Item 7. Management’s Discussion and Analysis
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 the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Company Overview
We are one of the world’s leading online marketplaces for connecting design lovers with many of the best sellers and makers of vintage, antique, and contemporary furniture, home décor, jewelry, watches, art, and fashion. We believe we are a
leading online marketplace for these luxury design products based on the aggregate number of such listings on our online
marketplace and our GMV. Our thoroughly vetted seller base, in-depth editorial content, and custom-built technology platform create trust in our brand and facilitate high-consideration purchases. By disrupting the way these items are bought and sold, we are both expanding access to, and growing the market for, luxury design products.
1stDibs began in 2000 with the vision of bringing the magic of the Paris flea market online by creating a listings site for top vintage and antique furniture sellers. Soon thereafter, we moved our headquarters to New York City and focused primarily on adding U.S.-based sellers to our site. The quality of our initial seller base enabled us to build a reputation in the design industry as a trusted source for unique luxury design products. Over the past two-plus decades, we have strengthened our brand and deepened our seller relationships. We launched our e-commerce platform in 2013 and transitioned to a full e-commerce marketplace model in 2016. We provide our sellers, the vast majority of which are small businesses, access to a global community of buyers and a platform to facilitate e-commerce at scale. Our sellers use our platform to manage their inventory,
build their digital marketing presence, and communicate and negotiate orders directly with buyers. We provide our buyers a trusted purchase experience with our user-friendly interface, dedicated specialist support, and 1stDibs Promise, our comprehensive buyer protection program. We operate an asset-light business model which allows us to scale in a capital efficient manner. While we facilitate shipping and fulfillment logistics, we do not take physical possession of the items sold on our online marketplace.
As of December 31, 2021, we operate an e-commerce marketplace with over 4,700 seller accounts, compared to approximately 4,200 as of December 31, 2020, 4.3 million users compared to 3.5 million as of December 31, 2020, approximately 1.3 million listings, compared to 1.1 million as of December 31, 2020, and a seller stock value in excess of $14.0 billion as of December 31, 2021. Users represent non-seller visitors who register on our website and include both buyers and prospective buyers. Our seller stock value is the sum of the stock value of all available products listed on our online marketplace. An individual listing’s stock value is calculated as the item’s current price multiplied by its quantity available for sale. Products with the quantity available for sale listed as “unlimited” are counted as “1” in our calculations.
We have experienced substantial growth in recent periods. We grew our GMV to $447.5 million for the year ended December 31, 2021 from $342.6 million for the year ended December 31, 2020, a growth rate of 31%. We grew our net revenue to $102.7 million for the year ended December 31, 2021 from $81.9 million for the year ended December 31, 2020, a growth rate of 25%. In the year ended December 31, 2021, we generated a net loss of $(21.0) million and Adjusted EBITDA of $(16.5) million, compared to a net loss of $(12.5) million and Adjusted EBITDA of $(6.6) million for the year ended December 31, 2020. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Initial Public Offering
Our registration statement on Form S-1 related to our IPO was declared effective by the SEC on June 9, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 10, 2021. On June 14, 2021, we completed our initial public offering of 6,612,500 shares of our common stock at a price to the public of $20.00 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 862,500 shares of our common stock. We received net proceeds of $123.0 million after deducting underwriters’ discounts and commissions, before deducting offering costs.
Upon the closing of the IPO, all shares of our outstanding redeemable convertible preferred stock automatically converted into 19,243,795 shares of common stock.
Prior to the IPO, deferred offering costs, which consist of direct incremental legal, accounting, and other third-party fees relating to the IPO, were capitalized in other current assets on the consolidated balance sheets. Upon completion of the IPO, the
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$5.5 million of deferred offering costs were reclassified into additional paid-in capital and accounted for as a reduction of the IPO proceeds in the consolidated balance sheets.
Stock Split
On May 25, 2021, our Board of Directors approved an amended and restated certificate of incorporation effecting a 1-for-3 reverse stock split of our issued and outstanding shares of redeemable convertible preferred stock and common stock. This was approved by the stockholders on May 28, 2021, and the split was effected on May 28, 2021 without any change in the par value per share. All information related to our redeemable convertible preferred stock, common stock, common stock warrants, and stock options, as well as the per share amounts, have been retroactively adjusted to give effect to the 1-for-3 reverse stock split for all periods presented.
Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic. The full extent of the impact of the pandemic on our business, key metrics, and results of operations depends on future developments that are uncertain and unpredictable, including the duration, severity, and spread of the pandemic, its impact on capital and financial markets and on the U.S. and global economies, and any new information that may emerge concerning the virus or vaccines or other efforts to control the virus.
As a result of the COVID-19 pandemic, we transitioned to an almost fully remote work environment. More recently, we have re-opened certain offices on a voluntary basis, and have implemented a flexible work model that we anticipate may have us continue to operate on a significantly remote and geographically dispersed basis for the foreseeable future.
