# TheRealReal, Inc. (REAL) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TheRealReal, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1573221/000157322124000030/real-20231231.htm
Accession: 0001573221-24-000030
Filing date: 2024-03-01
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/REAL/mda/fy2024/ (FY 2024)

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 as well as virtual consultations via online face-to-face platforms. Consignors may also drop off items at our luxury consignment offices. Our Neighborhood and Flagship 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 37.5 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 2023 and 2022, our overall take rate on consigned goods was 37.5% and 36.0% respectively. The increase in our take rate was due to the update of our consignor commission structure (effective November 1, 2022). 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 35.2 million members as of December 31, 2023. 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.

Through December 31, 2023, we have cumulatively paid approximately $4.0 billion in commissions to our consignors. Our GMV decreased to $1.7 billion in 2023 from $1.8 billion in 2022. Our AOV increased to $523 in 2023

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from $483 in 2022. In 2023 and 2022, our total revenue was $549.3 million and $603.5 million, respectively, representing a decrease of 9% in 2023. In 2023 and 2022, our gross profit was $376.3 million and $348.7 million, respectively, representing an increase of 8% in 2023. 

Impact of Public Health Emergencies and Macroeconomic Conditions on Our Business

The impact of public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases such as the COVID-19 pandemic has affected, and may continue to affect our business and results of operations. During any public health emergency, our top priority is 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.

Business Developments

On February 15, 2023, we implemented a savings plan intended to reduce operating expenses by (a) terminating approximately 230 employees, representing approximately 7% of our workforce, and (b) reducing our real estate presence (see Note 10 — Leases, for further information). We may not be able to fully realize the cost savings and benefits initially anticipated from the savings plan, and the expected costs may be greater than expected. See “Risk Factors—Risks Related to Our Business and Industry— The savings plan we implemented in February 2023 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 public health emergencies 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 2023 and 2022, our marketplace sell-through ratios were 92% and 91%, respectively.

Our growth has been driven in significant part by repeat sales by existing consignors concurrent with growth of our consignor base. In 2023 and 2022, repeat consignors accounted for approximately 84% and 83% 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 51 in 2023, and compared to our online shopping industry average of 45 according to NICE Satmetrix U.S. Consumer 2023 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 graph below shows trends in purchasing activity for buyer cohorts for each year beginning in 2017. 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 graph below, we have seen consistent retention of buyer activity across cohorts through 2023. In 2020, buyer retention was impacted by the adverse impacts of COVID-19 on supply, and as a result, GMV. 

We believe there is substantial opportunity to grow our business by having buyers also become consignors and vice versa. As of December 31, 2023, 15% of our buyers had become consignors and 49% 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.

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 requires 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.

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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 2023, 2022, and 2021.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(In thousands, except AOV and percentages)"],["GMV","$","1,725,983","","","$","1,815,983","","","$","1,482,432"],["NMV","$","1,269,880","","","$","1,335,506","","","$","1,092,353"],["Consignment revenue","$","415,572","","","$","384,979","","","$","302,221"],["Direct revenue","$","79,160","","","$","158,726","","","$","120,844"],["Shipping services revenue","$","54,572","","","$","59,788","","","$","44,627"],["Number of orders","3,300","","","3,757","","","2,981"],["Take rate","37.5","%","","36.0","%","","34.7","%"],["Active buyers","922","","","998","","","797"],["AOV","$","523","","","$","483","","","$","497"]]
[[/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 26.4%, 26.5%, and 26.3% of GMV in 2023, 2022, and 2021, 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. We continue to assess the impact of our updated take rate structure and may implement further changes in the future. 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.

Our 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.

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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.

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.

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.

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Restructuring

Restructuring expense is primarily comprised of right-of-use asset and fixed asset impairments, severance benefits, and other related charges, including net gain on lease terminations. Impairment losses are measured and recorded for the excess of carrying value over its fair value, estimated based on expected future cash flows using discount rate and other quantitative and qualitative factors. The assumptions used such as projected future cash flows, discount rates, and determination of appropriate market comparable, are subject to volatility and may differ from actual results.

