# TheRealReal, Inc. (REAL) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TheRealReal, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1573221/000157322123000022/real-20221231.htm
Accession: 0001573221-23-000022
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/REAL/
All MD&A years: /company/REAL/mda/
Previous year: /company/REAL/mda/fy2021/ (FY 2021)
Next year: /company/REAL/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information included in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the section titled “Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

We are the world’s largest online marketplace for authenticated, resale luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply from consignors and creates a trusted, curated online marketplace for buyers globally. Since our inception in 2011, we have cultivated a loyal and engaged consignor and buyer base through our investments in our technology platform, logistics infrastructure and people. We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers. We offer products across multiple categories including women’s and men’s fashion, fine jewelry and watches. We have built a vibrant online marketplace that we believe expands the overall luxury market, promotes the recirculation of luxury goods and contributes to a more sustainable world.

We have transformed the luxury consignment experience by removing the friction and pain points inherent in the traditional consignment model. For consignors, we offer concierge at-home consultation and pickup, and meetings with consignors via online face-to-face platforms, or virtual consultations. Consignors may also drop off items at our luxury consignment offices. Our Flagship and Neighborhood Stores provide an alternative location to drop off consigned items and an opportunity to interact with our authentication experts. Consignors may also utilize our complimentary shipping directly to our authentication centers. We leverage our proprietary transactional database and market insights from approximately 30.9 million item sales since our inception to deliver optimal pricing and rapid sell-through. For buyers, we offer highly coveted and exclusive authenticated pre-owned luxury goods at attractive values, as well as a high-quality experience befitting the products we offer. Our online marketplace is powered by our proprietary technology platform, including consumer facing applications and purpose-built software that supports our complex, single-SKU inventory management system.

The substantial majority of our revenue is generated by consignment sales. We also generate revenue from other services and direct sales.

•Consignment revenue. When we sell goods through our online marketplace or retail stores on behalf of our consignors, we retain a percentage of the proceeds, which we refer to as our take rate. Take rates vary depending on the total value of goods sold through our online marketplace on behalf of a particular consignor as well as the category and price point of the items. In 2022 and 2021, our take rate on consigned goods was 36.0% and 34.7% respectively. The increase in our take rate was due to the larger sales mix of higher take rate categories such as women's apparel. Additionally, we earn revenue from our subscription program, First Look, in which we offer buyers early access to the items we sell in exchange for a monthly fee.

•Direct revenue. When we accept out of policy returns from buyers, or when we make direct purchases from businesses and consignors, we take ownership of goods and retain 100% of the proceeds when the goods subsequently sell through our online marketplace or retail stores.

•Shipping services revenue. When we deliver purchased items to our buyers, we charge shipping fees to buyers for the outbound shipping and handling services. We also generate shipping services revenue from the shipping fees for consigned products returned by our buyers to us within policy. Shipping services revenue excludes the effect of buyer incentives and sales tax.

We generate revenue from orders processed through our website, mobile app and retail stores. Our omni-channel experience enables buyers to purchase anytime and anywhere. We have a global base of more than 31.3 million members as of December 31, 2022. We count as a member any user who has registered an email address on our website or downloaded our mobile app, thereby agreeing to our terms of service.

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Through December 31, 2022, we have cumulatively paid approximately $3.2 billion in commissions to our consignors. Our GMV increased to $1.8 billion in 2022 from $1.5 billion in 2021. Our AOV decreased to $483 in 2022 from $497 in 2021. In 2022 and 2021, our total revenue was $603.5 million and $467.7 million, respectively, representing an increase of 29% in 2022. In 2022 and 2021, our gross profit was $348.7 million and $273.5 million, respectively, representing an increase of 28% in 2022. 

Impact of COVID-19 and Macroeconomic Conditions on Our Business

The ongoing impact of the COVID-19 pandemic continues to affect our business and results of operations, although to a lesser extent than the prior years. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers. Macroeconomic uncertainty and inflationary pressure have and may in the future drive lower demand for the end customer and increase costs of labor and shipping.

Recent Business Developments

On February 15, 2023, we announced a savings plan intended to reduce operating expenses by (a) terminating approximately 230 employees (the “RIF”), representing approximately 7% of our workforce, and (b) reducing our real estate presence (the "Real Estate Reduction Plan") by (i) closing two flagship stores (San Francisco, California and Chicago, Illinois), two neighborhood stores (Atlanta, Georgia and Austin, Texas), and two luxury consignment offices (Miami, Florida and Washington, D.C.), including any co-located logistics hubs, and (ii) reducing our office spaces in San Francisco, California and New York, New York. We will continue to evaluate our real estate presence as we deem appropriate to create efficiencies and to address trends in the marketplace and macroeconomic factors.

We may not be able to fully realize the cost savings and benefits initially anticipated from the RIF or Real Estate Reduction Plan, and the expected costs may be greater than expected. See “Risk Factors—Risks Related to Our Business and Industry— Our reduction in workforce and the associated real estate reduction plan may not result in anticipated savings, could result in total costs and expenses that are greater than expected and could disrupt our business.”

