real-10q_20200331.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 March 31, 2020

OR

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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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 May 1, 2020, the registrant had 86,894,511 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 March 31, 2020 and December 31, 2019

1

 

Condensed Statements of Operations for the Three Months Ended March 31, 2020 and 2019

2

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

3

 

Condensed Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) as of March 31, 2020 and 2019

4

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

53

 

i


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 the ongoing impact of the COVID-19 pandemic on our business, 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,” “could,” “will”, “expects,” “plans,” “anticipates,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “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, as well as in our other filings with the Securities and Exchange Commission (SEC). 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, in particular with respect to the impacts of the COVID-19 pandemic;

 

 

 

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.

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

THE REALREAL, INC.

Condensed Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,662

 

 

$

154,446

 

Short-term investments

 

 

168,592

 

 

 

208,811

 

Accounts receivable

 

 

3,089

 

 

 

7,779

 

Inventory, net

 

 

24,916

 

 

 

23,599

 

Prepaid expenses and other current assets

 

 

11,273

 

 

 

13,804

 

Total current assets

 

 

342,532

 

 

 

408,439

 

Property and equipment, net

 

 

59,637

 

 

 

55,831

 

Operating lease right-of-use assets

 

 

124,346

 

 

 

 

Other assets

 

 

3,025

 

 

 

2,660

 

Total assets

 

$

529,540

 

 

$

466,930

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,916

 

 

$

11,159

 

Accrued consignor payable

 

 

33,489

 

 

 

52,820

 

Operating lease liabilities, current portion

 

 

14,209

 

 

 

 

Other accrued and current liabilities

 

 

43,941

 

 

 

54,567

 

Total current liabilities

 

 

101,555

 

 

 

118,546

 

Operating lease liabilities, net of current portion

 

 

120,174

 

 

 

 

Other noncurrent liabilities

 

 

1,038

 

 

 

9,456

 

Total liabilities

 

 

222,767

 

 

 

128,002

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.00001 par value; 500,000,000 shares

   authorized as of March 31, 2020 and December 31, 2019;

    86,850,694 and 85,872,320 shares issued and outstanding

   as of March 31, 2020 and December 31, 2019, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

699,249

 

 

 

693,426

 

Accumulated other comprehensive income

 

 

321

 

 

 

7

 

Accumulated deficit

 

 

(392,798

)

 

 

(354,506

)

Total stockholders’ equity

 

 

306,773

 

 

 

338,928

 

Total liabilities and stockholders’ equity

 

$

529,540

 

 

$

466,930

 

 

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

1


THE REALREAL, INC.

Condensed Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Consignment and service revenue

 

$

65,297

 

 

$

55,575

 

Direct revenue

 

 

12,942

 

 

 

15,007

 

Total revenue

 

 

78,239

 

 

 

70,582

 

Cost of revenue:

 

 

 

 

 

 

 

 

Cost of consignment and service revenue

 

 

18,088

 

 

 

15,946

 

Cost of direct revenue

 

 

10,954

 

 

 

12,254

 

Total cost of revenue

 

 

29,042

 

 

 

28,200

 

Gross profit

 

 

49,197

 

 

 

42,382

 

Operating expenses:

 

 

 

 

 

 

 

 

Marketing

 

 

12,922

 

 

 

11,733

 

Operations and technology

 

 

40,737

 

 

 

31,544

 

Selling, general and administrative

 

 

35,104

 

 

 

22,319

 

Total operating expenses

 

 

88,763

 

 

 

65,596

 

Loss from operations

 

 

(39,566

)

 

 

(23,214

)

Interest income

 

 

1,286

 

 

 

405

 

Interest expense

 

 

(20

)

 

 

(131

)

Other income (expense), net

 

 

8

 

 

 

(282

)

Loss before provision for income taxes

 

 

(38,292

)

 

 

(23,222

)

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$

(38,292

)

 

$

(23,222

)

Accretion of redeemable convertible preferred stock to

   redemption value

 

$

 

 

$

(3,355

)

Net loss attributable to common stockholders

 

$

(38,292

)

 

$

(26,577

)

Net loss per share attributable to common stockholders,

   basic and diluted

 

$

(0.44

)

 

$

(3.05

)

Shares used to compute net loss per share attributable to

   common stockholders, basic and diluted

 

 

86,588,796

 

 

 

8,705,664

 

 

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

2


THE REALREAL, INC.

