ThredUp Inc.: Form 10-Q for the period ended Mar 31, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other information, including our condensed consolidated financial statements and related notes included in Part I, Item 1, Financial Statements*, of this Quarterly Report on Form 10-Q; Part I, Item 1A,* Risk Factors*, of this Quarterly Report on Form 10-Q; and our consolidated financial statements and related notes appearing in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 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.*

Overview

thredUP operates one of the world’s largest online resale platforms for apparel, shoes and accessories. Our mission is to inspire a new generation of consumers to think secondhand first. 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 January 2023.

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 core marketplace we have built in the U.S. enables buyers to browse and purchase resale items for primarily women’s and kids’ apparel, shoes and accessories across a wide range of price points. Buyers love shopping value, premium and luxury brands all in one place, at up to 90% off estimated retail price. Sellers love thredUP because we make it easy to clean out their closets and unlock value for themselves or for the charity of their choice while doing good for the planet. thredUP’s sellers order a Clean Out Kit, fill it and return it to us using our prepaid label. We take it from there and do the work to make those items available for resale.

In addition to our core marketplace, some of the world’s leading brands and retailers are already taking advantage of our RaaS offering, which allows them to conveniently offer a scalable closet clean out service and/or resale shop to their customers. We believe RaaS will accelerate the growth of this emerging category and form the backbone of the modern resale experience domestically and internationally.

In 2021, we acquired Remix Global EAD (“Remix”), a fashion resale company based in Sofia, Bulgaria. With this acquisition, we further expanded our reach to European customers, added a complementary operational infrastructure and added an experienced management team to enable our expansion into Europe. In addition, Remix’s product assortment extended our resale offering to include men’s items and items sourced from a variety of supply channels, such as wholesale supply.

Key Factors Affecting Our Performance

Macroeconomic Factors

Macroeconomic factors, including inflation, increased interest rates, significant capital market volatility, and global economic and geopolitical developments have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. These factors contributed to increases in our operating costs during 2022 and the first quarter of 2023 primarily due to increased transportation costs and wage rates. In addition, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns. We expect some or all of these factors to continue to impact our operations throughout the rest of 2023.

Overview of First Quarter Results

Revenue: Total revenue was $75.9 million, representing an increase of 4.4% year-over-year.

Gross Profit and Margin: Gross profit totaled $51.1 million, representing an increase of 1.7% year-over-year. Gross margin was 67.3%, a decrease of 180 basis points from 69.1% in the comparable quarter last year.

Net Loss: Net loss was $19.8 million, or a negative 26.1% of revenue, for the first quarter of 2023, compared to a net loss of $20.7 million for the first quarter of 2022.

Non-GAAP Adjusted EBITDA Loss: Non-GAAP Adjusted EBITDA loss was $6.6 million, or a negative 8.7% of revenue, for the first quarter of 2023, compared to Non-GAAP Adjusted EBITDA loss of $13.0 million, or a negative 17.8% of revenue, for the first quarter of 2022. Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin are non-GAAP measures which may not be comparable to similarly-titled measures used by other companies. See below for a reconciliation of Non-GAAP Adjusted EBITDA loss to net loss.

Active Buyers and Orders: Active Buyers totaled 1.7 million and Orders totaled 1.5 million in the first quarter of 2023, representing a decrease of 2.7% and 7.9%, respectively, compared to the first quarter of 2022.

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.

(in thousands, except percentages)

(1) Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin are non-GAAP measures which may not be comparable to similarly-titled measures used by other companies. See below for a reconciliation of Non-GAAP Adjusted EBITDA loss 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 and purchased in our marketplaces, including through our RaaS clients, and is identified by a unique email address. A single person could have multiple thredUP accounts and count as multiple Active Buyers. The number of Active Buyers is a key driver of revenue for our marketplaces.

