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real-10q_20190930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 001-38953

The RealReal, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	45-1234222
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
55 Francisco Street Suite 600 San Francisco, CA	94133
(Address of principal executive offices)	(Zip Code)

(855) 435-5893

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, $0.00001 par value

REAL

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2019, the registrant had 85,791,236 shares of common stock, $0.00001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018	1
	Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	2
	Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018	3
	Condensed Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) as of September 30, 2019 and 2018	4
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	6
	Notes to Unaudited Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31


PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
Signatures		52

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, objectives of management for future operations, long term operating expenses, the opening of additional retail stores in the future, the development of our automation technology, expectations for capital requirements and the use of proceeds from our initial public offering, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” included under Part II, Item 1A below and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

•

our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, and our ability to achieve and maintain future profitability;

•

our ability to effectively manage or sustain our growth and to effectively expand our operations;

•

our strategies, plans, objectives and goals;

•

the market demand for authenticated, pre-owned luxury goods and new and pre-owned luxury goods in general and the online market for luxury goods;

•

our ability to compete with existing and new competitors in existing and new markets and offerings;

•

our ability to attract and retain consignors and buyers;

•

our ability to increase the supply of luxury goods offered through our online marketplace;

•

our ability to timely and effectively scale our operations;

•

our ability to enter international markets

•

our ability to optimize, operate and manage our merchandising and fulfillment facilities;

•

our ability to develop and protect our brand;

•

our ability to comply with laws and regulations;

•

our expectations regarding outstanding litigation;

•

our expectations and management of future growth;

•

our expectations concerning relationships with third parties;

•

economic and industry trends, projected growth or trend analysis;

•

seasonal sales fluctuations;

			•		our ability to add capacity, capabilities and automation to our operations; and

			•		our ability to attract and retain key personnel.

In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and, although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

THE REALREAL, INC.

Condensed Balance Sheets

(In thousands, except share and per share data)

(unaudited)

	September 30, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	364,995		$	34,393
Short-term investments		5,290			27,131
Accounts receivable		8,935			7,571
Inventory, net		13,846			10,355
Prepaid expenses and other current assets		13,071			9,696
Total current assets		406,137			89,146
Property and equipment, net		45,715			33,286
Restricted cash		—			11,234
Other assets		1,518			1,751
Total assets	$	453,370		$	135,417
Liabilities, Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	5,666		$	5,149
Accrued consignor payable		39,870			35,259
Other accrued and current liabilities		42,548			41,956
Long-term debt, current portion		—			5,990
Total current liabilities		88,084			88,354
Long-term debt, net of current portion		—			3,249
Other noncurrent liabilities		8,050			7,304
Total liabilities		96,134			98,907
Commitments and contingencies (Note 10)
Redeemable convertible preferred stock, $0.00001 par value; no and 31,053,601 shares authorized as of September 30, 2019 and December 31, 2018, respectively; no and 31,053,601 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		—			151,381
Convertible preferred stock $0.00001 par value; no and 73,950,153 shares authorized as of September 30, 2019 and December 31, 2018, respectively; no and 73,724,645 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		—			142,819
Stockholders’ equity (deficit):
Common stock, $0.00001 par value; 500,000,000 and 145,467,774 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 85,759,021 and 8,593,077 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		1			—
Additional paid-in capital		690,365			—
Accumulated comprehensive income (loss)		1			(25	)
Accumulated deficit		(333,131	)		(257,665	)
Total stockholders’ equity (deficit)		357,236			(257,690	)
Total liabilities, redeemable convertible preferred stock, convertible preferred stock and stockholders’ equity (deficit)	$	453,370		$	135,417

The accompanying notes are an integral part of these unaudited condensed financial statements.

THE REALREAL, INC.

Condensed Statements of Operations

(In thousands, except share and per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Consignment and service revenue	$	69,790		$	45,744		$	186,740		$	128,921
Direct revenue		10,695			6,095			33,976			16,362
Total revenue		80,485			51,839			220,716			145,283
Cost of revenue:
Cost of consignment and service revenue		19,446			13,157			52,593			37,083
Cost of direct revenue		8,811			5,352			27,464			13,486
Total cost of revenue		28,257			18,509			80,057			50,569
Gross profit		52,228			33,330			140,659			94,714
Operating expenses:
Marketing		13,390			10,624			36,838			29,534
Operations and technology		37,407			28,257			103,271			72,586
Selling, general and administrative		28,436			16,325			76,110			44,226
Total operating expenses		79,233			55,206			216,219			146,346
Loss from operations		(27,005	)		(21,876	)		(75,560	)		(51,632	)
Interest income		1,902			437			2,918			602
Interest expense		(60	)		(204	)		(572	)		(927	)
Other expense, net		(119	)		(205	)		(2,106	)		(1,592	)
Loss before provision for income taxes		(25,282	)		(21,848	)		(75,320	)		(53,549	)
Provision (benefit) for income taxes		(8	)		37			51			37
Net loss	$	(25,274	)	$	(21,885	)	$	(75,371	)	$	(53,586	)
Accretion of redeemable convertible preferred stock to redemption value	$	—		$	(3,200	)	$	(3,355	)	$	(5,651	)
Net loss attributable to common stockholders	$	(25,274	)	$	(25,085	)	$	(78,726	)	$	(59,237	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.30	)	$	(3.00	)	$	(2.28	)	$	(7.12	)
Shares used to compute net loss per share attributable to common stockholders, basic and diluted		84,634,956			8,349,403			34,556,485			8,321,296

The accompanying notes are an integral part of these unaudited condensed financial statements.

