1stdibs.com, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Audited Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 63 Consolidated Balance Sheets 64 Consolidated Statements of Operations 65 Consolidated Statements of Comprehensive Loss 66 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 67 Consolidated Statements of Cash Flows 69 Notes to Consolidated Financial Statements 71 62 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of 1stdibs.com, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of 1stdibs.com, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013. New York, New York March 3, 2022 63 1STDIBS.COM, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share amounts) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 168,226 $ 54,862 Accounts receivable, net of allowance for doubtful accounts of $ 29 and $ 51 at December 31, 2021 and 2020, respectively 701 887 Prepaid expenses 3,951 1,603 Receivables from payment processors 2,142 3,052 Other current assets 867 3,665 Total current assets 175,887 64,069 Property and equipment, net 4,459 5,136 Goodwill 7,202 7,212 Intangible assets, net 1,164 1,352 Other assets 3,542 3,573 Total assets $ 192,254 $ 81,342 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 4,729 $ 4,548 Payables due to sellers 10,225 4,493 Accrued expenses 13,745 9,452 Other current liabilities 3,512 4,918 Total current liabilities 32,211 23,411 Other liabilities 2,605 3,352 Total liabilities 34,816 26,763 Commitments and contingencies (Note 19) Redeemable convertible preferred stock (Series A, B, C, C-1, and D), $ 0.01 par value; zero and 57,771,864 shares authorized as of December 31, 2021 and 2020, respectively; zero and 19,243,795 shares issued and outstanding as of December 31, 2021 and 2020, respectively; and aggregate liquidation preference of zero and $ 301,300 as of December 31, 2021 and 2020, respectively — 298,525 Stockholders’ equity (deficit): Preferred stock, $ 0.01 par value; 10,000,000 and zero shares authorized as of December 31, 2021 and 2020, respectively; zero shares issued and outstanding as of December 31, 2021 and 2020 — — Common stock, $ 0.01 par value; 400,000,000 and 105,767,092 shares authorized as of December 31, 2021 and 2020, respectively; 38,000,086 and 11,376,048 shares issued as of December 31, 2021 and 2020, respectively; and 37,991,529 and 11,376,048 shares outstanding as of December 31, 2021 and 2020, respectively 380 114 Additional paid-in capital 425,769 — Accumulated deficit ( 268,482 ) ( 243,858 ) Accumulated other comprehensive loss ( 229 ) ( 202 ) Total stockholders’ equity (deficit) 157,438 ( 243,946 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 192,254 $ 81,342 See accompanying notes to the consolidated financial statements 64 1STDIBS.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share amounts) Year Ended December 31, 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 ) Accretion of redeemable convertible preferred stock to redemption value ( 7,061 ) ( 15,095 ) ( 13,744 ) Net loss attributable to common stockholders $ ( 28,024 ) $ ( 27,623 ) $ ( 43,597 ) Net loss per share attributable to common stockholders—basic and diluted $ ( 1.08 ) $ ( 2.50 ) $ ( 4.05 ) Weighted average common shares outstanding—basic and diluted 26,059,744 11,034,620 10,772,486 See accompanying notes to the consolidated financial statements. 65 1STDIBS.COM, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 20,963 ) $ ( 12,528 ) $ ( 29,853 ) Other comprehensive (loss) income: Foreign currency translation adjustment, net of tax of $ 0 for the years ended December 31, 2021, 2020, and 2019 ( 27 ) 43 28 Comprehensive loss $ ( 20,990 ) $ ( 12,485 ) $ ( 29,825 ) See accompanying notes to the consolidated financial statements. 66 1STDIBS.COM, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Amounts in thousands, except share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid - In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balances as of January 1, 2019 13,935,666 $ 193,823 10,604,511 $ 106 $ — $ ( 178,583 ) $ ( 273 ) $ ( 178,750 ) Impact of adoption of ASC 606 — — — — — 882 — 882 Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $ 3,934 5,308,129 75,863 — — — — — — Accretion of redeemable convertible preferred stock to redemption value — 13,744 — — ( 2,212 ) ( 11,532 ) — ( 13,744 ) Issuance of common stock as acquisition consideration — — 173,477 2 789 — — 791 Exercise of stock options — — 86,634 1 342 — — 343 Stock-based compensation — — — — 1,081 — — 1,081 Foreign currency translation adjustment — — — — — — 28 28 Net loss — — — — — ( 29,853 ) — ( 29,853 ) Balances as of December 31, 2019 19,243,795 $ 283,430 10,864,622 $ 109 $ — $ ( 219,086 ) $ ( 245 ) $ ( 219,222 ) Accretion of redeemable convertible preferred stock to redemption value — 15,095 — — ( 2,851 ) ( 12,244 ) — ( 15,095 ) Exercise of stock options — — 511,426 5 2,005 — — 2,010 Stock-based compensation — — — — 846 — — 846 Foreign currency translation adjustment — — — — — — 43 43 Net loss — — — — — ( 12,528 ) — ( 12,528 ) Balances as of December 31, 2020 19,243,795 $ 298,525 11,376,048 $ 114 $ — $ ( 243,858 ) $ ( 202 ) $ ( 243,946 ) See accompanying notes to the consolidated financial statements 67 1STDIBS.COM, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Amounts in thousands, except share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid - In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balances as of December 31, 2020 19,243,795 $ 298,525 11,376,048 $ 114 $ — $ ( 243,858 ) $ ( 202 ) $ ( 243,946 ) Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering ( 19,243,795 ) ( 305,586 ) 19,243,795 192 305,394 — — 305,586 Issuance of common stock in connection with initial public offering, net of issuance costs of $ 14,762 — — 6,612,500 66 117,422 — — 117,488 Accretion of redeemable convertible preferred stock to redemption value — 7,061 — — ( 3,400 ) ( 3,661 ) — ( 7,061 ) Issuance of common stock for acquisition of Design Manager — — 45,152 1 766 — — 767 Issuance of common stock for exercise of stock options — — 677,569 7 2,722 — — 2,729 Issuance of common stock for cashless exercise of warrants — — 35,665 — — — — — Vested restricted stock units converted to common shares — — 800 — — — — — Stock-based compensation — — — — 2,865 — — 2,865 Foreign currency translation adjustment — — — — — — ( 27 ) ( 27 ) Net loss — — — — — ( 20,963 ) — ( 20,963 ) Balances as of December 31, 2021 — $ — 37,991,529 $ 380 $ 425,769 $ ( 268,482 ) $ ( 229 ) $ 157,438 See accompanying notes to the consolidated financial statements 68 1STDIBS.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net loss $ ( 20,963 ) $ ( 12,528 ) $ ( 29,853 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,112 6,023 5,150 Stock-based compensation expense 2,839 846 1,081 Change in fair value of deferred acquisition consideration 427 134 — Provision for transaction losses and eCommerce returns 428 630 1,047 Amortization of costs to obtain revenue contracts 447 487 494 Amortization of debt issuance costs — — 334 Deferred rent ( 194 ) ( 2,837 ) ( 2,006 ) Deferred income taxes — — ( 424 ) Other, net 21 ( 11 ) ( 149 ) Changes in operating assets and liabilities: Accounts receivable 52 ( 652 ) ( 123 ) Prepaid and other current assets ( 1,145 ) 359 ( 2,993 ) Receivables from payment processors 910 553 ( 1,883 ) Other assets ( 145 ) ( 163 ) 499 Accounts payable and accrued expenses 5,055 2,219 2,794 Payables due to sellers 5,732 1,592 804 Other current liabilities and other liabilities ( 977 ) ( 95 ) 6,759 Net cash used in operating activities ( 4,401 ) ( 3,443 ) ( 18,469 ) Cash flows from investing activities: Development of internal-use software ( 2,110 ) ( 1,782 ) ( 4,191 ) Proceeds from repayment of notes receivable with related party — 3,112 — Purchases of property and equipment ( 129 ) ( 44 ) ( 1,911 ) Acquisition of Design Manager, net of cash acquired — — ( 2,308 ) Other, net ( 30 ) — — Net cash (used in) provided by investing activities ( 2,269 ) 1,286 ( 8,410 ) Cash flows from financing activities: Proceeds from issuance of common stock in initial public offering, net of underwriting discounts and commissions 122,993 — — Proceeds from exercise of stock options 2,729 2,010 343 Proceeds from the issuance of Series D redeemable convertible preferred stock, net of issuance costs — — 75,863 Payment of deferred acquisition consideration ( 640 ) — — Repayment of long-term debt — — ( 15,000 ) Payment of deferred offering costs ( 5,032 ) ( 448 ) — Debt refinancing costs — — ( 250 ) 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, cash equivalents, and restricted cash at beginning of the period 58,195 58,804 24,610 Cash, cash equivalents, and restricted cash at end of the period $ 171,559 $ 58,195 $ 58,804 69 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 69 $ 11 $ 2 Cash paid for interest 16 14 456 Supplemental disclosure of non-cash activities: Accretion of redeemable convertible preferred stock to redemption value $ 7,061 $ 15,095 $ 13,744 Conversion of redeemable convertible preferred stock in connection with initial public offering 305,586 872 — Change in deferred offering costs included in accounts payable and accrued expenses ( 872 ) — — Issuance of common stock as acquisition consideration 767 — 791 Deferred acquisition consideration — — 846 Impact of adoption of ASC 606 — — ( 882 ) See accompanying notes to the consolidated financial statements 70 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the Business and Basis of Presentation Nature of the Business 1stdibs.com, Inc. (“1stDibs” or the “Company”) is 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. The Company’s thoroughly vetted seller base, in-depth