Other Factors Affecting Our Performance

Other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic and macroeconomic conditions, impact our business. To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we focus on the factors described below. While each of these factors presents significant opportunity for our business, collectively, they also pose important challenges that we must successfully address in order to sustain our growth, improve our operating results and achieve and maintain our profitability.

Consignors and Buyers

Consignor growth and retention. We grow our sales by increasing the supply of luxury goods offered through our consignment online marketplace. We grow our supply both by attracting new consignors and by creating lasting engagement with existing consignors. We generate leads for new consignors principally through our advertising activity. We convert those leads into active consignors through the activities of our sales professionals, who are trained and incentivized to identify and source high-quality, coveted luxury goods from consignors. Our sales professionals form a consultative relationship with consignors and deliver a high-quality, rapid consigning experience. Our existing relationships with consignors allow us to unlock valuable supply across multiple categories, including women’s fashion, men’s fashion, and jewelry and watches.

We measure the ratio of demand versus supply in a given period, which we refer to as our online marketplace sell-through ratio. Sell-through ratio is defined as GMV in the period divided by the aggregate initial value of items added to our online marketplace in the period. In 2022 and 2021, our marketplace sell-through ratios were 91% and 94%, respectively.

Our growth has been driven in significant part by repeat sales by existing consignors concurrent with growth of our consignor base. In 2022 and 2021, repeat consignors accounted for approximately 83% and 84% of GMV, respectively.

Buyer growth and retention. We grow our business by attracting and retaining buyers. We attract and retain buyers by offering highly coveted, authenticated, pre-owned luxury goods at attractive values and delivering a high-quality, luxury experience. We measure our success in attracting and retaining buyers by tracking buyer satisfaction and purchasing

activity over time. We have experienced higher than average buyer satisfaction, as evidenced by our buyer net promoter score of 55 in 2022, and compared to our online shopping industry average of 41 according to NICE Satmetrix U.S. Consumer 2022 data. If we fail to continue to attract and retain our buyer base to our online marketplace, our operating results would be adversely affected.

The first graph below shows trends in purchasing activity for buyer cohorts for each year beginning in 2016. Each cohort represents all buyers that first purchased across our online marketplace in the designated year and the aggregate GMV purchased by such cohort for the initial year and each year thereafter. As illustrated in the first graph below, we have seen consistent retention of buyer activity across cohorts through 2022. In 2020, buyer retention was impacted by the adverse impacts of COVID-19 on supply, and as a result, GMV. The second graph below shows the percentage of GMV in each year from our repeat buyers. GMV from repeat buyers reflects purchases made after their initial purchase month.

We believe there is substantial opportunity to grow our business by having buyers also become consignors and vice versa. As of December 31, 2022, 15% of our buyers had become consignors and 50% of our consignors had become buyers. The graph below shows the percentage of GMV in each year from buyers who have participated as both buyers and consignors on our online marketplace. GMV attributable to consigning activity of such buyers is not included.

Buyer acquisition cost. Our financial performance depends on effectively managing the expenses we incur to attract and retain buyers. We closely monitor our efficiency in acquiring new buyers. Our buyer acquisition cost (“BAC”) for a given period is comprised of our total advertising spend for acquiring both buyers and consignors, which is principally the cost of television, digital and direct mail advertising, divided by the number of buyers acquired in that period. We adjust or re-allocate our advertising in real-time to optimize our spend across channels, buyer demographics and geographies to improve our return on advertising spend. With the exception of 2020 due to the adverse impacts of COVID-19 on our business, our BAC has declined over time driven by improving acquisition efficiencies.

Scaling operations and technology. To support the future growth of our business, we continue to invest in physical infrastructure, talent and technology. We principally conduct our intake, authentication, merchandising and fulfillment operations in our leased authentication centers located in Arizona and New Jersey comprising an aggregate of approximately 1.4 million square feet of space. We also operate retail stores in several geographies. In addition to scaling our physical infrastructure, growing our single-SKU business operations require that we attract, train and retain highly-skilled personnel for purposes of authentication, copywriting, merchandising, pricing and fulfilling orders. We have invested substantially in technology to automate our operations and support growth, including proprietary machine learning technology to support efficiency and quality. We continue to strategically invest in technology, as innovation positions us to scale and support growth into the future.

Seasonality. Historically, we have observed trends in seasonality of supply and demand in our business. Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter. As a result of this seasonality, we typically see stronger AOV and more rapid sell-through in the fourth quarter. We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes from increased demand.

