Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion includes both historical information and forward-looking information based upon current expectations that involve risk, uncertainties, and assumptions. Our actual results may differ materially from management’s expectations as a result of various factors, including, but not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Prior Periods’ Financial Statement Revisions
As described in Note 3 to the consolidated financial statements, we have revised previously issued financial statements to correct immaterial misstatements. Accordingly, this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the effects of the revisions.
Overview
We are a social marketplace that combines the human connection of a physical shopping experience with the scale, reach, ease, and selection benefits of eCommerce. In doing so, we bring the power of community to buying and selling online. We created Poshmark in 2011 to make buying and selling simple, social, and fun. Pairing technology with the inherent human desire to socialize, our marketplace creates passion and personal connections among users. We dynamically curate our marketplace into lifestyle categories that our users love, including apparel, accessories, footwear, home, beauty, and pets. Powered by our proprietary technology, our social marketplace is purpose-built to enable simple transactions, seamless logistics, and an engaging experience at scale. As of December 31, 2021, we had 7.6 million Active Buyers.
We empower people to sell a few items or to become successful entrepreneurs by providing them with end-to-end seller tools. We refer to this as “making selling a superpower.” Our comprehensive infrastructure makes it easy for sellers to build their businesses with seamless listing, merchandising, promotion, pricing, and shipping. Sellers use content, inventory selection, and social interactions to monetize their listings and drive growth. Our transparent fee structure aligns our success with the success of our sellers. Our fee is 20% of the final price for sales $15 and over, or a flat rate of $2.95 for sales under $15. We attract, engage, and retain sellers by offering the community the benefits of social connection with the ability to combine personal passion and economic empowerment. We do not own or manage inventory as products are listed, managed, sold, and shipped by our sellers, utilizing our transaction tool that makes the selling process seamless and easy. This asset-light model creates scalability and favorable working capital dynamics.
Our social features make the discovery and purchase process simple and enticing for buyers, fostering high engagement and retention. The engagement of our community has fueled strong growth in our business, supported by attractive unit economics and efficient user acquisition. We enable buyers to discover, connect, and curate their network and news feed with that of other users who share similar styles and personal preferences, creating a fun shopping experience. Our marketplace is vast, with sellers listing millions of secondhand and new items across multiple categories. We use data-driven personalization to customize each user’s feed to feature the most relevant listings and make it easy to quickly search for and find products of interest. Furthermore, sellers list a variety of items across all price points, with the added benefit of being able to negotiate offers directly with buyers seeking to optimize their budget, allowing sellers to manage their listings to achieve their individual objectives. Because our marketplace features a massive selection of secondhand items, buyers are also able to support their personal style while minimizing their environmental impact.
As of December 31, 2021, our community has generated over $6.2 billion in GMV since 2011, with $1.8 billion in 2021 and $1.4 billion in 2020, representing a 27% growth rate. In 2021 and 2020, we had revenue of $326.0 million and $261.6 million, respectively, representing a 25% growth rate. In 2021, we generated a net loss of $98.3 million,
and Adjusted EBITDA of $7.3 million compared to a net income of $18.8 million and Adjusted EBITDA of $36.0 million in 2020.
Key Operating and Non-GAAP Financial Metrics
We collect and analyze operating and financial data to evaluate the health of our community, allocate our resources (such as capital, time, and technology investments), and assess the performance of our business. In addition to revenue, net (loss) income, and other results under GAAP, the key operating and financial metrics we use are GMV, Active Buyers, and Adjusted EBITDA.
Gross Merchandise Value. Our gross merchandise value, or GMV, is the total dollar value of transactions on our platform in a given period, prior to returns and cancellations, and excluding shipping and sales taxes. GMV is a measure of the total economic activity generated by our marketplace, and an indicator of the scale and growth of our marketplace and the health of our marketplace ecosystem.
GMV
($ in millions)
Our GMV has grown at a 31% compound annual growth rate, or CAGR, from $807 million in 2018 to $1.8 billion in 2021. Our GMV grew 27% from $1.4 billion in 2020 to $1.8 billion in 2021. Our quarterly GMV has increased year-over-year for the past sixteen quarters. We have continued to add users and enhance our social marketplace with various initiatives and product updates, including the launch of our Brand Closet Program enabling brands to connect directly our community, an expansion of our partnership with Affirm to include their Buy Now Pay Later product, and the continued rollouts of Poshmark Mini, which is a simplified version of the Poshmark app that lives inside of Snapchat, and Bulk Listing Actions, which are closet management tools that allow sellers to update and promote multiple product listings at once.
Active Buyers. Active Buyers are unique users who have purchased at least one item on our platform in the trailing 12 months preceding the measurement date, regardless of returns and cancellations. An Active Buyer could have more than one account if they were to use a separate unique email address to set up each account. The number of Active Buyers is a key driver of GMV and revenue, as well as a measure of the scale and growth of our buyer community. We believe it is also an important indicator of our ability to convert user activity on our marketplace into transactions. The number of Active Buyers has increased steadily every quarter as we attract and retain users. Active Buyers can be new users to our marketplace who make a purchase, existing users who convert into buyers for the first time as our marketplace strengthens with more sellers and items, or repeat buyers.