editorial content, and custom-built technology platform create trust in the Company’s brand and facilitate high-consideration purchases of luxury design products online. By disrupting the way these items are bought and sold, 1stDibs is both expanding access to, and growing the market for, luxury design products. The Company was incorporated in the state of Delaware on March 10, 2000 and is headquartered in New York, NY with additional offices in Pennsylvania and the United Kingdom. Basis of Presentation The accompanying consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, 1stdibs.com, Ltd. and 1stdibs Design Manager, Inc. (“Design Manager”). All intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Initial Public Offering The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective by the SEC on June 9, 2021, and the Company’s common stock began trading on the Nasdaq Global Select Market on June 10, 2021. On June 14, 2021, the Company completed its initial public offering of 6,612,500 shares of its 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 the Company an additional 862,500 shares of the Company’s common stock. The Company 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 the Company’s 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 $ 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, the Company’s Board of Directors approved an amended and restated certificate of incorporation of the Company effecting a 1-for-3 reverse stock split of the Company’s 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 the Company’s 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. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, provision for transaction losses, accounting for business combinations, determination of useful lives of property and equipment, valuation and useful lives of intangible assets, impairment assessment of goodwill, capitalization of internal-use software and determination of useful lives, valuation of common stock, stock option valuations, income taxes, and the recognition and disclosure of contingent liabilities. The Company evaluates its estimates and assumptions on an ongoing basis. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. 71 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Currency and Currency Translation The functional currency for the Company’s wholly owned foreign subsidiary, 1stdibs.com, Ltd., is the British pound. Assets and liabilities of 1stdibs.com, Ltd. are translated into United States dollars at the exchange rate in effect on the balance sheet date. Income and expenses are translated at the average exchange rate in effect during the period. Unrealized translation gains and losses are recorded as a translation adjustment, which is included in the consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) as a component of accumulated other comprehensive loss. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in foreign exchange gain in total other income, net in the consolidated statements of operations. Segment Information An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision maker. The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on a consolidated basis for purposes of evaluating financial performance and allocating resources. The Company’s single reportable and operating segment contains two reporting units: 1stDibs, which consists of the Company’s online marketplace that enables commerce between sellers and buyers; and Design Manager, which is the Company’s separate online platform that is used to sell a software solution to interior designers. Business Combinations The Company has made acquisitions in the past and may continue to make acquisitions in the future. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, the Company first determines whether or not substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business and is instead deemed to be an asset. If this is not the case, the Company then further evaluates whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the single identifiable asset or group of similar identifiable assets and activities is a business. The Company made one acquisition during the year ended December 31, 2019, which was considered a business acquisition. The Company accounts for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date, and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. Transaction costs related to business combinations are expensed as incurred. Long-lived assets, primarily consisting of goodwill and other intangible assets, represent the largest components of the Company’s acquisitions. The intangible assets that the Company has acquired include customer relationships, developed and acquired technology, trade names and associated trademarks. The intangible assets are valued using an income approach based on projected cash flows or a replacement cost approach. The estimated fair values of these intangible assets reflect various assumptions including discount rates, revenue growth rates, operating margins, terminal values, useful lives, and other prospective financial information. Determining the fair values of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions. The judgments made in determining the estimated fair values assigned to the assets acquired, as well as the estimated life of the assets, can materially impact net income in periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. When the Company makes an acquisition, it also acquires other assets and assumes liabilities. These other assets and liabilities typically include but are not limited to, accounts receivable, accounts payable, and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities’ balance sheets. During the measurement period, which extends no later than one year from the acquisition date, the Company may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations and consolidated statements of comprehensive loss as operating gains or losses. 72 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are placed with large financial institutions that management believes are of high credit quality. At times, the Company’s cash balances with individual banking institutions are in excess of federally insured limits. The Company has not experienced any credit losses related to its cash and cash equivalents balance. As of December 31, 2021 and 2020, the Company had no single customer that represented more than 10% of the Company’s net revenue. The Company’s concentration of credit risk with respect to revenue is limited due to its diverse and geographically dispersed customer base. Cash, Cash Equivalents, and Restricted Cash The following represents the Company’s cash, cash equivalents, and restricted cash as of the periods presented: December 31, 2021 2020 2019 Cash and cash equivalents $ 168,226 $ 54,862 $ 55,470 Restricted cash 3,333 3,333 3,334 Total cash, cash equivalents and restricted cash $ 171,559 $ 58,195 $ 58,804 The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company’s restricted cash relates to a Letter of Credit for its office lease in New York, New York and is included in other assets in the Company’s consolidated balance sheets. The carrying value of the restricted cash approximates fair value. Debt Issuance Costs Debt issuance costs associated with the Company’s long-term debt agreements are recorded as a reduction of the carrying value of the long-term debt on the Company’s consolidated balance sheets and are amortized to interest expense over the term of the respective debt agreement using the effective interest method. During February 2019, the Company repaid all amounts associated with its long-term debt and amortized all remaining debt issuance costs upon repayment of its long-term debt (See Note 13). Deferred Offering Costs The Company capitalizes certain legal, accounting, and other third-party fees that are directly related to the Company’s in-process equity financings, including the Company’s IPO, until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses in the Company’s consolidated statements of operations and consolidated statements of comprehensive loss. As of December 31, 2021, there were no deferred offering costs included in the Company’s consolidated balance sheets. As of December 31, 2020, the Company had deferred offering costs of $ 1.3 million, which are included in other current assets in the Company’s consolidated balance sheets. Accounts Receivable, net The Company’s accounts receivable are customer obligations that are unconditional and are recorded at the amounts billed to customers. Accounts receivable are presented net of an estimated allowance for doubtful accounts for amounts that may not be collectible on the Company’s consolidated balance sheets. The Company’s accounts receivable do not bear interest and do not require collateral or other security to support related receivables. The Company establishes an allowance for doubtful accounts as losses are estimated to have occurred through a provision for bad debt. Losses are charged against the allowance when management believes the un-collectability of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for doubtful accounts is evaluated on a regular basis by management and is based on past collection history and management’s evaluation of accounts receivable. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Account balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments to the allowance for doubtful accounts are recorded as a component of provision for transaction losses in the consolidated statements of operations. 