Although we believe our business has been positively impacted to some extent by several trends related to the COVID-19 pandemic, including the increased willingness of sellers and buyers to engage in online transactions for luxury purchases, we cannot predict whether these trends will continue if and when the pandemic begins to subside, restrictions ease, and the risk and barriers associated with in-person transactions dissipate.
Any actions we take to mitigate the effects of the COVID-19 pandemic and uncertainties related to the COVID-19 pandemic could harm our business, financial condition, and results of operations. While we have not yet seen a material adverse impact on our operating results as a result of the pandemic, we cannot predict the duration, magnitude, or full impact that COVID-19 may have on our financial condition, operations, and workforce. See “Risk Factors—The COVID-19 pandemic has impacted, and may continue to impact, our business, key metrics, and results of operations in volatile and unpredictable ways” for further discussion of the possible impact of the COVID-19 pandemic on our business.
Our Business Model
We generate revenue primarily from fees from our seller marketplace services as well as other services, including advertisements and software services.
Seller Marketplace Services
Seller marketplace services consist of subscriptions, listings, and marketplace transactions and accounted for 96% of our net revenue in each of the years ended December 31, 2021, 2020, and 2019.
Subscription & Listing Fees
Our sellers pay annual subscription fees to access our online marketplace, which allows them to promote and list their items and execute successful purchase transactions with buyers. Our subscription revenue grows as we bring new sellers to our online marketplace. We earn listing fees from sellers who are subscribed to our online marketplace, on a per item basis, as directed by the seller to promote certain items at the seller’s discretion. Sellers do not pay a listing fee for a basic listing on our online marketplace, but can choose to pay for other listing fees, which provide promotional advantages over the basic listing. Subscription fees accounted for 23%, 27%, and 28% of our net revenue in the years ended December 31, 2021, 2020, and 2019, respectively. Our ability to maintain the level of our annual subscription fee rates depends on our ability to continue to generate sales for our sellers, which in turn depends on our ability to drive GMV growth, as GMV increases the network effect on our online marketplace.
Marketplace Transaction Fees
Our sellers pay us a commission fee and a processing fee for the successful sale of an item listed on our online marketplace. We have a commission fee structure that is a function of the item’s category and price. Our commission fees range from 5% to 50% and processing fees are 3%, net of expected refunds. Our marketplace transaction fees represent the majority of our net revenue and accounted for 71%, 67% and 64% of our net revenue in the years ended December 31, 2021, 2020, and 2019, respectively.
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Other Services
Other services consist of advertisements and software services and accounted for 4% of our net revenue in each of the years ended December 31, 2021, 2020, and 2019. Advertising revenue is generated when impression-based ads are displayed on our online marketplace on our sellers’ behalf. Software services revenue consists of monthly and annual subscriptions sold through our Design Manager subsidiary allowing users, typically interior designers, to access our project management and accounting software.
Key Operating and Financial Metrics
We use the following key metrics and non-GAAP measures to measure our performance, identify trends affecting our business, and make strategic decisions:
• Gross Merchandise Value;
• Number of Orders;
• Active Buyers; and
• Adjusted EBITDA.
These metrics are based on internal company data, assumptions, and estimates and are used in managing our business. We believe that these figures are reasonable estimates, and we actively take measures to improve their accuracy, such as eliminating known fictitious or duplicate accounts. There are, however, inherent challenges in gathering accurate data across large online and mobile populations. For example, individuals may have multiple email accounts in violation of our terms of service, which would result in an Active Buyer being counted more than once, thus impacting the accuracy of our number of Active Buyers. In addition, certain metrics, such as the number of Active Buyers and Number of Orders, are measured based on such numbers as reported in a given month, minus cancellations within that month. As we do not retroactively adjust such numbers for cancellations occurring after the month, the metrics presented do not reflect subsequent order cancellations. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. These key operating and financial metrics may vary from period to period and should not be viewed as indicative of other metrics.
Year Ended December 31,
(dollars in thousands) 2021 2020 2019
GMV $ 447,471 $ 342,586 $ 279,010
Number of Orders 158,061 127,911 102,606
Active Buyers 72,420 58,159 45,955
Adjusted EBITDA (unaudited) $ (16,493) $ (6,637) $ (24,951)
Gross Merchandise Value
We define GMV as the total dollar value from items sold by our sellers through 1stDibs in a given month, minus cancellations within that month, and excluding shipping and sales taxes. GMV includes all sales reported to us by our sellers, whether transacted through the 1stDibs marketplace or reported as an offline sale. We define “on-platform GMV” as GMV based only on sales placed or reported through the 1stDibs marketplace, thus on-platform GMV is a subset of GMV. Offline sales consist of sales completed by a small number of sellers outside of our online marketplace and reported to us by these sellers in exchange for increased marketing exposure and/or slightly lower commission rates on both their on-platform and offline sales. We do not intend to add new sellers to this program. On-platform GMV accounted for $432.6 million, or 97% and $328.8 million, or 96% of GMV in the years ended December 31, 2021 and 2020, respectively. We view GMV as a measure of the total economic activity generated by our online marketplace and as an indicator of the scale and growth of our online marketplace and the health of our ecosystem. Our historical growth rates for GMV may not be indicative of future growth rates in GMV.