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Key Financial and Operating Metrics

The key operating and financial metrics that we use to assess the performance of our business are set forth below for 2022, 2021, and 2020.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(In thousands, except AOV and percentages)"],["GMV","$","1,815,983","","","$","1,482,432","","","$","986,951"],["NMV","$","1,335,506","","","$","1,092,353","","","$","736,872"],["Consignment revenue","$","384,979","","","$","302,221","","","$","213,312"],["Direct revenue","$","158,726","","","$","120,844","","","$","52,623"],["Shipping services revenue","$","59,788","","","$","44,627","","","$","34,014"],["Number of orders","3,757","","","2,981","","","2,233"],["Take rate","36.0","%","","34.7","%","","35.7","%"],["Active buyers","998","","","797","","","649"],["AOV","$","483","","","$","497","","","$","442"],["% of GMV from repeat buyers","84.0","%","","83.9","%","","83.0","%"]]
[[/GREPCENT_TABLE]]

GMV

GMV represents the total amount paid for goods across our online marketplace in a given period. We do not reduce GMV to reflect product returns or order cancellations, which totaled 26.5%, 26.3%, and 25.3% of GMV in 2022, 2021, and 2020, respectively. GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of buyer incentives, shipping fees and sales tax. Platform-wide discounts are made available to all buyers on the online marketplace, and impact commissions paid to consignors. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on our platform. In addition to revenue, we believe this is an important measure of the scale and growth of our online marketplace and a key indicator of the health of our consignor ecosystem. We monitor trends in GMV to inform budgeting and operational decisions to support and promote growth in our business and to monitor our success in adapting our business to meet the needs of our consignors and buyers. While GMV is the primary driver of our revenue, it is not a proxy for revenue or revenue growth. See Note 2—Summary of Significant Accounting Policies—Revenue Recognition—Consignment Revenue.

NMV

Net merchandise value ("NMV") represents the value of sales from both consigned goods and our inventory net of platform-wide discounts less product returns and order cancellations and excludes the effect of buyer incentives, shipping fees and sales tax. We believe NMV is a supplemental measure of the scale and growth of our online marketplace. Like GMV, NMV is not a proxy for revenue or revenue growth.

Consignment Revenue

Consignment revenue is generated from the sale of pre-owned luxury goods through our online marketplace and retail stores on behalf of consignors. We retain a portion of the proceeds received, which we refer to as our take rate. We recognize consignment revenue, net of allowances for product returns, order cancellations, buyer incentives and adjustments. We also generate revenue from subscription fees paid by buyers for early access to products.

Direct Revenue

Direct revenue is generated from the sales of company-owned inventory. We recognize direct revenue upon shipment of the goods sold, based on the gross purchase price net of allowances for product returns, buyer incentives and adjustments.

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Shipping Services Revenue

Shipping services revenue is generated from shipping fees we charge to buyers for outbound shipping and handling activities related to delivering purchased items to our buyers. We also generate shipping services revenue from the shipping fees for consigned products returned by our buyers to us within policy. We recognize shipping services revenue over time as the shipping activity occurs. Shipping services revenue excludes the effect of buyer incentives and sales tax.

Number of Orders

Number of orders means the total number of orders placed across our online marketplace and retail stores in a given period. We do not reduce number of orders to reflect product returns or order cancellations.

Take Rate

Take rate is a key driver of our revenue and provides comparability to other marketplaces. The numerator used to calculate our take rate is equal to net consignment sales and the denominator is equal to the numerator plus consignor commissions. Net consignment sales represent the value of sales from consigned goods net of platform-wide discounts less consignor commission, product returns and order cancellations. We exclude direct revenue from our calculation of take rate because direct revenue represents the sale of inventory owned by us, which costs are included in cost of direct revenue. Our take rate reflects the high level of service that we provide to our consignors across multiple touch points and the consistently high velocity of sales for their goods. In November 2022, we updated our take rate structure with the goals of optimizing take rate, limiting consignment of lower value items, and increasing supply of higher value items. Previously, our take rate was primarily based on a tiered commission structure for consignors, where the more they sell the higher percent commission they earn. Consignors typically started at a 55% commission (which equals a 45% take rate for us) and could earn up to a 70% commission. In addition, there were commission exceptions from the tiered commission structure based on category and price point of the items.

Beginning in November 2022, the take rate structure is primarily based on the category and the price point of the sold items. For example, under the updated take rate structure, consignors can earn 20% commission on all sold items under $100, and up to 90% commission on watches sold for over $7,500. We launched a pricing tool for our consignors that provides detail on commission rates for specific categories and other aspects of the take rate structure. Consignors are eligible to receive additional commissions based on total net sales under an added tiered commission structure. Management assesses changes in take rates by monitoring the volume of GMV and take rate across each discrete commission grouping, encompassing commission tiers and exceptions.

Active Buyers

Active buyers include buyers who purchased goods through our online marketplace during the 12 months ended on the last day of the period presented, irrespective of returns or cancellations. We believe this metric reflects scale, brand awareness, buyer acquisition and engagement.

Average Order Value (“AOV”)

Average order value (“AOV”) means the average value of all orders placed across our online marketplace and retail stores, excluding the effect of buyer incentives, shipping fees and sales taxes. Our focus on luxury goods across multiple categories drives a consistently strong AOV. Our AOV reflects both the average price of items sold as well as the number of items per order. Our AOV is a key driver of our operating leverage.

Percent of GMV from Repeat Buyers

Repeat buyers represents buyers who made a purchase in the months subsequent to the month they made their initial purchase across our online marketplace and retail stores. GMV from repeat buyers reflects purchases made after their initial purchase month.

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Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure as an overall assessment of our performance, to evaluate the effectiveness of our business strategies and for business planning purposes. Adjusted EBITDA may not be comparable to similarly titled metrics of other companies.