Orders

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

Non-GAAP Financial Metrics

Non-GAAP Adjusted EBITDA Loss and Non-GAAP Adjusted EBITDA Loss Margin

Non-GAAP Adjusted EBITDA loss means net loss adjusted to exclude, where applicable in a given period, interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, acquisition-related expenses, and restructuring charges. Non-GAAP Adjusted EBITDA loss margin represents Non-GAAP Adjusted EBITDA loss divided by Total revenue. We use Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin, non-GAAP metrics, to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes. We believe that Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist 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 Non-GAAP Adjusted EBITDA loss:

(in thousands)

Comparison of the Three Months Ended March 31, 2023 and 2022

Revenue

(in thousands, except percentages)

Total revenue increased $3.2 million, or 4.4%, for the three months ended March 31, 2023 as compared to the same period in 2022. The increase in revenue for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to a $4.2 million increase in product revenue as our European operations continue to scale and grow as well as a mix shift due to growth in supply from our RaaS partners, which are recognized as part of product revenue, partially offset by a $1.0 million decrease in consignment revenue due to the mix shift described previously.

Cost of Revenue

(in thousands, except percentages)

Gross margin was 67.3% and 69.1% for the three months ended March 31, 2023 and 2022, respectively, or an unfavorable change of 180 basis points.

The decrease in gross margin for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to a 410 basis point increase in product revenue as a percentage of total revenue, partially offset by favorable labor variances for cost of consignment revenue. Consignment revenue is recognized net of seller payouts and cost of items sold, whereas for product revenue, seller payouts and cost of items sold are included as a component of cost of revenue. As such, product revenue has a lower gross margin than consignment revenue.

Cost of Consignment Revenue

(in thousands, except percentages)

Consignment gross margin was 80.2% and 78.8% for the three months ended March 31, 2023 and 2022, respectively, or a favorable change of 140 basis points. Consignment gross profit dollars were flat year-over-year.

The increase in consignment gross margin for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to 120 basis points of lower direct labor costs.

Cost of Product Revenue

(in thousands, except percentages)

Product gross margin was 47.0% and 50.8% for the three months ended March 31, 2023 and 2022, respectively, or an unfavorable change of 380 basis points. Product gross profit dollars were up 8% year-over-year.

The decrease in product gross margin for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to 290 basis points of higher inventory costs and an 60 basis points of higher packaging and other costs.

Operations, Product, and Technology

(in thousands, except percentages)

The $0.8 million decrease in operations, product, and technology expenses for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to a $1.4 million decrease in personnel-related costs, partially offset by a $0.8 million increase in inbound shipping and other costs.

Marketing

(in thousands, except percentages)

The $0.1 million decrease in marketing expenses for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to a $1.1 million decrease in social and other advertising costs and a $0.2 million decrease in professional services, partially offset by a $1.0 million increase in personnel-related costs, of which $0.9 million was related to stock-based compensation expense and a $0.2 million increase in facilities, technology, and other allocated costs.

Sales, General and Administrative

(in thousands, except percentages)

The $1.4 million increase in sales, general, and administrative expenses for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to a $3.0 million increase in personnel-related costs, of which $2.7 million was related to stock-based compensation expense, and a $0.1 million increase in facilities, technology, and other allocated costs, partially offset by a $1.2 million decrease in professional services and a $0.5 million decrease in other corporate expenses.

Interest Expense

(in thousands, except percentages)

The $0.3 million decrease in interest expense for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to an increase in amounts capitalized as part of an asset in conjunction with the build-out of our distribution centers and reclassified from interest expense.

Other Income, Net

(in thousands, except percentages)

The $0.2 million increase in other income, net for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to an increase in interest income on our marketable securities due to a higher interest rate environment.

Liquidity and Capital Resources

We have historically generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt. As of March 31, 2023, we had cash, cash equivalents and short-term marketable securities of $93.5 million. Additionally, we have a term loan facility (“Term Loan”) under which $38.0 million remained available to be drawn as of March 31, 2023 and we were in full compliance with our debt covenants under the Term Loan as of that date. See Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our Term Loan.