Number of Orders
We define Number of Orders as the total number of orders placed or reported through the 1stDibs marketplace in a given month, minus cancellations within that month. Our historical growth rates for Number of Orders may not be indicative of future growth rates in Number of Orders.
Active Buyers
We define Active Buyers as buyers who have made at least one purchase through our online marketplace during the 12 months ended on the last day of the period presented, net of cancellations. A buyer is identified by a unique email address; thus
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an Active Buyer could have more than one account if they were to use a separate unique email address to set up each account. We believe this metric reflects scale, engagement and brand awareness, and our ability to convert user activity on our online marketplace into transactions. Our historical growth rates for Active Buyers may not be indicative of future growth rates in new Active Buyers.
Adjusted EBITDA
We define Adjusted EBITDA as net loss excluding depreciation and amortization, stock-based compensation expense, other income (expense), net, and provision for income taxes. Adjusted EBITDA is a key performance measure used by our management and board of directors to assess our operating performance and the operating leverage of our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the income and expenses that we exclude from Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. See “Non-GAAP Financial Measures” for more information and for a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA.
Key Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, in the section titled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
Sourcing and Quality of Our Highly-Curated Luxury Supply
Our success depends in part on our ability to source luxury design products for our online marketplace through attracting and retaining leading and vetted sellers. Our revenue, brand, and network effect depend on the quality, authenticity, and exclusivity of the luxury design products available through our online marketplace. The total seller stock value on our online marketplace is in excess of $14.0 billion as of December 31, 2021. We have a diverse, non-concentrated base of over 4,700 seller accounts. As a leading at-scale online marketplace for luxury design products, we believe we are able to attract and onboard sellers seamlessly with very little marginal seller acquisition cost. A key driver of the increase in our seller stock value has been our over two decades, time-tested relationships with our seller base.
Growth and Retention of our Active Buyers
Our success depends in part on our ability to grow and retain our Active Buyer base. Our number of Active Buyers increased to 72,420 as of December 31, 2021 from 58,159 as of December 31, 2020. The total Number of Orders placed or reported through the 1stDibs marketplace for the year ended December 31, 2021 was 158,061, up from 127,911 for the year ended December 31, 2020. We had no Active Buyers who represented 1% or more of on-platform GMV for the year ended December 31, 2021.
With an AOV of above $2,700 in the year ended December 31, 2021, Active Buyers drive our on-platform GMV and net revenue and contribute to the network effects that allow us to attract new sellers and exclusive inventory.
We have been able to grow our on-platform GMV from both new and existing buyers. While we continue to acquire new buyers, the share of on-platform GMV from existing buyers has remained stable, indicating our ability to retain a high-quality, stable buyer base.
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We define new buyers as those who placed their first order on our online marketplace. The figures below represent our on-platform GMV from our online marketplace by buyer cohort for the year ended December 31, 2021.
We expect growth in new buyers to be driven by further penetration of the luxury consumer market, including growing our business in non-U.S. markets. In addition, we expect GMV to be driven by an increase in Active Buyers and continued strength in existing buyers.
Other Factors Affecting Our Performance
Our results of operations are impacted by a number of other factors, including, but not limited to, those discussed below. The extent to which these factors may positively or negatively impact our GMV and our results of operations, including our net revenue and gross profit, will depend in large part on the degree to which we are able to successfully achieve the following growth strategies, as well as the impact the ongoing COVID-19 pandemic may have on our business and on our seller and buyer base.
International Growth
Our growth will depend in part on international sellers and buyers, both of which constitute an increasing portion of our online marketplace transactions. On-platform GMV from buyers in non-U.S. markets constituted 19% in year ended December 31, 2021, representing a large untapped international opportunity. Currently, our sellers and buyers are based in over 100 countries. Our long-term strategy is to localize the user experience by providing technology solutions such as translation and payment capabilities, focus on local marketing efforts through organic search, email, performance-based marketing, and optimized public relations, and customize content and collections to suit regional tastes. As of December 31, 2021, we had over 4,700 seller accounts and 40% of the supply on our online marketplace came from outside the United States.
Diversify Product Verticals
Historically, our largest vertical by GMV has been antique and vintage furniture. Our unique product offerings in this vertical have inspired brand loyalty and increased demand for other luxury design products on the 1stDibs marketplace allowing us to expand into adjacent verticals, including new and custom furniture, jewelry, and art. Antique and vintage furniture comprised less than 50% of our on-platform GMV in the years ended December 31, 2021 and 2020. We expect antique and vintage furniture to account for less than 50% of on-platform GMV for the foreseeable future as we are investing in our new and custom furniture, jewelry, art, fashion, and NFT verticals. We anticipate these verticals will account for an increasing percentage of our on-platform GMV for the foreseeable future. Our new and custom furniture, jewelry and watches, art, and NFT verticals together comprised 46% of each of our years ended December 31, 2021 and 2020 on-platform GMV. Our brand and operating track record in existing verticals allow us to unlock valuable supply across adjacent and new verticals, increasing the exclusive products available on our online marketplace, thereby increasing the LTV of our new and existing buyer cohorts. We aim to continue to diversify into new verticals so that we can grow our future revenue streams.