Adjusted EBITDA means net loss before interest income, interest expense, other (income) expense net, provision for income taxes, and depreciation and amortization, further adjusted to exclude stock-based compensation, payroll taxes on employee stock transactions, restructuring charges, CEO transition costs, and certain one-time expenses. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we believe are not indicative of our core operating performance. Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA has certain limitations as the measure excludes the impact of certain expenses that are included in our statements of operations that are necessary to run our business and should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(In thousands)"],["Adjusted EBITDA Reconciliation:"],["Net loss","$","(196,445)","","","$","(236,107)","","","$","(175,832)"],["Add (deduct):"],["Depreciation and amortization","27,669","","","23,531","","","18,845"],["Interest income","(3,191)","","","(365)","","","(2,518)"],["Interest expense","10,472","","","21,531","","","5,264"],["Provision for income taxes","172","","","56","","","101"],["EBITDA","(161,323)","","","(191,354)","","","(154,140)"],["Stock-based compensation (1)","46,138","","","48,802","","","24,322"],["CEO separation benefits (2)","948","","","\u2014","","","\u2014"],["CEO transition costs (3)","1,551","","","\u2014","","","\u2014"],["Payroll taxes on employee stock transactions","451","","","1,168","","","\u2014"],["Legal fees reimbursement benefit (4)","(1,400)","","","(1,204)","","","\u2014"],["Legal settlements (5)","456","","","13,389","","","1,110"],["Restructuring charges (6)","896","","","2,314","","","514"],["Other (income) expense, net","(171)","","","(23)","","","169"],["Adjusted EBITDA","(112,454)","","","(126,908)","","","(128,025)"]]
[[/GREPCENT_TABLE]]

(1) The stock-based compensation expense for the year ended December 31, 2022 includes a one-time charge of $1.0 million related to the modification of certain equity awards pursuant to the terms of the transition and separation agreement entered into with our founder, Julie Wainwright, in connection with her resignation as Chief Executive Officer ("CEO") on June 6, 2022 (the "Separation Agreement").

(2) The separation benefit charges for the year ended December 31, 2022 consists of base salary, bonus and benefits for the 2022 fiscal year, as well as an additional twelve months of base salary and benefits payable to Julie Wainwright pursuant to the Separation Agreement. In addition, see footnote 1 for disclosure regarding the incremental stock-based compensation expense incurred in connection with the Separation Agreement.

(3) The CEO transition charges for the year ended December 31, 2022 consist of general and administrative fees, including legal and recruiting expenses, as well as retention bonuses for certain executives incurred in connection with our founder's resignation on June 6, 2022.

(4) During the year ended December 31, 2022, we received insurance reimbursement of $1.4 million related to a legal settlement expense. During the year ended December 31, 2021, we received insurance reimbursement of $4.3 million related to legal fees for a certain matter, of which $3.1 million were applied to legal expenses for the year ended December 31, 2021.

(5) The legal settlement charges for the year ended December 31, 2021 reflects legal settlement expenses arising from the settlement of a putative shareholder class action and derivative case.

(6) The restructuring charges for the year ended December 31, 2022 consists of employee severance payments and benefits. The restructuring charges for the year ended December 31, 2021 consist of the costs to transition operations from the Brisbane warehouse to our new Phoenix warehouse.

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Components of our Operating Results

Revenue

Our revenue is comprised of consignment revenue, direct revenue, and shipping services revenue.

•Consignment revenue. We generate the substantial majority of our revenue from the sale of pre-owned luxury goods through our online marketplace and retail stores on behalf of consignors. For consignment sales, we retain a percentage of the proceeds received, which we refer to as our take rate. We recognize consignment revenue, net of allowances for product returns, order cancellations, buyer incentives and adjustments. Additionally, we generate revenue from subscription fees paid by buyers for early access to products, but to date our subscription revenue has not been material.

•Direct revenue. We generate direct revenue from the sale of items that we own, which we refer to as our inventory. We generally acquire inventory when we accept out of policy returns from buyers, and when we make direct purchases from businesses and consignors. We recognize direct revenue upon shipment based on the gross purchase price paid by buyers for goods, net of allowances for product returns, buyer incentives and adjustments.

•Shipping services revenue. We generate shipping services revenue from the outbound shipping and handling fees we charge when delivering purchased items to our buyers. We also generate shipping services revenue from the shipping fees for consigned products returned by our buyers to us within policy. We recognize shipping services revenue over time as the shipping activity occurs. Shipping services revenue excludes the effect of buyer incentives and sales tax.

During the three months ended June 30, 2022, the Company changed its method of accounting for shipping and handling activities. Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2 " Change in Accounting Principle" to the financial statements included herein.

Cost of Revenue

Cost of consignment revenue consists of credit card fees, packaging, customer service personnel-related costs, website hosting services, and consignor inventory adjustments related to lost or damaged products. Cost of direct revenue consists of the cost of goods sold, credit card fees, packaging, customer service personnel-related costs, website hosting services, and inventory adjustments for lower of cost or net realizable value provisions and for lost or damaged products. Cost of shipping services revenue consists of the outbound shipping and handling costs to deliver purchased items to our buyers, the shipping costs for consigned products returned by our buyers to us within policy, and an allocation of the credit card fees associated with the shipping fee charged.

