1stdibs.com, Inc. 10-K

Item 7. Management’s Discussion And Analysis of Financial Condition And Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Company Overview We are one of the world’s leading online marketplaces for connecting design lovers with many of the best sellers and makers of vintage, antique, and contemporary furniture, home décor, jewelry, watches, art, and fashion. We believe we are a leading online marketplace for these luxury design products based on the aggregate number of such listings on our online marketplace and our Gross Merchandise Value (“GMV”). Our thoroughly vetted seller base, in-depth marketing content, and custom-built technology platform create trust in our brand and facilitate high-consideration purchases. By disrupting the way these items are bought and sold, we are both expanding access to, and growing the market for, luxury design products. 1stDibs began over two decades ago with the vision of bringing the magic of the Paris flea market online by creating a listings site for top vintage and antique furniture sellers. The quality of our initial seller base enabled us to build a reputation in the design industry as a trusted source for unique luxury design products. Since then, we have strengthened our brand and deepened our seller relationships. We launched our e-commerce platform in 2013 and transitioned to a full e-commerce marketplace model in 2016. As of December 31, 2022, we operate an e-commerce marketplace with approximately 7,300 seller accounts, compared to approximately 4,700 as of December 31, 2021. The increase in sellers reflects our launch of new seller pricing tiers in January 2022, including a subscription-free tier with higher commission rates. As of December 31, 2022, we had 5.5 million users compared to 4.3 million as of December 31, 2021, and approximately 1.5 million listings, compared to 1.3 million as of December 31, 2021. Users represent non-seller visitors who register on our website and include both buyers and prospective buyers. As of December 31, 2022, we had a seller stock value in excess of $16.0 billion compared to a seller stock value in excess of $14.0 billion as of December 31, 2021. Our seller stock value is the sum of the stock value of all available products listed on our online marketplace. An individual listing’s stock value is calculated as the item’s current price multiplied by its quantity available for sale. GMV was $425.4 million for the year ended December 31, 2022 compared to $447.5 million for the year ended December 31, 2021, a decrease of 5%. Our net revenue was $96.8 million for the year ended December 31, 2022 compared to $102.7 million for the year ended December 31, 2021, a decrease of 6%. We believe our GMV and net revenue have been negatively impacted, both directly and indirectly, by macroeconomic factors, including significant capital market volatility, the prolonged COVID-19 pandemic and the changing consumer behaviors as a result, significant housing market volatility, rising interest rates, global economic and geopolitical developments, and inflation; however, these impacts are difficult to isolate and quantify. In the year ended December 31, 2022, we generated a net loss of $(22.5) million and Adjusted EBITDA of $(20.7) million, compared to a net loss of $(21.0) million and Adjusted EBITDA of $(16.5) million for the year ended December 31, 2021. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Restructuring Charges In September 2022, we announced and implemented a restructuring plan to reduce operational costs and realign investment priorities involving the reduction of approximately 10% of our workforce. As a result of the reduction, we incurred approximately $0.7 million in non-recurring restructuring charges in the year ended December 31, 2022, consisting primarily of employee severance and benefits costs. We do not expect to incur any significant additional charges related to restructuring in the fiscal year ended December 31, 2022. See Note 2, “Summary of Significant Accounting Policies” for further discussion of our accounting for the restructuring charges. Sale of Design Manager On June 29, 2022, we sold 100% of our equity interest in Design Manager for $14.8 million. We recognized a net gain on the sale of $9.7 million during the year ended December 31, 2022. See Note 3, “Acquisitions & Disposals” for further discussion of our accounting for the sale of Design Manager. Our Business Model We generate revenue primarily from fees from our seller marketplace services as well as other services, including advertisements and, prior to the sale of Design Manager, software services. 43 Seller Marketplace Services Seller marketplace services consist of marketplace transactions, subscriptions, and listings, and accounted for 97%, 96% and 96% of our net revenue in the years ended December 31, 2022, 2021, and 2020, respectively. Marketplace Transaction Fees Our sellers pay us a commission fee and a processing fee for the successful sale of an item listed on our online marketplace. We have a commission fee structure that is a function of the item’s category and price. Our commission fees range from 5% to 50% and processing fees are 3%, net of expected refunds. Our marketplace transaction fees represent the majority of our net revenue and accounted for 71%, 71% and 67% of our net revenue in the years ended December 31, 2022, 2021, and 2020, respectively. Subscription & Listing Fees In January 2022, we launched new seller pricing tiers which allow sellers to choose the plan that best fits their business and includes choices of a higher monthly subscription fee and lower commission rates, as well as a subscription-free tier with higher commission rates. Depending on the tier chosen, sellers may pay annual subscription fees to access our online marketplace. Our subscription revenue grows as we bring new sellers to our online marketplace who choose to pay the subscription fee to access lower commission rates. Additionally, sellers may choose our no subscription fee and higher commission rate model, which in turn, could decrease our subscription