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. Prior year comparisons for 2022 and 2021 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, 2022. 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]]
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[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Revenue:"],["Consignment revenue","76","%","","64","%","","65","%"],["Direct revenue","14","","","26","","","26"],["Shipping services revenue","10","","","10","","","9"],["Total revenue","100","","","100","","","100"],["Cost of revenue:"],["Cost of consignment revenue","11","","","9","","","10"],["Cost of direct revenue","14","","","24","","","22"],["Cost of shipping services revenue","7","","","9","","","10"],["Total cost of revenue","32","","","42","","","42"],["Gross profit","68","","","58","","","58"],["Operating expenses:"],["Marketing","11","","","11","","","13"],["Operations and technology","47","","","46","","","50"],["Selling, general and administrative","33","","","33","","","38"],["Restructuring","8","","","\u2014","","","\u2014"],["Legal settlement","\u2014","","","\u2014","","","3"],["Total operating expenses","99","","","90","","","104"],["Loss from operations","(31)","","","(32)","","","(46)"],["Interest income","2","","","1","","","\u2014"],["Interest expense","(2)","","","(2)","","","(5)"],["Other income, net","\u2014","","","\u2014","","","\u2014"],["Loss before provision for income taxes","(31)","","","(33)","","","(51)"],["Provision for income taxes","\u2014","","","\u2014","","","\u2014"],["Net loss","(31)","%","","(33)","%","","(51)","%"]]
[[/GREPCENT_TABLE]]

Comparison of 2023 and 2022

Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Consignment revenue, net","$","415,572","","","$","384,979","","","$","30,593","","","8","%"]]
[[/GREPCENT_TABLE]]

Consignment revenue increased by $30.6 million, or 8%, in 2023 compared to 2022. The increase in revenue was driven primarily by an increase in consignment GMV, and improvement in our take rate during the year ended December 31, 2023. Overall GMV decreased by 5% during the year ended December 31, 2023. The decrease in GMV is driven by a decrease in direct GMV, partially offset by the increase in consignment GMV.

Returns and cancellations as a percentage of GMV for the year ended December 31, 2023 was 26.4%, compared to 26.5% for the year ended December 31, 2022. Our take rate increased to 37.5% from 36.0% during the year ended December 31, 2023 compared to last year due to the update of our consignor commission structure which went into effect on November 1, 2022.

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Direct Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Direct revenue","$","79,160","","","$","158,726","","","$","(79,566)","","","(50)","%"]]
[[/GREPCENT_TABLE]]

Direct revenue decreased by $79.6 million, or 50%, in 2023 compared to 2022. The decrease was primarily driven by our planned actions to minimize vendor-purchased company-owned inventory as the margin profile of our direct revenue is lower than consignment revenue. We recognize direct revenue upon shipment of the purchased good to the buyer. Direct revenue as a percentage of total revenue may vary from period to period primarily based on the amount of consignment revenue.

Shipping Services Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Shipping services revenue","$","54,572","","","$","59,788","","","$","(5,216)","","","(9)","%"]]
[[/GREPCENT_TABLE]]

Shipping services revenue decreased by $5.2 million, or 9%, in 2023 compared to 2022 primarily due to a decrease in the number of orders.

Cost of Consignment Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of consignment revenue","$","58,120","","","$","56,963","","","$","1,157","","","2","%"],["As a percent of consignment revenue","14","%","","15","%"]]
[[/GREPCENT_TABLE]]

Cost of consignment revenue increased by $1.2 million, or 2%, in 2023 compared to 2022. The increase was primarily attributable to the 8% increase in consignment revenue compared to the prior year, partially offset by efficiencies in our cost leverage.

Consignment revenue gross margin increased by 81 basis points in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the 8% increase in consignment revenue.