Marketing

Marketing expense comprises the cost of acquiring and retaining consignors and buyers, including the cost of television, digital and direct mail advertising. Marketing expense also includes personnel-related costs for employees engaged in these activities. We expect these expenses to continue to decrease as a percentage of revenue.

Operations and Technology

Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as our general information technology expense. Operations and technology expense also includes allocated facility and overhead costs, costs related to our retail stores, facility supplies, inbound consignment shipping costs, and depreciation of hardware and equipment, as well as research and development expense for technology associated with managing and improving our operations. We capitalize a portion of our proprietary software and technology development costs. As such, operations and technology expense also includes amortization of capitalized technology development costs. We expect operations and technology expense to increase in future periods to support our growth, including continuing to invest in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from year to year as a percentage of revenue, depending primarily upon when we choose to make more significant investments. We expect these expenses to continue to decrease as a percentage of revenue.

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Selling, General and Administrative

Selling, general and administrative expense is principally comprised of personnel-related costs for our sales professionals and employees involved in finance and administration. Selling, general and administrative expense also includes allocated facilities and overhead costs and professional services, including accounting and legal advisors. We expect these expenses to continue to decrease as a percentage of revenue.

Legal Settlement

Legal settlement expense primarily includes actual or estimated losses related to legal settlements when they become probable and estimable.

Provision for Income Taxes

Our provision for income taxes consists primarily of state minimum taxes in the United States. We have a full valuation allowance for our net deferred tax assets primarily consisting of net operating loss carryforwards, accruals and reserves, stock-based compensation, fixed assets, and other book-to-tax timing differences. We expect to maintain this full valuation allowance for the foreseeable future.

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Results of Operations

The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in the Annual Report. Except as described below, prior year comparisons for 2021 and 2020 are included 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 fiscal year ended December 31, 2021. However, during the three months ended June 30, 2022, the Company changed its accounting policy from those disclosed in the audited financial statements and related notes for the year ended December 31, 2021 related to shipping services revenue. Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2 "Change in Accounting Principle" to the financial statements included herein. Year-over-year discussion and analysis of consignment revenue, shipping services revenue, cost of consignment revenue and cost of shipping services revenue are included below for 2021 and 2020 on a reclassified basis. The following tables set forth our results of operations (in thousands) and such data as a percentage of revenue for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(In thousands)"],["Revenue:"],["Consignment revenue","$","384,979","","","$","302,221","","","$","213,312"],["Direct revenue","158,726","","","120,844","","","52,623"],["Shipping services revenue","59,788","","","44,627","","","34,014"],["Total revenue","603,493","","","467,692","","","299,949"],["Cost of revenue:"],["Cost of consignment revenue","56,963","","","44,985","","","30,389"],["Cost of direct revenue","141,661","","","101,427","","","45,406"],["Cost of shipping services revenue","56,178","","","47,803","","","36,587"],["Total cost of revenue","254,802","","","194,215","","","112,382"],["Gross profit","348,691","","","273,477","","","187,567"],["Operating expenses:"],["Marketing","63,128","","","62,749","","","54,813"],["Operations and technology","279,110","","","235,829","","","163,808"],["Selling, general and administrative","195,160","","","176,418","","","140,652"],["Legal settlement","456","","","13,389","","","1,110"],["Total operating expenses","537,854","","","488,385","","","360,383"],["Loss from operations","(189,163)","","","(214,908)","","","(172,816)"],["Interest income","3,191","","","365","","","2,518"],["Interest expense","(10,472)","","","(21,531)","","","(5,264)"],["Other income (expense), net","171","","","23","","","(169)"],["Loss before provision for income taxes","(196,273)","","","(236,051)","","","(175,731)"],["Provision for income taxes","172","","","56","","","101"],["Net loss","$","(196,445)","","","$","(236,107)","","","$","(175,832)"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Revenue:"],["Consignment revenue","64","%","","65","%","","71","%"],["Direct revenue","26","","","26","","","18"],["Shipping services revenue","10","","","9","","","11"],["Total revenue","100","","","100","","","100"],["Cost of revenue:"],["Cost of consignment revenue","9","","","10","","","10"],["Cost of direct revenue","24","","","22","","","15"],["Cost of shipping services revenue","9","","","10","","","12"],["Total cost of revenue","42","","","42","","","37"],["Gross profit","58","","","58","","","63"],["Operating expenses:"],["Marketing","11","","","13","","","18"],["Operations and technology","46","","","50","","","55"],["Selling, general and administrative","33","","","38","","","47"],["Legal settlement","\u2014","","","3","","","\u2014"],["Total operating expenses","90","","","104","","","120"],["Loss from operations","(32)","","","(46)","","","(57)"],["Interest income","1","","","\u2014","","","1"],["Interest expense","(2)","","","(5)","","","(2)"],["Other income (expense), net","\u2014","","","\u2014","","","\u2014"],["Loss before provision for income taxes","(33)","%","","(51)","","","(58)"],["Provision for income taxes","\u2014","","","\u2014","","","\u2014"],["Net loss","(33)","%","","(51)","%","","(58)","%"]]
[[/GREPCENT_TABLE]]

Comparison of 2022 and 2021

Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Consignment revenue, net","$","384,979","","","$","302,221","","","$","82,758","","","27","%"]]
[[/GREPCENT_TABLE]]

Consignment revenue increased by $82.8 million, or 27%, in 2022 compared to 2021. The increase in revenue was driven primarily by a 23% increase in GMV, and improvement in our take rate during the year ended December 31, 2022. GMV growth during the year ended December 31, 2022 was driven by a 26% increase in orders, due to strong market demand for online luxury goods, partially offset by a 3% decrease in AOV. We believe GMV growth is driven by interest in luxury resale due to increasing consumer desire for more affordable, accessible luxury goods in a sustainable circular economy.