fee revenue. Subscription fees accounted for 24%, 23%, and 27% of our net revenue in the years ended December 31, 2022, 2021, and 2020, respectively. Our ability to maintain the level of our annual subscription fee rates depends on our ability to continue to generate sales for our sellers, which in turn depends on our ability to drive GMV growth, as GMV increases the network effect on our online marketplace. We earn listing fees from sellers who are subscribed to our online marketplace, on a per item basis, as directed by the seller to promote certain items at the seller’s discretion. Sellers do not pay a listing fee for a basic listing on our online marketplace, but can choose to pay for other listing fees, which provide promotional advantages over the basic listing. Other Services Other services consist of advertisements and, prior to the sale of Design Manager, software services and accounted for 3%, 4% and 4% of our net revenue in the years ended December 31, 2022, 2021, and 2020, respectively. Advertising revenue is generated when impression-based ads are displayed on our online marketplace on our sellers’ behalf. Software services revenue consists of monthly and annual subscriptions previously sold through our Design Manager subsidiary allowing users, typically interior designers, to access our project management and accounting software. On June 29, 2022, we sold Design Manager and no revenue related to software services has been recognized since. Key Operating and Financial Metrics We use the following key metrics and non-GAAP measures to measure our performance, identify trends affecting our business, and make strategic decisions: • GMV; • Number of Orders; • Active Buyers; and • Adjusted EBITDA. These metrics are based on internal company data, assumptions, and estimates and are used in managing our business. We believe that these figures are reasonable estimates, and we actively take measures to improve their accuracy, such as eliminating known fictitious or duplicate accounts. There are, however, inherent challenges in gathering accurate data across large online and mobile populations. For example, individuals may have multiple email accounts in violation of our terms of service, which would result in an Active Buyer being counted more than once, thus impacting the accuracy of our number of Active Buyers. In addition, certain metrics, such as the number of Active Buyers and Number of Orders, are measured based on such numbers as reported in a given month, minus cancellations within that month. As we do not retroactively adjust such numbers for cancellations occurring after the month, the metrics presented do not reflect subsequent order cancellations. We regularly 44 review and may adjust our processes for calculating these metrics to improve their accuracy. These key operating and financial metrics may vary from period to period and should not be viewed as indicative of other metrics. Year Ended December 31, (dollars in thousands) 2022 2021 2020 GMV $ 425,375 $ 447,471 $ 342,586 Number of orders 148,399 158,061 127,911 Active Buyers 67,598 72,420 58,159 Adjusted EBITDA (unaudited) $ (20,670) $ (16,493) $ (6,637) Gross Merchandise Value We define GMV as the total dollar value from items sold by our sellers through 1stDibs in a given month, minus cancellations within that month, and excluding shipping and sales taxes. GMV includes all sales reported to us by our sellers, whether transacted through the 1stDibs online marketplace or reported as an offline sale. We define “on-platform GMV” as GMV based only on sales placed or reported through the 1stDibs online marketplace, thus on-platform GMV is a subset of GMV. Offline sales consist of sales completed by a small number of sellers outside of our online marketplace and reported to us by these sellers in exchange for increased marketing exposure and/or slightly lower commission rates on both their on-platform and offline sales. We do not intend to add new sellers to this program. On-platform GMV accounted for $409.4 million, or 96%, $432.6 million, or 97%, and $328.8 million, or 96% of GMV in the years ended December 31, 2022, 2021 and 2020, respectively. We view GMV as a measure of the total economic activity generated by our online marketplace and as an indicator of the scale, growth, and health of our online marketplace. Our historical growth rates for GMV may not be indicative of future growth rates in GMV. Number of Orders We define Number of Orders as the total number of orders placed or reported through the 1stDibs online marketplace in a given month, minus cancellations within that month. Our historical growth rates for Number of Orders may not be indicative of future growth rates in Number of Orders. Active Buyers We define Active Buyers as buyers who have made at least one purchase through our online marketplace during the 12 months ended on the last day of the period presented, net of cancellations. A buyer is identified by a unique email address; thus an Active Buyer could have more than one account if they were to use a separate unique email address to set up each account. We believe this metric reflects scale, engagement and brand awareness, and our ability to convert user activity on our online marketplace into transactions. Our historical growth rates for Active Buyers may not be indicative of future growth rates in new Active Buyers. Adjusted EBITDA We define Adjusted EBITDA as net loss excluding depreciation and amortization, stock-based compensation expense, other income (expense), net, provision for income taxes, gain on sale of Design Manager, one-time expenses related to the sale of Design Manager, and non-recurring restructuring charges. Adjusted EBITDA is a key performance measure used by our management and board of directors to assess our operating performance and the operating leverage of our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the income and expenses that we exclude from Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. See “Non-GAAP Financial Measures” for more information and for a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA. Key Factors Affecting Our Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us, including those discussed in Part I, Item 1, “Business,” but also pose risks and challenges, including those discussed in the section titled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. 