Growth in Brand Awareness
While we have grown to-date largely due to strong brand awareness from direct and organic channels such as word of mouth referrals, we have ample opportunity to drive further engagement with new and existing buyers. As we continue to build and maintain our buyer base, we plan to launch additional marketing campaigns with leading design industry organizations, interior designers, and influencers, host events and enter into partnerships with leading luxury brands and develop new and compelling editorial content. While a large portion of our advertising spend is dedicated to performance-based marketing, we
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have opportunities to explore relatively untapped channels, such as television, radio, podcasts, and online display, to bolster engagement on our online marketplace. As many users may continue to view 1stDibs primarily as a vintage and antique furniture marketplace, we have a substantial opportunity to educate our buyers on the breadth of our offerings and drive cross-vertical transactions.
Investment in Technology and Innovation
We have made, and will continue to make, significant investments in our platform to drive seller success through new tools, convert users to buyers, grow our long-term revenue and operating results, drive technological innovation, and enhance the overall experience of our online marketplace. As we continue to scale, we plan to invest in innovation to address the needs of our sellers and buyers and drive efficiencies in our business, localize our platform, and enter new verticals and geographies. Overall, investments in our platform are focused on maximizing traffic, increasing conversion rate, and improving the overall efficiency of our operations.
Components of Results of Operations
Net Revenue
Our net revenue consists principally of seller marketplace services, software services, and advertisements. Seller marketplace services consist of subscriptions, listings, and marketplace transactions. Revenue from subscriptions consist of access to our online marketplace, allowing sellers, who are our customers, to execute successful purchase transactions with buyers. Sellers pay us for promoting certain products on their behalf and at their discretion through our online marketplace. For successful purchase transactions, sellers also pay us commissions ranging from 5% to 50%, and processing fees of 3%, net of expected refunds. If a seller accepts a return or refund of an on-platform purchase, the related commission and processing fees are refunded to the seller. Software services revenue consists of monthly and annual subscriptions allowing customers to access our Design Manager software, typically used by interior designers. Advertisements consist of impression-based ads displayed on our online marketplace on the seller’s behalf.
Our revenue recognition policies are discussed under “Critical Accounting Policies” and Note 2, “Summary of Significant of Accounting Policies,” to our consolidated financial statements.
Cost of Revenue
Cost of revenue includes payment processor fees, hosting expenses, and resold software usage and services. Cost of revenue also includes expenses associated with payroll, employee benefits, stock-based compensation, consulting costs, amortization of internal-use software, and other headcount-related expenses associated with operations personnel supporting revenue-related operations. A portion of rent, related facilities and maintenance costs, and depreciation of property and equipment related to a gallery space used by us is also allocated to cost of revenue. A Surrender Agreement for the gallery lease was entered into in December 2019.
In certain transactions where our shipping services are elected by sellers, we facilitate shipping of items purchased from the seller to the buyer. The difference between the amount collected for shipping and the amount charged by the shipping carrier is included in cost of revenue in the consolidated statements of operations. We do not own or manage inventory or directly manage fulfillment and shipping.
Gross Profit and Gross Margin
Gross profit is net revenue less cost of revenue, and gross margin is gross profit as a percentage of net revenue. Gross profit has been, and will continue to be, affected by various factors, including leveraging economies of scale, the costs associated with hosting our platform, the level of amortization of our internal-use software, and the extent to which we expand our operations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors.
Operating Expenses
Operating expenses consist of sales and marketing, technology development, general and administrative, and provision for transaction loss expenses. We include stock-based compensation expense in connection with the grant of the stock options in the applicable operating expense category based on the respective equity award recipient’s function.
Sales and Marketing
Sales and marketing expenses include advertising expense, payroll, employee benefits, stock-based compensation, rent and related facilities and maintenance costs related to our gallery space, depreciation of property and equipment related to the gallery, promotional discounts offered to new and existing buyers, incentives offered to select buyers who reach a certain purchase amount threshold, and other headcount-related expenses associated with the sales and marketing personnel. Advertising expenses consist primarily of costs incurred promoting and marketing our services, such as costs associated with acquiring new users through performance-based marketing, print advertising, email, and events. Promotional discounts and
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incentives represent incentives solely to end buyers and, therefore, are not considered payments made to our customers. Buyers are not our customers because access to the 1stDibs marketplace is free for buyers, and we have no performance obligations with respect to buyers.