Cost of Direct Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of direct revenue","$","74,343","","","$","141,661","","","$","(67,318)","","","(48)","%"],["As a percent of direct revenue","94","%","","89","%"]]
[[/GREPCENT_TABLE]]

Cost of direct revenue decreased by $67.3 million, or 48%, in 2023 compared to 2022. The decrease was primarily attributable to the 50% decrease in direct revenue compared to the prior year as a result of our planned actions to minimize vendor-purchased company-owned inventory.

Direct revenue gross margin decreased by 467 basis points in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by strategic liquidation of company owned inventory sold at discounted prices, which resulted in the sell through of inventory that was previously reserved. 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"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Cost of shipping services revenue","$","40,563","","","$","56,178","","","$","(15,615)","","","(28)","%"],["As a percent of shipping services revenue","74","%","","94","%"]]
[[/GREPCENT_TABLE]]

Cost of shipping services revenue decreased by $15.6 million, or 28%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease is primarily due to a decrease in the number of orders, and due to realizing benefits of cost savings initiatives.

Shipping services revenue gross margin increased by 1,963 basis points in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to decreased costs related to cost savings initiatives.

Total Gross Margin

Our total gross margin increased by 1,072 basis point in the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily driven by the increase in higher margin consignment revenue and decrease in lower margin direct revenue. Gross margin may vary from period to period.

Marketing

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Marketing","$","58,275","","","$","62,988","","","$","(4,713)","","","(7)","%"]]
[[/GREPCENT_TABLE]]

Marketing expense decreased by $4.7 million, or 7%, in 2023 compared to 2022. The decrease was primarily due to a decrease in advertising costs and lower employee compensation related expenses due to a decrease in headcount.

As a percentage of revenue, marketing remained flat at 11% in the years ended December 31, 2023 and 2022. 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"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Operations and technology","$","257,041","","","$","278,628","","","$","(21,587)","","","(8)","%"]]
[[/GREPCENT_TABLE]]

Operations and technology expense decreased by $21.6 million, or 8%, in 2023 compared to 2022. The decrease was primarily due to lower employee compensation related expenses due to a decrease in headcount related to the savings plan implemented during 2023. The decrease was also attributed to lower rent and lease related expenses due to retail store closures related to the savings plan implemented during 2023.

As a percentage of revenue, operations and technology expense increased to 47% in 2023 from 46% in 2022 due to a decrease in direct revenue. 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 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"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Selling, general and administrative","$","182,453","","","$","194,886","","","$","(12,433)","","","(6)","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expense decreased by $12.4 million, or 6%, in 2023 compared to 2022. The decrease was due to lower employee compensation expenses due to a decrease in headcount related to the savings plan implemented during 2023. The decrease was also attributed to lower rent and lease related expenses due to office closures related to the savings plan implemented during 2023.

As a percentage of revenue, selling, general and administrative remained flat at 33% in the years ended December 31, 2023 and 2022 . 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.

Restructuring

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Restructuring","$","43,462","","","$","896","","","$","42,566","","","4,751","%"]]
[[/GREPCENT_TABLE]]

Restructuring increased by $42.6 million, or over 100%, in 2023 compared to 2022. The increase was primarily due to charges to reduce our real estate presence and operating expenses through the closure of certain retail and office locations and workforce reduction. Restructuring consisted of right-of-use asset impairment charge of $31.1 million, leasehold improvements impairment charge of $8.6 million, employee severance of $3.0 million, and other related charges of $1.5 million, partially offset by a $0.7 million gain on lease terminations. As of the date of this annual report, the real estate reduction plan we implemented in February 2023 is substantially complete.

Interest Income

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Interest income","$","8,805","","","$","3,191","","","$","5,614","","","176","%"]]
[[/GREPCENT_TABLE]]

Interest income increased by $5.6 million, or over 100%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily driven by higher average interest rates.