Condensed Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(38,292

)

 

$

(23,222

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

314

 

 

 

28

 

Comprehensive loss

 

$

(37,978

)

 

$

(23,194

)

 

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

 

 

3


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

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2019

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

85,872,320

 

 

$

1

 

 

$

693,426

 

 

$

7

 

 

$

(354,506

)

 

$

338,928

 

Issuance of common stock upon exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

964,085

 

 

 

 

 

 

2,564

 

 

 

 

 

 

 

 

 

2,564

 

Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,289

 

 

 

 

 

 

(151

)

 

 

 

 

 

 

 

 

(151

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,410

 

 

 

 

 

 

 

 

 

3,410

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

314

 

 

 

 

 

 

314

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,292

)

 

 

(38,292

)

Balance as of March 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

86,850,694

 

 

$

1

 

 

$

699,249

 

 

$

321

 

 

$

(392,798

)

 

$

306,773

 

 

 

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

4


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

 

 

Income (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

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,109

 

 

 

 

 

 

 

 

 

1,109

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

28

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,222

)

 

 

(23,222

)

Balance as of March 31, 2019

 

 

37,403,946

 

 

$

198,308

 

 

 

77,556,411

 

 

$

169,098

 

 

 

 

9,337,065

 

 

$

 

 

$

 

 

$

3

 

 

$

(280,982

)

 

$

(280,979

)

 

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

 

 

5


THE REALREAL, INC.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(38,292

)

 

$

(23,222

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,145

 

 

 

2,808

 

Stock-based compensation expense

 

 

3,410

 

 

 

1,109

 

Reduction of operating lease right-of-use assets

 

 

4,121

 

 

 

 

Bad debt expense

 

 

455

 

 

 

321

 

Compensation expense related to stock sales by current and former employees

 

 

 

 

 

819

 

Change in fair value of convertible preferred stock warrant liability

 

 

 

 

 

280

 

Accretion of unconditional endowment grant liability

 

 

23

 

 

 

26

 

Accretion of debt discounts

 

 

 

 

 

7

 

Amortization of premiums (discounts) on short-term investments

 

 

(207

)

 

 

40

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,235

 

 

 

(4,050

)

Inventory, net

 

 

(1,317

)

 

 

(173

)

Prepaid expenses and other current assets

 

 

2,356

 

 

 

(2,388

)

Other assets

 

 

(365

)

 

 

(111

)

Operating lease liability

 

 

(2,721

)

 

 

 

Accounts payable

 

 

(2,206

)

 

 

797

 

Accrued consignor payable

 

 

(19,331

)

 

 

1,292

 

Other accrued and current liabilities

 

 

(8,865

)

 

 

(475

)

Other noncurrent liabilities

 

 

(412

)

 

 

349

 

Net cash used in operating activities

 

 

(54,971

)

 

 

(22,571

)

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(73,280

)

 

 

 

Proceeds from maturities of short-term investments

 

 

114,020

 

 

 

12,873

 

Capitalized proprietary software development costs

 

 

(1,480

)

 

 

(1,686

)

Purchases of property and equipment

 

 

(6,486

)

 

 

(3,743

)

Net cash provided by investing activities

 

 

32,774

 

 

 

7,444

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs

 

 

 

 

 

43,572

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

26,279

 

Proceeds from exercise of stock options and common stock warrants

 

 

2,564

 

 

 

1,332

 

Payment of deferred offering costs

 

 

 

 

 

(222

)

Taxes paid related to restricted stock vesting

 

 

(151

)

 

 

 

Repayment of debt

 

 

 

 

 

(1,250

)

Net cash provided by financing activities

 

 

2,413

 

 

 

69,711

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(19,784

)

 

 

54,584

 

Cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

 

Beginning of period

 

 

154,446

 

 

 

45,627

 

End of period

 

$

134,662

 

 

$

100,211

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4

 

 

$

98

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

 

 

 

3,355

 

Purchases of property and equipment included in accounts payable and other current liabilities

 

 

(771

)

 

 

(704

)

Purchases of capitalized proprietary software development costs included in accounts payable and other current liabilities

 

 

756

 

 

 

 

Deferred offering costs in accounts payable and accrued liabilities

 

 

 

 

 

1,457

 

 

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

 

6


 

THE REALREAL, INC.

