real-10q_20210331.htm
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2021-04-30

 

 

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, 2021

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 April 30, 2021, the registrant had 90,809,675 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, 2021 and December 31, 2020

1

 

Condensed Statements of Operations for the Three Months Ended March 31, 2021 and 2020

2

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020

3

 

Condensed Statements of Stockholders’ Equity as of March 31, 2021 and 2020

4

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

37

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

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 authentication centers;

 

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,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

547,859

 

 

$

350,846

 

Short-term investments

 

 

 

 

 

4,017

 

Accounts receivable, net

 

 

5,994

 

 

 

7,213

 

Inventory

 

 

49,502

 

 

 

42,321

 

Prepaid expenses and other current assets

 

 

15,267

 

 

 

17,072

 

Total current assets

 

 

618,622

 

 

 

421,469

 

Property and equipment, net

 

 

66,637

 

 

 

63,454

 

Operating lease right-of-use assets

 

 

143,331

 

 

 

118,136

 

Other assets

 

 

2,156

 

 

 

2,050

 

Total assets

 

$

830,746

 

 

$

605,109

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,260

 

 

$

14,346

 

Accrued consignor payable

 

 

54,484

 

 

 

57,053

 

Operating lease liabilities, current portion

 

 

15,275

 

 

 

14,999

 

Other accrued and current liabilities

 

 

63,394

 

 

 

61,862

 

Total current liabilities

 

 

142,413

 

 

 

148,260

 

Operating lease liabilities, net of current portion

 

 

140,775

 

 

 

115,084

 

Convertible senior notes, net

 

 

336,112

 

 

 

149,188

 

Other noncurrent liabilities

 

 

1,541

 

 

 

1,284

 

Total liabilities

 

 

620,841

 

 

 

413,816

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   authorized as of March 31, 2021 and December 31, 2020;

   90,675,268 and 89,301,664 shares issued and outstanding

   as of March 31, 2021 and December 31, 2020, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

797,918

 

 

 

723,302

 

Accumulated other comprehensive income

 

 

 

 

 

11

 

Accumulated deficit

 

 

(588,014

)

 

 

(532,021

)

Total stockholders’ equity

 

 

209,905

 

 

 

191,293

 

Total liabilities and stockholders’ equity

 

$

830,746

 

 

$

605,109

 

 

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,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Consignment and service revenue

 

$

75,082

 

 

$

65,086

 

Direct revenue

 

 

23,735

 

 

 

12,942

 

Total revenue

 

 

98,817

 

 

 

78,028

 

Cost of revenue:

 

 

 

 

 

 

 

 

Cost of consignment and service revenue

 

 

20,114

 

 

 

18,088

 

Cost of direct revenue

 

 

20,365

 

 

 

10,954

 

Total cost of revenue

 

 

40,479

 

 

 

29,042

 

Gross profit

 

 

58,338

 

 

 

48,986

 

Operating expenses:

 

 

 

 

 

 

 

 

Marketing

 

 

15,561

 

 

 

12,922

 

Operations and technology

 

 

51,934

 

 

 

40,737

 

Selling, general and administrative

 

 

43,616

 

 

 

35,104

 

Total operating expenses

 

 

111,111

 

 

 

88,763

 

Loss from operations

 

 

(52,773

)

 

 

(39,777

)

Interest income

 

 

87

 

 

 

1,286

 

Interest expense

 

 

(3,296

)

 

 

(20

)

Other income (expense), net

 

 

17

 

 

 

8

 

Loss before provision for income taxes

 

 

(55,965

)

 

 

(38,503

)

Provision (benefit) for income taxes

 

 

28

 

 

 

 

Net loss attributable to common stockholders

 

$

(55,993

)

 

$

(38,503

)

Net loss per share attributable to common stockholders,

   basic and diluted

 

$

(0.62

)

 

$

(0.44

)

Shares used to compute net loss per share attributable to

   common stockholders, basic and diluted

 

 

90,044,082

 

 

 

86,588,796

 

 

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,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(55,993

)

 

$

(38,503

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

(11

)

 

 

314

 

Comprehensive loss

 

$

(56,004

)

 

$

(38,189

)

 

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

 

 

3


 

THE REALREAL, INC.