Technology Development
Technology development expenses include payroll, employee benefits, stock-based compensation, and other headcount-related expenses associated with engineering and product development personnel and consulting costs related to technology development. We expense all technology development expenses as incurred, except for those expenses that meet the criteria for capitalization as internal-use software.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation, rent and related facilities and maintenance costs, other headcount-related expenses associated with finance, facility and human resources related personnel, depreciation and amortization of property and equipment, business liability insurance, and legal, accounting, and professional fees. We expense all general and administrative expenses as incurred.
Provision for Transaction Losses
Provision for transaction losses primarily consists of transaction loss expense associated with our buyer protection program, including damages to products caused by shipping and transit, items that were not received or not as represented by the seller, and reimbursements to buyers at our discretion if they are dissatisfied with their experience. The provision for transaction losses also includes bad debt expense associated with our accounts receivable balance.
Results of Operations
The following table summarizes our results of operations for the periods indicated:
Year Ended December 31,
(in thousands) 2021 2020 2019
Net revenue $ 102,731 $ 81,863 $ 70,567
Cost of revenue 32,167 25,948 23,718
Gross profit 70,564 55,915 46,849
Operating expenses:
Sales and marketing 47,414 36,526 44,170
Technology development 19,110 16,510 15,162
General and administrative 21,293 12,565 15,200
Provision for transaction losses 5,191 3,820 3,499
Total operating expenses 93,008 69,421 78,031
Loss from operations (22,444) (13,506) (31,182)
Other income (expense), net:
Interest income 146 194 718
Interest expense (16) (14) (536)
Other, net 1,372 809 738
Total other income (expense), net 1,502 989 920
Net loss before income taxes (20,942) (12,517) (30,262)
(Provision for) benefit from income taxes (21) (11) 409
Net loss $ (20,963) $ (12,528) $ (29,853)
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The following table summarizes our results of operations as a percentage of net revenue for the periods indicated:
Year Ended December 31,
2021 2020 2019
Net revenue 100 % 100 % 100 %
Cost of revenue 31 32 34
Gross profit 69 68 66
Operating expenses:
Sales and marketing 46 44 63
Technology development 19 20 21
General and administrative 21 15 21
Provision for transaction losses 5 5 5
Total operating expenses 91 84 110
Loss from operations (22) (16) (44)
Other income (expense), net:
Interest income — — 1
Interest expense — — (1)
Other, net 2 1 1
Total other income (expense), net 2 1 1
Net loss before income taxes (20) (15) (43)
(Provision for) benefit from income taxes — — 1
Net loss (20) % (15) % (42) %
Comparison of the Years Ended December 31, 2021 and 2020
Net Revenue
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Net revenue $ 102,731 $ 81,863 $ 20,868 25 %
Net revenue was $102.7 million for the year ended December 31, 2021, as compared to $81.9 million for the year ended December 31, 2020. The increase of $20.9 million, or 25%, was primarily driven by an increase in seller marketplace services revenue of $20.2 million. The increase in seller marketplace services revenue was primarily due to the $18.0 million increase in commission and processing fees as a result of the growth in our GMV. The growth in GMV is mainly due to an increase in order volume driven by growth in Active Buyers.
Cost of Revenue
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Cost of revenue $ 32,167 $ 25,948 $ 6,219 24 %
Cost of revenue was $32.2 million for the year ended December 31, 2021, as compared to $25.9 million for the year ended December 31, 2020. The increase of $6.2 million, or 24%, was primarily driven by increases in payment processing fees of $3.3 million and hosting fees of $0.7 million, consistent with our GMV growth. There were also increases of $2.8 million in shipping costs driven by an increase in shipping activities and shipping prices associated with our marketplace services, and $1.1 million in salaries and benefits due to higher headcount to support increased order volume. These increases were partially offset by a decrease in depreciation expense of $1.5 million as internal-use software capitalized projects were more substantial in fiscal years prior to 2020, and many of those assets are now fully amortized.
Gross Profit and Gross Margin
Gross profit was $70.6 million and gross margin was 68.7% for the year ended December 31, 2021, as compared to gross profit of $55.9 million and gross margin of 68.3% for the year ended December 31, 2020. The increase of gross profit and gross margin for the year ended December 31, 2021 were primarily driven by the increase in seller marketplace services revenue and
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decreases in amortization expense for capitalized internal-use software as a percentage of net revenue due to improved leverage of our technology platform as GMV grows partially offset by the increases in cost of revenue discussed above .
Operating Expenses
Sales and Marketing
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Sales and marketing $ 47,414 $ 36,526 $ 10,888 30 %
Sales and marketing expense was $47.4 million for the year ended December 31, 2021, as compared to $36.5 million for the year ended December 31, 2020. The increase of $10.9 million, or 30%, was primarily driven by an increase in performance-based marketing of $5.7 million in an effort to continue to drive our growth and an increase in promotional discounts and incentives of $3.0 million, partially due to the increase in GMV as well as the increased use of testing of promotional campaigns which are focused on buyer acquisition. There was also an increase in facility rent due to negative rent of $2.6 million recognized in the first quarter of the fiscal year ended December 31, 2020 related to the Surrender Agreement for our gallery space. These increases were partially offset by a decrease in depreciation expense of $1.3 million due to accelerated depreciation of our gallery leasehold improvements recognized in the first quarter of the year ended December 31, 2020 in connection with the Surrender Agreement for our gallery space.