Notes to Unaudited Condensed Financial Statements

Note 1. Description of Business and Basis of Presentation

Organization and Description of Business

The RealReal, Inc. (the “Company”) is an online marketplace for authenticated, consigned luxury goods across multiple categories, including women’s, men’s, kids’, jewelry and watches, and home and art. The Company was incorporated in the state of Delaware on March 29, 2011 and is headquartered in San Francisco, California.

Impact of the Coronavirus (“COVID-19”) Pandemic

The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility of financial markets.  While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, the Company expects its business operations and results of operations, including its net revenues, earnings and cash flows, will be materially adversely impacted, including as a result of reduced operations in its fulfillment centers, temporary closures of retail stores, decreased productivity due to shelter-in-place orders, and a slowdown in the U.S. economy and uncertain global economic outlook.

The Company believes that its financial resources, along with managing discretionary expenses, will allow it to manage the anticipated impact of COVID-19 on the Company’s business operations for the foreseeable future. The Company believes its existing cash and cash equivalents and short-term investments as of March 31, 2020 will be sufficient to meet its working capital and capital expenditures needs for at least the next 12 months.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. The Company’s functional and reporting currency is the U.S. dollar.

The condensed balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date. The accompanying unaudited condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss, redeemable convertible preferred stock, convertible preferred stock, and stockholders’ equity (deficit), and cash flows for the periods presented.

These unaudited condensed financial statements should be read in conjunction with the Company’s financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on March 11, 2020.

Initial Public Offering

The Company’s registration statement on Form S-1 (the “IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on June 27, 2019, and the Company’s common stock began trading on the Nasdaq Global Select Market on June 28, 2019. On July 2, 2019, the Company completed its IPO, selling 15,000,000 shares of common stock at a price to the public of $20.00 per share, plus an additional 2,250,000 shares of common stock at a price to the public of $20.00 per share pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company received aggregate net proceeds of $315.5 million after deducting underwriting discounts and commissions of $24.1 million and issuance costs of $5.3 million.  

Immediately prior to the completion of the IPO, the Company filed its Amended and Restated Certificate of Incorporation, which authorizes a total of 500,000,000 shares of common stock, and 50,000,000 shares of undesignated preferred stock.

The Company recorded the conversion of 114,960,357 shares of convertible preferred stock and redeemable convertible preferred stock then outstanding into 58,363,606 shares of common stock to additional paid-in capital. All outstanding preferred stock warrants converted into an aggregate of 103,563 common stock warrants.

 

Reverse Stock Split

On June 13, 2019 the Company effected a reverse split of shares of the Company’s common stock on a 1-for-2 basis (the “Reverse Stock Split”). All issued and outstanding shares of common stock, warrants for common stock, options to purchase common

7


 

stock and the related per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. The par value and authorized shares of common stock were not adjusted as a result of the Reverse Stock Split. Additionally, the authorized, issued and outstanding shares of redeemable convertible preferred stock and convertible preferred stock and their related per share amounts, other than the conversion price per share, were not adjusted as a result of the Reverse Stock Split.

 

Note 2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve and material right related to the Company’s tiered consignor commission plan, valuation of inventory, stock-based compensation, redemption value of redeemable convertible preferred stock, incremental borrowing rates related to lease liability, and other contingencies. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

The Company is not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require it to update its estimates, assumptions or revise the carrying value of its assets or liabilities. Its estimates may change, however, as new events occur and additional information is obtained; any such changes will be recognized in the financial statements. Actual results could differ from estimates, and any such differences may be material to the financial statements.

Net Loss per Share Attributable to Common Stockholders

The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method determines net loss per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available or attributable to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Before the IPO, the Company’s redeemable convertible preferred stock and convertible preferred stock were considered participating securities. However, the holders of such shares did not have a contractual obligation to participate in the Company’s losses.

For periods in which the Company reports net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because potentially dilutive common shares are not assumed to have been issued within the calculation, if their effect is anti-dilutive.

Revenue Recognition

The Company generates revenue from the sale of pre-owned luxury goods through its online marketplace and retail locations.