Active Buyers
(in thousands)
5,713 6,032 6,231 5,374 4,952 4,550 4,190 3,734 3,345 2,953 2,657 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 Active Buyers measured as of the last day of the quarter presented
Active Buyers measured as of the last day of the quarter presented
Adjusted EBITDA. We define Adjusted EBITDA as net (loss) income attributable to common stockholders, excluding depreciation and amortization, stock-based compensation expense, interest income, other expense, net, change in accrued sales tax, provision (benefit) for income taxes, and undistributed earnings attributable to participating securities. Adjusted EBITDA is a key performance measure used by our management and board of directors to assess our operating performance and the operating leverage in our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the income and expenses that we exclude in Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making. See “—Reconciliation of Non-GAAP Financial Measures” for more information and for a reconciliation of net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA.
Adjusted EBITDA
($ in millions)
Key Factors Affecting Our Performance
Growth and Retention of Users. We focus on attracting new users and retaining existing users. New users and the social and transactional activities they contribute help keep existing users more active, increasing their lifetime value over time. Users engage in many ways on our social marketplace: they connect, they browse, they buy, and they sell. The positive relationship between new users and existing users illustrates the network effects of our marketplace. As of December 31, 2021, we had 7.6 million Active Buyers.
User Engagement. The engagement of our community has fueled strong growth in our business, supported by attractive unit economics and efficient user acquisition. We believe that cultivating a robust network of users over the longer-term is crucial to bolstering broader community engagement, growing social interactions, and increasing GMV. Users can engage on our marketplace in a variety of activities that range from shopping and social interactions to buying and selling. The continuous increase in users, social interactions, and listings has led to steady activations of buyers and sellers across cohorts, resulting in increasing GMV for these cohorts.
Cumulative % Sellers Activated as Buyers from Year 1 to Year 5 31% of First-Time Sellers Also Became Buyers in Year 1 40% 42% 44% 37% 31% Year of Seller's Year 2 Year 3 Year 4 Year 5 First Sale
Investments in Growing Our User Community . We have invested substantially in marketing to grow our user community and drive further awareness of our brand. These investments have enabled us to grow our base of new users, buyers, and sellers while continuing to retain buyers and sellers, resulting in strong growth of our GMV and revenue. Marketing expenses represented 44% and 35% of revenue in 2021 and 2020, respectively. We intend to manage our marketing spend to balance growth and profitability. While we have seen fluctuations and uncertainty in user acquisition costs, partially due to Apple's recent policy change that limits the ability of advertisers to collect user data, we will continue to invest in user acquisition and retention while the underlying user unit economics indicate the return on investment is strong.
Investments in Platform Innovation. We invest in both the people and technology behind our platform. We also intend to continue to make significant investments in the technology and infrastructure of our platform to attract and retain buyers and sellers, expand the capabilities and scope of our platform, and enhance the user experience. We expect to continue to make significant investments to attract and retain employees, particularly engineers, data scientists, designers, product management, and operations personnel. All functions are important, and we intend to invest in our people to help us drive additional efficiencies across our marketplace. In addition, we may invest in new
and existing businesses that may lower our margins temporarily but may enhance our platform capabilities, deliver revenue growth, and enable us to achieve and maintain long-term profitability.
International Expansion. We began operations in Canada, the first country we expanded to after the United States, in May 2019. In February 2021, we expanded our operations to Australia. In September 2021, we launched operations in India. International expansion may impact our financial performance in the short term. In 2021 and 2020, revenue from international operations was less than 10% of our net revenue. As we continue our global expansion, we believe international demand for our platform will develop and increase. Accordingly, we believe there is a significant opportunity to grow our international business. We have invested, and plan to continue to invest, in the adoption of our platform and solutions internationally, including localization of our platform and the addition of critical capabilities to our platform required to serve those local markets.
Impact of the COVID-19 Pandemic. The COVID-19 pandemic has had a variety of impacts on our business to date and will continue to impact our business in ways that remain unpredictable. In the initial weeks of the pandemic in the United States, we experienced a significant decrease in GMV. In the month of March 2020, we had negative 13% year-over-year GMV growth which in turn impacted the year-over-year GMV growth for the quarter ended March 31, 2020, which was 9%. Subsequently, in the quarter ended June 30, 2020, the year-over-year GMV growth rebounded to 42% as buyer and seller activity resumed. We have seen strong year-over-year GMV growth in subsequent quarters, but , such trends may not continue and could be reversed. While the rollout of COVID-19 vaccines and lifting of movement restrictions have begun in the U.S. and internationally, there remains substantial uncertainty about the pandemic’s impact on the global economy, e-commerce, and global macroeconomic conditions that impact consumer spending. In particular, to the extent that federal and state governmental aid programs initiated in connection with the pandemic are reduced or terminated, consumer discretionary spending would likely decrease, which would have a negative impact on our business.
As a result of the COVID-19 pandemic, the lives of our users, buyers, and sellers have been disrupted as many people have been required to stay home and many have experienced significant economic and employment disruption. As many people have shifted to a work-from-home environment, there has been less of a need for some to purchase apparel. In some cases, buyers also have a decreased ability to spend on our marketplace due to economic concerns and pressures. In other cases, physical stores have been viewed as potentially dangerous, driving demand to online alternatives such as Poshmark. For our sellers, our marketplace has continued to serve as a means for additional income, though the requirement to handle their own logistics amid quarantine has proven difficult at times. Additionally, the social nature of our platform and the community we have built continued to attract users throughout the pandemic to come shop, interact, and share.
