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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-22 · 155 added, 262 removed, 161 unchanged (72% of the section changed)

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Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full calendar year or any other period.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 is included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our final prospectus filed pursuant to Rule 424(b) on March 26, 2021 (“Prospectus”).

thredUP is one of the world’s largest online resale platforms for women’s and kids’ apparel, shoes and accessories.

This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-over-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 10-K”).

thredUP operates one of the world’s largest online resale platforms for apparel, shoes and accessories.

Our mission is to inspire a new generation of consumers to think secondhand first.

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Our custom-built operating platform consists of distributed processing infrastructure, proprietary software and systems and data science expertise.

This platform is powering the rapidly emerging resale economy, one of the fastest growing sectors in retail, according to a GlobalData market survey conducted in April 2021.

This platform is powering the rapidly emerging resale economy, one of the fastest growing sectors in retail, according to a GlobalData market survey conducted in February 2022.

thredUP’s proprietary operating platform is the foundation for our managed marketplace, where we have bridged online and offline technology to make the buying and selling of tens of millions of unique items easy and fun.

The marketplace we have built enables buyers to browse and purchase resale items for women’s and kids’ apparel, shoes and accessories across a wide range of price points.

The core marketplace we have built in the U.S.

enables buyers to browse and purchase resale items for primarily women’s and kids’ apparel, shoes and accessories across a wide range of price points.

Buyers love shopping value, premium and luxury brands all in one place, at up to 90% off estimated retail price.

Sellers love thredUP because we make it easy to clean out their closets and unlock value for themselves or for the charity of their choice while doing good for the planet.

Sellers order a Clean Out Kit, fill it and return it to us using our prepaid label.

thredUP’s sellers order a Clean Out Kit, fill it and return it to us using our prepaid label.

We take it from there and do the work to make those items available for resale.

In 2018, based on our success with consumers directly, we extended our platform to enable brands and retailers to participate in the resale economy.

A number of the world’s leading brands and retailers are already taking advantage of our RaaS offering.

In October 2021, we closed the acquisition of Remix, a fashion resale company headquartered in Sofia, Bulgaria, which further expands our reach to the European customer.

With this acquisition, we added a complementary operational infrastructure and an experienced management team to enable our expansion into Europe.

In addition to our core marketplace, some of the world’s leading brands and retailers are already taking advantage of our RaaS offering, which allows them to conveniently offer a scalable closet clean out service and/or resale shop to their customers.

We believe RaaS will accelerate the growth of this emerging category and form the backbone of the modern resale experience domestically and internationally.

In 2021, we acquired Remix Global EAD (“Remix”), a fashion resale company based in Sofia, Bulgaria.

With this acquisition, we further expanded our reach to European customers, added a complementary operational infrastructure and added an experienced management team to enable our expansion into Europe.

In addition, Remix’s product assortment extended our resale offering to include men’s items and items sourced from a variety of supply channels, such as wholesale supply.

Recent Business Developments

Initial and Follow-on Public Offering

Historically, we have financed our operations primarily through private sales of equity securities and debt.

Our registration statement related to the initial public offering (the “IPO”) was declared effective on March 25, 2021 by the SEC, and our Class A common stock began trading on the Nasdaq Global Select Market (“Nasdaq”) on March 26, 2021.

Upon the completion of our IPO, we s old 13.8 million shares of Class A common stock at a price to the public of $14.00 per share.

We received aggregate net proceeds of $175.5 million after deducting offering costs, underwriting discounts and commissions of $17.7 million.

On August 2, 2021, we issued and sold an aggregate of two million shares of Class A common stock at a price of $24.25 per share in a registered public offering.

The aggregate net proceeds were approximately $45.5 million , after deducting offering costs of $1.1 million and underwriting discounts and commissions of $2.2 million.

Acquisition of Remix Global AD

On July 24, 2021, we entered into Share Purchase Agreements (collectively, the “Share Purchase Agreement”), with the shareholders of Remix to purchase 100% of the outstanding equity interests of Remix and its subsidiary (the “Remix Acquisition”).

On October 7, 2021, we completed our acquisition of Remix and paid approximately $7.2 million in cash to shareholders of Remix and its subsidiary, and $12.1 million in cash to pay off Remix’s outstanding term loan.

Shortly after the completion of Remix Acquisition, we paid on behalf of Remix approximately $6.2 million in cash for its outstanding tax and other liabilities.

Subject to customary purchase price adjustments, we will issue 130,597 shares of our Class A common stock 18 months following the completion of the Remix Acquisition to four shareholders of Remix.

COVID-19 Impact

In December 2019, a novel strain of coronavirus was first identified, and in March 2020, the World Health Organization categorized COVID-19 as a pandemic.

The COVID-19 pandemic has adversely impacted businesses worldwide and has impacted aspects of our business and operations.

In March 2020, we shifted all of our corporate employees and contract engineers to a remote work model and implemented additional measures to better enable remote work.

As of December 31, 2021, our remote work model remains largely in place.

Financial Impact

In the twelve months ended December 31, 2021, we saw increased demand, which we believe was partly related to COVID-19 recovery and re-opening efforts such as the vaccine roll out, easing of social distancing restrictions and federal stimulus legislation.