Returns and cancellations as a percentage of GMV for the year ended December 31, 2022 was 26.5%, compared to 26.3% for the year ended December 31, 2021. Our take rate increased to 36.0% from 34.7% during the year ended December 31, 2022 compared to last year due to increased contribution from higher take rate products such as women's apparel.

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Direct Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Direct revenue","$","158,726","","","$","120,844","","","$","37,882","","","31","%"]]
[[/GREPCENT_TABLE]]

Direct revenue increased by $37.9 million, or 31%, in 2022 compared to 2021. The increase was primarily driven by the sell-through of company owned inventory from previous direct purchases from businesses. We recognize direct revenue on a gross basis upon shipment of the purchased good to the buyer. Direct revenue was flat as a percentage of total revenue year over year. We anticipate direct revenue to decrease as a percentage of total revenue as we have acted to limit the amount of direct purchases from businesses and plan to continue to do so in the future.

Shipping Services Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Shipping services revenue","$","59,788","","","$","44,627","","","$","15,161","","","34","%"]]
[[/GREPCENT_TABLE]]

Shipping services revenue increased by $15.2 million, or 34%, in 2022 compared to 2021 primarily due to increased shipping rates charged to buyers for outbound and return shipments and the fulfillment of a larger number of orders, which increased 26% in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Cost of Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of consignment revenue","$","56,963","","","$","44,985","","","$","11,978","","","27","%"],["As a percent of consignment revenue","15","%","","15","%"]]
[[/GREPCENT_TABLE]]

Cost of consignment revenue increased by $12.0 million, or 27%, in 2022 compared to 2021. The increase was primarily attributable to the 27% increase in consignment revenue compared to the prior year, as well as higher credit card fees and overhead costs driven by growth in our business.

Consignment revenue gross margin remained flat in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Cost of Direct Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of direct revenue","$","141,661","","","$","101,427","","","$","40,234","","","40","%"],["As a percent of direct revenue","89","%","","84","%"]]
[[/GREPCENT_TABLE]]

Cost of direct revenue increased by $40.2 million, or 40%, in 2022 compared to 2021. The increase was primarily attributable to the 31% increase in direct revenue compared to the prior year.

Direct revenue gross margin decreased by 5 percentage points in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by strategic liquidation of company owned inventory sold at discounted prices. The margin profile of our direct revenue is lower than the margin profile of our consignment revenue.

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Cost of Shipping Services Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of shipping services revenue","$","56,178","","","$","47,803","","","$","8,375","","","18","%"],["As a percent of shipping services revenue","94","%","","107","%"]]
[[/GREPCENT_TABLE]]

Cost of shipping services revenue increased by $8.4 million, or 18%, in the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase is primarily due to the fulfillment of a larger number of orders as well as higher shipping fees.

Shipping service revenue gross margin increased by 13 percentage points in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to increased shipping rates charged to buyers for outbound and return shipments beginning in Q4 2021.

Our total gross margin decreased by 1 percentage point in the year ended December 31, 2022 compared to the year ended December 31, 2021 driven by the decrease in direct revenue gross margin as discussed above. Gross margin may vary from period to period.

Marketing

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Marketing","$","63,128","","","$","62,749","","","$","379","","","1","%"]]
[[/GREPCENT_TABLE]]

Marketing expense increased by $0.4 million, or 1%, in 2022 compared to 2021. The increase was primarily due to increases in advertising costs and marketing program expenses as we seek to optimize the digital experience on our online marketplace and grow the number of buyers and consignors.

As a percentage of revenue, marketing expense decreased to 11% in 2022 from 13% in 2021. These expenses may vary from period to period as a percentage of revenue, depending primarily upon our marketing investments. We expect these expenses to decrease as a percentage of revenue over the longer term.

Operations and Technology

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Operations and technology","$","279,110","","","$","235,829","","","$","43,281","","","18","%"]]
[[/GREPCENT_TABLE]]

Operations and technology expense increased by $43.3 million, or 18%, in 2022 compared to 2021. The increase was primarily due to higher employee compensation related expenses due to increased headcount to support our growth, and higher inbound consignment shipping costs. The increase was also attributed to higher amortization associated with capitalized proprietary software.

As a percentage of revenue, operations and technology expense decreased to 46% in 2022 from 50% in 2021. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments. We expect these expenses to continue to decrease as a percentage of revenue over the longer term.