Condensed Statements of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2020

 

 

89,301,664

 

 

$

1

 

 

$

723,302

 

 

$

11

 

 

$

(532,021

)

 

$

191,293

 

Issuance of common stock upon exercise of options

 

 

543,963

 

 

 

 

 

 

3,973

 

 

 

 

 

 

 

 

 

3,973

 

Issuance of common stock upon vesting of restricted stock units, net of

   shares withheld for employee taxes

 

 

829,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

11,278

 

 

 

 

 

 

 

 

 

11,278

 

Purchase of capped calls

 

 

 

 

 

 

 

 

(33,666

)

 

 

 

 

 

 

 

 

(33,666

)

Equity component of convertible senior notes, net of issuance costs of $3,131

 

 

 

 

 

 

 

 

93,031

 

 

 

 

 

 

 

 

 

93,031

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55,993

)

 

 

(55,993

)

Balance as of March 31, 2021

 

 

90,675,268

 

 

$

1

 

 

$

797,918

 

 

$

 

 

$

(588,014

)

 

$

209,905

 

 

 

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

4


THE REALREAL, INC.

Condensed Statements of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,503

)

 

 

(38,503

)

Balance as of March 31, 2020

 

 

86,850,694

 

 

$

1

 

 

$

699,249

 

 

$

321

 

 

$

(393,009

)

 

$

306,562

 

 

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,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(55,993

)

 

$

(38,503

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,435

 

 

 

4,145

 

Stock-based compensation expense

 

 

10,919

 

 

 

3,410

 

Reduction of operating lease right-of-use assets

 

 

4,755

 

 

 

4,121

 

Bad debt expense

 

 

 

 

 

455

 

Accrued interest on convertible notes

 

 

1,469

 

 

 

 

Accretion of debt discounts and issuance costs

 

 

1,815

 

 

 

 

Other adjustments

 

 

5

 

 

 

(184

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

1,219

 

 

 

4,235

 

Inventory

 

 

(7,181

)

 

 

(1,106

)

Prepaid expenses and other current assets

 

 

1,769

 

 

 

2,356

 

Other assets

 

 

(106

)

 

 

(365

)

Operating lease liability

 

 

(3,983

)

 

 

(2,721

)

Accounts payable

 

 

(5,072

)

 

 

(2,206

)

Accrued consignor payable

 

 

(2,569

)

 

 

(19,331

)

Other accrued and current liabilities

 

 

(547

)

 

 

(8,865

)

Other noncurrent liabilities

 

 

257

 

 

 

(412

)

Net cash used in operating activities

 

 

(47,808

)

 

 

(54,971

)

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

 

 

 

(73,280

)

Proceeds from maturities of short-term investments

 

 

4,000

 

 

 

114,020

 

Capitalized proprietary software development costs

 

 

(2,405

)

 

 

(1,480

)

Purchases of property and equipment

 

 

(5,925

)

 

 

(6,486

)

Net cash provided by (used in) investing activities

 

 

(4,330

)

 

 

32,774

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2028 convertible senior notes, net of issuance costs

 

 

278,844

 

 

 

 

Purchase of capped calls

 

 

(33,666

)

 

 

 

Proceeds from exercise of stock options

 

 

3,973

 

 

 

2,564

 

Taxes paid related to restricted stock vesting

 

 

 

 

 

(151

)

Net cash provided by financing activities

 

 

249,151

 

 

 

2,413

 

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

 

 

197,013

 

 

 

(19,784

)

Cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

 

Beginning of period

 

 

350,846

 

 

 

154,446

 

End of period

 

$

547,859

 

 

$

134,662

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

7

 

 

$

4

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment additions not yet paid in cash

 

 

2,434

 

 

 

2,266

 

Capitalized proprietary software development costs additions not yet paid in cash

 

 

430

 

 

 

756

 

Issuance costs associated with issuance of 2025 and 2028 convertible senior notes included in other accrued and current liabilities

 

 

1,173

 

 

 

 

Stock-based compensation capitalized to proprietary software development costs

 

 

359

 

 

 

 

 

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

In the year ended December 31, 2020, the COVID-19 pandemic materially impacted the Company's business operations and results of operations. Operations in the Company’s authentication centers were initially limited in accordance with shelter-in-place orders resulting in operations below full capacity. In-person concierge consignment appointments were temporarily suspended. Luxury consignment offices and retail stores were temporarily closed. During the second half of fiscal year 2020, operations capacity was no longer limited by restrictions related to COVID-19 and all luxury consignment offices and retail stores were open. In-person concierge consignment appointments were available as an option for our consignor base and were augmented with virtual appointments.