73 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Receivables from Payment Processors and Payables Due to Sellers Receivables from payment processors represent amounts received from buyers via third-party payment processors, including credit card, PayPal, ApplePay, and ACH payments, which will be deposited by the payment processors to 1stDibs’ bank accounts for payment to sellers and shipping carriers. The Company also collects sales tax from buyers on behalf of sellers in certain jurisdictions as a marketplace facilitator and remits these collected taxes directly to the tax authorities. The portion of the cash and related receivable remaining after deducting the Company’s commission and processing fees represents the total payables due to third parties, which consists of payables due to sellers, payables due to shipping carriers in instances where 1stDibs’ shipping services are elected by sellers, and payables due to tax authorities. 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. The Company capitalizes 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. The Company records 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. The Company also capitalizes 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 , and are included in cost of revenue in the consolidated statements of operations. The general range of useful lives of property and equipment is as follows: Estimated Useful Life Leasehold improvements Lesser of lease term or life of asset Furniture and fixtures 3 years Computer equipment and software 3 years Internal-use software Lesser of contract term or 3 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 in the consolidated statements of operations and consolidated statements of comprehensive loss. Costs of repairs and maintenance are expensed as incurred. Goodwill Goodwill represents the excess of cost over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s goodwill impairment test is performed at the reporting unit level, based on the Company having two reporting units, 1stDibs and Design Manager. The Company’s goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances exist that would lead the Company to conclude it is more likely than not that the fair value of the reporting unit is below its carrying amount. Such qualitative factors include industry and market considerations, economic conditions, entity-specific financial performance, and other events such as changes in management, strategy, and primary customer base. If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations. Based on the Company’s assessment, there were no impairment losses recorded during the years ended December 31, 2021, 2020 and 2019. Intangible Assets The Company’s intangible assets include customer relationships, trade names and associated trademarks, acquired and developed technology, and other intangibles such as patents and non-compete agreements obtained through business acquisitions. Intangible assets acquired in a business combination are recognized at fair value using generally accepted 74 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS valuation methods deemed appropriate for the type of intangible asset acquired, and reported net of accumulated amortization, separately from goodwill. Intangible assets are amortized over their estimated useful lives. Intangible assets are amortized on a straight-line basis as presented below: Asset Estimated Useful Life Customer relationships 15 years Trade names and associated trademarks 5 - 10 years Acquired and developed technology 3 years Other 3 years Impairment of Long-Lived Assets The Company reviews the carrying value of its long-lived assets for impairment whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects and the effects of obsolescence, demand, competition, and other economic factors. For the years ended December 31, 2021, 2020 and 2019, there were no impairment losses recorded. Contingencies The Company has certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability on the Company’s consolidated balance sheets. The Company does not accrue for contingent losses that, in its judgement, are considered to be reasonably possible, but not probable; however, it discloses the range of reasonably possible losses. Fair Value of Financial Instruments Certain assets and liabilities are carried at fair value in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies, and similar techniques. The carrying values of cash and cash equivalents, accounts receivable, net, prepaid expenses, receivables from payment processors, accounts payable, payables due to sellers, accrued expenses, and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities. As of December 31, 2020, the Company’s deferred acquisition consideration in connection with its Design Manager acquisition (see Note 3) was carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above. The fair value of the deferred acquisition consideration was determined by considering as an input the fair value per share of the Company’s common stock which was determined through a third-party valuation. As of December 31, 2021, the shares of common stock were issued and no deferred acquisition consideration remained on the Company’s consolidated balance sheet. There were no transfers between Level 1, Level 2 or Level 3 during the years ended December 31, 2021 and 2020. 75 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized. The Company follows the provisions of the authoritative guidance from the Financial Accounting Standards Board (“FASB”) on accounting for uncertainty in income taxes. These provisions provide a comprehensive model for the recognition, measurement, and disclosure in the financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under these provisions, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, the Company must accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2021 and 2020, the Company had no accrued interest or penalties related to uncertain tax positions. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in its foreign subsidiary are indefinitely invested. Any required adjustment to the income tax provision (benefit) would be reflected in the period that the Company changes this assessment. The Company recognizes the tax on global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries as a period expense in the period the tax is incurred. Net Loss per Share Attributable to Common Stockholders The Company applies the two-class method to compute basic and diluted net loss per share when shares meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period has been distributed. During periods of loss, there is no allocation required under the two-class method. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period without consideration of potentially dilutive common stock. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, redeemable convertible preferred stock, and warrants to purchase shares of common stock, are considered potential dilutive common shares. Revenue Recognition The Company generates revenue primarily from the Company’s seller marketplace services as well as other optional services sold to sellers including advertisements, and software services sold to interior designers. Revenue is recognized as the Company transfers control of promised goods or services to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk, has the latitude in establishing pricing and selecting suppliers, among other factors. Seller Marketplace Services (Subscriptions, Listings and Marketplace Transactions) The Company sells subscriptions to access the 1stDibs online 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 76 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. The Company has determined that its customers are sellers on its online marketplace since sellers pay for the use of the platform to sell their inventory. The Company offers sellers annual subscriptions that are payable on a monthly basis. If during the annual subscription period a seller ceases to make its monthly payment, the Company is no longer obligated to provide the subscribed services and the seller can be terminated at the Company’s sole discretion. The Company earns listing fees from sellers who are subscribed to its online marketplace on a per item basis as directed by the seller to promote certain items at the seller’s discretion. The Company charges sellers commission and processing fees for successful purchases through its 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. The Company records discounts provided to the end buyer, to whom the Company has no performance obligation, such as promotional discounts, in sales and marketing expense since the discounts are not related directly to the Company’s 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, the Company collects the gross merchandise value from the buyer, but the Company recognizes the associated revenue on a net basis, which equates to the commission and processing fees earned in exchange for the seller marketplace services. The Company does not take title to inventory sold or assume risk of loss at any point in time during the transaction and is 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 buyer and seller, and listing fees are recognized ratably over time when the listing is publicly posted. Advertisements Advertising revenue is generated by displaying seller ads on the 1stDibs online marketplace. For advertising services, the Company enters 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. The Company recognizes 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 insertion orders. Impressions are considered delivered when an ad is displayed to users. Software Services Through the Company’s subsidiary, Design Manager, the