We also saw increased operating expenses due to the additional labor costs associated with increased processing to support the demand experienced to date and in anticipation of accelerating demand.

Impact on Processing at our Distribution Centers

We still face challenges in hiring and retaining employees and have implemented compensation and benefits programs to enhance hiring and retention, which has contributed to higher Cost of Revenue and higher Operations, Product and Technology expenses.

These programs are primarily aimed at mitigating the macro trend of increased competition for labor, including seasonal employment opportunities.

We have been monitoring and continue to monitor the varied impact of COVID-19 on our business and operations.

In the twelve months ended December 31, 2021, we saw increased demand from the prior year, which we believe was partly related to COVID-19 recovery and re-opening efforts such as the vaccine roll out, easing of social distancing restrictions and federal stimulus legislation.

More broadly however, we expect the evolving COVID-19 pandemic to continue to have an adverse impact on our business, results of operations and financial condition, including our revenue and cash flows, for at least the first part of 2022.

For instance, a slowdown or further uncertainty in the United States economy may result in additional changes in buyer and seller behavior, which could cause either a potential reduction in discretionary spending on our marketplace or increased activity on our marketplace as customers look for high-value, lower-priced alternatives.

In particular, following the stimulus package in March 2021, we experienced a brief increase in Orders followed by a return to expected Orders activity.

Additionally, future developments, such as new information which may emerge concerning COVID-19, the new COVID-19 strains (e.g., delta and omicron variants), and the actions to contain the coronavirus or treat its impact, could have an adverse impact to our business.

Due to the unknown duration and unprecedented impact of the COVID-19 pandemic and the range of national, state and local responses thereto, the related financial impact on our business could change and cannot be accurately predicted at this time.

See the section titled “Risk Factors—Risks Relating to our Business and Industry—The global COVID-19 pandemic has had and may continue to have an adverse impact on our business, results of operations and financial condition.”

Macroeconomic Factors

Macroeconomic factors, including inflation, increased interest rates, significant capital market volatility, the prolonged COVID-19 pandemic, global supply chain constraints, and global economic and geopolitical developments have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.

These factors contributed to increases in our operating costs during 2022 primarily due to increased transportation costs and wage rates.

In addition, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns.

We expect some or all of these factors to continue to impact our operations into 2023.

Foreign Currency

During 2022, the U.S.

dollar appreciated against major European currencies, including the Bulgarian lev.

We believe the strengthening U.S.

dollar had a negative impact on our European sales.

We are managing the currency risk related to earnings through natural hedges and have offsetting costs relating to operating our business and a regional source of supply.

Therefore, changes to exchange rates have not had a significant impact to our consolidated financial results.

We continue to monitor our foreign exchange exposure as we grow our business globally.

We have not engaged in hedging of foreign currency transactions to date, although we may choose to do so in the future.

For further details, please refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk , of this Annual Report on Form 10-K.

Restructuring

In the second and third quarters of 2022, we restructured certain corporate and managerial functions to improve efficiencies and to reduce overhead costs.

In addition, we closed our processing centers in Tennessee and Texas and consolidated their operations into our distribution center in Texas.

These activities have, and are expected to, provide future efficiency benefits;

however, the actual results may differ.

Overview of 2022 Results

Total revenue was a record at $251.8 million, an increase of 35% year-over-year.

Total revenue was $288.4 million, an increase of 14.5% year-over-year.

Gross Profit and Margin:

Gross profit totaled $178.1 million representing growth of 39% year-over-year.

Gross margin expanded by 185 basis points to 71% from 69% last year.

GAAP net loss was $63.2 million for the year ended December 31, 2021, representing a 32% increase from the GAAP net loss of $47.9 million for the year ended December 31, 2020.

Adjusted EBITDA:

Adjusted EBITDA loss was $36.5 million, a negative 14% of revenue, compared to Adjusted EBITDA loss of $33.4 million for the year ended December 31, 2020, a negative 18% of 2020 revenue.

Gross profit totaled $192.3 million, representing an increase of 8.0% year-over-year.

Gross margin decreased by 405 basis points to 66.7% from 70.7% year-over-year.

Net Loss Attributable to Common Stockholders:

Net loss attributable to common stockholders was $92.3 million, or a negative 32.0% of revenue, for the year ended December 31, 2022 as compared to a net loss attributable to common stockholders of $63.2 million, or a negative 25.1% of revenue, for the same period in 2021.

Non-GAAP Adjusted EBITDA:

Non-GAAP Adjusted EBITDA loss was $43.4 million, or a negative 15.0% of revenue, for the year ended December 31, 2022 as compared to a non-GAAP Adjusted EBITDA loss of $36.5 million, or a negative 14.5% of revenue, for the same period in 2021.

Active Buyers and Orders:

Total 2021 Active Buyers of 1.69 million and Orders of 5.3 million grew 36% and 34%, respectively, compared to 2020.

Active Buyers totaled 1.65 million and Orders totaled 6.51 million in 2022, representing a decline of 2.4% and growth of 22.1%, respectively, compared to the prior year.

