 2022, we entered into a two-year revolving facility agreement with a borrowing limit of $126 million that bears interest at the average of 91-days CD interest rate plus 2.30%. The revolving facility is secured by certain of our inventories.

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2021 Revolving Credit Facility

We have a three-year $1.0 billion unsecured credit facility (the “2021 revolving credit facility”). As of December 31, 2022, there was no balance outstanding on the 2021 revolving credit facility.

Borrowings under the 2021 revolving credit facility bear interest, at our option, at a rate per annum equal to (i) a base rate equal to the highest of (A) the prime rate, (B) the higher of the federal funds rate or a composite overnight bank borrowing rate plus 0.50%, or (C) an adjusted London interbank offered rate (“LIBOR”) for a one-month interest period plus 1.00% or (ii) an adjusted LIBOR plus a margin equal to 1.00%. We are also required to pay other customary fees for a credit facility of this size and type, including letter of credit fees, an upfront fee, and an unused commitment fee. The 2021 revolving credit facility contains a number of covenants that, among other things, restrict our ability to:

•incur or guarantee additional debt;

•make certain investments and acquisitions;

•make certain restricted payments and payments of certain indebtedness;

•incur certain liens or permit them to exist; and

•make fundamental changes and dispositions (including dispositions of the equity interests of subsidiary guarantors).

Each of these restrictions is subject to various exceptions.

The 2021 revolving credit facility is guaranteed on a senior unsecured basis by certain material restricted subsidiaries of Coupang, Inc. (including Coupang Corp.), subject to customary exceptions. The 2021 revolving credit facility also contains certain customary affirmative covenants and events of default for facilities of this type.

The 2021 and 2022 revolving credit facilities both require us to (i) maintain a ratio of secured indebtedness to total consolidated tangible assets of less than 35%, if we have $1 or more of revolving loans or any unreimbursed drawn letters of credit outstanding under the 2021 or 2022 revolving credit facility at the end of each fiscal quarter and (ii) maintain a minimum amount of liquidity of at least $625 million (or $313 million to the extent the aggregate commitment of the 2021 or the 2022 revolving credit facility, respectively, is $500 million).

Refer to Note 12 — "Short-Term Borrowings and Long-Term Debt" in Part II, Item 8 - “Financial Statements and Supplementary Data” for disclosure of our debt obligations.

Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and judgments that affect the amounts reported in those consolidated financial statements and accompanying notes. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Although we believe that the estimates we use are reasonable, given the inherent uncertainty involved in making those estimates, and due to the unforeseen effects of the current global macroeconomic environment, those estimates required increased judgment, and actual results reported in future periods could differ materially from those estimates and assumptions. See Note 1 — "Description of Business and Summary of Significant Accounting Policies" to our consolidated financial statements appearing elsewhere in in Part II, Item 8 of this Form 10-K for a description of our significant accounting policies.

The following items require significant estimation or judgment:

Revenue Recognition

The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may require relevant contract interpretation to determine the appropriate accounting treatment, including whether the promised goods and services specified in a multiple element arrangement should be treated as separate performance obligations. Other significant judgments include determining whether we are acting as the principal or the agent from an accounting perspective in a transaction.

For certain arrangements, we apply significant judgment in determining whether we are acting as the principal or agent in a transaction. We are acting as the principal if we obtain control over the goods and services before they are transferred to customers. Generally, when we are primarily obligated in a transaction and are subject to inventory risk or have latitude in establishing prices, or have several but not all of these indicators, we act as the principal and record revenue on a gross basis. We act as the agent and record the net amount as revenue earned if we do not obtain control over the goods and services before they are transferred to the customers.

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Inventories

We account for our inventories, which consist of products available for sale, using the weighted average cost method, and value them at the lower of cost or net realizable value. This valuation requires management judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product suppliers, or liquidations, and expected recoverable values of separate inventory categories. If changes in market conditions result in reductions to the estimated net realizable value of our inventory, we would increase our valuation in the period in which we made such a determination.

Income Taxes

We record deferred tax assets net of valuation allowances when, based on the weight of available evidence, it is more likely than not that all or some portion of the recorded deferred tax assets will not be realized in future periods. Realization of deferred tax assets is dependent on the generation of future taxable income. In considering the need for a valuation allowance, we consider historical, as well as future projected taxable income, along with other positive and negative evidence in assessing the realizability of its deferred tax assets. We recorded valuation allowances of $1.1 billion and $1.3 billion as of December 31, 2022 and 2021, respectively.

We also recognize and measure uncertain tax positions taken or expected to be taken in a tax return utilizing a two-step process. In the first step, recognition, we determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that has a likelihood of greater than 50 percent of being realized upon ultimate settlement.

Defined Severance Benefits

We have severance benefits covering employees in Korea. See Part II, Item 8 “Financial Statements and Supplementary Data” — Note 5 — "Defined Severance Benefits" to the consolidated financial statements.

Actuarial valuations are used in determining amounts recognized in the financial statements for our severance benefit plans. These valuations incorporate the following significant assumptions:

•discount rates; and

•salary growth rates

Management believes that these assumptions are critical accounting estimates because significant changes in these assumptions could impact our results of operations and financial position. Management believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’ experience and advice received from its outside actuaries. We review the severance benefit plan assumptions annually and modify the assumptions based on current rates and trends as appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future periods.

At the end of each fiscal year, we determine the weighted-average discount rates and salary growth rates used to calculate the projected defined severance benefits obligation. The discount rates are an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year. As of December 31, 2022, we determined the discount rates for the severance benefit plan used in determining the projected and accumulated benefit obligations to be 5.10% to 5.30%, as compared to 2.70% to 3.00% as of December 31, 2021. In estimating these rates, we review rates of return on high-quality corporate bond indices, which approximate the timing and amount of benefit payments. Assuming all other defined benefit plan assumptions remain constant, a one percentage point decrease in the discount rates would result in an immaterial change in benefit plan expense during 2023. As of December 31, 2022, we determined the salary growth rates for the severance benefit plan used in determining the projected and accumulated benefit obligations to be 5.00% to 8.00%, as compared to 5.00% to 5.24% as of December 31, 2021. In estimating these rates, we review our historical and expected rates as well as industry growth rates. Assuming all other defined benefit plan assumptions remain constant, a one percentage point decrease in the salary growth rates would result in an immaterial change in benefit plan expense during 2023.

Recently Adopted Accounting Pronouncements

See Note 1 — "Basis of Presentation and Summary of Significant Accounting Policies" to the consolidated financial statements included elsewhere in Part II, Item 8 of this Annual Report on Form 10-K.

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