45 Growth and Retention of our Active Buyers Our success depends in part on our ability to grow and retain our Active Buyer base. Our number of Active Buyers was 67,598 as of December 31, 2022 compared to 72,420 as of December 31, 2021. The total Number of Orders placed or reported through the 1stDibs online marketplace for the year ended December 31, 2022 was 148,399 compared to 158,061 for the year ended December 31, 2021. Similar to GMV and net revenue, we believe these metrics have been negatively impacted, directly and indirectly, by macroeconomic factors. We had no Active Buyers who represented 5% or more of on-platform GMV for the years ended December 31, 2022 or 2021. Active Buyers drive our on-platform GMV and net revenue and contribute to the network effects that allow us to attract new sellers and exclusive inventory. 46 During the year ended December 31, 2022, we retained 27% of the 2021 on-platform GMV from buyers acquired in 2021; this is a decrease from the year ended December 31, 2021, where we retained 39% of the 2020 on-platform GMV from buyers acquired in 2020. We define new buyers as those who placed their first order on our online marketplace. We categorize buyers into cohorts based on the date of their first purchase on the 1stDibs platform. GMV attributed to a buyer cohort represents the total dollar value from items purchased by that buyer cohort in a given period, minus cancellations within that period and excluding shipping and sales taxes. To calculate the percentage of buyers retained, we divide total GMV in a specific period for a given cohort by the GMV of that cohort in the prior period. Similar to GMV and net revenue, we believe these metrics have been negatively impacted, directly and indirectly, by macroeconomic factors. The figures below represent our on-platform GMV from our online marketplace by buyer cohort for the year ended December 31, 2022. We expect the current macroeconomic factors to continue to negatively impact our operations into 2023. We plan to invest in strategic initiatives to drive supply growth through more sellers and listings. If and when macroeconomic conditions improve, we will look to increase retention in existing buyers and grow new buyers by further penetration of the luxury consumer market, including growing our business in non-U.S. markets and the growth of our supply. 47 Other Factors Affecting Our Performance Our results of operations are impacted by a number of other factors, including, but not limited to, those discussed below. The extent to which these factors may positively or negatively impact our GMV and our results of operations, including our net revenue and gross profit, will depend in large part on the degree to which we are able to successfully achieve the following growth strategies. International Growth Our growth will depend in part on international sellers and buyers, both of which constitute an increasing portion of our online marketplace transactions. Currently, our sellers and buyers are based in over 150 countries. Our long-term strategy is to localize the user experience by providing technology solutions such as translation and payment capabilities, focus on local marketing efforts through organic search, email, performance-based marketing, and optimized public relations, and customize content and collections to suit regional tastes. We had over 51% and 47% of seller accounts and 41% and 40% of the supply on our online marketplace come from outside the United States in the years ended December 31, 2022, and 2021, respectively. On-platform GMV from buyers in non-U.S. markets constituted 17% in the year ended December 31, 2022, a slight decrease from 19% in the year ended December 31, 2021. We believe there is an opportunity to grow our GMV from non-U.S. markets. Diversify Product Verticals Historically, our largest vertical by GMV has been antique and vintage furniture. Our unique product offerings in this vertical have inspired brand loyalty and increased demand for other luxury design products on the 1stDibs online marketplace allowing us to expand into adjacent verticals, including new and custom furniture, jewelry, and art. Antique and vintage furniture comprised less than 50% of our on-platform GMV in the years ended December 31, 2022 and 2021, respectively. We expect antique and vintage furniture to account for less than 50% of on-platform GMV for the foreseeable future as we are investing in our new and custom furniture, jewelry, art, and fashion verticals. We anticipate these verticals will account for an increasing percentage of our on-platform GMV for the foreseeable future. Our new and custom furniture, jewelry, watches, and art verticals together comprised 48% and 46% of our on-platform GMV in the years ended December 31, 2022 and 2021, respectively. We believe our brand and operating track record in existing verticals allow us to unlock valuable supply across adjacent and new verticals, increasing the exclusive products available on our online marketplace, thereby increasing the Long Term Value (“ LTV”) of our new and existing buyer cohorts. We aim to continue to diversify into new verticals so that we can grow our future revenue streams. Growth in Brand Awareness While we rely on strong brand awareness from direct and organic channels such as word of mouth referrals, we have ample opportunity to drive further engagement with new and existing buyers. While a large portion of our advertising spend is dedicated to performance-based marketing, we have opportunities to explore relatively untapped channels, such as television, radio, podcasts, and online display, to bolster engagement on our online marketplace. As many users may continue to view 1stDibs primarily as a vintage and antique furniture marketplace, we have a substantial opportunity to educate our buyers on the breadth of our offerings and drive cross-vertical transactions. Investment in Technology and Innovation We have made, and will continue to make, strategic investments in our platform to drive seller success through new tools, convert users to buyers, grow our long-term revenue and operating results, drive technological innovation, and enhance the overall experience of our online marketplace. As we continue to scale, we plan to strategically invest in innovation to address the needs of our sellers and buyers and drive efficiencies in our business, localize our platform, and enter new verticals and geographies. Overall, investments in our platform are focused on maximizing traffic, increasing conversion rate, and improving the overall efficiency of our operations. Components of Results of Operations Net Revenue Our net revenue consists principally of seller marketplace services, advertisements, and, prior to the sale of Design Manager, software services. Seller marketplace services primarily consist of marketplace transactions, subscriptions, and listing fees. Marketplace transaction fees are collected when sellers pay us commissions ranging from 5% to 50%, and processing fees of 3%, for successful purchase transactions, 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. Revenue from subscriptions consist of access to our online marketplace, allowing sellers, who are our customers, to execute successful purchase transactions with buyers. In January 2022, we launched new seller pricing tiers which allow new sellers to choose the plan that best fits their business and includes choices of a higher monthly subscription fee and lower commission rates, as well as a subscription-free tier with higher commission 48 rates. Listing fee revenue is collected when sellers pay us for promoting certain products on their behalf and at their discretion through our online marketplace. Prior to the sale of Design Manager, software services revenue consisted of monthly and annual subscriptions allowing customers to access our Design Manager software, typically used by interior designers. Due to the sale of Design Manager on June 29, 2022, there was no net revenue related to software services after the sale and we anticipate that net revenue will no longer include software services in future periods. Advertisements consist of impression-based ads displayed on our online marketplace on the seller’s behalf. Our revenue recognition policies are discussed under “Critical Accounting Policies” and Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements. Cost of Revenue Cost of revenue includes payment processor fees and hosting expenses. Cost of revenue also includes expenses associated with payroll, employee benefits, stock-based compensation, other headcount-related expenses associated with operations personnel supporting revenue-related operations, consulting costs, and amortization expense related to our capitalized internal-use software. In certain transactions where our shipping services are elected by sellers, we enable 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 our consolidated statements of operations. We enable fulfillment and shipping, but do not own or manage inventory. Gross Profit and Gross Margin Gross profit is net revenue less cost of revenue, and gross margin is gross profit as a percentage of net revenue. Gross profit has been, and will continue to be, affected by various factors, including leveraging economies of scale, the costs associated with hosting our platform, the level of amortization of our internal-use software, and the extent to which we expand our operations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors. Sales and Marketing Sales and marketing expenses include payroll, employee benefits, stock-based compensation, other headcount-related expenses associated with sales and marketing personnel, advertising expense, consulting costs, and promotional discounts offered to new and existing buyers. Advertising expenses consist primarily of costs incurred promoting and marketing our services, such as costs associated with acquiring new users through performance-based marketing, social media programs, email, and events. Promotional discounts and incentives represent incentives solely to end buyers and, therefore, are not considered payments made to our customers. Buyers are not our customers because access to the 1stDibs online marketplace is free for buyers, and we have no performance obligations with respect to buyers. Technology Development Technology development expenses include payroll, employee benefits, stock-based compensation, and other headcount-related expenses associated with engineering and product development personnel and consulting costs related to technology development. We expense all technology development expenses as incurred, except for those expenses that meet the criteria for capitalization as internal-use software. General and Administrative General and administrative expenses include payroll, employee benefits, stock-based compensation, other headcount-related expenses associated with finance, legal, facility and human resources related personnel, lease expense, business liability insurance, accounting, professional fees, and depreciation and amortization of property and equipment. We expense all general and administrative expenses as incurred. Provision for Transaction Losses Provision for transaction losses primarily consists of transaction loss expense associated with our buyer protection program, including damages to products caused by shipping and transit, items that were not received or not as represented by the seller, and reimbursements to buyers at our discretion if they are dissatisfied with their experience. The provision for transaction losses also includes bad debt expense associated with our accounts receivable balance. 