Our headquarters and offices remained temporarily closed as of December 31, 2021, with substantially all of our employees working remotely, temporarily lowering our operating expenses. As the pandemic subsides, we intend to open our offices in accordance with local guidelines and regulations. Additional disruptions or a resurgence of offline shopping demand could adversely affect our business, results of operations, liquidity, and financial condition in future periods. The conditions caused by the pandemic are still evolving and we will continue to evaluate the potential impact of the pandemic on our business. See “Part I., Item 1A. Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business, operations and financial condition.
Seasonality. Our business is seasonal in nature as it is affected by the cyclicality of the consumer as well as broader market conditions. Historically, we have often seen both stronger growth in the number of Active Users and Active Buyers and in engagement during the first quarter of the year. In addition, we have seen higher GMV in the fourth quarter of the year, followed by the third quarter, which we believe is due in part to the higher price points of seasonal apparel and footwear and the holiday season. We believe the recent growth in our business, as well as the recent effects of sales taxes and the COVID-19 pandemic, have partially masked these trends to date, and we expect the impact of seasonality to be more pronounced in our future quarterly results as our business matures.
GAAP and Non-GAAP Financial Measures
We also review the following GAAP and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Year Ended December 31,
(in thousands)
Net (Loss) Income
Net (Loss) Income Margin (1)
Adjusted EBITDA
Adjusted EBITDA Margin (2)
Net (Loss) Income Margin is calculated by dividing Net (Loss) Income for a period by revenue for the same period.
Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period.
Adjusted EBITDA
Adjusted EBITDA is a key performance measure that we use to assess our operating performance and the operating leverage in our business. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes.
We calculate Adjusted EBITDA as net (loss) income attributable to common stockholders, adjusted to exclude:
depreciation and amortization;
stock-based compensation expense;
interest income;
other expense, net;
change in accrued sales tax;
(benefit) provision for income taxes; and
undistributed earnings attributable to participating securities.
Adjusted EBITDA decreased $28.8 million for the year ended December 31, 2021 compared to the same period in 2020 primarily due to an increase in marketing spend to grow the number of Active Users and Active Buyers and increase our brand awareness, and an increase in headcount cost to support our growth.
Adjusted EBITDA increased $72.1 million for the year ended December 31, 2020 compared to the same period in 2019 primarily due to an increase in revenue and a decrease in marketing spend in response to the COVID-19 pandemic.
Reconciliation of Non-GAAP Financial Measures
We use Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, and to evaluate the effectiveness of our business strategies. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish similar metrics. Furthermore, this metric has certain limitations in that it does not include the impact of certain expenses that are reflected in our consolidated statements of operations that are necessary to run our business. Thus, our Adjusted EBITDA and Adjusted EBITDA Margin should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
We compensate for these limitations by providing a reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin to the related GAAP financial measure, net (loss) income attributable to common stockholders. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with their respective related GAAP financial measures.
The following table provides a reconciliation of net (loss) income to Adjusted EBITDA (in thousands):
Year Ended December 31,
(in thousands)
Net (loss) income attributable to
common stockholders
Adjusted to exclude the following:
Depreciation and amortization
Stock-based compensation
Interest income
Other expense, net
Change in accrued sales taxes (1)
(Benefit) provision for income taxes
Undistributed earnings
attributable to
participating securities
Adjusted EBITDA
Reflects our estimated liability for the non-collection and non-remittance of sales taxes which became required beginning in 2018. We began collecting and remitting sales tax in April 2019. Accordingly, these liabilities were no longer incurred in 2020.
Components of Results of Operations
Net Revenue
We generate revenue from sellers for fees earned when they sell items they have listed on our social marketplace to buyers (20% of the final price for sales $15 and over, or a flat rate of $2.95 for sales under $15). The buyer also pays a shipping label fee as part of their order. On some orders, the shipping label fee exceeds our shipping label cost, which we record as revenue. In 2021, this revenue was 4% of our total net revenue. In 2020, this revenue was 3% of our total net revenue and was 1% in 2019. Our revenue is recognized when we satisfy our performance obligations. We report both revenue from buyers and revenue from sellers based upon the net amount earned, which is reduced by certain buyer and seller incentives.
Costs and Expenses
Cost of Net Revenue. Cost of net revenue primarily consists of costs associated with credit card processing, transaction fees for order related payments, and hosting expenses associated with operating our platform. Cost of net revenue does not include depreciation and amortization.
We expect cost of net revenue to increase in absolute dollars in future periods and to vary from period to period as a percentage of net revenue for the foreseeable future as we grow our platform by increasing Active Buyers and generating higher GMV.
Operations and Support. Operations and support expense primarily consists of personnel-related compensation costs, including stock-based compensation, incurred in providing support to users of our platform including authentication services that we provide. This expense also includes postage and shipping costs that we incur primarily from order losses and cancellations, and credits and incentives issued to buyers for customer satisfaction purposes in excess of shipping facilitation revenue.
We expect that operations and support expenses will increase in absolute dollars for the foreseeable future as we continue to grow our operations and hire additional employees to support the scaling of our business. To the extent we are successful in becoming more efficient in supporting our users, we would expect operations and support expenses as a percentage of revenue to decrease over the long term.
Research and Development . Research and development expense consist primarily of compensation expenses for engineering, product development, and design employees, including stock-based compensation, expenses associated with ongoing improvements to and maintenance and testing of our platform offerings including website, mobile apps, and other products, and other research and development programs. Research and development expenses are expensed as incurred. We capitalize certain costs associated with website development and software for internal use.
We expect that research and development expenses will increase in absolute dollars and vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in research and development activities relating to ongoing improvements to and maintenance and testing of our platform offerings including website, mobile apps, and other products, and other research and development programs, including the hiring of engineering, product development, and design employees to support these efforts.