Consignment and Service Revenue

The Company provides a service to sell pre-owned luxury goods on behalf of consignors to buyers through its online marketplace and retail locations. The Company retains a percentage of the proceeds received as payment for its consignment service, which the Company refers to as its take rate. The Company reports consignment revenue on a net basis as an agent and not the gross amount collected from the buyer. Title to the consigned goods remain with the consignor until transferred to the buyer subsequent to purchase of the consigned goods and expiration of the allotted return period. The Company does not take title of consigned goods at any time except in certain cases where returned goods become Company-owned inventory.

The Company recognizes consignment revenue upon purchase of the consigned good by the buyer as its performance obligation of providing consignment services to the consignor is satisfied at that point. Consignment revenue is recognized net of certain buyer incentives and estimated returns and cancellations. The Company recognizes a returns reserve based on historical experience, which is recorded in other accrued and current liabilities on the balance sheets (see Note 5). Sales tax assessed by governmental authorities is excluded from revenue.

Certain transactions provide consignors with a material right resulting from the tiered consignor commission plan. Under this plan, the amount an individual consignor receives for future sales of consigned goods may be dependent on previous consignment

8


 

sales for that consignor within his/her consignment period. Accordingly, in certain consignment transactions, a small portion of the Company’s consignment revenue is allocated to such material right using the portfolio method and recorded as deferred revenue, which is recorded in other accrued and current liabilities on the balance sheets.

The Company charges shipping fees to buyers and has elected to treat shipping and handling activities performed after control transfers to the buyer as fulfillment activities. All outbound shipping and handling costs are accounted for as fulfillment costs in cost of consignment and service revenue at the time revenue is recognized.

The Company also generates subscription revenue from monthly memberships allowing buyers early access to shop for luxury goods. The buyers receive the early access and other benefits over the term of the subscription period, which represents a single stand-ready performance obligation. Therefore, the subscription fees paid by the buyer are recognized over the monthly subscription period. Subscription revenue was not material in the three months ended March 31, 2020 and 2019.

Direct Revenue

The Company generates direct revenue from the sale of Company-owned inventory. The Company recognizes direct revenue on a gross basis upon shipment of the purchased good to the buyer as the Company acts as the principal in the transaction. Direct revenue is recognized net of incentives and estimated returns. Sales tax assessed by governmental authorities is excluded from revenue. Cost of direct revenue is also recognized upon shipment to the buyer in an amount equal to that paid to the consignor from the original consignment sale.

Incentives

Promotional incentives, which include basket promotional code discounts and other credits, may periodically be offered to consignors and buyers. These are treated as a reduction of consignment and service revenue and direct revenue. Additionally, the Company may offer site credits to buyers on current transactions to be applied towards future transactions, which are accounted as deferred revenue and included in other accrued and current liabilities on the balance sheets.

Contract Liabilities

The Company’s contractual liabilities consist of deferred revenue for material rights primarily related to the tiered consignor commission plan totaling $2.6 million as of March 31, 2020 and $3.5 million as of December 31, 2019, which are recognized as revenue using a portfolio approach based on the pattern of exercise, and certain unredeemed site credits, which were immaterial as of March 31, 2020 and December 31, 2019. Contract liabilities are recorded in other accrued and current liabilities on the balance sheets and are generally expected to be recognized within one year.

Cost of Revenue

Cost of consignment and service revenue consist of shipping costs, credit card fees, packaging, customer service personnel-related costs, and website hosting services. Cost of direct revenue consists of the cost of goods sold, credit card fees, packaging, customer service personnel-related costs, and website hosting services.

Stock-based Compensation

Stock-based compensation expense related to employees is measured based on the grant-date fair value of the awards. Compensation expense is recognized in the statements of operations over the period during which the employee is required to perform services in exchange for the award (the vesting period of the applicable award) using the straight-line method. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model and accounts for forfeitures as they occur. The fair value of restricted stock units (“RSUs”) is estimated based on the fair market value of the Company’s common stock on the date of grant, which is determined based on the closing price of the Company’s common stock.

 

Certain employees have sold their shares of the Company’s common stock to the Company’s existing investors. In such secondary sale transactions, the Company recorded the difference in purchase price and the fair value of such shares as compensation expense within selling, general and administrative in the statements of operations and a corresponding credit to additional paid-in capital.