49 Results of Operations The following table summarizes our results of operations for the periods indicated: Year Ended December 31, (in thousands) 2022 2021 2020 Net revenue $ 96,849 $ 102,731 $ 81,863 Cost of revenue 29,670 32,167 25,948 Gross profit 67,179 70,564 55,915 Operating expenses: Sales and marketing 44,776 47,414 36,526 Technology development 24,437 19,110 16,510 General and administrative 27,594 21,293 12,565 Provision for transaction losses 5,933 5,191 3,820 Gain on sale of Design Manager (9,684) — — Total operating expenses 93,056 93,008 69,421 Loss from operations (25,877) (22,444) (13,506) Other income (expense), net: Interest income 1,606 146 194 Interest expense (11) (16) (14) Other, net 1,781 1,372 809 Total other income (expense), net 3,376 1,502 989 Net loss before income taxes (22,501) (20,942) (12,517) Provision for income taxes (37) (21) (11) Net loss $ (22,538) $ (20,963) $ (12,528) The following table summarizes our results of operations as a percentage of net revenue for the periods indicated: Year Ended December 31, 2022 2021 2020 Net revenue 100 % 100 % 100 % Cost of revenue 31 31 32 Gross profit 69 69 68 Operating expenses: Sales and marketing 46 46 44 Technology development 25 19 20 General and administrative 29 21 15 Provision for transaction losses 6 5 5 Gain on sale of Design Manager (10) — — Total operating expenses 96 91 84 Loss from operations (27) (22) (16) Other income (expense), net: Interest income 2 — — Interest expense — — — Other, net 2 2 1 Total other income (expense), net 4 2 1 Net loss before income taxes (23) (20) (15) Provision for income taxes — — — Net loss (23) % (20) % (15) % 50 Comparison of the Years Ended December 31, 2022 and 2021 Net Revenue Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Net revenue $ 96,849 $ 102,731 $ (5,882) (6) % Net revenue was $96.8 million for the year ended December 31, 2022, as compared to $102.7 million for the year ended December 31, 2021. The decrease of $5.9 million, or 6%, was primarily due to a $4.7 million decrease in seller marketplace services revenue, which was primarily due to a decrease in marketplace transaction fees as a result of the decrease in our GMV. We believe our GMV and net revenue have been impacted negatively, both directly and indirectly, by macroeconomic factors, including significant capital market volatility, the prolonged COVID-19 pandemic and the changing consumer behaviors as a result, significant housing market volatility, raising interest rates, global economic and geopolitical developments, and inflation; however, these impacts are difficult to isolate and quantify. Additionally, there was a $0.9 million decrease in software services as a result of the sale of Design Manager in June 2022. Our marketplace transaction fees represent the majority of our net revenue and accounted for 71% of our net revenue for both years ended December 31, 2022 and 2021, respectively. Subscription fees accounted for 24% and 23% of our net revenue for the years ended December 31, 2022 and 2021, respectively. Cost of Revenue Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Cost of revenue $ 29,670 $ 32,167 $ (2,497) (8) % Cost of revenue was $29.7 million for the year ended December 31, 2022, as compared to $32.2 million for the year ended December 31, 2021. The decrease of $2.5 million, or 8%, was primarily due to a $3.9 million decrease in shipping expense, resulting from increases in buyer paid shipping charges compared to the prior year, a $0.6 million decrease in credit card fees due to the decrease in GMV, and a $0.2 million decrease in costs associated with Design Manager due to the sale in June 2022. These decreases were partially offset by a $1.1 million increase in hosting and co-location costs due to increased traffic on-platform, and an increase of $1.1 million in salaries and benefits resulting from increases in headcount throughout the prior year and one-time restructuring charges recorded in September 2022 related to reductions in workforce. The cost savings as a result of the restructuring were not fully realized in the year ended December 31, 2022, as the headcount reductions were not in effect until the end of September 2022. Gross Profit and Gross Margin Gross profit was $67.2 million and gross margin was 69.4% for the year ended December 31, 2022, as compared to gross profit of $70.6 million and gross margin of 68.7% for the year ended December 31, 2021. The decrease in gross profit was primarily driven by the decrease in net revenue. The increase in gross margin percentage was primarily driven by a decrease in our cost of revenue, as explained above, decreasing at a faster pace than the decrease in net revenue, due mainly to the decreases in shipping expense. Operating Expenses Sales and Marketing Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Sales and marketing $ 44,776 $ 47,414 $ (2,638) (6) % Sales and marketing expense was $44.8 million for the year ended December 31, 2022, as compared to $47.4 million for the year ended December 31, 2021. The decrease of $2.6 million, or 6%, was primarily due to decreases in discretionary expenses, including a $4.1 million decrease in performance-based marketing and a $1.7 million decrease in promotional marketing campaigns. These decreases were partially offset by a $2.0 million increase in stock-based compensation expense, and a $1.1 million increase in salaries and benefits resulting from increases in headcount throughout the prior year and one-time restructuring charges recorded in September 2022 related to reductions in workforce. The cost savings as a result of the restructuring were not fully realized in the year ended December 31, 2022, as the headcount reductions were not in effect until the end of September 2022. 51 Technology Development Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Technology development $ 24,437 $ 19,110 $ 5,327 28 % Technology development expense was $24.4 million for the year ended December 31, 2022, as compared to $19.1 million for the year ended December 31, 2021. The increase of $5.3 million, or 28%, was primarily due to a $3.5 million increase in stock-based compensation and a $1.6 million increase in salaries and benefits resulting from increases in headcount throughout the prior year and one-time restructuring charges recorded in September 2022 related to reductions in workforce. The cost savings as a result of the restructuring were not fully realized in the year ended December 31, 2022, as the headcount reductions were not in effect until the end of September 2022. General and Administrative Year Ended December 31, (in thousands) 2022 2021 $ Change % Change General and administrative $ 27,594 $ 21,293 $ 6,301 30 % General and administrative expense was $27.6 million for the year ended December 31, 2022, as compared to $21.3 million for the year ended December 31, 2021. The increase of $6.3 million, or 30%, was primarily due to a $2.5 million increase in stock-based compensation expense, a $1.4 million increase in liability insurance, a $1.4 million increase in salaries and benefits due to a higher average headcount. These increases were primarily related to our operations as a public company. There was also a $0.6 million increase in legal and professional fees partially associated with the sale of Design Manager. Provision for Transaction Losses Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Provision for transaction losses $ 5,933 $ 5,191 $ 742 14 % Provision for transaction losses was $5.9 million for the year ended December 31, 2022, as compared to $5.2 million for the year ended December 31, 2021. The increase of $0.7 million, or 14%, was primarily driven by a higher volume of transactional and shipping accommodations. Other Income (Expense), Net Year Ended December 31, (in thousands) 2022 2021 $ Change % Change Total other income (expense), net $ 3,376 $ 1,502 $ 1,874 125 % Other income (expense), net was $3.4 million for the year ended December 31, 2022, as compared to $1.5 million for the year ended December 31, 2021. The increase of $1.9 million, or 125%, was primarily driven by an increase in interest income due to increased cash and cash equivalents from our IPO in the year ended December 31, 2021, as well as increasing interest rates on our money market accounts, particularly in the second half of the year ended December 31, 2022. Non-GAAP Financial Measures We have included Adjusted EBITDA, which is a non-GAAP financial measure, because it is a key measure used by our management team to help us to assess our operating performance and the operating leverage in our business. We also use this measure to analyze our financial results, establish budgets and operational goals for managing our business, and make strategic decisions. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the income and expenses that we exclude from Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. We also believe that the presentation of this non-GAAP financial measure provides an additional tool for investors to use in comparing our core 52 business and results of operations over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors, and to analyze our cash performance. The non-GAAP financial measures presented may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, comparable financial measures calculated in accordance with GAAP. Further, these non-GAAP financial measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, these non-GAAP financial measures should be considered as supplemental in nature, and are not intended, and should not be construed, as a substitute for the related financial information calculated in accordance with GAAP. These limitations of Adjusted EBITDA include the following: • The exclusion of certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets. While these are non-cash charges, we may need to replace the assets being depreciated and amortized in the future and Adjusted EBITDA does not reflect cash requirements for these replacements or new capital expenditure requirements; • The exclusion of stock-based compensation expense, which has been a significant recurring expense and will continue to constitute a significant recurring expense for the foreseeable future, as equity awards are expected to continue to be an important component of our compensation strategy; • The exclusion of other income (expense), net, which includes interest income related to our cash equivalents, interest expense, and realized and unrealized gains and losses on foreign currency exchange; • The exclusion of gain on sale of Design Manager, which is a one-time sale of our wholly owned subsidiary, as well as the related one-time expenses to sell the subsidiary which include primarily legal fees; and • The exclusion of restructuring charges, which are expenses from non-recurring employee severance and benefits costs. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results. We define Adjusted EBITDA as our net loss, excluding: (1) depreciation and amortization; (2) stock-based compensation expense; (3) other income (expense), net; (4) provision for income taxes; (5) gain on sale of Design Manager; (6) one-time expenses related to the sale of Design Manager; and (7) restructuring charges. The following table provides a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA: Year Ended December 31, (in thousands) 2022 2021 2020 Net loss $ (22,538) $ (20,963) $ (12,528) Depreciation and amortization 2,710 3,112 6,023 Stock-based compensation expense 11,214 2,839 846 Other income, net (3,376) (1,502) (989) Provision for income taxes 37 21 11 Gain on sale of Design Manager (9,684) — — One-time expenses related to sale of Design Manger 307 — — Restructuring charges 660 — — Adjusted EBITDA (unaudited) $ (20,670) $ (16,493) $ (6,637) Seasonality We have historically experienced increased sales during the fourth quarter holiday shopping season compared to the other quarters. This has generally resulted in increased GMV and net revenue during the fourth quarter of each fiscal year. We expect this seasonality to continue in future years, unless there are unforeseen factors, for example, in the year ended December 31, 2022, we believe that macroeconomic factors negatively impacted us both directly and indirectly resulting in lower net revenue and GMV in the fourth quarter of 2022 vs the first quarter of 2022. As our growth rates fluctuate or other unforeseen factors arise, the impact of these seasonality trends on our results of operations may become more or less pronounced. Our cost of revenue and marketing expenses generally follow this trend, with the highest costs corresponding with the fourth quarter; however, similar to net revenue and GMV, cost of revenue and marketing were lower during the fourth quarter of 2022 vs other quarters due to macroeconomic factors, as well as our reduction in workforce in September 2022, which decreased salaries and benefits for the fourth quarter of 2022. 