Interest Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Interest expense","$","(10,701)","","","$","(10,472)","","","$","229","","","2","%"]]
[[/GREPCENT_TABLE]]

Interest expense increased by $0.2 million, or 2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Other Income, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Other income, net","$","\u2014","","","$","171","","","$","(171)","","","-100","%"]]
[[/GREPCENT_TABLE]]

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Other income decreased by $0.2 million, or 100%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.

Legal Settlement

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","%"],["","(In thousands, except percentage)"],["Legal settlement","$","1,340","","","$","456","","","$","884","","","194","%"]]
[[/GREPCENT_TABLE]]

Legal settlement expense increased by $0.9 million, or over 100%, in 2023 compared to 2022. This increase was primarily due to settlements of two former employees’ individual claims and California Private Attorney General Actions initiated against the Company.

Liquidity and Capital Resources

As of December 31, 2023, we had cash and cash equivalents of $175.7 million and an accumulated deficit of $1,119.6 million. We had restricted cash of $14.9 million as of December 31, 2023, consisting of cash deposited with a financial institution as collateral for our letters of credit, facility leases and credit cards. 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 our 3.00% Convertible Senior Notes due 2025 (the “2025 Notes”) and the related capped call transactions. In March 2021, we received net proceeds of $244.5 million from our 1.00% Convertible Senior Notes due 2028 (the “2028 Notes” and together with the 2025 Notes, the "Notes”) and the related capped call transactions. 

On February 29, 2024, we entered into an exchange agreement with certain holders of our Notes (the “Holders” and such agreement the “Exchange Agreement”). Under the terms of the Exchange Agreement the Holders agreed to exchange $145,751,000 aggregate principal amount of the 2025 Notes and $6,480,000 aggregate principal amount of the 2028 Notes for $135,000,000 aggregate principal amount of our new senior notes due 2029 (the “2029 Notes”, and such transaction the “Exchange”). Additionally, in connection with the Exchange, we issued warrants to acquire an aggregate of up to 7,894,737 shares of the Company’s common stock to the Holders. The Exchange was consummated on February 29, 2024. The 2029 Notes bear cash interest at a rate of 8.75% per annum payable semi-annually in arrears and bear interest at a rate of 4.25% payable in kind.

We expect that operating losses and negative cash flows from operations could continue in the foreseeable future. We believe our existing cash and cash equivalents as of December 31, 2023 will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.

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. The remaining 2025 Notes not exchanged will mature on June 15, 2025, unless earlier redeemed or repurchased by the Company or converted and the remaining 2028 Notes not exchanged will mature on March 1, 2028, unless earlier redeemed or repurchased by the Company or converted. 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 revenues and the timing of investments to support growth in our business, such as the build-out of our authentication centers and, to a lesser extent, the opening of new retail stores. 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. As of June 30, 2023, $0 had been drawn on the Revolving Credit Agreement, and the credit facility has expired and was not renewed.

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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, 2022.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(In thousands)"],["Net cash (used in) provided by:"],["Operating activities","$","(61,268)","","","$","(91,557)","","","$","(142,151)"],["Investing activities","(42,128)","","","(36,922)","","","(43,437)"],["Financing activities","226","","","4,101","","","252,913"],["Net (decrease) increase in cash and cash equivalents","$","(103,170)","","","$","(124,378)","","","$","67,325"]]
[[/GREPCENT_TABLE]]

Net Cash Used in Operating Activities

During 2023, net cash used in operating activities was $61.3 million, which consisted of a net loss of $168.5 million, adjusted by non-cash charges of $136.3 million and cash outflows due to a net change of $29.1 million in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of cash outflows due to a decrease of $26.5 million in operating lease liabilities, a decrease of $4.4 million in consignor payables, an increase of $7.0 million in accounts receivable, and an increase of $3.1 million in other assets, partially offset by cash inflows due to a decrease of $10.9 million in inventory driven by a decrease in direct purchases of inventory from vendors. 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 2023, net cash used in investing activities was $42.1 million, which consisted of $29.2 million for purchases of property and equipment, net, including leasehold improvements, and $13.0 million for capitalized proprietary software costs.