Key Financial and Operating Metrics

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These key financial and operating metrics are set forth below for the periods presented.

Year Ended December 31, % Change

2021 2020 2019 2021 vs 2020 2020 vs 2019

(in thousands)

Year Ended December 31,

2022 2021 Change 2021 2020 Change

(in thousands, except percentages)

Active Buyers (as of period end) 1,651 1,691 (2.4) % 1,691 1,240 36.4 %

Orders 6,507 5,328 22.1 % 5,328 3,965 34.4 %

Net loss $ (63,176) $ (47,877) $ (38,197) 32 % 25 %

Net loss margin (25) % (26) % (23) % 1 % (3) %

Adjusted EBITDA loss (1)

$ (36,506) $ (33,398) $ (24,343) 9 % 37 %

Adjusted EBITDA margin (14) % (18) % (15) % 4 % (3) %

(1) See below for a reconciliation of Adjusted EBITDA to net loss.

Total revenue $ 288,379 $ 251,792 14.5 % $ 251,792 $ 186,015 35.4 %

Gross profit $ 192,338 $ 178,132 8.0 % $ 178,132 $ 128,148 39.0 %

Gross margin 66.7 % 70.7 % 70.7 % 68.9 %

Net loss attributable to common stockholders $ (92,284) $ (63,176) 46.1 % $ (63,176) $ (47,877) 32.0 %

Net loss attributable to common stockholders margin (32.0) % (25.1) % (25.1) % (25.7) %

Non-GAAP Adjusted EBITDA loss(1) $ (43,388) $ (36,506) 18.9 % $ (36,506) $ (33,398) 9.3 %

Non-GAAP Adjusted EBITDA loss margin (15.0) % (14.5) % (14.5) % (18.0) %

(1) Adjusted EBITDA is a non-GAAP measure which may not be comparable to similarly-titled measures used by other companies.

See below for a reconciliation of Adjusted EBITDA loss to net loss attributable to common stockholders.

Active Buyers

An Active Buyer is a thredUP buyer who has made at least one purchase in the last twelve months.

A thredUP buyer is a customer who has created an account in our marketplace.

A thredUP buyer is identified by a unique email address and a single person could have multiple thredUP accounts and count as multiple Active Buyers.

The number of Active Buyers is a key driver of revenue for our marketplace and we expect the number of Active Buyers to increase over time.

Orders means the total number of orders placed by buyers across our marketplace, including through our RaaS clients, in a given period, net of cancellations.

A thredUP buyer is a customer who has created an account or purchased in our marketplaces, including through our RaaS clients, and is identified by a unique email address.

A single person could have multiple thredUP accounts and count as multiple Active Buyers.

The number of Active Buyers is a key driver of revenue for our marketplaces.

Orders means the total number of orders placed by buyers across our marketplaces, including through our RaaS clients, in a given period, net of cancellations.

We expect Orders to increase over time.

Adjusted EBITDA

Adjusted EBITDA means net loss adjusted to exclude, where applicable in a given period, depreciation and amortization, stock-based compensation expense, acquisition and offering related expenses, interest expense, change in fair value of convertible preferred stock warrant liability, loss on extinguishment of debt, and provision for income taxes.

We use Adjusted EBITDA, a Non-GAAP metric,

to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes.

We believe that Adjusted EBITDA, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

The following table provides a reconciliation of net loss to Adjusted EBITDA (in thousands):

Non-GAAP Financial Metrics

Non-GAAP Adjusted EBITDA

Non-GAAP Adjusted EBITDA loss means net loss attributable to common stockholders adjusted to exclude, where applicable in a given period, stock-based compensation expense, depreciation and amortization, impairment of non-marketable equity investment, restructuring charges, interest expense, acquisition-related expenses, provision for income taxes, change in fair value of convertible preferred stock warrant liability.

We use Adjusted EBITDA loss, a non-GAAP metric, to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes.

We believe that non-GAAP Adjusted EBITDA loss, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

The following table provides a reconciliation of GAAP net loss attributable to common stockholders to non-GAAP Adjusted EBITDA loss:

Year Ended December 31,

2022 2021 2020

Adjusted EBITDA Reconciliation:

GAAP Net loss $ (63,176) $ (47,877) $ (38,197)

Depreciation and amortization 9,155 5,581 4,274

(in thousands)

GAAP net loss attributable to common stockholders, as reported $ (92,284) $ (63,176) $ (47,877)

Stock-based compensation expense 26,817 12,959 7,336

Acquisition and offering related expenses 1,271 — —

Depreciation and amortization 14,033 9,155 5,581

Impairment of non-marketable equity investment 3,750 — —

Restructuring charges 3,182 — —

Interest expense 805 2,275 1,305

Change in fair value of convertible preferred stock warrant liability 930 201 6

Loss on extinguishment of debt — — 432

Acquisition and offering-related expenses 274 1,271 —

Provision for income taxes 35 80 56

Non-GAAP Adjusted EBITDA $ (36,506) $ (33,398) $ (24,343)

Components of Results of Operations

Change in fair value of convertible preferred stock warrant liability — 930 201

Non-GAAP Adjusted EBITDA loss $ (43,388) $ (36,506) $ (33,398)

Our revenue is comprised of consignment revenue and product revenue.