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Selling, General and Administrative

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Selling, general and administrative","$","195,160","","","$","176,418","","","$","18,742","","","11","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expense increased by $18.7 million, or 11%, in 2022 compared to 2021. The increase was due to higher employee compensation expenses due to increased headcount, in addition to an increase in cloud and software service fees. The increase was also driven by costs associated with the resignation of the Company's founder during the year ended December 31, 2022.

As a percentage of revenue, selling, general and administrative expense decreased to 33% in 2022 from 38% in 2021. These expenses may vary from period to period as a percentage of revenue. We expect these expenses to decrease as a percentage of revenue over the long term.

Interest Income

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Interest income","$","3,191","","","$","365","","","$","2,826","","","774","%"]]
[[/GREPCENT_TABLE]]

Interest income increased by $2.8 million, or over 100%, in the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by higher average interest rates.

Interest Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Interest expense","$","(10,472)","","","$","(21,531)","","","$","11,059","","","-51","%"]]
[[/GREPCENT_TABLE]]

Interest expense decreased by $11.1 million, or 51%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily due to the adoption of ASU 2020-06 on January 1, 2022, which eliminated the debt discount related to both the 3.00% convertible senior notes issued in June 2020 and the 1.00% convertible senior notes issued in March 2021.

Other Income, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Other income, net","$","171","","","$","23","","","$","148","","","643","%"]]
[[/GREPCENT_TABLE]]

Other income increased by $0.1 million, or over 100%, in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Legal Settlement

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","Amount","","%"],["","(In thousands, except percentage)"],["Legal settlement","$","456","","","$","13,389","","","$","(12,933)","","","(97)","%"]]
[[/GREPCENT_TABLE]]

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Legal settlement expense decreased by $12.9 million, or 97%, in 2022 compared to 2021. This decrease was primarily due to the $11.0 million legal settlement accrued for during the year ended December 31, 2021 in connection with the settlement of the shareholder class action filed against us and $0.5 million of attorney's fees as part of the settlement for the related derivative case filed against us.

Comparison of 2021 and 2020

As described above, prior year comparisons for 2021 and 2020 are included 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 fiscal year ended December 31, 2021. However, during the three months ended June 30, 2022, the Company had a change in accounting policy from those disclosed in the audited financial statements and related notes for the year ended December 31, 2021 related to shipping services revenue. Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2 " Change in Accounting Principle" to the financial statements included herein. Year-over-year discussion and analysis of consignment revenue, shipping services revenue, cost of consignment revenue and cost of shipping services revenue are included below for 2021 and 2020 on a reclassified basis.

Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(In thousands, except percentage)"],["Consignment revenue, net","$","302,221","","","$","213,312","","","$","88,909","","","42","%"]]
[[/GREPCENT_TABLE]]

Consignment and service revenue increased by $88.9 million, or 42%, in 2021 compared to 2020. The increase in revenue was driven primarily by a 50% increase in GMV, partially offset by an increase in returns and cancellations year over year. 

Shipping Services Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(In thousands, except percentage)"],["Shipping services revenue","$","44,627","","","$","34,014","","","$","10,613","","","31","%"]]
[[/GREPCENT_TABLE]]

Shipping services revenue increased by $10.6 million, or 31%, in 2021 compared to 2020 primarily due to the fulfillment of a larger number of orders, which increased 33% in the year ended December 31, 2021 compared to the year ended December 31, 2020, as well as increased shipping fee introduced in Q4 of 2021.

Cost of Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of consignment revenue","$","44,985","","","$","30,389","","","$","14,596","","","48","%"],["As a percent of consignment revenue","15","%","","14","%"]]
[[/GREPCENT_TABLE]]

Cost of consignment revenue increased by $14.6 million, or 48%, in 2021 compared to 2020. The increase was primarily attributable to the 42% increase in consignment revenue compared to the prior year, as well as higher credit card fees driven by growth in our business.

Consignment revenue gross margin decreased by 1 percentage point in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by higher overhead costs due to growth in our business.

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Cost of Shipping Services Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of shipping services revenue","$","47,803","","","$","36,587","","","$","11,216","","","31","%"],["As a percent of shipping services revenue","107","%","","108","%"]]
[[/GREPCENT_TABLE]]

Cost of shipping services revenue increased by $11.2 million, or 31%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to the fulfillment of a larger number of orders, as well as an increase in shipping costs from rising prices of fulfillment services during the pandemic.

Shipping service revenue gross margin improved in the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the increase in shipping fees implemented during the three months ended December 31, 2021.

Liquidity and Capital Resources

As of December 31, 2022, we had cash and cash equivalents of $293.8 million and an accumulated deficit of $951.2 million. Since our inception, we have generated negative cash flows from operations and have primarily financed our operations through equity and convertible debt financings. In July 2019, we received net proceeds of $315.5 million upon completion of our IPO on July 2, 2019. In June 2020, we received net proceeds of $143.3 million from the issuance of the 2025 Notes and the related capped call transactions. In March 2021, we received net proceeds of $244.5 million from the 2028 Notes and the related capped call transactions. We expect that operating losses and negative cash flows from operations could continue in the foreseeable future.