Company offers subscriptions to access software typically 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. The Company offers both monthly and annual subscriptions. For software services, the Company offers subscriptions to customers that are tailored to design firms as an end-to-end business solution for project management and accounting and enters 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. Contract Costs The Company capitalizes commission costs that are incremental and directly related to the acquisition of seller agreements. Commissions are earned by the Company’s sales force when the seller’s listings are publicly visible and available for purchase on the 1stDibs marketplace. Commission costs are capitalized when earned and are amortized as expense over an estimated seller relationship period of three years . The Company determined the estimated seller relationship period by taking into consideration the contractual term of the seller agreements, the seller’s lifetime expected value, and the fact that no additional commission is paid for renewed seller agreements. As of December 31, 2021 and 2020, the Company recorded $ 0.5 million and $ 0.6 million, respectively, of costs to obtain revenue contracts in the Company’s consolidated balance sheets. Amortization of costs to obtain revenue contracts totaled $ 0.4 million, $ 0.5 million, and $ 0.5 million for the years ended December 31, 2021, 2020, and 2019, respectively, and are included in sales and marketing in the Company’s consolidated statements of operations. The Company periodically reviews the costs to obtain revenue contracts to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these costs to obtain revenue contracts. 77 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contract Balances from Contracts with Customers A contract liability is an obligation to transfer goods or services for which consideration has been received or is due to a customer. Contract liabilities consist of deferred revenue that is unearned related to Design Manager software subscription fees charged to the Company’s customers, and to a lesser extent, setup fees charged to new sellers at the inception of service and advertising fees charged to advertisers for which advertisements have not been delivered. Deferred revenue for setup fees is recognized as revenue over the expected life of the seller relationship. Deferred revenue for software and advertising fees is recognized as revenue in the periods in which services are provided. The current portion of deferred revenue was $ 0.8 million and $ 0.5 million as of December 31, 2021 and 2020, respectively, and are included in other current liabilities in the Company’s consolidated balance sheets. The non-current portion of deferred revenue was $ 0.1 million as of both December 31, 2021 and 2020, and are included in other liabilities in the Company’s consolidated balance sheets (see Note 4). 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 the Company is also allocated to cost of revenue. A Surrender Agreement for the gallery lease was entered into in December 2019. In certain transactions where 1stDibs shipping services are elected by sellers, the Company facilitates 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. Sales and Marketing Sales and marketing expenses include advertising expense, payroll, employee benefits, stock-based compensation, consulting costs, rent and related facilities and maintenance costs related to a gallery space used by the Company, 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 sales and marketing personnel. Advertising expenses consist primarily of costs incurred promoting and marketing the Company’s services, such as costs associated with acquiring new users through performance-based marketing, print advertising, email, and events. Promotional discounts and incentives represent incentives solely to end buyers and, therefore, are not considered payments made to the Company’s customers. Buyers are not customers because access to the 1stDibs marketplace is free for buyers and the Company has no performance obligations with respect to buyers. The Company expenses all advertising expenses as incurred. During the years ended December 31, 2021, 2020, and 2019, the Company incurred advertising expenses of approximately $ 21.2 million, $ 15.1 million, and $ 14.6 million, respectively. 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. The Company expenses all technology development expenses as incurred. Expenses that meet the criteria for capitalization as internal-use software are capitalized to property and equipment, net on the consolidated balance sheets and amortized over their useful life. This amortization expense is included in cost of revenue in the consolidated statements of operations. 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. The Company expenses all general and administrative expenses as incurred. Provision for Transaction Losses Provision for transaction losses consists primarily of losses resulting from the Company’s 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 the Company’s discretion if they are dissatisfied with their experience. The provision for transaction losses also includes bad debt expense associated with the Company’s accounts receivable. 78 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation The Company measures all stock-based awards granted to employees, directors, and non-employees based on the fair value on the date of the grant and recognizes 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 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 the Company’s common stock, expected stock price volatility, the expected term of the award, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s 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 the Company does 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. The Company has not paid dividends and has 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 the Company’s common stock. The fair value of common stock underlying options has historically been determined by the Company’s board of directors, with input from management, and considering third-party valuations of the Company’s common stock. Because there had been no public market for the Company’s 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 the Company’s IPO, the fair value of the underlying common stock is the Company’s closing stock price as reported on the Nasdaq. The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. Classification and Accretion of Redeemable Convertible Preferred Shares The Company has classified the redeemable convertible preferred stock outside of stockholders’ equity (deficit) in temporary equity in the Company’s consolidated balance sheets due to the shares containing certain redemption features that are not solely within the control of the Company. The carrying values of the redeemable convertible preferred shares are accreted to their redemption values from the date of issuance through the earliest date of redemption using the effective interest method. Increases to the carrying value of the redeemable convertible preferred stock are charged to additional paid-in capital or accumulated deficit. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB under its ASC or other standard setting bodies. The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts 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. Recently Adopted Accounting Pronouncements In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). The update is associated with customer accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years and interim periods beginning after December 15, 2019 for public business entities, and for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, for all other entities. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. 79 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Issued Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The guidance in ASU 2016-02 supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. An entity may adopt the guidance either (1) retrospectively to each prior reporting period presented in the financial statements with a cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The guidance is effective for fiscal years and interim periods beginning after December 15, 2018 for public business entities, and for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, for all other entities. The Company plans to adopt this standard on January 1, 2022, utilizing the modified retrospective approach. Under this adoption method, all prior periods will continue to be reported under previous lease accounting guidance and the new standard will be applied to all existing leases as of the adoption date. The Company plans to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The Company has completed its process of identifying the population of leases impacted by the adoption and is in the process of completing its analysis of applying the new guidance to these leases. It is also evaluating the appropriate incremental borrowing rates to discount its future minimum lease payments in calculating the right-of-use assets and lease liabilities. The Company expects the adoption of this standard will result in the recognition of material right-of-use assets and lease liabilities, primarily related to its office facilities, which are disclosed in Note 19 "Commitments and Contingencies". The Company does not expect the adoption to have a material impact on its consolidated statements of operations. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes, eliminates certain exceptions with ASC 740, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. This guidance is effective for fiscal years and interim periods beginning after December 15, 2020 for public business entities and for fiscal years beginning after December 15, 2021 for all other entities, with early adoption permitted. The Company plans to adopt this standard on January 1, 2022 and does not expect the adoption to have a material impact on the Company's consolidated financial statements. 3. Acquisitions The below acquisition qualifies as a business combination, and the Company has recorded all assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price in the acquisition over the fair value of the tangible and identifiable intangible assets acquired less the liabilities assumed has been recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the businesses. There were no transaction expenses associated with business acquisitions for the years ended December 31, 2021 and 2020, and $ 0.8 million for the year ended December 31, 2019, which are included in general and administrative expenses in the Company’s consolidated statements of operations. Design Manager On May 2, 2019, the Company acquired 100 % of the outstanding equity of Franklin Potter Associates, Inc. and its subsidiary, doing business as Design Manager, a privately-held company that sells subscriptions to a software solution to interior designers to assist with project management, purchasing, and accounting for a total purchase consideration of $ 4.2 million, subject to customary purchase price adjustments. The acquisition was intended to further enhance the Company’s offerings to interior designers, as both the 1stDibs and Design Manager platforms offer tools that are integral to their businesses. The acquisition qualified as a business combination, and the Company recorded all assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price in the acquisition over the fair value of the tangible and identifiable intangible assets acquired less the liabilities assumed was recorded as goodwill. The results of Design Manager have been included in the consolidated financial statements since the date of acquisition. 80 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total purchase consideration as of the acquisition date was as follows (in thousands): Cash paid at closing $ 2,513 Shares issued at closing 791 Cash to be paid at secondary anniversary of closing 640 Shares to be issued at secondary anniversary of closing 206 Total purchase consideration $ 4,150 The cash to be paid and the shares to be issued at the second anniversary after the closing date represent deferred acquisition consideration that secured the sellers’ indemnity obligations for general representations and warranties of the sellers. To the Company’s knowledge, the representations and warranties were accurate as of the acquisition date and no event or condition has occurred that would result in a claim against the deferred acquisition consideration. Prior to the second anniversary of closing, the deferred acquisition consideration included in the purchase price was recorded in other current liabilities in the Company’s consolidated balance sheets. The Company recorded the shares to be issued on the second anniversary of closing at fair value of $ 0.2 million at the time of the acquisition. The shares to be issued were subsequently remeasured to fair value at each reporting date with changes in fair value recognized as a general and administrative expense in the Company’s consolidated statements of operations. Changes in the fair value of the deferred acquisition consideration were $ 0.4 million and $ 0.1 million during the years ended December 31, 2021 and 2020, respectively. The 45,152 shares of common stock were issued in May 2021, upon the second anniversary after the closing date, with a final fair value of $ 0.8 million. Additionally, a cash payment of $ 0.6 million was made in May 2021. As of December 31, 2021, no deferred acquisition consideration remained on the Company’s consolidated balance sheet. 4. Revenue Recognition The following table summarizes the Company’s net revenue by type of service for the periods presented: Year Ended December 31, (in thousands) 2021 2020 2019 Seller marketplace services $ 98,984 $ 78,811 $ 67,565 Other services 3,747 3,052 3,002 Total net revenue $ 102,731 $ 81,863 $ 70,567 The Company generates revenue from seller marketplace services and other services. Seller marketplace services primarily consist of subscription, listing, and marketplace transaction fees. Other services primarily consist of advertising revenues generated from displaying ads on the Company’s online marketplace and offering subscriptions to access software typically used by interior designers. Contract Balances from Contracts with Customers The following table provides a rollforward of the deferred revenue amounts as follows (in thousands): Balance as of January 1, 2020 $ 575 Billings 967 Revenue recognized ( 926 ) Balance as of December 31, 2020 $ 616 Billings 2,668 Revenue recognized ( 2,340 ) Balance as of December 31, 2021 $ 944 The amount of revenue recognized during the year ended December 31, 2021 that was included in the deferred revenue balance at January 1, 2021 was $ 0.5 million. 81 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, and (ii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. The Company does not have any remaining performance obligations associated with contracts with terms greater than one year. 5. Accounts Receivable, net Accounts receivable, net was $ 0.7 million and $ 0.9 million at December 31, 2021 and 2020, respectively. The Company recorded an allowance for doubtful accounts of less than $0.1 million and $0.1 million as of December 31, 2021 and 2020, respectively. Changes in the allowance for doubtful accounts for the periods presented were as follows (in thousands): Balance as of January 1, 2020 $ 42 Provisions charged to operating results 280 Account write-offs ( 271 ) Balance as of December 31, 2020 $ 51 Provisions charged to operating results 124 Account write-offs ( 146 ) Balance as of December 31, 2021 $ 29 6. Other Current Assets As of December 31, 2021 and 2020, other current assets consisted of the following: December 31, (in thousands) 2021 2020 Costs to obtain revenue contracts $ 246 $ 363 Deferred offering costs — 1,320 Other current assets 621 1,982 Total other current assets $ 867 $ 3,665 7. Property and Equipment, net As of December 31, 2021 and 2020, property and equipment, net consisted of the following: December 31, (in thousands) 2021 2020 Internal-use software $ 16,346 $ 14,625 Leasehold improvements 3,591 3,591 Furniture and fixtures 1,107 1,107 Computer equipment and software 882 753 Construction in progress 1,047 761 Total property and equipment, gross 22,973 20,837 Less: Accumulated depreciation and amortization ( 18,514 ) ( 15,701 ) Total property and equipment, net $ 4,459 $ 5,136 As of December 31, 2021 and 2020, the net book value of internal-use software was $ 3.2 million and $ 4.2 million, respectively. Depreciation and amortization expense related to the Company’s property and equipment totaled $ 2.9 million, $ 5.8 million, and $ 5.0 million, for the years ended December 31, 2021, 2020, and 2019, respectively, which included amortization expense for internal-use software of $ 2.8 million, $ 4.3 million, and $ 3.5 million, respectively. 82 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Goodwill and Intangible Assets Goodwill The changes in the carrying balance of goodwill for the periods presented were as follows (in thousands): Balance as of January 1, 2020 $ 7,180 Foreign currency translation adjustment 32 Balance as of December 31, 2020 $ 7,212 Foreign currency translation adjustment ( 10 ) Balance as of December 31, 2021 $ 7,202 Intangible Assets, net Intangible assets subject to amortization consisted of the following as of December 31, 2021 and 2020: December 31, 2021 (in thousands) Weighted Average Remaining Amortization Period (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 12.3 $ 1,230 $ 219 $ 1,011 Acquired and developed technology 0.1 6,400 6,366 34 Trade names and associated trademarks 1.6 705 595 110 Other intangible assets subject to amortization — 64 64 — Other intangible assets not subject to amortization — 9 — 9 Total intangible assets 2.4 $ 8,408 $ 7,244 $ 1,164 December 31, 2020 (in thousands) Weighted Average Remaining Amortization Period (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 13.3 $ 1,230 $ 137 $ 1,093 Acquired and developed technology 0.1 6,400 6,266 134 Trade names and associated trademarks 1.8 705 580 125 Other — 64 64 — Total intangible assets 2.6 $ 8,399 $ 7,047 $ 1,352 As of December 31, 2021, the Company had an immaterial amount of intangible assets classified as indefinite-lived that were not subject to amortization. Total amortization expense for intangible assets was $ 0.2 million, $ 0.2 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. 