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Sales, General and Administrative

Sales, general and administrative expense consists of personnel costs for employees involved in general corporate functions, including accounting, finance, tax, legal and people services, customer service, and retail stores.

Sales, general and administrative also includes payment processing fees, professional fees and allocation of corporate facilities and information technology costs such as equipment, depreciation and rent.

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While these expenses may vary from period to period as a percentage of revenue, we expect them to increase in absolute dollars and decrease as a percentage of revenue over the longer term.

Interest expense

In 2019, we entered into a loan and security agreement with Western Alliance Bank.

As of December 31, 2021, we had borrowed $40.0 million under our loan and security agreement, with $36.0 million principal outstanding.

For the years ended December 31, 2021, 2020 and 2019, we recorded $2.3 million, $1.3 million and $1.4 million of interest expense, respectively.

Other income, net

Other income, net for the year ended December 31, 2021 is primarily comprised of claim proceeds for lost shipments, offset by change in preferred stock warrants.

Other income, net for the years ended December 31, 2020 and 2019 was immaterial.

Results of Operations

The results of operations presented below should be reviewed in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K:

Year Ended December 31,

2021 2020 2019

(in thousands, except per share data)

Consignment $ 186,114 $ 138,096 $ 97,763

Product 65,678 47,919 66,049

Total revenue 251,792 186,015 163,812

Cost of revenue:

Consignment 41,856 34,184 22,764

Product 31,804 23,683 28,544

Total cost of revenue 73,660 57,867 51,308

Gross profit 178,132 128,148 112,504

Operating expenses:

Operations, product and technology 128,079 101,408 82,078

Marketing 63,625 44,765 44,980

Sales, general and administrative 48,814 28,564 22,253

Total operating expenses 240,518 174,737 149,311

Operating loss (62,386) (46,589) (36,807)

Interest expense (2,275) (1,305) (1,428)

Other income, net 1,565 73 74

Loss before provision for income taxes (63,096) (47,821) (38,161)

Provision for income taxes 80 56 36

Net loss $ (63,176) $ (47,877) $ (38,197)

Net loss per share attributable to common stockholders, basic and diluted $ (0.82) $ (4.14) $ (3.72)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 77,092 11,565 10,265

Comparison of Years Ended December 31, 2021 and 2020

Other Expense (Income), Net

Other expense (income), net consists of non-operating income and expenses such as impairments of non-marketable equity investments, claim proceeds for lost shipments, and changes in the fair value of convertible preferred stock warrants.

Financial Results for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Year Ended December 31, Change

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Total revenue $ 288,379 $ 251,792 $ 36,587 14.5 %

Consignment revenue as a % of total revenue 74 % 74 %

Product revenue as a % of total revenue 26 % 26 %

The $65.8 million increase in total revenue represents a 35% increase in total revenue for the year ended December 31, 2021, as compared to the year ended December 31, 2020.

This increase was primarily attributable to a 34% increase in Orders and a 1% increase in revenue per Order over the same period.

The 34% increase in Orders was primarily driven by growth in Active Buyers of 36% over the same period mainly due to our increased marketing and advertising efforts and our expansion into Europe through the acquisition of Remix.

Consignment revenue as a percentage of total revenue 60.7 % 73.9 %

Product revenue as a percentage of total revenue 39.3 % 26.1 %

Total revenue increased $36.6 million, or 14.5%, for the year ended December 31, 2022 as compared to the same period in 2021.

The increase was attributable to a 22.1% increase in total Orders mainly due to the inclusion of our European operations beginning October 2021, which increased product revenue by $47.4 million.

This was partially offset by a $11.1 million decrease in consignment revenue primarily in our core marketplace.

We experienced slowing revenue and Order growth beginning in June 2022 and continuing into the second half of the year that was attributable to various factors including, but not limited to, general global economic uncertainty, rising interest rates, increased inflation, and weakening consumer discretionary spending, as well as excess inventory at retailers and brands leading to a highly promotional and competitive environment.

Cost of Revenue

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Gross profit $ 192,338 $ 178,132 $ 14,206 8.0 %

Gross profit margin 71 % 69 %

Cost of revenue as a % of total revenue 29 % 31 %

Cost of consignment revenue as a % of total cost of revenue 57 % 59 %

Cost of product revenue as a % of total cost of revenue 43 % 41 %

Total cost of revenue as a percentage of total revenue was 29% for the year ended December 31, 2021, a decrease of 200 basis points from 31% for the year ended December 31, 2020.

This increase in gross profit margin was primarily attributable to an increase in revenue and efficiencies in our shipping process.

However, we do expect cost of revenue to increase in absolute dollars and the resulting gross margin to decrease due to growth in the sales of our European operations, which are primarily product sales.

Consignment sales result in higher gross profit margin than product sales because revenue for consignment sales is recognized net of seller payouts, whereas, for product sales, seller payouts are recognized as a component of cost of revenue, leading to different gross margin profiles between consignment sales and product sales.

Gross margin 66.7 % 70.7 %

Gross margin was 66.7% and 70.7% for the years ended December 31, 2022 and 2021, respectively, or an unfavorable change of 400 basis points.