53 We enable fulfillment and shipping, but do not own or manage inventory. If our growth rates moderate, the impact of these seasonality trends on our results of operations may become more pronounced. We anticipate that gross margin may fluctuate from quarter to quarter based on variability in the costs associated with hosting our online marketplace and supporting order processing. We intend to continue making strategic investments in marketing to drive future net revenue growth. We also intend to continue strategically investing in our technology development efforts to improve and expand our platform. We expect the majority of our technology development expenses will result from consulting and/or headcount-related expenses. We expect provision for transaction losses to vary based on fluctuations in GMV. Liquidity and Capital Resources As of December 31, 2022, we had cash and cash equivalents of $153.2 million and an accumulated deficit of $291.0 million. Net cash used in operating activities was $27.9 million in the year ended December 31, 2022. We expect operating losses and negative cash flows from operations to continue in the foreseeable future as we continue to strategically invest in growth activities. Our principal use of cash is to fund our operations and platform development to support our strategic initiatives. Based on our current plans, we believe our existing cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements through at least the next 12 months. We expect to continue to incur substantial expenditures in the near term to support our ongoing activities. While management believes that our current cash and cash equivalents are sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months, we may need to borrow funds or raise additional equity to achieve our longer-term business objectives. Our future capital requirements will depend on many factors, including: • the emergence of competing online marketplaces and other adverse marketing developments; • the timing and extent of our sales and marketing and technology development expenditures; and • any investments or acquisitions we may choose to pursue in the future. A change in the outcome of any of these or other variables could significantly impact our operating plans, and we may need additional funds to meet operational needs and capital requirements associated with such plans. In addition, any future borrowings may result in additional restrictions on our business and any issuance of additional equity would result in dilution to investors. If we are unable to raise additional capital when we need it, it could harm our business, results of operations, and financial condition. Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, (in thousands) 2022 2021 2020 Net cash used in operating activities $ (27,914) $ (4,401) $ (3,443) Net cash provided by (used in) investing activities 12,641 (2,269) 1,286 Net cash provided by financing activities 2,035 120,050 1,562 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (278) (16) (14) Net (decrease) increase in cash, cash equivalents, and restricted cash $ (13,516) $ 113,364 $ (609) Cash Flows from Operating Activities Net cash used in operating activities was $27.9 million for the year ended December 31, 2022, as compared to net cash used in operating activities of $4.4 million for the year ended December 31, 2021. The increase in net cash used of $23.5 million was primarily driven by the decrease in net revenue and increase in operating expenses, including salaries and benefits, public company expenses, and one-time restructuring charges as described in the “Results of Operations” section. There were also negative changes in our operating assets and liabilities, including an $8.8 million change in payables due to sellers and a $10.3 million change in accounts payable and accrued expenses primarily due to the timing of payments. Cash Flows from Investing Activities Net cash provided by investing activities was $12.6 million for the year ended December 31, 2022, as compared to net cash used in investing activities of $2.3 million for the year ended December 31, 2021. The increase in cash provided by investing activities of $14.9 million was primarily due to the $14.6 million of proceeds from the sale of Design Manager. 54 Cash Flows from Financing Activities Net cash provided by financing activities was $2.0 million for the year ended December 31, 2022, as compared to $120.1 million for the year ended December 31, 2021. The decrease in cash flows of $118.0 million is primarily due to the proceeds from issuance of common stock in our IPO in the year ended December 31, 2021, as well as a $0.7 million decrease in proceeds from the exercise of stock options. Off-Balance Sheet Arrangements For the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Recent Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements, for a description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows. Emerging Growth Company We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. While our significant accounting policies are described in greater detail in Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements, we believe that the following policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We generate revenue from seller marketplace services and other services. Seller marketplace services primarily consist of marketplace transactions, subscriptions, and listing fees. Other services primarily consist of advertising revenues generated from displaying ads on our online marketplace and software services revenue