83 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021 the estimated annual amortization expense for each of the next five years and thereafter is expected to be as follows (in thousands): Year Ending December 31, Estimated Amortization Expense 2022 $ 131 2023 97 2024 97 2025 97 2026 97 Thereafter 636 Total $ 1,155 9. Other Assets As of December 31, 2021 and 2020, other assets consisted of the following: December 31, (in thousands) 2021 2020 Restricted cash $ 3,333 $ 3,333 Other 209 240 Total other assets $ 3,542 $ 3,573 10. Accrued Expenses As of December 31, 2021 and 2020, accrued expenses consisted of the following: December 31, (in thousands) 2021 2020 Shipping $ 6,669 $ 2,901 Payroll 2,174 2,297 Sales & use tax payable 1,721 1,787 Allowance for transaction losses 1,127 844 Payment processor fees 1,052 883 Allowance for eCommerce returns 415 406 Other 587 334 Total accrued expenses $ 13,745 $ 9,452 11. Other Current Liabilities As of December 31, 2021 and 2020, other current liabilities consisted of the following: December 31, (in thousands) 2021 2020 Deferred rent $ 194 $ 194 Sales and use tax contingencies 1,922 2,087 Buyer deposits 595 1,149 Deferred acquisition consideration — 980 Deferred revenue 801 508 Total other current liabilities $ 3,512 $ 4,918 84 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Other Liabilities As of December 31, 2021 and 2020, other liabilities consisted of the following: December 31, (in thousands) 2021 2020 Deferred rent $ 2,458 $ 2,652 Deferred revenue 143 108 Other 4 592 Total other liabilities $ 2,605 $ 3,352 13. Debt Credit Agreement On November 28, 2016, the Company entered into a Loan and Security Agreement with Ally Bank (the “Lender”), which provided a $ 15.0 million term loan (the “Term Loan”) and a $ 10.0 million revolving credit line (the “Revolver” and together with the Term Loan, the “Credit Agreement”), with the Term Loan having a maturity date of November 28, 2019 and the Revolver having a maturity date of November 28, 2018. On November 28, 2018, the Company entered into an amendment (“Amended Credit Agreement”) with the Lender with the Term Loan having an amended maturity date of November 28, 2020 and the Revolver having an amended maturity date of November 28, 2019. In connection with entering into the Amended Credit Agreement, the payment of the deferred issuance costs of $ 0.1 million associated with the Credit Agreement was extended to November 28, 2020. On February 27, 2019, the Company terminated the Amended Credit Agreement and repaid all amounts due under the Amended Credit Agreement of $ 15.3 million, including outstanding principal of $ 15.0 million and $ 0.3 million of accrued and unpaid fees and interest. The Company recognized aggregate interest expense of $ 0.5 million under the Amended Credit Agreement, including cash paid for interest associated with the Amended Credit Agreement of $ 0.2 million and amortization of all remaining debt issuance costs upon repayment of the Amended Credit Agreement of $ 0.3 million, during the year ended December 31, 2019. 14. Redeemable Convertible Preferred Stock Upon the closing of the IPO, all shares of the Company’s outstanding redeemable convertible preferred stock automatically converted into 19,243,795 shares of common stock. As of December 31, 2020, redeemable convertible preferred stock consisted of the following: December 31, 2020 (in thousands, except share amounts) Preferred Stock Designated Preferred Stock Issued and Outstanding Carrying Value Liquidation Preference Common Stock Issuable Upon Conversion Series A preferred stock 21,662,000 7,220,666 $ 94,604 $ 94,623 7,220,666 Series B preferred stock 10,996,181 3,665,390 62,931 62,935 3,665,390 Series C preferred stock 3,182,158 1,060,719 21,137 21,137 1,060,719 Series C-1 preferred stock 5,966,682 1,988,891 35,089 35,098 1,988,891 Series D preferred stock 15,964,843 5,308,129 84,764 87,507 5,308,129 57,771,864 19,243,795 $ 298,525 $ 301,300 19,243,795 In January 2021, the Company’s preferred stockholders executed an Agreement and Waiver of Preferred Stockholders, which waived redemption rights for their preferred stock in connection with a non-qualified IPO event during the effective period. A non-qualified IPO is an IPO that does not result in: (i) aggregate gross proceeds to the Company of at least $ 50.0 million and (ii) a price per share paid by the public of an amount greater than or equal to $ 24.93 , as appropriately adjusted for stock splits, stock combinations, and stock dividends. The waiver was effective from the date the Company filed with or confidentially submitted to the United States Securities and Exchange Commission a registration statement on Form S-1 relating to a contemplated IPO, through June 30, 2022, or the earliest to occur of one of several termination events as defined therein, including the Company’s completion of an IPO. 85 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Equity As of December 31, 2021 and 2020, the Company had reserved shares of common stock for issuance in connection with the following: December 31, 2021 2020 Conversion of outstanding shares of redeemable convertible preferred stock — 19,243,795 Options to purchase common stock 3,949,943 3,170,321 Restricted stock units 309,530 — Common stock warrants to purchase common stock — 44,222 Shares to be issued to former Design Manager stockholders on second anniversary of closing — 45,152 Shares available for future grant under the 2011 Plan — 204,022 Shares available for future grant under the 2021 Plan 5,103,772 — Shares available for future grant under the ESPP 800,000 — Total 10,163,245 22,707,512 Preferred Stock Effective June 14, 2021, in connection with the closing of the Company’s IPO, the Company’s Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock, $ 0.01 par value per share, in one or more series. The Company's Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. As of December 31, 2021 and 2020, no shares of preferred stock were issued or outstanding. Common Stock As of December 31, 2021 and 2020, the Company had authorized 400,000,000 and 105,767,092 shares, respectively, of voting common stock, $ 0.01 par value per share. Each holder of the Company's common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative rights. Subject to any preferential rights of any outstanding preferred stock, holders of the Company's common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds. If there is a liquidation, dissolution, or winding up of the Company, holders of the Company's common stock would be entitled to share in the Company's assets remaining after the payment of liabilities and any preferential rights of any outstanding preferred stock. The rights, preferences, and privileges of the holders of the Company's common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which the Company may designate and issue in the future. Common Stock Warrants In June 2021, before the closing of the Company’s IPO, the 44,222 common stock warrants were exercised in a cashless exercise for a net amount of 35,665 common shares. 16. Stock-based compensation 2011 Option Plan The Company adopted the 2011 Stock Option and Grant Plan (the “2011 Plan”) on September 2, 2011 and amended and restated the plan on December 14, 2011. The 2011 Plan provided for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, and other stock-based awards to its employees, directors, officers, outside advisors, and non-employee consultants. At the time of grant, the options issued to new employees pursuant to the 2011 Plan expire ten years from the date of grant and generally vest over four years , with 25 % vesting on the first anniversary and the balance vesting ratably over the remaining 36 months. Additional options issued to current employees, current outside advisors, and non-employee consultants pursuant to the 2011 Plan expire ten years from the date of grant and generally vest ratably over 48 months. The 2011 Plan is administered by the Company’s board of directors or, at the discretion of the Company’s board of directors, by a committee thereof. The exercise prices, vesting, and other restrictions are determined at the discretion of the Company’s board of directors, or its committee if so delegated. In February 2021, the Company’s board of directors approved 86 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS an increase of 2,333,333 shares of common stock to be available for future issuance under the 2011 Option Plan, which was approved by the stockholders in March 2021. Following the completion of the Company’s IPO, no additional awards and no shares of the Company’s common stock remain available for future issuance under the 2011 Plan. However, the 2011 Plan will continue to govern the terms and conditions of the outstanding awards previously granted thereunder. 2021 Stock Incentive Plan In May 2021, the Company's board of directors adopted, and its stockholders approved, the 2021 Stock Incentive Plan (the “2021 Plan”), which became effective upon the SEC declaring the Company’s IPO registration statement effective. The 2021 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), restricted share awards, stock unit awards, stock appreciation rights, cash-based awards, and performance-based stock awards, or collectively, stock awards. ISOs may be granted only to the Company’s employees, including officers, and the employees of its parent or subsidiaries. All other stock awards may be granted to the Company’s employees, officers, non-employee directors, and consultants and the employees and consultants of its parent, subsidiaries, and affiliates. The aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2021 Plan will not exceed the sum of (x) 4,333,333 shares (as adjusted for stock splits, stock dividends, combinations, and the like), plus (y) the sum of (1) the number of reserved shares not issued or subject to outstanding awards under the 2011 Plan on the effective date of the 2021 Plan and (2) the number of shares subject to outstanding stock awards granted under the 2011 Plan and that, following the effective date of the 2021 Plan, (A) are subsequently forfeited or terminated for any reason before being exercised or settled, (B) are not issued because such stock award is settled in cash, (C) are subject to vesting restrictions and are subsequently forfeited, (D) are