The decrease in gross margin for the year ended December 31, 2022 as compared to the same period in 2021 was due to the inclusion of operating results of our European operations from October 2021 onward.

Revenue from our European operations is derived from product sales with a lower gross margin.

Consignment sales have a higher gross margin than product sales but made up a smaller percentage of total revenue for the year ended December 31, 2022 as compared to the same period in 2021.

Revenue for consignment sales is recognized net of seller payouts and cost of items sold, whereas for product sales, seller payouts and cost of items sold are included as a component of cost of revenue.

Cost of Consignment Revenue

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Cost of consignment revenue $ 37,015 $ 41,856 $ (4,841) (11.6) %

$ 41,856 $ 34,184 $ 7,672 22 %

As a percent of consignment revenue 22 % 25 %

Consignment gross margin 78.8 % 77.5 %

The $7.7 million increase in cost of consignment revenue represents a 22% increase in the cost of consignment revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase in cost of consignment revenue for the year ended December 31, 2021 was primarily driven by higher consignment revenue and related costs outlined in the below table.

Consignment gross margin increased 300 basis points to 78% for the year ended December 31, 2021.

Consignment revenue growth outpaced the increase in outbound shipping and packaging costs due to increased revenue per order and efficiencies in our shipping process.

Year Ended December 31, Change

2021 2020 Amount %

(in thousands, except percentages)

Outbound shipping $ 30,255 $ 24,593 $ 5,662 23 %

Direct labor 8,473 6,962 1,511 22 %

Packaging 2,514 2,259 255 11 %

Other 614 370 244 66 %

Total cost of consignment revenue $ 41,856 $ 34,184 $ 7,672 22 %

Consignment gross margin was 78.8% and 77.5% for the years ended December 31, 2022 and 2021, respectively, or a favorable change of 130 basis points.

The increase in consignment gross margin for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to a favorable impact of outbound shipping as a result of order consolidation of 240 basis points, partially offset by an unfavorable impact of direct labor of 60 basis points and an unfavorable impact of packaging and other costs of 50 basis points.

Cost of Product Revenue

Year Ended December 31,

Year Ended December 31, Change

2022 2021 Amount %

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Cost of product revenue $ 59,026 $ 31,804 $ 27,222 85.6 %

As a percent of product revenue 48 % 49 %

Product gross margin 47.9 % 51.6 %

The $8.1 million increase in cost of product revenue represents a 34% increase in the cost of product revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase in cost of product revenue in the year ended December 31, 2021 was primarily driven by higher product revenue and related costs outlined in the below table.

Product gross margin increased 100 basis points to 52% for the year ended December 31, 2021.

We expect cost of product revenue to increase in absolute dollar value and the resulting gross margin to decrease due to growth in the sales of our European operations, which are primarily product sales.

Product gross margin was 47.9% and 51.6% for the years ended December 31, 2022 and 2021, or an unfavorable change of 370 basis points.

The decrease in product gross margin for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to a net unfavorable impact of 800 basis points from including our European operations from October 2021 onward, which have a lower product gross margin, and an unfavorable impact of direct labor and packaging of 80 basis points, partially offset by a favorable impact of inventory costs of 280 basis points and a favorable impact of outbound shipping of 230 basis points.

Operations, Product and Technology

Year Ended December 31, Change

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(in thousands, except percentages)

Inventory costs $ 20,707 $ 13,036 $ 7,671 59 %

Outbound shipping 8,317 7,730 587 8 %

Direct labor 2,113 2,169 (56) (3) %

Packaging 667 748 (81) (11) %

Total cost of product revenue $ 31,804 $ 23,683 $ 8,121 34 %

Operating Expenses

Year Ended December 31,

Operations, product and technology $ 155,642 $ 128,079 $ 27,563 21.5 %

Operations, product and technology as a percentage of total revenue 54.0 % 50.9 %

The $27.6 million increase in operations, product and technology expenses for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to a $14.3 million increase in personnel-related costs resulting from the inclusion of our European operations from October 2021 onward, increases in employee salaries, wages and stock-based compensation, expenses associated with our distribution network, and restructuring charges;

an $8.6 million increase in facilities, technology and other allocated costs resulting from the expansion of our distribution network, the inclusion of our European operations and higher technology and other costs;

a $3.5 million increase in inbound shipping;

and $1.1 million in amortization of acquired developed technology.

Year Ended December 31, Change

2022 2021 Amount %

(in thousands, except percentages)

Operations, product and technology $ 128,079 $ 101,408 $ 26,671 26 %

Marketing $ 64,369 $ 63,625 $ 744 1.2 %

Marketing as a percentage of total revenue 22.3 % 25.3 %

The $0.7 million increase in marketing expenses for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to a $4.0 million increase in personnel-related costs related to salaries, stock-based compensation and other expenses resulting from the inclusion of our European operations from October 2021 onward;

a $1.3 million increase in facilities, technology and allocated costs;

and a $0.3 million increase in professional services;

partially offset by a $4.8 million decrease in costs of lead generation, affiliates and partnerships, and advertising.