Technology Development
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Technology development $ 19,110 $ 16,510 $ 2,600 16 %
Technology development expense was $19.1 million for the year ended December 31, 2021, as compared to $16.5 million for the year ended December 31, 2020. The increase of $2.6 million, or 16%, was primarily driven by an increase of $1.6 million in consulting fees for technology development, including costs to translate our website into new languages to help our international expansion, as well as an increase of $1.0 million in salaries and benefits due to higher headcount.
General and Administrative
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
General and administrative $ 21,293 $ 12,565 $ 8,728 69 %
General and administrative expense was $21.3 million for the year ended December 31, 2021, as compared to $12.6 million for the year ended December 31, 2020. The increase of $8.7 million, or 69%, was primaril y driven by a $2.5 million increase in liability insurance, a $1.9 million increase in salaries and benefits due to higher headcount, a $1.5 million increase in professional services fees related to legal, audit, and accounting services, and a $1.2 million increase in stock-based compensation expense due to additional awards granted in the year ended December 31, 2021 and the higher valuation of our common stock. These expense increases were primarily related to our operations as a public company.
Provision for Transaction Losses
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Provision for transaction losses $ 5,191 $ 3,820 $ 1,371 36 %
Provision for transaction losses was $5.2 million for the year ended December 31, 2021, as compared to $3.8 million for the year ended December 31, 2020. The increase of $1.4 million, or 36%, was primarily driven by the growth in our GMV.
Other Income (Expense), Net
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Total other income (expense), net $ 1,502 $ 989 $ 513 52 %
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Other income (expense), net was $1.5 million for the year ended December 31, 2021, as compared to $1.0 million for the year ended December 31, 2020. The increase of $0.5 million, or 52%, was primarily driven by an increase in foreign exchange gains.
Non-GAAP Financial Measures
We have included Adjusted EBITDA, which is a non-GAAP financial measure, because it is a key measure used by our management team to help us to assess our operating performance and the operating leverage in our business. We also use this measure to analyze our financial results, establish budgets and operational goals for managing our business, and make strategic decisions. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the income and expenses that we exclude from Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. We also believe that the presentation of this non-GAAP financial measure provides an additional tool for investors to use in comparing our core business and results of operations over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors, and to analyze our cash performance.
The non-GAAP financial measures presented may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, comparable financial measures calculated in accordance with GAAP. Further, these non-GAAP financial measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these non-GAAP financial measures should be considered as supplemental in nature, and are not intended, and should not be construed, as a substitute for the related financial information calculated in accordance with GAAP. These limitations of Adjusted EBITDA include the following:
• The exclusion of certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets. While these are non-cash charges, we may need to replace the assets being depreciated and amortized in the future and Adjusted EBITDA does not reflect cash requirements for these replacements or new capital expenditure requirements;
• The exclusion of other income (expense), net, which includes interest income related to our cash equivalents and our notes receivable from related party, which were paid in full in December 2020, interest expense, and realized and unrealized gains and losses on foreign currency exchange; and
• The exclusion of stock-based compensation expense, which has been a significant recurring expense and will continue to constitute a significant recurring expense for the foreseeable future, as equity awards are expected to continue to be an important component of our compensation strategy.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.
We define Adjusted EBITDA as our net loss, excluding: (1) depreciation and amortization; (2) stock-based compensation expense; (3) other income (expense), net; and (4) provision for income taxes. The following table provides a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA:
Year Ended December 31,
(in thousands) 2021 2020 2019
Net loss $ (20,963) $ (12,528) $ (29,853)
Depreciation and amortization 3,112 6,023 5,150
Stock-based compensation expense 2,839 846 1,081
Other (income) expense, net (1,502) (989) (920)
Provision for (benefit from) income taxes 21 11 (409)
Adjusted EBITDA (unaudited) $ (16,493) $ (6,637) $ (24,951)
Seasonality
We have historically experienced increased sales during the fourth-quarter holiday shopping season compared to the other quarters. This has generally resulted in increased GMV and net revenue during the fourth quarter of each fiscal year. We expect this seasonality to continue in future years. Our cost of revenue and marketing expenses also follow this trend, with the highest costs corresponding with the fourth quarter. We do not own or manage inventory or directly manage fulfillment and shipping. If
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our growth rates moderate, the impact of these seasonality trends on our results of operations may become more pronounced. We anticipate that gross margin may fluctuate from quarter to quarter based on variability in the costs associated with hosting our online marketplace and supporting order processing.
We intend to continue making investments in marketing to drive future net revenue growth. We also intend to continue investing in our technology development efforts to improve and expand our platform. We expect the majority of our technology development expenses will result from consulting or headcount-related expenses. General and administrative expenses are expected to increase in the future due to the additional costs to operate as a public company. We expect to continue to see an increase in provision for transaction losses as the volume of our on-platform GMV continues to grow.
Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of $168.2 million and an accumulated deficit of $268.5 million. Net cash used in operating activities was $4.4 million in the year ended December 31, 2021. We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we continue to invest in expansion activities. Our principal use of cash is to fund our operations and platform development to support our growth.
Based on our current plans, we believe our existing cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements through at least the next 12 months. Over the longer term, our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, the continuing market acceptance of our solutions and any investments or acquisitions we may choose to pursue in the future. We expect to incur substantial additional expenditures in the near term to support our ongoing activities. Additionally, we expect to incur additional costs as a result of operating as a public company. While management believes that our current cash and cash equivalents are sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months, we may need to borrow funds or raise additional equity to achieve our longer-term business objectives.
Our future capital requirements will depend on many factors, including:
• the emergence of competing online marketplaces and other adverse marketing developments;
• the timing and extent of our sales and marketing and technology development expenditures; and
• any investments or acquisitions we may choose to pursue in the future.
A change in the outcome of any of these or other variables could significantly impact our operating plans, and we may need additional funds to meet operational needs and capital requirements associated with such plans. In addition, any future borrowings may result in additional restrictions on our business and any issuance of additional equity would result in dilution to investors. If we are unable to raise additional capital when we need it, it could harm our business, results of operations, and financial condition.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
(in thousands) 2021 2020 2019
Net cash used in operating activities $ (4,401) $ (3,443) $ (18,469)
Net cash (used in) provided by investing activities (2,269) 1,286 (8,410)
Net cash provided by financing activities 120,050 1,562 60,956
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (16) (14) 117
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 113,364 $ (609) $ 34,194
Cash Flows from Operating Activities
Net cash used in operating activities was $4.4 million for the year ended December 31, 2021, as compared to net cash used in operating activities of $3.4 million for the year ended December 31, 2020. The increase in net cash used of $1.0 million was primarily driven by a $8.4 million increase in net loss and a $1.8 million increase from the change in prepaid expenses primarily due to the significant increase in the premium associated with our directors and officers insurance related to our IPO, partially offset by a $4.1 million decrease from the increase in payables due to sellers due to a change in our seller payment policies in March 2021 that more closely aligns seller payments to the timing of the seller’s shipment of a confirmed order and a $3.1 million decrease from the increase in accrued expenses, primarily related to higher accruals for shipping expenses due to longer timelines for the completion and invoicing of shipments.
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Cash Flows from Investing Activities
Net cash used in investing activities was $2.3 million for the year ended December 31, 2021, as compared to net cash provided by investing activities of $1.3 million for the year ended December 31, 2020. The increase in cash used of $3.6 million was primarily due to proceeds of $3.1 million from the repayment of notes receivable from related party during the year ended December 31, 2020.
Cash Flows from Financing Activities
Net cash provided by financing activities was $120.1 million for the year ended December 31, 2021, as compared to $1.6 million for the year ended December 31, 2020. The increase of $118.5 million primarily consists of the $123.0 million proceeds, net of underwriting discounts and commissions, from our IPO, offset by increased payments of deferred offering costs of $4.6 million. Additionally, proceeds from the exercise of stock options increased by $0.7 million.
Off-Balance Sheet Arrangements
For the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
See Note 2 “Summary of Significant of Accounting Policies” to our consolidated financial statements, for a description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows.
Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have 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 until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
While our significant accounting policies are described in greater detail in Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements, we believe that the following policies are those most critical to the judgements and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generate revenue primarily from our seller marketplace services as well as other optional services including advertisements and software services sold to interior designers. Revenue is recognized as we transfer control of promised goods or services transfers to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We evaluate whether it is appropriate to recognize revenue on a gross or net basis based upon our evaluation of whether we obtain control of the specified goods or services by considering if we are primarily responsible for fulfillment of the promise, have inventory risk, or have latitude in establishing pricing and selecting suppliers, among other factors.
Seller Marketplace Services (Subscriptions, Listings, and Marketplace Transactions)
We sell subscriptions to access the 1stDibs.com marketplace, which allow sellers to promote and list items to be sold to buyers and execute successful purchase transactions with buyers. Through the subscription the sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. We have determined that our customers are sellers on our online marketplace since sellers pay for the use of our online marketplace to sell their inventory. We offer sellers annual subscriptions
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that are payable on a monthly basis. If during the annual subscription period a seller ceases to make its monthly payment, we are no longer obligated to provide the subscribed services and the seller can be terminated at our sole discretion.
We earn listing fees from sellers who are subscribed to our online marketplace on a per item basis as directed by the seller to promote certain items at the seller’s discretion.