Marketing. Marketing expense primarily consists of expenses associated with personnel-related compensation costs, including stock-based compensation, and costs related to user acquisition, public relations, marketing events such as Posh Parties, and business development. User acquisition costs primarily consist of costs associated with acquiring new users by spend on advertising channels such as television, Google, Facebook, Instagram, Snapchat, and TikTok. These marketing expenses also include promotional credits and incentives issued to buyers to encourage buyer activity on our platform in excess of shipping facilitation revenue and cost of referral incentives for new user acquisition. We plan to continue to invest in our marketing efforts, including hiring additional employees, in order to attract new users.
We expect that marketing expenses will increase in absolute dollars and vary from period to period as a percentage of revenue for the foreseeable future as we plan to continue to invest in marketing to grow the number of Active Users and Active Buyers and increase our brand awareness. The trend and timing of our brand marketing expenses will depend in part on the timing of marketing campaigns.
General and Administrative. General and administrative expense consists primarily of employee related costs including stock-based compensation for those employees associated with administrative services such as legal, human resources, information technology, accounting, and finance, and all related costs associated with our facilities, such as rent and office administration. These expenses also include certain third-party consulting services, facilities, IT services, meals and other corporate costs not allocated to other expense categories.
We expect that general and administrative expenses will increase in absolute dollars and vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in personnel, corporate infrastructure, and systems required to support our strategic initiatives, the growth of our business, and our compliance and reporting obligations, and controls to enable our internal support functions to scale with the growth of our business. We expect to incur additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and expenses for general and director and officer insurance, investor relations, and professional services. We also expect rent expense and other facilities related costs to continue to increase in the future.
Depreciation and Amortization. Depreciation and amortization expense primarily consists of depreciation of computer equipment and software, furniture and fixtures, leasehold improvements, website development and software for internal use and amortization of intangible assets.
We expect that depreciation and amortization expense will increase in absolute dollars as we continue to build out our network infrastructure, recognize amortization expense from acquired intangible assets resulting from acquisitions and establish new office locations to support our growth.
Interest Income
Interest income primarily relates to amounts earned on our cash and cash equivalents and marketable securities.
Other Expense, Net
Other expense, net mainly relates to changes in fair value of the Convertible Notes, redeemable convertible preferred stock warrants and contingent consideration relating to acquisition, and foreign exchange remeasurement gains and losses recorded from consolidating our foreign subsidiaries at each period end.
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes consists primarily of foreign taxes and state minimum taxes in the United States. As we expand the scale of our international business activities, any changes in the U.S. and foreign taxation of such activities may increase our overall provision (benefit) for income taxes in the future. We have established a valuation allowance for our U.S. deferred tax assets, including federal and state NOLs.
We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.
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.
The following tables set forth our consolidated results of operations data and such data as a percentage of net revenue for the periods presented:
Year Ended December 31,
(in thousands)
Net revenue
Costs and expenses (2) :
Cost of net revenue, exclusive of depreciation
and amortization
Operations and support
Research and development
Marketing
General and administrative
Depreciation and amortization
Total costs and expenses
(Loss) income from operations
Interest income
Other expense, net
Change in fair value of redeemable convertible
preferred stock warrant liability
Change in fair value of convertible notes
Loss on extinguishment of the convertible notes
Change in fair value of contingent consideration
Other, net
(Loss) income before provision (benefit) for
income taxes
(Benefit) provision for income taxes
Net (loss) income
Undistributed earnings attributable to participating
securities
Net (loss) income attributable to common
stockholders
Includes the impact of revisions of the consolidated financial statements to correct for errors as noted above.
Costs and expenses include stock-based compensation expense as follows:
Year Ended December 31,
(in thousands)
Operations and support
Research and development
Marketing
General and administrative
Total
Year Ended December 31,
Net revenue
Costs and expenses:
Cost of net revenue, exclusive of
depreciation and amortization
Operations and support
Research and development
Marketing
General and administrative
Depreciation and amortization
Total costs and expenses
(Loss) income from operations
Interest income
Other expense, net
Change in fair value of redeemable
convertible preferred stock warrant
liability
Change in fair value of convertible notes
Loss on extinguishment of the convertible notes
Change in fair value of contingent consideration
Other, net
(Loss) income before (benefit) provision for
income taxes
(Benefit) provision for income taxes
Net (loss) income
Undistributed earnings attributable to
participating securities
Net (loss) income attributable to common
stockholders
Includes the impact of revisions of the consolidated financial statements to correct for errors as noted above.
Comparison of Years Ended December 31, 2021 and 2020
Net Revenue
Year Ended December 31,
Change
(dollars in thousands)
Net revenue
Net revenue increased $64.4 million for the year ended December 31, 2021 compared to the prior year. This growth was primarily due to an increase in the volume of GMV on our marketplace to a total of $1.8 billion, an increase of 27% for the year ended December 31, 2021 compared to the prior year. The increase in GMV was substantially driven by the increase in Active Buyers on the platform to 7.6 million for the year ended December 31, 2021, a 17% increase compared to the same period in 2020, and an 9% increase in GMV per Active Buyer for the year ended December 31, 2021 compared to the prior year.
Cost of Net Revenue
Year Ended December 31,
Change
(dollars in thousands)
Cost of net revenue
Cost of net revenue increased $8.4 million for the year ended December 31, 2021 compared to the prior year. The increase was driven by a $5.8 million increase in costs related to overall volume increases on our marketplace, including increased credit card processing fees and associated expenses, and an increase in data hosting costs of $2.6 million to support the increased usage of our platform and upgrades we made to our systems which were required to support our growth.
As a percent of revenue, cost of net revenue decreased to 16% from 17% during the year ended December 31, 2021 and 2020, respectively, primarily due to a non-recurring credit in payment processing fees.
Operations and Support
Year Ended December 31,
Change
(dollars in thousands)
Operations and support
Operations and support expense increased $17.0 million for the year ended December 31, 2021 compared to the prior year. The increase was primarily driven by the combined effect from a $10.7 million increase in customer service and support personnel costs, including $4.1 million in stock-based compensation, mainly due to the satisfaction of the performance-based vesting condition for our outstanding RSUs upon the effectiveness of our IPO in January 2021, a $5.5 million increase in net shipping costs as a result of our growth, and a $0.6 million increase in credits and incentives issued to users for the purposes of dispute resolution.
Research and Development
Year Ended December 31,
Change
(dollars in thousands)
Research and development
Research and development expense increased $28.7 million for the year ended December 31, 2021 compared to the prior year. The increase was primarily due to an increase of $27.8 million in engineering personnel costs required to support the growth of our business as we launch new innovations and improve functionality on our platform, including $18.4 million in stock-based compensation, mainly due to the satisfaction of the performance based vesting condition for our outstanding RSUs upon the effectiveness of our IPO in January 2021, and a $0.9 million increase in development-related services.
Marketing
Year Ended December 31,
Change
(dollars in thousands)
Marketing
Marketing expense increased $50.3 million for the year ended December 31, 2021 compared to the prior year. The increase was primarily due to a $41.8 million in spending on marketing programs, including increased spending on television ad campaigns and digital marketing, and a $8.5 million increase in marketing personnel costs, including $5.3 million in stock-based compensation, mainly due to the satisfaction of the performance-based vesting condition for our outstanding RSUs upon the effectiveness of our IPO in January 2021.
General and Administrative
Year Ended December 31,
Change
(dollars in thousands)
General and administrative
General and administrative expense increased $29.2 million for the year ended December 31, 2021 compared to the prior year. This increase was primarily driven by the combined effect from increases of $19.3 million increase in personnel costs which were required to support our growth and transition to a public company and included $12.5 million in stock-based compensation mainly due to the satisfaction of the performance-based vesting condition for our outstanding RSUs upon the effectiveness of our IPO in January 2021, increased legal and consulting fees of $5.0 million required to support our public company transition, increased insurance costs of $4.8 million required as a result of becoming a public company, and increased IT services of $0.6 million to support the growth of our business . These increases were partially offset by a $0.4 million decrease in chargeback costs due to lower fraud activity in the current period.
Depreciation and Amortization
Year Ended December 31,
Change
(dollars in thousands)
Depreciation and amortization
The increase in depreciation and amortization expense is primarily driven by an increase in the capitalization of website and software development and amortization of intangible assets.
Interest Income
Year Ended December 31,
Change
(dollars in thousands)
Interest income
The decrease in interest income is due to the lower balance of our marketable securities and lower interest rates earned from our marketable securities.
Other Expense, Net
Year Ended December 31,
Change
(dollars in thousands)
Other expenses, net
Other expense, net increased $47.8 million for the year ended December 31, 2021 compared to the same period in 2020. The increase is primarily due to an increase in fair value of the Convertible Notes, and the change in fair value of the redeemable convertible preferred stock warrant liability which was driven by an increase in the fair value of the underlying redeemable convertible preferred stock, with no comparable activity in the same period in 2020.
(Benefit) Provision for Income Taxes
Year Ended December 31,
Change
(dollars in thousands)
(Benefit) provision for income taxes
The change in our (benefit) provision for income taxes is primarily attributable to pre-tax foreign earnings and changes in state income tax.
Comparison of Years Ended December 31, 2020 and 2019
Net Revenue
Year Ended December 31,
Change
(dollars in thousands)
Net revenue
Net revenue increased $56.6 million for the year ended December 31, 2020 compared to the prior year. This growth was primarily due to an increase in the volume of GMV on our marketplace to a total of $1.4 billion, an increase of 29% for the year ended December 31, 2020 compared to the prior year. The increase in GMV was substantially driven by the increase in Active Buyers on the platform to 6.5 million for the year ended December 31, 2020, a 20% increase compared to the same period in 2019, and an 8% increase in GMV per Active Buyer for the year ended December 31, 2020 compared to the prior year.
Cost of Net Revenue
Year Ended December 31,
Change
(dollars in thousands)
Cost of net revenue
Cost of net revenue increased $9.4 million for the year ended December 31, 2020 compared to the prior year. The increase was driven by a $8.2 million increase in costs related to overall volume increases on our marketplace, including increased credit card processing fees and associated expenses, and an increase in data hosting costs of $1.2 million to support the increased usage of our platform and upgrades we made to our systems which were required to support our growth.
Operations and Support
Year Ended December 31,
Change
(dollars in thousands)
Operations and support
Operations and support expense increased $9.9 million for the year ended December 31, 2020 compared to the prior year. The increase was primarily driven by the overall volume increase on our marketplace, including a $5.0 million increase in net shipping costs as a result of our growth, a $2.5 million increase in credits and incentives issued to users for the purposes of dispute resolution, and a $2.3 million increase in customer service and support personnel costs as a result of increased headcount.
Research and Development
Year Ended December 31,
Change
(dollars in thousands)
Research and development
Research and development expense increased $5.0 million for the year ended December 31, 2020 compared to the prior year. The increase was primarily due to an increase of $4.8 million in engineering personnel costs required to support the growth of our business as we launch new innovations and improve functionality on our platform.
Marketing
Year Ended December 31,
Change
(dollars in thousands)
Marketing
Marketing expense decreased $39.8 million in the year ended December 31, 2020 compared to the prior year. The decrease was primarily due to a $41.5 million decrease in spending on marketing programs and events, including decreased spending on television ad campaigns and digital marketing to preserve liquidity in response to the COVID-19 pandemic, partially offset by an increase of $1.7 million in marketing personnel costs as a result of an increase in headcount to support the growth of our business.
General and Administrative
Year Ended December 31,
Change
(dollars in thousands)
General and administrative
General and administrative expense decreased $2.7 million for the year ended December 31, 2020 compared to the prior year. This decrease was primarily driven by a $2.6 million decrease in legal and consulting fees as the current year period was impacted by decreased spending on corporate initiatives and projects to preserve liquidity in response to the COVID-19 pandemic, lower expenses for sales tax accruals as the prior year period included accruals of $0.9 million with no corresponding change in the current year period, and lower facility costs of $0.8 million, partially offset by a $1.5 million increase in chargeback costs related to the overall volume increase on our marketplace and increased fraud activity.
Depreciation and Amortization
Year Ended December 31,
Change
(dollars in thousands)
Depreciation and amortization
Depreciation and amortization expense increased $0.8 million for the year ended December 31, 2020 compared to the prior year. The increase was primarily due to an increase in leasehold improvements amortization associated with our new headquarters.
Interest Income
Year Ended December 31,
Change
(dollars in thousands)
Interest income
The decrease in interest income is due to the lower balance of our marketable securities and lower interest rates earned from our marketable securities.
Other Expense, Net
Year Ended December 31,
Change
(dollars in thousands)
Other expenses, net
The increase in other expense, net is primarily due to an increase in fair value of the Convertible Notes and the associated write-off of debt issuance costs related to the Convertible Notes for the year ended December 31, 2020 with no comparable activity in the prior year period, and the change in fair value of the redeemable convertible preferred stock warrant liability which was driven by an increase in the fair value of the underlying redeemable convertible preferred stock.
Provision for Income Taxes
Year Ended December 31,
Change
(dollars in thousands)
Provision for income taxes
The increase in our provision for income taxes is primarily due to state income taxes.
Liquidity and Capital Resources
As of December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $581.5 million. Cash equivalents consisted of institutional money market funds, and cash in transit from third-party credit card providers that we receive within approximately three to five business days from the date of the underlying transaction.
As of December 31, 2021, our cash and cash equivalents held by our foreign subsidiaries were not material.
Since our inception, we have most often generated negative cash flows from operations and as of December 31, 2021, we had an accumulated deficit of $221.8 million, and we have financed our operations primarily through private sales of equity securities, payments received through our platform, and the issuance of convertible debt. Proceeds from our IPO in January 2021 will be used to finance our operations. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to raise additional funds at any time through the issuance of debt, equity, and equity-linked arrangements.
Consolidated Statements of Cash Flows Data
Year Ended December 31,
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
For the year ended December 31, 2021, cash provided by operating activities was $28.6 million, which consisted of a net loss of $98.3 million, adjusted by non-cash charges of $105.6 million and net cash inflows from the change
in net operating assets and liabilities of $21.3 million. The non-cash charges were primarily comprised of the change in fair value of convertible notes of $51.1 million, stock-based compensation of $48.2 million, depreciation and amortization of $3.5 million, and change in fair value of redeemable convertible preferred stock warrant liability of $2.8 million. The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $27.8 million increase in our funds payable to customers as a result of our growth, partially offset by a $10.7 million decrease in our accounts payable attributable to the timing of payments.
For the year ended December 31, 2020, cash provided by operating activities was $86.1 million, which consisted of a net income of $18.8 million, adjusted by non-cash charges of $16.9 million and net cash inflows from the change in net operating assets and liabilities of $50.3 million. The non-cash charges were primarily comprised of stock-based compensation of $8.0 million, change in fair value of convertible notes of $3.8 million, depreciation and amortization of $2.9 million, and change in fair value of redeemable convertible preferred stock warrant liability of $2.3 million. The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $43.3 million increase in our funds payable to customers as a result of our growth, a $10.2 million increase in our accounts payable attributable to the timing of payments, partially offset by a $6.0 million decrease in prepaid expenses and other assets.
For the year ended December 31, 2019, net cash used in operating activities was $5.9 million, which consisted primarily of a net loss of $47.7 million, adjusted by non-cash charges of $11.3 million and net cash inflows from the change in net operating assets and liabilities of $30.5 million. The non-cash charges were primarily comprised of stock-based compensation of $9.7 million. The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $22.3 million increase in our funds payable to customers, an $18.2 million increase in our accrued expenses and other liabilities, partially offset by a $5.8 million decrease in our accounts payable attributable to the timing of payments, and a $4.2 million decrease in prepaid expenses and other assets.
Cash Flows from Investing Activities
For the year ended December 31, 2021, net cash provided by investing activities of $17.5 million, was mainly attributable to the proceeds from the maturities of marketable securities, partially offset by cash paid for acquisition.
For the year ended December 31, 2020, net cash provided by investing activities of $37.9 million, was mainly attributable to the proceeds from the sales and maturities of marketable securities, net of purchases.
For the year ended December 31, 2019, net cash used in investing activities of $5.3 million, was mainly attributable to $4.2 million of cash used for purchases of property and equipment, including computer equipment, furniture, and fixtures to support our growth.
Cash Flows from Financing Activities
For the year ended December 31, 2021, cash provided by financing activities was $296.5 million, which consisted primarily of net proceeds from our IPO.
For the year ended December 31, 2020, cash provided by financing activities was $50.2 million, consisting primarily of net proceeds of $50.0 million from the issuance of convertible notes.
For the year ended December 31, 2019, cash provided by financing activities was $0.9 million, due to proceeds from the exercise of stock options.
Concentration of Credit Risk
We are subject to concentration of credit risk principally from cash and cash equivalents. We reduce credit risk by placing our cash and cash equivalents with major financial institutions with high credit ratings. No customer accounted for 10% or more of our net revenue for the years ended December 31, 2021, 2020 and 2019.
Contractual Obligations and Commitments
Our principal commitments consist of rental payments under our non-cancelable operating leases and purchase commitments which expire between 2022 and 2025. The following table summarizes our contractual commitments as of December 31, 2021 (in thousands):
Payments Due by Period
Total
Less than 1
Year
Years
Years
More than
5 Years
Operating lease commitments
Purchase commitments (1)
Total
Relates to non-cancelable commitments for network and cloud services in the ordinary course of business with varying expiration terms through October 31, 2022.
Convertible Note Financing
In September 2020, we issued the Convertible Notes to certain of our investors in an aggregate principal amount of $50.0 million. The Convertible Notes mature on September 14, 2023. The Convertible Notes do not accrue interest, except during the existence of an event of default related to non-payment of the obligations under the Convertible Notes at maturity or upon acceleration. The Convertible Notes converted into 1,400,560 shares of our Class A common stock in connection with our IPO. See Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Revenue Recognition
We recognize revenue when we satisfy our performance obligations. We consider both sellers and buyers to be customers. We generate revenue from sellers for fees earned when sellers sell items they have listed on our social marketplace to buyers. We generate revenue from buyers for fees earned when they purchase shipping labels used for delivery of the items purchased. We periodically reassess our revenue recognition policies as new offerings become material and business models evolve. We recognize revenue net of estimated returns and cancellations based on our historical experience. Transactions may be cancelled by a buyer or seller in certain circumstances. In 2021, 2020 and 2019, cancellations were 15%, 14% and 12%, respectively, of GMV, including returns which were 2%, 2% and 2%, respectively, of GMV.
We enter into the TOS with buyers and sellers to use our technology platform. The TOS governs these parties’ use of the platform, including payment terms for the buyer and the seller and services to be provided by us. Under the TOS, upon the buyer’s purchase from the seller, the buyer, the seller and we are committed to perform and enforceable rights and obligations are established.
Sellers
Sellers are able to list their items for sale on our social marketplace at no charge. We charge a fee upon the sale of items listed on our social marketplace. The fee is 20% of the final price for sales $15 and over, or a flat rate of $2.95 for sales under $15. The service we provide to sellers includes the facilitation of the sale of their items as well as certain ancillary activities such as payment processing and authentication (for luxury items). These activities comprise a single performance obligation to sellers, which is to facilitate the sale of the listed items between sellers and buyers on our platform (sale facilitation).
We evaluate the presentation of revenue from sellers on a gross or net basis based on whether we act as a principal or an agent in the sale of listed items between sellers and buyers. We do not control the listed items at any time prior to the transfer of such items to buyers. We act as an agent in facilitating the sale of items from sellers to buyers by allowing them to connect and interact on our social marketplace. We are not primarily responsible for fulfillment of purchased items, do not have inventory risk, and do not set the price for the listed item. As such, we report revenue from sellers on a net basis to reflect the fees received from sellers.
Revenue is recognized at the point in time we satisfy the performance obligation to facilitate the sale of a listed item. This occurs when both the seller and the buyer agree to a sale and the payment is processed on our platform. For luxury items authenticated by us, sale facilitation revenue is recognized when we authenticate and arrange for shipment of the items to the buyer, as this is the point in time a sale is finalized and we have satisfied our performance obligation.
Buyers
When a sale is finalized, the buyer purchases a shipping label from the USPS through our platform. We email the shipping label to the seller and the seller ships the item to the buyer through the shipping provider, USPS. We do not purchase the shipping label on behalf of the buyer until after the buyer has purchased an item and has remitted payment. As a result, we have one performance obligation to buyers, which is to facilitate the sale of shipping labels to buyers for the delivery of items purchased on our platform (shipping facilitation).
We evaluate the presentation of revenue from buyers on a gross or net basis based on whether we act as a principal or an agent in shipment of listed items between sellers and buyers. We do not control the shipping service, which is provided by the shipping provider. We are not primarily responsible for shipping, and we do not assume any of the risks for the items shipped such as risk of damage or loss during shipping. We act as an agent of the buyer in facilitating the shipping. As such, we report revenue on a net basis which is the difference between the shipping fee paid by the buyer and the cost of shipping labels paid to the shipping provider.
Revenue from shipping facilitation is recognized upon transfer of the shipping label to the seller on behalf of the buyer.
We estimate chargebacks based on historical collectability rates. We record a reserve for chargebacks in accrued expenses and other current liabilities with an offset to general and administrative expenses.
Sales tax and other amounts collected on behalf of third parties are excluded from the transaction price.
Incentives
Under the referral program, an existing user (the referrer) earns an incentive (Posh Credit) when a new user (the referee) first buys an item on our platform. Posh Credits are not redeemable for cash and can only be applied for purchases on our platform. We record the incentive to the referrer, which is in exchange for a distinct referral service, as a liability at the time the incentive is earned by the referrer with a corresponding charge recorded to marketing expense in the consolidated statements of operations.
Credits and incentives issued to existing users for referring new users are contingent upon a new user completing an initial purchase on our platform and represent an incremental cost of obtaining a contract with a customer. We expense such new user referral incentives as marketing expense when the referral incentives are earned because the amortization period would be one year or less.
We have several buyer incentive programs, which are offered to encourage buyer activity on our platform. These promotions reduce the fees we charge for shipping facilitation. Accordingly, we record these incentives as a reduction to revenue from the buyer when the incentive is used by the buyer. Amounts in excess of cumulative shipping facilitation revenue earned are presented as marketing expense in our consolidated statements of operations.
We participate in certain joint incentive programs with sellers that are recorded as a reduction to the fees received from the seller.
We may elect to issue incentives to buyers for customer satisfaction purposes or for refunds. These incentives (which are in the form of Posh Credits) can be applied towards future orders and, thereby, results in a reduced fee earned by us from the buyer, or redeemable credits that can also be redeemed for cash. In cases where the seller performed as required by our TOS, we reduce shipping facilitation revenue earned on the transaction and any cumulative revenue earned from the same buyer for Posh Credits and redeemable credits granted. If the amount of the incentive exceeds cumulative revenues from the buyer, then the excess is presented as operations and support expense in the consolidated statements of operations. If refunds are provided in a case where the seller did not perform and the amount cannot be recovered from the seller, the refund is presented as a reduction of revenue.
Stock-Based Compensation
We grant stock-based awards consisting of stock options and RSUs to employees and consultants.
RSUs granted prior to the occurrence of a Qualified IPO vest upon the satisfaction of both time-based service and performance-based conditions. The time-based vesting condition for the majority of these awards is satisfied over four years. The performance-based vesting condition is satisfied upon the occurrence of a qualifying event, which is generally defined as a change in control transaction or the effective date of a Qualified IPO. Through December 31, 2020, no stock-based compensation expense had been recognized for RSUs with a liquidity event performance condition, as such qualifying event was not probable. Upon the completion of Company's IPO, the liquidity event performance condition was met. Accordingly, u pon the effectiveness of the IPO, the Company recognized cumulative stock-based compensation expense determined using the grant-date fair values and the accelerated attribution method. The remaining stock-based compensation related to these awards will be recognized over the remaining time-based service over the remaining requisite service period using the accelerated attribution method. RSUs granted after the date of the Qualified IPO only include a time-based service condition. Accordingly, these awards will be measured using the grant date fair values and will be amortized on a straight-line basis over the requisite service period. The requisite service period for is generally four years from the date of grant. for all stock-based awards are recognized as they occur.
Stock-based compensation expense for employee stock options is measured based on the grant-date fair value of the awards and is recognized in the consolidated statements of operations on a straight-line basis over the requisite service period, net of forfeitures. Forfeitures are recognized as they occur.
We estimate the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model. 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, exercise price, expected term, risk-free interest rate, expected annual dividend yield, and expected stock price volatility over the expected term. For all stock options granted, we calculated the expected term using the simplified method. We have no publicly available stock information. Therefore, we have used the historical volatility of the stock price of similar publicly traded peer companies to estimate volatility of our equity awards granted. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.
Prior to our initial public offering, the fair value of the shares of common stock underlying the stock options was determined by our board of directors, with assistance by management and using contemporaneous third-party valuations, as there was no public market for the common stock. Following the closing of our initial public offering, the fair value per share of our common stock for purposes of determining stock-based compensation is the closing price of our common stock as reported on the applicable grant date.
The following table summarizes the weighted-average assumptions used in estimating the fair value of stock options granted during each of the periods presented:
Year Ended December 31,
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (in years)
Internal Use Software
We capitalize certain costs associated with website development and software for internal use. The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized and amortized on a straight-line basis over the estimated life of the asset. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality which are capitalized and amortized over their estimated useful lives. Capitalized costs are included in property and equipment, net on our consolidated balance sheets.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Recent Accounting Pronouncements
See Note 2 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
As of December 31, 2021, we had cash and cash equivalents of $581.5 million, which consisted primarily of cash held in one high-credit quality financial institution within the United States, cash in transit from third-party credit card providers, and institutional money market funds, which each carry a degree of interest rate risk. Changes in interest rates affect the interest income we earn on our cash and cash equivalents, and the fair value of our cash equivalents. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations as of December 31, 2021.
Foreign Currency Exchange Risk
Our revenue is denominated in U.S. dollars. Our expenses are primarily denominated in U.S. dollars, except for our non-U.S. operations, which are denominated in the local currency. As our operations in countries outside of the
United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates. To date, these fluctuations have not been material. As exchange rates vary, our operating loss may differ from expectations. To date, we have not entered into any foreign currency hedging contracts, although we may do so in the future. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to other currencies would not have a material effect on our operating results as of December 31, 2021.
Item 8. Financial Statement s and Supplementary Data.
Please refer to the Financial Statements and Notes to Financial Statements in this Annual Report on Form 10-K which is incorporated herein by reference.