Sales, General and Administrative

Total Total operating expenses $ 240,518 $ 174,737 $ 65,781 38 %

Operations, product and technology as a % of total revenue 51 % 55 %

Marketing as a % of total revenue 25 % 24 %

Sales, general and administrative as a % of total revenue 19 % 15 %

Operating expenses increased $65.8 million, or 38%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Gross profit increased $50.0 million, or 39%, in the same period.

Operating expenses increased as we continue to invest in the expansion of distribution center processing capacity, marketing efforts, and infrastructure to support being a public company, and expansion into Europe through the acquisition of Remix.

Results by operating expenses line item are discussed below.

Operations, Product and Technology

Year Ended December 31,

2021 2020 Amount %

(in thousands, except percentages)

Personnel-related costs $ 82,896 $ 60,799 $ 22,097 36 %

Facilities and other allocated costs 26,088 23,335 2,753 12 %

Inbound shipping 18,007 15,782 2,225 14 %

Other 1,088 1,492 (404) (27) %

Total operations, product and technology expenses $ 128,079 $ 101,408 $ 26,671 26 %

Operations, product and technology as % of total revenue 51 % 55 %

Personnel-related costs were $82.9 million for the year ended December 31, 2021, which increased by 36% from $60.8 million for the year ended December 31, 2020 due to a 35% increase in the average headcount for operations, research and development, including growth in headcount from the acquisition of Remix.

There was an increase in compensation cost at distribution centers primarily to attract and retain processing center staff in order to support our distribution center operations growth.

Facilities and other allocated costs were $26.1 million for the year ended December 31, 2021, which increased by 12% from $23.3 million for the year ended December 31, 2020.

The increase was primarily due to the addition of our new Georgia distribution center in June 2020.

Inbound shipping costs were $18.0 million for the year ended December 31, 2021, which increased by 14% from $15.8 million for the year ended December 31, 2020.

The increase was primarily due to growth in items per bag and higher shipping rates.

We lifted restrictions on the ability of sellers to order Clean Out Kits at the end of February 2021, resulting in more Clean Out Kits being received.

Year Ended December 31,

Year Ended December 31, Change

2022 2021 Amount %

(in thousands, except percentages)

Marketing and advertising costs $ 54,053 $ 38,398 $ 15,655 41 %

Personnel-related costs

6,628 4,762 1,866 39 %

Facilities and technology allocated costs 1,396 949 447 47 %

Professional Services 824 160 664 415 %

Other 724 496 228 46 %

Total marketing expense $ 63,625 $ 44,765 $ 18,860 42 %

Marketing as % of total revenue 25 % 24 %

Marketing costs increased 42% for the year ended December 31, 2021 compared to 39% gross profit growth.

Marketing and advertising costs were $54.1 million for the year ended December 31, 2021, which increased by 41% from $38.4 million for the year ended December 31, 2020.

This increase was primarily due to higher customer retention and goody box marketing spend as well as higher CPM (cost per thousand impression).

Personnel-related costs were $6.6 million for the year ended December 31, 2021, which increased by 39% from $4.8 million for the year ended December 31, 2020.

The $0.3 million increase was due to non-cash stock-based compensation.

Facilities and technology allocated costs were $1.4 million for the year ended December 31, 2021, which increased from $0.9 million for the year ended December 31, 2020.

These increases were primarily due to a 19% average headcount increase and higher software, support, computer equipment depreciation and other costs.

Professional services costs were $0.8 million for the year ended December 31, 2021, which increased by 415% from $0.2 million for the year ended December 31, 2020.

The increase was mainly due to higher spend in consulting services to support marketing initiatives, including our growing RaaS business.

Sales, general and administrative $ 61,814 $ 48,814 $ 13,000 26.6 %

Year Ended December 31,

2021 2020 Amount %

(in thousands, except percentages)

Personnel-related costs $ 23,505 $ 14,061 $ 9,444 67 %

Professional services 8,322 4,811 3,511 73 %

Payment processing fees 8,107 6,264 1,843 29 %

Other 8,880 3,428 5,452 159 %

Total sales, general and administrative costs $ 48,814 $ 28,564 $ 20,250 71 %

Sales, general and administrative as % of total revenue 19 % 15 %

Sales, general and administrative expense increased 71% for the year ended December 31, 2021, compared to 39% gross profit growth.

This increase was mainly the result of investments, primarily in personnel and professional services costs, made towards scaling our business and improving our processes as we became a public company.

Personnel-related costs were $23.5 million for the year ended December 31, 2021, which increased from $14.1 million for the year ended December 31, 2020.

The increase was primarily due to 35% average headcount increase to support growth in our corporate functions and other costs related to being a public company.

In addition, non-cash stock-based compensation increased by $4.8 million for the year ended December 31, 2021.

Professional services costs were $8.3 million for the year ended December 31, 2021, increased 73% from $4.8 million for the year ended December 31, 2020.

The increase was mainly due to an increase in accounting, consulting and legal fees of $3.5 million for the year ended December 31, 2021 related to being a public company and the acquisition of Remix.

Payment processing fees were $8.1 million for the year ended December 31, 2021, which increased 29% from $6.3 million for the year ended December 31, 2020.