Net Cash Provided by Financing Activities

During 2023, net cash provided by financing activities was $0.2 million, which primarily consisted of $0.9 million of proceeds from the issuance of common stock related to the Company's employee stock purchase plan, partially offset by $0.7 million of taxes related to restricted stock units vesting.

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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 and for incentive and compensation 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, CEO separation benefits, 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.

In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of stock-based compensation and the related employer payroll tax expense on employee stock transactions, excludes an item that we do not consider to be indicative of our core operating performance. Investors should, however, understand that stock-based compensation and the related employer payroll tax expense will be a significant recurring expense in our business and an important part of the compensation provided to our employees. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(In thousands)"],["Adjusted EBITDA Reconciliation:"],["Net loss","$","(168,472)","","","$","(196,445)","","","$","(236,107)"],["Add (deduct):"],["Depreciation and amortization","31,695","","","27,669","","","23,531"],["Interest income","(8,805)","","","(3,191)","","","(365)"],["Interest expense","10,701","","","10,472","","","21,531"],["Provision for income taxes","283","","","172","","","56"],["EBITDA","(134,598)","","","(161,323)","","","(191,354)"],["Stock-based compensation (1)","34,273","","","46,138","","","48,802"],["CEO separation benefits (2)","\u2014","","","948","","","\u2014"],["CEO transition costs (3)","159","","","1,551","","","\u2014"],["Payroll taxes on employee stock transactions","195","","","451","","","1,168"],["Legal fees reimbursement benefit (4)","\u2014","","","(1,400)","","","(1,204)"],["Legal settlements (5)","1,340","","","456","","","13,389"],["Restructuring (6)","43,462","","","896","","","2,314"],["Other expense, net","\u2014","","","(171)","","","(23)"],["Adjusted EBITDA","(55,169)","","","(112,454)","","","(126,908)"]]
[[/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 CEO separation benefit charges for the year ended December 31, 2022 consist 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.

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(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. The CEO transition charges for the year ended December 31, 2023 consists of retention bonuses for certain executives incurred in connection with our founder's resignation in 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, 2023 reflect legal settlement expenses arising from the settlement of two former employees’ individual claims and California Private Attorney General Actions initiated against the Company on behalf of such former employees and those similarly situated. The legal settlement charges for the year ended December 31, 2021 reflect legal settlement expenses arising from the settlement of a putative shareholder class action and derivative case.

(6) Restructuring for the year ended December 31, 2023 consists of impairment of right-of-use assets and property and equipment, employee severance charges, gain on lease terminations, and other charges, including legal and transportation expenses. Restructuring for the year ended December 31, 2022 consists of employee severance payments and benefits. Restructuring for the year ended December 31, 2021 consist of the costs to transition operations from the Brisbane warehouse to our new Phoenix warehouse.

Material Contractual and Other Obligations

Our material contractual and other obligations as of December 31, 2023 consist of:

•Operating Leases. As of December 31, 2023, 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 $146.7 million, of which $27.0 million is expected to be paid within the next 12 months.

•Convertible Senior Notes. As of December 31, 2023, our cash requirements related to our Convertible Senior Notes that are included on our balance sheet and the related periodic interest payments were $480.7 million, of which $8.1 million is expected to be paid within the next 12 months. Our 2025 Notes will mature on June 15, 2025, unless earlier redeemed or repurchased by the Company or converted and our 2028 Notes will mature on March 1, 2028, unless earlier redeemed or repurchased by the Company or converted. On February 29, 2024, we entered in an exchange agreement with certain holders of our Notes (see Note 16 – Subsequent Events for further information).

•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 $21.5 million, of which approximately $7.9 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.

For the year ended December 31, 2023, 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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