Our primary capital requirements include contractual obligations related to our operating leases, payments on our debt, certain non-cancellable contracts, and compensation and benefits payments to support our strategic plans. Our future capital requirements and the adequacy of available funds will depend on many factors, including, but not limited to, those set forth under the heading “Risk Factors” in this Annual Report, and our ability to grow our revenue and the timing of investments to support growth in our business, such as the build-out of our authentication centers. We believe that our existing cash and cash equivalents as of December 31, 2022 will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements for at least the next 12 months. We may seek additional equity or debt financing. 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 adversely affected.

In April 2021, the Company entered into a loan and security agreement ("Revolving Credit Agreement") with a lender, to provide a revolving line of credit of up to $50 million. The credit facility expires in April 2023. The Revolving Credit Agreement contains affirmative, negative and financial covenants, including covenants that require maintaining minimum cash and investment balances over specified periods of time and covenants that restrict, among other things, the Company’s ability to change its name, business, management, ownership or business locations, enter into mergers or acquisitions or incur additional indebtedness. As of December 31, 2022, the Company was in compliance with all covenants. As of December 31, 2022, $0 had been drawn on the Revolving Credit Agreement. For more information on the Revolving Credit Agreement, please see Note 6 of our Notes to Financial Statements included elsewhere in this Annual Report.

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Cash Flows

The following table summarizes our cash flows for the periods indicated. Prior year comparisons are included in "Park 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 fiscal year ended December 31, 2021.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(In thousands)"],["Net cash (used in) provided by:"],["Operating activities","$","(91,557)","","","$","(142,151)","","","$","(134,419)"],["Investing activities","(36,922)","","","(43,437)","","","178,004"],["Financing activities","4,101","","","252,913","","","152,815"],["Net (decrease) increase in cash and cash equivalents","$","(124,378)","","","$","67,325","","","$","196,400"]]
[[/GREPCENT_TABLE]]

Net Cash Used in Operating Activities

During 2022, net cash used in operating activities was $91.6 million, which consisted of a net loss of $196.4 million, adjusted by non-cash charges of $98.2 million and cash inflows due to a net change of $6.7 million in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of cash inflows due to a decrease in 2022 of $28.0 million in inventory driven by a decrease in direct purchases of inventory from vendors, an increase of $10.5 million in accrued consignor payables, and by a $4.9 million increase in accounts payable, partially offset by a decrease of $17.8 million in operating lease liability and a decrease of $9.8 million in other accrued and current liabilities. Our primary uses of cash in operating activities include operating costs such as operating lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business growth.

Net Cash Used in Investing Activities

During 2022, net cash used in investing activities was $36.9 million, which consisted of $22.9 million for purchases of property and equipment, net, including leasehold improvements, and $14.1 million for capitalized proprietary software costs.

Net Cash Provided by Financing Activities

During 2022, net cash provided by financing activities was $4.1 million, which primarily consisted of $2.9 million from the exercise of stock options, and $1.4 million from the issuance of common stock related to the Company's employee stock purchase plan (the "ESPP").

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Material Contractual and Other Obligations

Our material contractual and other obligations as of December 31, 2022 consist of:

•Operating Leases. As of December 31, 2022, our cash requirements related to our operating leases on our authentication centers, retail stores, and corporate offices that are included in our balance sheet were $175.1 million, of which $29.0 million is expected to be paid within the next 12 months.

•Convertible Senior Notes. As of December 31, 2022, our cash requirements related to our Convertible Senior Notes that are included on our balance sheet and the related periodic interest payments were $488.8 million, of which $8.1 million is expected to be paid within the next 12 months.

•Non-cancellable purchase commitments. Our cash requirements related to certain other non-cancellable purchase commitments associated primarily with software services and hosting arrangements, were approximately $24.4 million, of which approximately $11.2 million is expected to be paid within the next 12 months.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires our management 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 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.

While our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies, we believe that the accounting estimates discussed below relate to the more significant areas involving management’s judgments and estimates.

Convertible Senior Notes

In recording our convertible debt instruments for the years ended December 31, 2021 and December 31, 2020, we separately account for the liability and equity components by allocating proceeds between the liability component and the embedded conversion options, or equity components. We allocate the debt components of the instruments on the basis of the estimated fair value of a similar liability that does not have an associated convertible feature and the remaining proceeds are allocated to the equity component. The allocation was performed in a manner that reflects our non-convertible debt borrowing rate for similar debt. The fair value borrowing rate is considered a critical estimate because the judgment in assessing an interest rate that would be available to the company of a similar debt instrument that does not have a conversion feature. For the 2025 Notes with a principal amount of $172.5 million, an interest rate of 5.67% was used to compute the initial fair value of the liability component of $152.7 million. For the 2028 Notes with a principal amount of $287.5 million, an interest rate of 7.18% was used to compute the initial fair value of the liability component of $191.3 million. As disclosed in Note 2—Summary of Significant Accounting Policies, this critical accounting estimate was not necessary for the fiscal year ended December 31, 2022 as a result of the adoption of ASU 2020-06.

For the year ended December 31, 2022, we have not identified critical accounting estimates that involve a significant level of estimation uncertainty and would have a material impact on our results. Refer to our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies” to our financial statements included elsewhere in this Annual Report on Form 10-K for recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.

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