related to Design Manager, typically used by interior designers. Design Manager was sold on June 29, 2022; therefore, no related net revenue for software services was recognized after the sale date. Revenue is recognized as we transfer control of promised goods or services transfers to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We evaluate whether it is appropriate to recognize revenue on a gross or net basis based upon our evaluation of whether we obtain control of the specified goods or services by considering if we are primarily responsible for fulfillment of the promise, have inventory risk, or have latitude in establishing pricing and selecting suppliers, among other factors. Property and Equipment, net Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. We capitalize costs related to internal-use software during the application development stage, including consulting costs and compensation expenses related to employees who devote time to the development projects. We record software development costs in property and equipment, net. Costs incurred in the preliminary stages of development activities and post implementation activities are expensed in the period incurred and are included in technology development in the consolidated statements of operations. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Once the project is available for general release, capitalization ceases, and asset amortization begins. Capitalized costs associated with internal-use software are amortized on a straight-line basis over 55 their estimated useful life, which is generally three years , and are included in cost of revenue in the consolidated statements of operations. Stock-Based Compensation We measure all stock-based awards granted to employees, directors, and non-employees based on the fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The fair value of each stock option 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 our 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 our expected dividend yield. Expected volatility was calculated based on the implied volatilities from market comparisons of certain publicly traded companies and other factors. The expected option term was calculated based on the simplified method, which uses the midpoint between the vesting date and the contractual term, as we do not have sufficient historical data to develop an estimate based on participant behavior. The risk-free interest rate was based on the U.S. Treasury bond yield with an equivalent term. We have not paid dividends and have no foreseeable plans to pay dividends. The fair value of restricted stock units are estimated on the date of grant based on the fair value of our common stock. Item 7A. Qualitative and Quantitative Disclosures About Market Risk We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks are described below. Interest Rate Sensitivity Interest rate risk relates to the loss we could incur in our cash portfolios due to a change in interest rates. We held cash and cash equivalents of $153.2 million as of December 31, 2022. We generally hold our cash for immediate operating needs in non-interest bearing checking accounts and the majority of the remaining cash and cash equivalents are held in interest bearing money market accounts. Due to the nature of our cash and cash equivalents, we would expect a hypothetical 100 basis point change in interest rates may result in an approximate $1.5 million change in our cash and cash equivalents. While these are our best estimates of the impact of the specified interest rate scenario, actual results could differ from those projected. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes of this magnitude are rarely instantaneous or parallel. Our principal use of cash and cash equivalents is to fund our operations and platform development to support our strategic initiatives and the remainder are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Foreign Currency Risk Our net revenue is primarily denominated in U.S. dollars, Euros, and British pounds, depending on the currency selection of the seller. Our cost of revenue and operating expenses are primarily denominated in U.S. dollars. As our online marketplace continues to grow globally, our results of operations and cash flows may be subject to fluctuations due to the change in foreign exchange rates. To date, fluctuations due to changes in the Euro and British pound have not been significant, but we may experience material foreign exchange gains and losses in our statement of operations in the future. As of December 31, 2022, we would expect that a 10% increase or decrease in current exchange rates would not result in more than a $3.5 million change in revenue, a $1.5 million change in operating expenses, and a $0.5 million change in assets and liabilities. Credit Risk We are exposed to credit risk on accounts receivable balances. This risk is mitigated by requiring upfront payment for many of our services and due to our diverse customer base, dispersed over various geographic regions and industrial sectors. For the years ended December 31, 2022 and 2021, no single customer accounted for more than 10% of our net revenue. We maintain provisions for potential credit losses and such losses to date have been within our expectations. We evaluate the solvency of our customers on an ongoing basis to determine if additional allowances for doubtful accounts need to be recorded. Inflation Risk Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe certain metrics, including our GMV and net revenue, have been negatively impacted, both directly and indirectly, by macroeconomic factors, including inflation and as a result significant capital market and housing market volatility. Additionally, if our costs were to become subject to inflationary pressures, we might not be able to fully offset such higher costs through net revenue and GMV increases. 56 Our inability or failure to do so could harm our business, financial condition, and results of operations. We cannot assure you our business will not be affected in the future by inflation. 57