The increase was mainly due to an increase in overall sales.

Other expenses were $8.9 million for the year ended December 31, 2021, an increase from $3.4 million for the year ended December 31, 2020.

This increase was primarily due to a $4.1 million increase in insurance expenses, mainly related to higher insurance premiums associated with our public company status, and a $1.3 million increase in software expenses to support and scale our growing business.

Sales, general and administrative as a percentage of total revenue 21.4 % 19.4 %

The $13.0 million increase in sales, general, and administrative expenses for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to a $13.8 million increase in personnel-related costs related to salaries, stock-based compensation, restructuring, our European operations and other personnel costs;

and a $1.0 million increase in facilities, technology and allocated costs;

partially offset by a $1.1 million decrease in professional services and $0.7 million of other corporate expenses.

Interest Expense

The $1.5 million decrease in interest expense for the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to an increase in amounts capitalized as part of an asset and reclassified from interest expense.

Other Expense (Income), Net

The $1.9 million of other expense, net for the year ended December 31, 2022 was primarily due to an impairment charge related to our non-marketable equity investment, partially offset by claim proceeds for lost shipments.

The $1.6 million of other income, net for the year ended December 31, 2021 was primarily comprised of claim proceeds for lost shipments, offset by change in preferred stock warrants.

Liquidity and Capital Resources

As of December 31, 2021, we had cash, cash equivalents and short-term marketable securities of $205.8 million and an accumulated deficit of $315.3 million.

Since our founding, we have generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt.

Additionally, we currently have a term loan facility with Western Alliance Bank .

In March 2021 , we completed our IPO for aggregate net proceeds of $175.5 million, net of offering costs, underwriter discounts and commissions of $17.7 million.

In August 2021, we completed our follow-on public offering and sold an aggregate of two million shares.

The aggregate net proceeds were $45.5 million after deducting $3.3 million of underwriter discounts and commissions and offering costs .

We expect operating losses and negative cash flows from operations to continue into the foreseeable future as we continue to invest in growing our business and expanding our infrastructure.

Our primary use of cash includes operating costs such as distribution center operating costs and product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth.

Additionally, our primary capital expenditures are related to th e set-up, automation and expansion of our distribution centers.

Based upon our current operating plans, we believe that our existing cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months.

We have historically generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt.

As of December 31, 2022, we had cash, cash equivalents and short-term marketable securities of $104.9 million.

Additionally, we have a term loan facility (“Term Loan”) under which $38.0 million remained available to be drawn as of December 31, 2022, and we were in full compliance with our debt covenants under the Term Loan as of that date.

See Note 9, Long-Term Debt , to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for a further discussion on our Term Loan.

We expect operating losses and negative cash flows from operations to continue in the near term as we continue to invest in growing our business and expanding our infrastructure.

Our primary use of cash includes operating costs such as distribution network spend, product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth.

Additionally, our primary capital expenditures are related to the set-up, expansion and/or automation of our distribution network and may be accelerated or delayed based on our operating position and business needs.

Based upon our current operating plans, we believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient to meet our short- and long-term capital requirements and we do not anticipate expanding our distribution network to include additional locations in the near term.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements will depend on many factors, including, but not limited to the timing of our increased distribution center automation and expansion plans to support planned revenue growth, the expansion of sales and marketing activities, the potential introduction of new offerings and new RaaS clients, the continuing growth of our marketplace and overall economic conditions.

However, we expect that our capital expenditures will decline significantly in 2023 as we completed the first phase of our new distribution center in Texas.

We may seek additional equity or debt financing.

If we raise equity financing, our stockholders may experience significant dilution of their ownership interests.

If we conduct an additional debt financing, the terms of such debt financing may be similar or more restrictive than our current term loan facility and we would have additional debt service obligations.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be harmed.

See the section titled “Risk Factors—Risks Relating to Our Business and Industry—We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.”

See the section titled “Risk Factors—Risks Relating to Our Indebtedness and Liquidity—We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.”

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

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Financing activities (3,936) 228,960

Effect of exchange rate changes on cash and cash equivalents (64) —

Net increase (decrease) in cash, cash equivalents and restricted cash $ 24,301 $ (20,314)

Changes in Cash Flow from Operating Activities

For the year ended December 31, 2021, net cash used in operating activities was $35.0 million, which consisted of a net loss of $63.2 million, partially offset by non-cash charges of $28.4 million.

Operating cash flows from operating assets and liabilities was immaterial with increases in receivables, inventory and other assets, offset by increases in payables, seller payables and other liabilities.

For the year ended December 31, 2020, net cash used in operating activities was $19.1 million, which consisted of a net loss of $47.9 million, partially offset by non-cash adjustment of $17.5 million and a net change of $11.3 million in our operating assets and liabilities.

Changes in Cash Flow from Investing Activities

For the year ended December 31, 2021, net cash used in investing activities was $169.6 million, which was driven by $125.2 million in purchases of marketable securities, $23.6 million for the acquisition of Remix net of Remix cash acquired, $19.8 million of capital expenditures primarily for our distribution centers and a $3.8 million equity investment, partially offset by $2.8 million maturities of marketable securities.