We expect operating losses and negative cash flows from operations to continue in the near term as we continue to invest in growing our business and expanding our infrastructure. Our primary use of cash includes operating costs such as distribution network spend, product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth. Additionally, our primary capital expenditures are related to the set-up, expansion and/or automation of our distribution network. Based upon our current operating plans, we believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient to meet our short- and long-term capital requirements and we do not anticipate expanding our distribution network to include additional locations in the near term. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements will depend on many factors, including, but not limited to the timing of our increased distribution center automation and expansion plans to support planned revenue growth, the expansion of sales and marketing activities, the potential introduction of new offerings and new RaaS clients, the continuing growth of our marketplaces and overall economic conditions. However, we expect that our capital expenditures will decline significantly in 2023 as we complete the first phase of our new distribution center in Texas. We may seek additional equity or debt financing. See the section titled “Risk Factors—Risks Relating to Our Indebtedness and Liquidity—We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders” within the 2022 10-K.

Cash Flows

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

(in thousands)

24

Changes in Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023 decreased $2.2 million, or 33.3%, as compared to the same period in 2022. The decrease in net cash used in operating activities was due to a $6.6 million decrease in net loss excluding non-cash and reconciling items disclosed within our consolidated statement of cash flows, partially offset by $4.3 million of unfavorable changes in operating assets and liabilities. The $6.6 million decrease in net loss excluding non-cash and reconciling items was primarily driven by a favorable change in the reconciling impact of stock-based compensation expense as well as lower net loss. The $4.3 million of unfavorable changes in operating assets and liabilities was primarily driven by unfavorable changes in accrued and other current liabilities, operating lease liabilities, and inventory, partially offset by favorable changes in accounts payable, other current and non-current assets, and other non-current liabilities.

Changes in Cash Flows from Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2023 increased $26.8 million as compared to the same period in 2022. The increase in net cash provided by investing activities was primarily due to a $19.9 million increase in maturities of marketable securities and a $7.0 million decrease in purchases of property and equipment.

Changes in Cash Flows from Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 remained flat as compared the same period in 2022 due to offsetting impacts of a $1.0 million decrease in repayments of debt against a $1.0 million net increase in cash outflows related to stock-based award activity.

Critical Accounting Policies and Estimates

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies since the 2022 10-K. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our condensed consolidated financial statements, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2022 10-K.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. 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 condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

New Accounting Pronouncements

See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for information on new accounting pronouncements.

We are exposed to market risks in the ordinary course of our business. These risks primarily include:

Interest Rate Risk

As of March 31, 2023, we had cash and cash equivalents of $50.7 million and marketable securities of $42.7 million, consisting primarily of money market funds, commercial paper, corporate debt securities, U.S. treasury securities and U.S. government agency bonds, which carry a degree of interest rate risk. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short- to intermediate-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to fluctuations in interest rates.

The Term Loan bears variable interest rates tied to the prime rate, with a floor of 6.00%, and therefore carries interest rate risk. If interest rates were to increase or decrease by 1% for the year and our borrowing amounts on the Term Loan remained constant, our annual interest expense could increase or decrease by approximately $0.3 million, respectively. See the risk factor discussion captioned "Risks Relating to Our Indebtedness and Liquidity—Recent events affecting the financial services industry could have an adverse impact on our business, results of operations and financial conditions" under Part II, Item 1A of this Quarterly Report on Form 10-Q for more discussion on adverse developments affecting the financial services industry that may have an adverse impact on our business, results of operations and financial conditions.

Inflation Risk

In recent months, inflation has increased significantly in the U.S. and overseas where we conduct our business, resulting in rising interest rates and fuel, labor and processing, freight and other costs that have affected our gross margin and operating expenses. We believe these increases have negatively impacted our business, and although difficult to quantify, inflation is potentially having an adverse effect on our customers’ ability to purchase in our marketplaces, resulting in slowing revenue and Order growth. If we are unable to increase our prices to sufficiently offset the rising costs of doing business, our profitability and financial position could be adversely impacted.

Foreign Currency Exchange Rate Risk

We transact business in Europe through Remix in multiple currencies. As a result, our operating results, cash flows and net investment in Remix are subject to fluctuations due to changes in foreign currency exchange rates. As of March 31, 2023, our most significant currency exposure was the Bulgarian lev. We manage our foreign currency exchange rate risks through natural hedges including foreign currency revenue and costs matching, as well as foreign currency assets offsetting liabilities. We have not entered into any hedging arrangements with respect to foreign currency risk, but we may do so in the future if our exposure to foreign currency becomes more significant.

Assets and liabilities of our foreign operations are translated into dollars at period-end rates, while income and expenses are translated using the average exchange rate during the period in which the transactions occurred. The related translation adjustments were reflected as an unfavorable foreign currency translation adjustment of $0.5 million during the three months ended March 31, 2023, which was recognized in accumulated other comprehensive loss within our condensed consolidated balance sheet.

A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on our financial condition or results of operations during any of the periods presented.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined under the Exchange Act, means controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of control can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Because of the material weakness in our internal control over financial reporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective. In light of this fact, our management, including our Chief Executive Officer and Chief Financial Officer, has put in place processes and controls and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the unaudited interim condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Previously Reported Material Weaknesses in Internal Control Over Financial Reporting

As previously described in the 2022 10-K, in connection with the audits of our consolidated financial statements in certain prior years, we and our independent registered public accounting firms identified certain control deficiencies in the design and implementation of our internal control over financial reporting that, in the aggregate, constituted a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.

Our material weakness related to the following control deficiency:

• We did not design and maintain adequate controls over the preparation and review of certain account reconciliations and journal entries. Specifically, we did not design and maintain controls and we did not maintain a sufficient complement of accounting personnel to ensure account reconciliations were prepared and reviewed at the appropriate level of precision on a consistent and timely basis.

The deficiency described above, if not remediated, could result in a misstatement of one or more account balances or disclosures in our annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that this control deficiency constitutes a material weakness.

Remediation Plans

To address our material weakness, we have added accounting and finance personnel and implemented new financial accounting processes, controls, and systems. We are continuing to take steps to remediate the material weakness described above through hiring additional qualified accounting and finance resources and further evolving our accounting close processes. We will not be able to fully remediate this control deficiency until these steps have been completed and the controls have been operating effectively for a sufficient period of time.

Changes in Internal Control over Financial Reporting

We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. Except as described above, there was not any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company is supplementing the risk factors previously disclosed in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 7, 2023 (our “Fiscal 2022 10-K”) to include the following risk factor, which should be read in conjunction with the other risk factors presented in our Fiscal 2022 10-K.

Risks Relating to Our Indebtedness and Liquidity

Recent events affecting the financial services industry could have an adverse impact on our business, results of operations and financial conditions.

On March 10, March 12 and May 1 of 2023, the Federal Deposit Insurance Corporation (the “FDIC”) took control and was appointed receiver of Silicon Valley Bank, Signature Bank and First Republic Bank, respectively, after each bank was unable to continue their operations. These events exposed vulnerabilities in the regional banking sector, including liquidity constraints, contagion and solvency risk and other legal uncertainties and caused significant volatility in the market prices of the common stock of certain other regional banks.

Although we do not have any deposits with any of the banks that have been placed into receivership to date, we are unable to predict the extent or nature of the impacts of these evolving circumstances at this time. For example, we are party to an amended and restated loan and security agreement with Western Alliance Bank, a regional bank, which provides a term loan and credit facility for an aggregate borrowing amount of up to $70.0 million. As of March 31, 2023, the balance of this debt is $29.3 million. While our restated loan and security agreement requires that we maintain minimum cash deposits with Western Alliance Bank that exceed the FDIC insurance limits, we utilize an insured cash sweep program to extend FDIC insurance to this balance. Further, while we maintain the contractual minimum cash deposits with Western Alliance Bank, most of our cash is invested in managed assets outside of Western Alliance Bank. If Western Alliance Bank or other financial institutions with which we have relationships were to enter into receivership or become insolvent, our ability to access the cash and cash equivalents that we hold at such institutions, as well as our ability to draw on our credit facility, may be impacted. In such an event, it could become more difficult for us to access sufficient liquidity or acquire financing on commercially reasonable terms or at all. Any such event could adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, which could result in breaches of our financial and other contractual obligations, any of which could materially and adversely impact our business, results of operations and financial condition.