THE REALREAL, INC.

Condensed Statements of Comprehensive Loss

(In thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(25,274	)	$	(21,885	)	$	(75,371	)	$	(53,586	)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investments		(4	)		(8	)	26				(2	)
Comprehensive loss	$	(25,278	)	$	(21,893	)	$	(75,345	)	$	(53,588	)

The accompanying notes are an integral part of these unaudited condensed financial statements.

THE REALREAL, INC.

Condensed Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(unaudited)

	Redeemable Convertible				Convertible								Additional			Accumulated Other						'Total
	Preferred Stock				Preferred Stock				Common Stock				Paid-in			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Gain (Loss)			Deficit			Equity (Deficit)
Balance as of December 31, 2017		12,956,724	$	50,367		69,834,789	$	122,990		8,287,983	$	—	$	4,591		$	(6	)	$	(181,571	)	$	(176,986	)
Accretion of redeemable convertible preferred stock to redemption value		—		1,109		—		—		—		—		(1,109	)		—			—			(1,109	)
Issuance of common stock upon exercise of options		—		—		—		—		18,621		—		39			—			—			39
Stock-based compensation expense		—		—		—		—		—		—		545			—			—			545
Other comprehensive income		—		—		—		—		—		—		—			6			—			6
Net loss		—		—		—		—		—		—		—			—			(14,106	)		(14,106	)
Balance as of March 31, 2018		12,956,724		51,476		69,834,789		122,990		8,306,604		—		4,066			—			(195,677	)		(191,611	)
Issuance of Series G redeemable convertible preferred stock upon conversion of notes, net of issuance costs of $190		1,067,550		5,452		—		—		—		—		—			—			—			—
Issuance of Series G convertible preferred stock upon conversion of notes, net of issuance costs of $355		—		—		1,997,709		10,202		—		—					—			—			—
Loss on extinguishment of convertible notes		—		—		—		—		—		—		(370	)		—			—			(370	)
Issuance of Series G redeemable convertible preferred stock, net of issuance costs of $3,360		17,029,327		86,640		—		—		—		—		—			—			—			—
Accretion of redeemable convertible preferred stock to redemption value		—		1,342		—		—		—		—		(1,342	)		—			—			(1,342	)
Issuance of common stock upon exercise of options		—		—		—		—		17,502		—		24			—			—			24
Stock-based compensation expense		—		—		—		—		—		—		681			—			—			681
Net loss		—		—		—		—		—		—		—			—			(17,595	)		(17,595	)
Balance as of June 30, 2018		31,053,601		144,910		71,832,498		133,192		8,324,106		—		3,059			—			(213,272	)		(210,213	)
Issuance of Series G convertible preferred stock, net of issuance costs of $373						1,892,147		9,627		—		—		—			—						—
Accretion of redeemable convertible preferred stock to redemption value		—		3,200		—		—		—		—		(3,200	)		—						(3,200	)
Compensation expense related to stock sales by current and former employees														847									847
Issuance of common stock upon exercise of options		—		—		—		—		124,083		—		194			—			—			194
Stock-based compensation expense		—		—		—		—		—		—		740			—						740
Other comprehensive loss		—		—		—		—		—		—		—			(8	)		—			(8	)
Net loss		—		—		—		—		—		—		—						(21,885	)		(21,885	)
Balance as of September 30, 2018		31,053,601	$	148,110		73,724,645	$	142,819	$	8,448,188	$	—	$	1,640		$	(8	)	$	(235,157	)	$	(233,525	)

The accompanying notes are an integral part of these unaudited condensed financial statements.

THE REALREAL, INC.

Condensed Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(unaudited)

	Redeemable Convertible				Convertible								Additional			Accumulated Other						Total
	Preferred Stock				Preferred Stock				Common Stock				Paid-in			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Gain (Loss)			Deficit			Equity (Deficit)
Balance as of December 31, 2018		31,053,601	$	151,381		73,724,645	$	142,819		8,593,077	$	—	$	—		$	(25	)	$	(257,665	)	$	(257,690	)
Issuance of Series H redeemable convertible preferred stock net of issuance costs of $86		6,350,345		43,572		—		—		—		—		—			—			—			—
Issuance of Series H convertible preferred stock net of issuance costs of $63		—		—		3,831,766		26,279		—		—		—			—			—			—
Accretion of redeemable preferred stock to redemption value		—		3,355		—		—		—		—		(3,260	)		—			(95	)		(3,355	)
Compensation expense related to stock sales by current and former employees		—		—		—		—		—		—		819			—			—			819
Issuance of common stock upon exercise of options		—		—		—		—		739,053		—		1,319			—			—			1,319
Issuance of common stock upon exercise of warrants		—		—		—		—		4,935		—		13