For the year ended December 31, 2020, net cash used in investing activities was $19.4 million, which consisted of capital expenditures primarily for our distribution centers.

Changes in Cash Flow from Financing Activities

For the year ended December 31, 2021, net cash provided by financing activities was $229.0 million, which consisted of $226.9 million in net proceeds from equity offerings, $5.2 million in proceeds from exercise of common stock options and withholding taxes for the net share settlement of restricted stock units, $4.6 million in proceeds from debt issuance, and $1.0 million in proceeds from employee purchases of common stock under the ESPP.

These proceeds were partially offset by $4.7 million in payment of costs for equity offerings, and $4.0 million in repayment of debt.

For the year ended December 31, 2020, net cash provided by financing activities was $18.2 million, which consisted primarily of debt financing proceeds of $18.4 million.

Contractual Obligations and Commitments

Effect of exchange rate changes on cash, cash equivalents and restricted cash (672) (64)

Net change in cash, cash equivalents and restricted cash $ (47,789) $ 24,301

Changes in Cash Flows from Operating Activities

Net cash used in operating activities increased $17.1 million, or 48.8%, for the year ended December 31, 2022 as compared to the same period in 2021.

The increase in net cash used in operating activities for the year ended December 31, 2022 was due to $12.5 million of unfavorable changes in operating assets and liabilities and a $4.6 million increase in net loss attributable to common stockholders excluding non-cash and reconciling items disclosed within our consolidated statement of cash flows.

The $12.5 million change in operating assets and liabilities was primarily the result of unfavorable changes in seller payable, inventory, accrued and other current liabilities, and accounts payable, partially offset by favorable changes in other current and non-current assets and operating lease liabilities.

The $4.6 million increase in net loss attributable to common stockholders excluding non-cash and reconciling items was primarily driven by lower gross margin and higher operating expenses.

Changes in Cash Flows from Investing Activities

Net cash provided by investing activities was $8.9 million for the year ended December 31, 2022 compared to net cash used in investing activities of $169.6 million for the same period in 2021.

The decrease in net cash used in investing activities for the year ended December 31, 2022 was primarily due a $174.6 million decrease in net cash used to purchase marketable securities and a $23.6 million decrease in acquisitions, partially offset by a $23.4 million net increase in purchases of property and equipment.

Changes in Cash Flows from Financing Activities

Net cash used in financing activities increased $232.9 million, or 101.7%, for the year ended December 31, 2022 as compared to the same period in 2021.

The increase in net cash used in financing activities for the year ended December 31, 2022 was primarily due to a $222.2 million decrease in net proceeds from the IPO and secondary offerings in 2021, a $6.6 million increase in net repayments of debt, and a $4.2 million decrease in net proceeds from the exercise of employee stock awards.

Contractual Obligations

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.

As of December 31, 2022, the value of our non-cancellable unconditional purchase obligations was $5.7 million.

See Note 12 of our Notes to Consolidated Financial Statements for additional information regarding our purchase obligations.

We lease office spaces and distribution centers under non-cancellable operating lease arrangements that expire at various dates through 2032.

As of December 31, 2021, the value of our obligations under operating leases was $60.9 million.

See Note 8 of our Notes to Consolidated Financial Statements for additional information regarding our lease obligations.

We have a loan and security agreement with Western Alliance Bank (“Bank”).

As of December 31, 2021, we had borrowed $40.0 million under our loan and security agreement, with $36.0 million principal outstanding as of such date, which mature at various dates through 2024.

See Note 9 of our Notes to Consolidated Financial Statements for additional information regarding our debt obligations .

See Note 12, Commitments and Contingencies , to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for additional information regarding our purchase obligations.

For a further discussion on our operating lease commitments and long-term debt as of December 31, 2022, see the sections above as well as Note 8, Leases , and Note 9, Long-Term Debt , to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be

provided by us or from intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material.

Use of Estimates

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year.

We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses.

Actual results could differ materially from those estimates.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

11 unchanged sentences

Sales tax assessed by governmental authorities is excluded from revenue.

Loyalty points and rewards are accounted for as separate performance obligations and accrued as deferred revenue in the amount of the transaction price allocated to the points and rewards.

The allocated transaction price is based on the estimated fair value per point, net of breakage.

Breakage is estimated based on our historical redemption rates.

Revenue is recognized when the loyalty rewards are redeemed or expire.

For gift cards and site credits, we recognize breakage revenue when we determine that the redemption of gift cards and site credits is remote.

Stock-Based Compensation

5 unchanged sentences

The Black-Scholes Model considers several variables and assumptions in estimating the fair value of stock-based awards.

These variables include per share fair value of the underlying common stock,

expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term.

These variables include per share fair value of the underlying common stock, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term.

For all stock options granted to date, we calculated the expected term using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).

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Goodwill is not subject to amortization but will be reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, refer to Note 2 to our consolidated financial statements titled “Significant Accounting Policies.”

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the JOBS Act.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“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.

1 unchanged sentence

Accordingly, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

New Accounting Pronouncements

See discussion under Note 2, Significant Accounting Policies , to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for information on new accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis