ThredUp Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
ThredUp operates an online resale marketplace for women’s and children’s apparel, shoes and accessories, including its Resale-as-a-Service offering. This unaudited report covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020.
The company completed its initial public offering in March 2021. It sold 13.8 million Class A shares at $14.00 per share and received net proceeds of $175.5 million. Existing convertible preferred stock converted into Class B common stock. Class B shares carry ten votes per share versus one vote for Class A shares.
Key financial and operating metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $55.7 million | $48.3 million | 15% increase |
| Consignment revenue | $44.7 million | $35.3 million | 27% increase |
| Product revenue | $11.0 million | $13.0 million | 15% decrease |
| Gross profit | $39.7 million | $32.6 million | 22% increase |
| Gross margin | 71% | 68% | Expanded by 3 percentage points |
| Operating loss | $14.7 million | $13.3 million | Loss increased |
| GAAP net loss | $16.2 million | $13.2 million | Loss increased |
| Net loss per share | $0.86 | $1.23 | Improved due primarily to share count increase |
| Adjusted EBITDA loss | $9.1 million | $10.4 million | Loss improved by $1.3 million |
| Active Buyers | 1.29 million | 1.14 million | 14% increase |
| Orders | 1.13 million | 0.96 million | 18% increase |
Revenue growth was driven by higher order volume and active buyers, partially offset by a 2% decline in revenue per order. Consignment revenue increased as a proportion of total revenue to 80% from 73%, benefiting reported gross margin because consignment revenue is recognized net of seller payouts.
Operating expenses increased 18% to $54.4 million. Operations, product and technology expense rose 11% to $28.3 million, marketing expense rose 19% to $15.4 million, and sales, general and administrative expense rose 43% to $10.6 million. The increases reflected investments in distribution-center capacity, personnel, marketing, technology, public-company infrastructure and professional services.
Cash flow, liquidity and debt
- Cash and cash equivalents were $246.5 million at March 31, 2021, compared with $64.5 million at December 31, 2020. Including restricted cash, total cash, cash equivalents and restricted cash was $249.6 million.
- Operating activities provided $1.1 million of cash in Q1 2021, compared with $9.1 million used in Q1 2020. The improvement was supported by increases in accounts payable, accrued liabilities and seller payables despite the net loss.
- Investing activities used $4.1 million, primarily for property and equipment and distribution-center automation, compared with $4.7 million used in the prior-year quarter.
- Financing activities provided $185.1 million, primarily from the IPO, additional debt proceeds and option exercises.
- Total debt principal was $40.0 million at March 31, 2021, with a 5.75% nominal interest rate and 6.84% effective interest rate. The company borrowed an additional $5.0 million in February 2021.
- The company stated that it was in compliance with its debt covenants at March 31, 2021 and believes existing cash and cash equivalents will fund operations for at least the next twelve months.
- Management expects operating losses and negative operating cash flows to continue for the foreseeable future and may seek additional equity or debt financing.
Material changes versus the prior comparable period
- Total revenue increased 15%, while consignment revenue grew 27% and product revenue declined 15% because of a continuing shift toward consignment sales.
- Gross margin expanded from 68% to 71%, primarily due to the revenue mix shift and improved product gross margin.
- Net loss increased by $3.0 million, largely because operating expenses grew faster than revenue and because interest and other expense increased.
- Adjusted EBITDA loss improved from $10.4 million to $9.1 million, although the company remained meaningfully unprofitable.
- Operating cash flow improved from a $9.1 million outflow to a $1.1 million inflow, but the improvement was materially supported by working-capital changes.
- Cash and equity increased substantially following the IPO, and preferred stock was converted into Class B common stock.
- The number of unprocessed Clean Out Kits declined from the prior quarter as processing improved, but remained somewhat elevated. The company continued to face employee hiring and retention challenges in its distribution centers.
Guidance, outlook, risks and unusual items
- Management expects gross margin to remain relatively flat in Q2 2021 and expects operating expenses to increase in absolute dollars as revenue grows and infrastructure is expanded.
- The company reported increased demand during Q1 2021, which it attributed partly to vaccine rollout, easing restrictions and federal stimulus legislation. It expects COVID-19-related effects to continue adversely affecting the business, results and financial condition through at least the remainder of 2021.
- COVID-19 continues to present risks involving distribution-center productivity, labor availability, processing delays, shipping, consumer demand and operating costs.
- The company has a history of losses and expects continued losses while investing in distribution centers, automation, technology, marketing and public-company capabilities.
- Management disclosed a material weakness in internal control over financial reporting related to information-technology controls, user access, program changes, data validation, account reconciliations, journal entries and staffing. Disclosure controls and procedures were therefore concluded to be ineffective as of March 31, 2021. Remediation efforts are underway but are not complete.
- The Western Alliance Bank loan is secured by substantially all company assets and includes financial covenants and operating restrictions. A covenant breach could permit acceleration of the debt and enforcement against collateral.
- Operating lease liabilities totaled $23.9 million, including $3.1 million current and $20.8 million non-current.
- Stock-based compensation expense was $3.5 million in Q1 2021, compared with $1.4 million in Q1 2020. Approximately $20.1 million of unrecognized compensation expense remained at March 31, 2021.
- The company reported no material pending legal proceedings and stated that ordinary-course litigation is not expected to have a material adverse effect, although indemnification exposure is described as unknown.
- Other material risks include competition, reliance on consumer discretionary spending, labor and distribution-center expansion, data security and privacy, third-party technology and shipping providers, counterfeit or stolen goods, regulatory compliance, future dilution and concentrated voting control.
Important facts for investors to verify
- Whether revenue and order growth can continue after COVID-19 recovery effects, stimulus support and elevated promotional activity normalize.
- Whether the consignment mix can sustain the reported 71% gross margin and whether gross margin remains flat as management expects.
- Whether operating expenses and distribution-center investments can scale more slowly than gross profit and produce a path toward profitability.
- Whether the company can maintain positive operating cash flow without relying primarily on working-capital benefits or additional capital raises.
- Progress and timing of remediation of the material weakness in internal control over financial reporting.
- Compliance with the Western Alliance Bank debt covenants and the company’s ability to service $40.0 million of principal while continuing to fund growth.
- Distribution-center labor availability, Clean Out Kit backlogs, processing capacity and the effect of automation investments.
- The potential dilution and market effects of 22.1 million outstanding stock options, Class B voting control and future equity financing.