# ThredUp Inc. (TDUP) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ThredUp Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1484778/000148477822000044/tdup-20211231.htm
Accession: 0001484778-22-000044
Filing date: 2022-03-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TDUP/
All MD&A years: /company/TDUP/mda/
Next year: /company/TDUP/mda/fy2022/ (FY 2022)

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

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. 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. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. 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”).

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Overview

thredUP is one of the world’s largest online resale platforms for women’s and kids’ apparel, shoes and accessories. Our mission is to inspire a new generation of consumers to think secondhand first. We believe in a sustainable fashion future and we are proud that our business model creates a positive impact to the benefit of our buyers, sellers, clients, employees, investors and the environment. 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.

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. 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. 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.

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 sold 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.

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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.”

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Overview of 2021 Results

Revenue: Total revenue was a record at $251.8 million, an increase of 35% 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.

Net Loss: 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.

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.

Key Financial and Operating Metrics

We review a number of operating and financial metrics, including the following key business and non-GAAP metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. These key financial and operating metrics are set forth below for the periods presented.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","% Change"],["","2021","","2020","","2019","","2021 vs 2020","","2020 vs 2019"],["","(in thousands)"],["Active Buyers (as of period end)","1,691","","","1,240","","","997","","","36","%","","24","%"],["Orders","5,328","","","3,965","","","3,134","","","34","%","","27","%"],["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)","%"]]
[[/GREPCENT_TABLE]]

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

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

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. 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,

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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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Adjusted EBITDA Reconciliation:"],["GAAP Net loss","$","(63,176)","","","$","(47,877)","","","$","(38,197)"],["Depreciation and amortization","9,155","","","5,581","","","4,274"],["Stock-based compensation expense","12,959","","","7,336","","","7,678"],["Acquisition and offering related expenses","1,271","","","\u2014","","","\u2014"],["Interest expense","2,275","","","1,305","","","1,428"],["Change in fair value of convertible preferred stock warrant liability","930","","","201","","","6"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","432"],["Provision for income taxes","80","","","56","","","36"],["Non-GAAP Adjusted EBITDA","$","(36,506)","","","$","(33,398)","","","$","(24,343)"]]
[[/GREPCENT_TABLE]]

Components of Results of Operations

Revenue

Our revenue is comprised of consignment revenue and product revenue.

Consignment revenue

We generate consignment revenue from the sale of secondhand women’s and kids’ apparel, shoes and accessories on behalf of sellers. We recognize consignment revenue, net of seller payouts, discounts, incentives and returns. We expect consignment revenue to continue to increase as we increase our Active Buyers and Orders and grow our business.

Product revenue

We also generate product revenue from the sale of items that we own, which we refer to as our inventory. While we shifted our business to primarily consignment sales in mid-2019, historically, we purchased most of our inventory from our sellers prior to inclusion on our online marketplace. The sales from our newly acquired European operations are primarily from sale of owned items. We recognize product revenue, net of discounts, incentives and returns. We expect product revenue to increase in absolute dollars and as a percentage of total revenue in the near term as we continue to grow our international business. We expect the percentage share of product revenue to decrease in the long term as we introduce the consignment model to our European operations.

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Cost of Revenue

Cost of consignment revenue

Cost of consignment revenue consists of outbound shipping, outbound labor and packaging costs. We expect cost of consignment revenue to decrease and gross margin to increase as a percentage of total consignment revenue as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

Cost of product revenue

Cost of product revenue mainly consists of inventory cost, inbound shipping related to the sold merchandise, outbound shipping, outbound labor, packaging costs and inventory write-downs. We expect cost of product revenue to increase in absolute dollars and decrease as a percentage of total revenue, leading to an increase in gross margin. We expect further gross margin to increase as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

Operating Expenses

Operations, Product and Technology

Operations, product and technology expenses consist primarily of distribution center operating costs and product and technology expenses. Distribution center operating costs mainly include inbound shipping costs, other than those capitalized in inventory, as well as personnel costs, distribution center rent, maintenance and depreciation of equipment and leasehold improvements. Product and technology costs include personnel costs for the design and development of product and the related technology that is used to operate our distribution centers, merchandise science, website development and related expenses for these departments. Operations, product and technology expenses also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect operations, product and technology expenses to increase in absolute dollars in future periods to support our growth, especially as costs to increase our supply (inbound costs) are generally incurred prior to the expected revenue growth. Additionally, we expect to bring on additional distribution centers and continue investing in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments, including business acquisitions. We expect these expenses to increase in absolute dollars and decrease as a percentage of revenue over the longer term due to better leverage in our operations.

Marketing

Marketing expense consists primarily of advertising, public relations expenditures and personnel costs for employees engaged in marketing. Marketing costs also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect our marketing expenses to fluctuate as a percentage of revenue as we intend to increase marketing spend to drive the growth of our business.