withheld or reacquired to satisfy the applicable exercise, strike, or purchase price, or (E) are withheld or reacquired to satisfy a tax withholding obligation, plus (z) an annual increase on the first day of each fiscal year, for a period of not more than 10 years, beginning on January 1, 2022 and ending on, and including, January 1, 2031, in an amount equal to the lesser of (i) 5% of the outstanding shares on the last day of the immediately preceding fiscal year or (ii) such lesser amount that the Compensation Committee determines for purposes of the annual increase for that fiscal year. As of December 31, 2021, 5,103,772 shares were available for future grants of the Company’s common stock. Stock Option Valuation The following table presents, on a weighted-average basis, the assumptions used in the Black Scholes option-pricing model to determine the grant-date fair value: Year Ended December 31, 2021 2020 2019 Expected term in years 6.0 6.1 5.9 Expected stock price volatility 67.5 % 46.7 % 45.3 % Risk-free interest rate 1.1 % 0.5 % 2.1 % Expected dividend yield — — — Stock Options The following table summarizes the Company’s stock option activity since December 31, 2020: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2020 3,170,321 $ 4.11 6.2 $ 10,847 Granted 1,553,567 10.25 Exercised 677,569 4.03 Cancelled 96,376 7.07 Outstanding as of December 31, 2021 3,949,943 $ 6.46 6.9 $ 24,543 Options exercisable as of December 31, 2021 2,079,867 $ 4.34 5.1 $ 16,988 Options vested and expected to vest as of December 31, 2021 3,949,943 $ 6.46 6.9 $ 24,543 87 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for all stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised was $ 4.8 million, $ 1.8 million, and $ 0.1 million during the years ended December 31, 2021, 2020, and 2019 respectively. The weighted-average grant-date fair value per share of stock options granted was $ 6.20 , $ 2.10 , and $ 2.08 during the years ended December 31, 2021, 2020, and 2019, respectively. The total fair value of stock options vested was $ 1.5 million, $ 1.0 million, and $ 1.0 million during the years ended December 31, 2021, 2020, and 2019, respectively. The stock options granted during the year ended December 31, 2021 included 615,997 stock options granted to executive officers that include a performance condition related to a sale event or initial public offering occurring before December 31, 2021 in addition to the standard service condition. These options will vest over four years , with approximately 21 % vesting on January 1, 2022, and the balance vesting ratably over the remaining 38 months. During the year ended December 31, 2021, $ 0.7 million of stock-based compensation expense was recognized for options having a performance condition. Restricted Stock Units The following table summarizes the activity related to the Company's restricted stock units: Outstanding Restricted Stock Units Weighted- Average Grant Date Fair Value Outstanding as of December 31, 2020 — $ — Granted 312,015 15.32 Vested 800 17.73 Cancelled 1,685 16.28 Outstanding as of December 31, 2021 309,530 $ 15.30 The estimated weighted-average grant date fair value of restricted stock units granted was $ 15.32 per share for the year ended December 31, 2021. The total grant date fair value of restricted stock units vested was less than $ 0.1 million for the year ended December 31, 2021. Employee Stock Purchase Plan In May 2021, the Company's board of directors adopted, and its stockholders approved, the Company's 2021 Employee Stock Purchase Plan (the "ESPP"). A total of 800,000 shares of the Company's authorized but unissued or reacquired shares of its common stock (as adjusted for stock splits, stock dividends, combinations, and the like) are available for issuance under the ESPP. The number of shares of the Company's common stock that will be available for issuance under the ESPP also includes an annual increase on the first day of each fiscal year, for a period of not more than 10 years, beginning on January 1, 2022, equal to the least of: (i) 1 % of the outstanding shares of the Company’s common stock on such date, (ii) 400,000 shares (as adjusted for stock splits, stock dividends, combinations, and the like) or (iii) a lesser amount determined by the Compensation Committee or the Company’s board of directors. During regularly scheduled “offerings” under the ESPP, participants may purchase the Company’s common stock through payroll deductions, up to a maximum of 15 % of their eligible compensation, or such lower limit as may be determined by the Compensation Committee from time to time. Participants will be able to withdraw their accumulated payroll deductions prior to the end of the offering period in accordance with the terms of the offering. Participation in the ESPP will end automatically on termination of employment. The purchase price will be specified pursuant to the offering, but cannot, under the terms of the ESPP, be less than 85 % of the fair market value per share of the Company’s common stock on either the offering date or on the purchase date, whichever is less. The fair market value of the Company’s common stock for this purpose will generally be the closing price on Nasdaq (or such other exchange as the Company’s common stock may be traded at the relevant time) for the date in question, or if such date is not a trading day, for the last trading day before the date in question. As of December 31, 2021, no shares of common stock were purchased under the ESPP. 88 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation The following table below summarizes the classification of the Company’s stock-based compensation in the consolidated statements of operations: Year Ended December 31, 2021 2020 2019 Cost of revenue $ 81 $ 23 $ 35 Sales and marketing 559 303 337 Technology development 707 230 307 General and administrative 1,492 290 402 Total stock-based compensation $ 2,839 $ 846 $ 1,081 As of December 31, 2021, total unrecognized compensation expense related to unvested stock-based awards was $ 13.0 million, which is expected to be recognized over a weighted-average period of 3.1 years. 17. Income Taxes Net loss before income taxes for the years ended December 31, 2021, 2020, and 2019 was as follows: Year Ended December 31, (in thousands) 2021 2020 2019 United States $ ( 20,986 ) $ ( 12,468 ) $ ( 30,218 ) Foreign 44 ( 49 ) ( 44 ) Total $ ( 20,942 ) $ ( 12,517 ) $ ( 30,262 ) For the years ended December 31, 2021, 2020, and 2019, the provision for (benefit from) income taxes consisted of the following: Year Ended December 31, (in thousands) 2021 2020 2019 Current U.S. Federal $ — $ 1 $ 1 State 21 10 13 Foreign — — 1 Total current expense 21 11 15 Deferred tax benefit U.S. Federal — — ( 364 ) State — — ( 60 ) Foreign — — — Total deferred tax benefit — — ( 424 ) Total provision for (benefit from) income taxes $ 21 $ 11 $ ( 409 ) 89 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of the U.S. federal statutory rate to the Company’s effective rate is as follows: Year Ended December 31, 2021 2020 2019 Income tax benefit using U.S. federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 4.7 9.0 0.3 Nondeductible expenses 0.3 ( 2.0 ) ( 2.3 ) Tax law change 0.2 0.5 — Research credits 1.0 1.1 1.2 Change in the valuation allowance ( 27.2 ) ( 30.2 ) ( 18.8 ) Other ( 0.1 ) 0.5 — Income tax benefit (provision), net ( 0.1 )% ( 0.1 )% 1.4 % Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The significant components of the Company’s deferred income tax assets and liabilities at December 31, 2021 and 2020 were comprised of the following: Year Ended December 31, (in thousands) 2021 2020 Deferred tax assets Net operating losses $ 32,734 $ 27,526 Research credits 3,047 3,020 Property and equipment 488 427 Intangible assets and goodwill 1,496 1,669 Other 3,297 3,015 Total deferred tax assets 41,062 35,657 Valuation allowance ( 39,725 ) ( 34,039 ) Net deferred tax assets $ 1,337 $ 1,618 Deferred tax liabilities Intangible assets and goodwill ( 291 ) ( 332 ) Capitalized internal-use software ( 815 ) ( 931 ) Other ( 231 ) ( 355 ) Total deferred tax liabilities ( 1,337 ) ( 1,618 ) Net deferred tax liabilities $ — $ — A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company considered the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not that the benefits of these deductible differences will not be fully realizable at December 31, 2021 and 2020. Accordingly, the Company has applied a valuation allowance against its net deferred tax assets. The net change in the total valuation allowance for the years ended December 31, 2021 and 2020 was an increase of approximately $ 5.7 million and $ 3.8 million, respectively, primarily as a result of the generation of additional net operating losses. 