9


 

 

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of amounts invested in U.S. treasury securities. Restricted cash consists of cash deposited with a financial institution as collateral for the Company’s letters of credit for its facility leases and the Company’s credit cards.               

The following table provides a reconciliation of cash, cash equivalents and restricted cash that sum to the total of the same amounts shown in the statements of cash flows (in thousands):

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Cash and cash equivalents

 

$

134,662

 

 

$

88,790

 

Restricted cash

 

 

 

 

 

11,421

 

Total cash, cash equivalents and restricted cash

 

$

134,662

 

 

$

100,211

 

 

Short-term Investments

The Company has classified and accounted for its short-term investments as available-for-sale which are carried at fair value on its balance sheets. Available-for-sale securities with remaining maturities of 12 months or less are classified as short term and available-for-sale securities with remaining maturities greater than 12 months are classified as long term. The Company records any unrealized gains and losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit), except for unrealized losses determined to be other than temporary, of which there were none as of March 31, 2020 and 2019.

The Company evaluates its short-term investments periodically for possible impairment. A decline in the fair value below the amortized costs of the short-term investment is considered an other-than-temporary impairment if the Company has the intent to sell the short-term investments or it is more likely than not that the Company will be required to sell the short-term investment before recovery of the entire amortized cost basis.

Inventory, Net

Inventory primarily consists of finished goods arising from goods returned after the title has transferred from the buyer to the Company in an amount equal to that paid to the consignor. The Company also periodically purchases finished goods directly from vendors. Inventory is valued at the lower of cost and net realizable value using the specific identification method and the Company records provisions, as appropriate, to write down obsolete and excess inventory to estimated net realizable value. After the inventory value is reduced, adjustments are not made to increase it from the estimated net realizable value.

Our provisions to write down obsolete and excess inventory to net realizable value have not been material for the three months ended March 31, 2020 and 2019.  

Software Development Costs

Proprietary software includes the costs of developing the Company’s internal proprietary business platform and automation projects. The Company capitalizes qualifying proprietary software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (1) the preliminary project stage is completed and (2) it is probable that the software will be completed and used for its intended function. Such costs are capitalized in the period incurred. Capitalization ceases and amortization begins when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.

Accretion of Redeemable Convertible Preferred Stock

The carrying value of the redeemable convertible preferred stock that is probable of redemption is accreted to redemption value from the date of issuance to the earliest redemption date using the effective interest method until redemption is no longer probable. Increases to the carrying value of redeemable convertible preferred stock recognized in each period are charged to additional paid-in capital, or in the absence of additional paid-in capital, charged to accumulated deficit.

10


 

Convertible Preferred Stock Warrant Liability

The Company issued convertible preferred stock warrants in conjunction with the issuance of debt. Such warrants were recorded as other noncurrent liabilities on the balance sheets at their estimated fair value because the shares underlying the warrants may obligate the Company to transfer assets to the holders at a future date under certain circumstances such as a deemed liquidation event. The warrants are subject to re-measurement at each balance sheet date and the change in fair value, if any, is included in other income (expense), net. The Company continued to remeasure these warrants until the earlier of the expiration, exercise or conversion of the convertible preferred stock warrants into common warrants, which occurred upon the completion of the IPO on July 2, 2019. In connection with the completion of the IPO, the convertible preferred stock warrants automatically converted into common stock warrants. Upon conversion of the convertible preferred stock warrants, the related convertible preferred stock warrant liability was reclassified to additional paid-in capital.

Leases

Prior to the adoption of ASC 842

Leases are reviewed for classification as operating or capital leases. For operating leases, the Company recognizes rent on a straight-line basis over the term of the lease. The Company records the difference between cash payments and rent expense recognized as a deferred rent liability included in other accrued and current liabilities and other noncurrent liabilities on the balance sheets. Incentives granted under the Company’s facility leases, including allowances to fund leasehold improvements, are deferred and are recognized as adjustments to rental expense on a straight-line basis over the term of the lease.