We charge sellers commission and processing fees, for successful purchases through our online marketplace. The commission fees range from 5% to 50% and processing fees are 3%, net of expected refunds. If a seller accepts a return or refund of an on-platform purchase, the related commission and processing fees are refunded to the seller. We record discounts provided to the end buyer, to whom we have no performance obligation, such as promotional discounts, in selling and marketing expense, since the discounts are not related directly to the revenue source but rather used as a marketing tool and the seller is not made aware of the discounts provided to the end buyer.
For the items purchased through the 1stDibs marketplace, we collect the gross merchandise value from the buyer, but recognize the associated revenue on a net basis, which equates to the commissions and processing fees earned in exchange for the seller marketplace facilitation services. We do not take title to inventory sold or assume risk of loss at any point in time during the transaction, and we are authorized to collect consideration from the buyer and remit net consideration to the seller to facilitate the processing of the confirmed purchase transaction.
The subscription fee is recognized monthly, the commission and processing fees are recognized net of estimated refunds when the corresponding transaction is confirmed by the seller and buyer, and the listing fee is recognized ratably over time when the listing is publicly posted.
Advertisements
Advertising revenue is generated by displaying ads on the 1stDibs marketplace. For advertising services, we enter into agreements with advertisers, or sellers, in the form of signed insertion orders, which specify the terms of services and fees, prior to advertising campaigns being run. We recognize revenue from the display of impression-based ads in the period in which the impressions are delivered in accordance with the contractual terms of the seller insertion orders. Impressions are considered delivered when an ad is displayed to users.
Software Services
Through our subsidiary, Design Manager, we offer subscriptions to access software used by interior designers. Subscriptions do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts. We offer both monthly and annual subscriptions. For software services, we offer subscriptions to customers that are tailored to design firms as an end-to-end business solution for project management and accounting and enter into agreements with the customers through their acceptance of online terms of service, which specifies the terms of services and fees, prior to the customers receiving access to the software platform.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives.
We capitalize costs related to internal-use software during the application development stage, including consulting costs and compensation expenses related to employees who devote time to the development projects. We record software development costs in property and equipment, net. Costs incurred in the preliminary stages of development activities and post implementation activities are expensed in the period incurred and are included in technology development in the consolidated statements of operations. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality.
Once the project is available for general release, capitalization ceases, and the asset can begin being amortized. Capitalized costs associated with internal-use software are amortized on a straight-line basis over their estimated useful life, which is generally three years.
When assets are sold or retired, the cost and related accumulated depreciation or amortization of assets disposed of are removed from the accounts, with any resulting gain or loss recorded in income from operations. Costs of repairs and maintenance are expensed as incurred.
Stock-Based Compensation
We measure all stock-based awards granted to employees, directors, and non-employees based on the fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair value of
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our common stock, expected stock price volatility, the expected term of the award, and the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. Expected volatility was calculated based on the implied volatilities from market comparisons of certain publicly traded companies and other factors. The expected option term was calculated based on the simplified method, which uses the midpoint between the vesting date and the contractual term, as we do not have sufficient historical data to develop an estimate based on participant behavior. The risk-free interest rate was based on the U.S. Treasury bond yield with an equivalent term. We have not paid dividends and have no foreseeable plans to pay dividends. The fair value of restricted stock units are estimated on the date of grant based on the fair value of our common stock.
The fair value of common stock underlying options has historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock. Because there has been no public market for our common stock, the board of directors has determined its fair value at the time of grant of the option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital, and general and industry specific economic outlook, among other factors. Subsequent to our IPO, the fair value of the underlying common stock is our closing stock price as reported on the Nasdaq.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks are described below.
Interest Rate Sensitivity
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. We held cash and cash equivalents of $168.2 million as of December 31, 2021. We generally hold our cash in non-interest-bearing checking accounts. Cash equivalents consist of amounts held in money market accounts. Due to the nature of our cash and cash equivalents, a hypothetical 100 basis point change in interest rates would not have a material effect on the fair value of our cash and cash equivalents. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.
Foreign Currency Risk
Our net revenue is primarily denominated in U.S. dollars, Euros, and British pounds, depending on the currency selection of the seller. Our cost of revenue and operating expenses are primarily denominated in U.S. dollars, except for our U.K. operations, which are denominated in British pounds. As our online marketplace continues to grow globally, our results of operations and cash flows may be subject to fluctuations due to the change in foreign exchange rates. To date, fluctuations due to changes in the Euro and British pound have not been significant, but we may experience material foreign exchange gains and losses in our statement of operations in the future. As of December 31, 2021, a 10% increase or decrease in current exchange rates would not have a material impact on our consolidated financial statements.
Credit Risk
We are exposed to credit risk on accounts receivable balances. This risk is mitigated by requiring upfront payment for many of our services and due to our diverse customer base, dispersed over various geographic regions and industrial sectors. For the years ended December 31, 2021 and 2020, no single customer accounted for more than 10% of our net revenue. We maintain provisions for potential credit losses and such losses to date have been within our expectations. We evaluate the solvency of our customers on an ongoing basis to determine if additional allowances for doubtful accounts need to be recorded.
Inflation Risk
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.
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