90 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The activity in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2021 and 2020, was as follows: Year Ended December 31, (in thousands) 2021 2020 Valuation allowance at beginning of year $ 34,039 $ 30,235 Increases recorded to income tax provision 5,686 3,804 Valuation allowance at end of year $ 39,725 $ 34,039 At December 31, 2021, the Company had approximately $ 117.7 million and $ 115.3 million of federal and state net operating loss (“NOL”) carryforwards, respectively. Approximately $ 57.5 million of the federal NOL and $ 82.0 million of the state NOL was generated prior to the 2018 tax year. As a result, these net operating loss carryforwards will expire, if not utilized, between 2031 and 2037 for federal and state income tax purposes. In response to the market volatility and instability resulting from the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act (“TCJA”) that was enacted in the U.S. in December 2017. The CARES Act allows for a five-year carryback of federal NOLs generated in 2018 through 2020 and eliminates the 80% taxable income limitation by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018 through 2020. Furthermore, the post 2017 NOLs are subject to an indefinite carryforward period; therefore, $ 60.1 million of federal NOLs generated after 2017 may be carried forward indefinitely. As it pertains to the approximately $ 33.4 million of state NOLs generated after 2017, not all states have conformed to the Act; therefore, the NOL expiration will vary based on the state. The Company also has federal and state tax credits of $ 4.1 million and less than $ 0.1 million, which begin to expire in 2031. The utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“IRC”), a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has completed a formal study through August 18, 2021 to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred. As a result of the study, it was determined the Company experienced an ownership change on July 28, 2015; however, the limitation from the ownership change will not result in any of the NOLs or tax credits expiring unutilized. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in its foreign subsidiary are indefinitely invested. The Company is permanently reinvested in its foreign subsidiary. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which it operates or does business in. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company records uncertain tax positions as liabilities in accordance with ASC 740-10 and adjusts these liabilities when the Company’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of each December 31, 2021 and 2020, the Company had liabilities for uncertain tax positions of $ 1.0 million, which, if recognized, would not impact the Company’s tax provision and effective income tax rate due to a full valuation allowance. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of 91 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 and 2020, the Company had not accrued interest or penalties related to uncertain tax positions. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: Year Ended December 31, (in thousands) 2021 2020 Gross tax contingencies as of beginning of year $ 1,007 $ 961 Increases in gross tax contingencies 9 46 Gross tax contingencies as of end of year $ 1,016 $ 1,007 The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, foreign jurisdictions, and various state and local jurisdictions. The Company’s federal and state tax returns for the tax years ended December 31, 2013 and forward generally remain subject to examination from the Internal Revenue Service and state tax authorities. However, the federal and state tax authorities can generally reduce a net operating loss (but not create taxable income) for a period outside the statutes of limitations in order to determine the correct amount of net operating loss which may be allowed as a deduction against income for a period within the statutes of limitations. Therefore, the Company’s tax years generally remain open to examination for all federal and state income tax matters until its net operating loss carryforwards are utilized and the respective statutes of limitations have lapsed. The returns in U.S. and state jurisdictions have varying statutes of limitations. The Company’s income tax returns for December 31, 2015 through December 31, 2021 for their foreign subsidiary remain subject to examination by tax authorities in the United Kingdom. During the second quarter of the year ended December 31, 2021, the Finance Act 2021 (the “Act”) was enacted in the United Kingdom. The Act increases the corporate income tax rate from 19% to 25% effective April 1, 2023 and enhances the first-year capital allowance on qualifying new plant and machinery assets effective April 1, 2021. The effects on the Company’s existing deferred tax balances have been recorded and is offset by the valuation allowance maintained against the Company’s U.K. net deferred tax assets. 18. Net Loss Per Share The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders for the years ended December 31, 2021, 2020, and 2019: Year Ended December 31, (in thousands, except share and per share amounts) 2021 2020 2019 Numerator: Net loss $ ( 20,963 ) $ ( 12,528 ) $ ( 29,853 ) Accretion of redeemable convertible preferred stock to redemption value ( 7,061 ) ( 15,095 ) ( 13,744 ) Net loss attributable to common stockholders $ ( 28,024 ) $ ( 27,623 ) $ ( 43,597 ) Denominator: Weighted average common shares outstanding—basic and diluted 26,059,744 11,034,620 10,772,486 Net loss per share attributable to common stockholders—basic and diluted $ ( 1.08 ) $ ( 2.50 ) $ ( 4.05 ) 92 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s potentially dilutive securities, which include outstanding stock options, redeemable convertible preferred stock, and warrants to purchase shares of common stock have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect: Year Ended December 31, 2021 2020 2019 Options to purchase common stock 3,949,943 3,170,321 3,453,324 Restricted stock units 309,530 — — Common stock warrants to purchase common stock — 44,222 44,222 Redeemable convertible preferred stock (as converted to common stock) — 19,243,795 19,243,795 4,259,473 22,458,338 22,741,341 19. Commitments and Contingencies Lease Commitments The Company leases office space for its headquarters in New York, New York under a non-cancellable operating lease expiring in 2029. This operating lease was signed in 2013, lease commencement started in 2014, and rent commencement started in 2015. The Company also leases offices in Pennsylvania and the United Kingdom. The leases require, among other things, the payment of minimum annual rentals and a portion of the real estate taxes and insurance, maintenance and other operating expenses related to the properties. The Company recognizes rent expense on a straight-line basis over the lease period. In 2018, the Company signed a non-cancellable operating lease for space to establish a 1stDibs gallery in New York, New York. The lease and rent commencement both started during 2018, and the lease was scheduled to expire in 2022. In December 2019, the Company entered into a Surrender Agreement with the landlord to terminate the lease early in March 2020. As consideration for the early termination of this lease, the Company received a payment of $ 1.3 million in December 2019, and a second payment of $ 1.2 million to be paid after the surrender of the premises back to the landlord. The Company received the second payment in March 2020. The $ 2.5 million lease incentive was accounted for as a reduction in rent expense over the remaining lease term. The Company recognizes rent expense on a straight-line basis over the respective lease period and has recorded deferred rent for rent expense incurred but not yet paid. Rent expense, including associated common area maintenance charges, was $ 4.1 million, $ 1.5 million, and $ 5.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, future minimum lease payments under noncancelable operating leases are as follows (in thousands): Year Ending December 31, 2022 $ 3,883 2023 3,755 2024 3,791 2025 3,968 2026 3,968 Thereafter 11,904 Total $ 31,269 Legal Proceedings The Company is subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to its business, including those related to regulation, litigation, business transactions, employee-related matters, and taxes, among others. When the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a 93 Table of Contents 1STDIBS.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS liability for the loss. The liability recorded includes probable and estimable legal costs incurred to date and future legal costs to the point in the legal matter where the Company believes a conclusion to the matter will be reached. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible. The Company does not believe that it is a party to any pending legal proceedings that are likely to have a material adverse effect on its business, financial condition or results of operations for the years ended December 31, 2021 and 2020. Indemnification In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. Sales and Use Taxes On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair . The State of South Dakota alleged that U.S. constitutional law should be revised to permit South Dakota to require remote marketplace sellers to collect and remit sales tax in South Dakota in accordance with South Dakota’s sales tax statute. Under the U.S. Supreme Court’s ruling, the longstanding Quill Corp v. North Dakota sales tax case was overruled, and states may now require remote marketplace sellers to collect sales tax under certain circumstances. Additionally, certain states have extended these requirements to marketplace facilitators like 1stDibs. The Company began collecting sales tax in relevant jurisdictions in 2019. The Company recognized liabilities for contingencies related to state sales and use tax deemed probable and estimable totaling $ 1.9 million and $ 2.1 million as of December 31, 2021 and 2020, respectively, which are included in other current liabilities in the Company’s consolidated balance sheets. 20. 401(K) Savings Plans The Company established defined contribution savings plans under Section 401(k) of the Internal Revenue Code. These plans cover substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company’s board of directors. These contributions to date have been immaterial. 94 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.