Subsequent to the adoption of ASC 842

Contracts that have been determined to convey the right to use an identified asset are evaluated for classification as an operating or finance lease.   For the Company’s operating leases, the Company records a lease liability based on the present value of the lease payments at lease inception, using the applicable incremental borrowing rate.  The Company estimates the incremental borrowing rate based on its own synthetic credit ratings, corresponding yield curves, and the terms of each lease, from the financial credit market information available at the lease commencement date.  The corresponding right-of-use asset is recorded based on the corresponding lease liability at lease inception, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred and any tenant incentives allowed for under the lease.  The Company does not include optional renewal terms or early termination provisions unless the Company is reasonably certain such options would be exercised at the inception of the lease.  Operating lease right-of-use assets, operating lease liabilities, current portion and operating lease liabilities, net of current portion are included on the Company’s condensed balance sheet.

The Company has elected the practical expedients that allows for the combination of lease components and non-lease components and to record short-term leases as lease expense on a straight-line basis on the condensed statements of operations.  Variable lease payments are recorded as expense as they are incurred.

The Company has finance leases for several vehicles, and the amounts of finance lease right-of-use assets and finance lease liabilities have been immaterial to date.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, and investments. At times, such amount may exceed federally-insured limits. The Company reduces credit risk by placing its cash and cash equivalents, restricted cash and investments with major financial institutions within the United States.

As of March 31, 2020 and December 31, 2019, there were no customers that represented 10% or more of the Company’s accounts receivable balance and there were no customers that individually exceeded 10% of the Company’s total revenue for each of the three months ended March 31, 2020 and 2019.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 is aimed at making leasing activities more transparent and comparable. This new standard requires substantially all leases to be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard is effective for non-public entities in fiscal years beginning after December 15, 2021 and interim periods in fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities. 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

11


 

private companies. As an “emerging growth company” as defined in the JOBS Act, the new standard is effective for the Company beginning January 1, 2022. The Company chose to early adopt the standard on January 1, 2020.  The Company can choose to adopt new or revised accounting standards earlier than such time those standards apply to private companies and retain its election for the extended transition period, if early adoption is permitted for all entities.

The Company adopted and began applying the standard on January 1, 2020 using the modified retrospective approach and applied it to all existing leases as of the adoption date, which allows for a cumulative-effect adjustment to retained earnings on the adoption date.  The Company will continue to present prior periods amounts under ASC 840. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which does not require the Company to reassess whether contracts that expired prior to the adoption date contained an embedded lease, reassess historical lease classification, or evaluate direct costs for leases that were in effect at the adoption date.  

As a result of implementing this guidance, the Company recognized $110.3 million in right of use assets as of January 1, 2020. The Company also recorded $12.8 million in current operating lease liabilities and $106.2 million in operating lease liabilities, net of current portion in its condensed balance sheet as of January 1, 2020.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This standard modifies disclosure requirements related to fair value measurement and is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance effective January 1, 2020, which did not have a material impact on its financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The standard amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For available for sale debt securities, credit losses will be presented as an allowance rather than as a write-down. As an “emerging growth company” as defined in the JOBS Act, the new standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company does not expect the adoption of this standard to have a material impact on the operating results.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. As an “emerging growth company” as defined in the JOBS Act, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than the Company’s adoption date of ASC 606. The Company does not expect the adoption of this standard to have a material impact on the operating results.

 

Note 3. Cash, Cash Equivalents and Short-term Investments

The following tables summarize the estimated value of the Company’s cash, cash equivalents and short-term investments (in thousands):

 

 

 

March 31, 2020

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

50,257

 

 

$

 

 

$

 

 

$

50,257

 

U.S. Treasury securities

 

 

39,978

 

 

 

20

 

 

 

 

 

 

39,998

 

Money market fund

 

 

39,412

 

 

 

 

 

 

 

 

 

39,412

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

Agency bonds

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

4,994

 

 

 

1

 

 

 

 

 

 

4,995

 

Total cash and cash equivalents

 

$

134,641

 

 

$

21

 

 

$

 

 

$

134,662

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

100,928

 

 

$

511

 

 

$

 

 

$

101,439

 

Corporate bonds

 

 

51,569

 

 

 

 

 

 

(225

)

 

 

51,344

 

Agency bonds

 

 

10,000

 

 

 

13

 

 

 

 

 

 

10,013

 

Commercial paper

 

 

5,794

 

 

 

2

 

 

 

 

 

 

5,796

 

Total short-term investments

 

$

168,291

 

 

$

526