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. We expect to increase sales, general and administrative expense as we grow our infrastructure to support operating as a public company and the overall growth in our business. 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.

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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:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Revenue:","(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"]]
[[/GREPCENT_TABLE]]

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Comparison of Years Ended December 31, 2021 and 2020

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(in thousands, except percentages)"],["Consignment revenue","$","186,114","","","$","138,096","","","$","48,018","","","35","%"],["Product revenue","65,678","","","47,919","","","17,759","","","37","%"],["Total revenue","$","251,792","","","$","186,015","","","$","65,777","","","35","%"],["Consignment revenue as a % of total revenue","74","%","","74","%"],["Product revenue as a % of total revenue","26","%","","26","%"]]
[[/GREPCENT_TABLE]]

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.

Cost of Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(in thousands, except percentages)"],["Cost of consignment revenue","$","41,856","","","$","34,184","","","$","7,672","","","22","%"],["Cost of product revenue","31,804","","","23,683","","","8,121","","","34","%"],["Total cost of revenue","$","73,660","","","$","57,867","","","$","15,793","","","27","%"],["Gross profit","$","178,132","","","$","128,148"],["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","%"]]
[[/GREPCENT_TABLE]]

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.

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Cost of Consignment Revenue

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Change"],["","","2021","","2020","","Amount","","%"],["","(in thousands, except percentages)"],["Cost of consignment revenue","","$","41,856","","","$","34,184","","","$","7,672","","","22","%"],["As a percent of consignment revenue","","22","%","","25","%"],["Consignment gross margin","","78","%","","75","%"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","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","%"]]
[[/GREPCENT_TABLE]]

Cost of Product Revenue

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Change"],["","","2021","","2020","","Amount","","%"],["","(in thousands, except percentages)"],["Cost of product revenue","","$","31,804","","","$","23,683","","","$","8,121","","","34","%"],["As a percent of product revenue","","48","%","","49","%"],["Product gross margin","","52","%","","51","%"]]
[[/GREPCENT_TABLE]]

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.

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2021","","2020","","Amount","","%"],["","(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","%"]]
[[/GREPCENT_TABLE]]

Operating Expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","Change"],["","","2021","","2020","","Amount","","%"],["","","(in thousands, except percentages)"],["Operations, product and technology","","$","128,079","","","$","101,408","","","$","26,671","","","26","%"],["Marketing","","63,625","","","44,765","","","18,860","","","42","%"],["Sales, general and administrative","","48,814","","","28,564","","","20,250","","","71","%"],["Total Total operating expenses","","$","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","%"]]
[[/GREPCENT_TABLE]]

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.

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Operations, Product and Technology

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","Change"],["","","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","%"]]
[[/GREPCENT_TABLE]]

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.

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Marketing

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","Change"],["","","2021","","2020","","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","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
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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.

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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.

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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 the 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. 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. 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.”

Cash Flows

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

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[[/GREPCENT_TABLE]]

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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

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2021, the value of our non-cancellable unconditional purchase obligations was $17.0 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.

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

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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. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss or consolidated statements of cash flows.

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. 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.

Revenue Recognition

We generate revenue primarily from the sale of secondhand women’s and kids’ apparel, shoes and accessories on behalf of sellers. We retain a percentage of the proceeds received as payment for our consignment service. We report consignment revenue on a net basis as an agent and not the gross amount collected from the buyer. We recognize consignment revenue upon purchase of the seller’s secondhand item by the buyer.

We also generate revenue from the sale of our purchased inventory which we refer to as product revenue. We sell our purchased inventory mainly through our online marketplace. We recognize product revenue on a gross basis. Online sales and sales to our retail partners are recognized upon shipment of the purchased secondhand items to the buyer. Sales at retail stores are recognized upon checkout and sales of accepted items from goody boxes are recognized upon acceptance, which generally occurs at the same time as payment.

Both consignment and product revenue are recognized net of discounts, incentives and returns. Sales tax assessed by governmental authorities is excluded from revenue.

Stock-Based Compensation

We estimate the fair value of stock options and the ESPP at the grant date using the Black-Scholes option-pricing model (the “Black-Scholes Model”). The fair values of Restricted Stock Units (“RSU”) are determined based on our stock price on the date of grant. The fair values of equity awards are recognized as compensation expense over the requisite service period or over the period in which the related services are received (generally the vesting period), using the straight-line method. The estimated fair value of equity awards that contain performance conditions is expensed over the term of the award once we have determined that it is probable that performance conditions will be satisfied. We account for forfeitures as they occur.

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,

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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). We determine volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on United States Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

Business Combinations

We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Once the purchase accounting is finalized, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.

Acquired Intangible Assets

When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as trademarks, acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. 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. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. 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.

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