In the first quarter of fiscal year 2021, the Company resumed in-person concierge consignment appointments in various areas. The authentication centers and retail stores experience intermittent closures to perform safety and cleaning procedures.

The Company believes that its financial resources 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 as of March 31, 2021 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, 2020 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, and stockholders’ equity, and cash flows for the periods presented.

Certain changes in presentation have been made to conform the prior period presentation to the current period reporting. Such reclassifications did not affect total revenues, operating income, or net income. We have made certain presentation changes to reclassify loss (gain) on retirement of property and equipment, accretion of unconditional grant liability, and amortization of premiums (discounts) on short-term investments to other adjustments within operating cash flows in the Condensed Statements of Cash Flows. 

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 1, 2021.  

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, valuation of inventory, software development costs, incremental borrowing rates related to lease liability, fair value of the liability component of convertible senior notes, valuation of deferred taxes, 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.

7


 

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.

 

The Company’s convertible senior notes are participating securities as they give the holders the right to receive dividends if dividends or distributions declared to the common stockholders is equal to or greater than the last reported sale price of the Company’s common stock on the trading day immediately preceding the ex-dividend date for such dividend or distribution as if the instruments had been converted into shares of common stock. No undistributed earnings were allocated to the participating securities as the contingent event is not satisfied as of the reporting date.

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 and assumed conversion of the convertible senior notes 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 stores.

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 stores. 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 remains with the consignor until transferred to the buyer upon 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 estimated returns, cancellations, buyer incentives and adjustments. The Company recognizes a returns reserve based on historical experience, which is recorded in other accrued and current liabilities on the condensed 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 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 condensed balance sheets. The impact of the deferral has not been material to the financial statements.

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, 2021 and 2020.

8


 

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 estimated returns, buyer incentives and adjustments. 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, an amount equal to that paid as a direct purchase from a third party, or the lower of cost of the inventory purchased and its net realizable value. 

Incentives

Incentives, which include platform-wide discounts and buyer incentives, may periodically be offered to buyers. Platform-wide discounts are made available to all buyers on the online marketplace. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on the Company’s platform, and do not impact the commissions paid to consignors. These are treated as a reduction of consignment and service revenue and direct revenue. Additionally, the Company periodically offers commission exceptions to consignors to optimize its supply. These are treated as reduction of consignment and service revenue, and are reflected in the Company’s take rate. The Company may offer a certain type of buyer incentive in the form of site credits to buyers on current transactions to be applied towards future transactions, which are 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, 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, 2021 and December 31, 2020. Contract liabilities are recorded in other accrued and current liabilities on the balance sheets and are generally expected to be recognized within one year. Contract liabilities were immaterial as of March 31, 2021 and December 31, 2020.

Cost of Revenue

Cost of consignment and service revenue consist of shipping costs, credit card fees, packaging, customer service personnel-related costs, website hosting services, and consignor inventory adjustments relating to lost or damaged products. Cost of direct revenue consists of the cost of goods sold, credit card fees, packaging, customer service personnel-related costs, website hosting services, and inventory adjustments.

Stock-based Compensation

Stock-based compensation expense related to employees and nonemployees 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. The fair value of each purchase under the employee stock purchase plan (ESPP) is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

 

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 primarily consist of investments in short-term money market funds and amounts invested in U.S. treasury securities.    

As of March 31, 2021 and December 31, 2020, the Company had no restricted cash.           

 

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 condensed 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.

9


 

Available-for-sale investments are reported at fair value based on quoted market prices and other observable market data. The Company records any unrealized gains and losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity, of which there were none as of March 31, 2021 and December 31, 2020. The Company evaluates its short-term investments periodically for possible impairment. If the Company determines that an investment with an amortized cost basis in excess of estimated fair value is caused by expected credit losses, the expected credit loss on the investment is recognized in Other income and expense, net. As of March 31, 2021 and December 31, 2020, the Company had not recorded any impairments due to credit loss.

Inventory

Inventory consists of finished goods arising from goods returned after the title has transferred from the buyer to the Company as well as finished goods from direct purchases from vendors and consignors. The cost of inventory is an amount equal to that paid to the consignor or vendors. Inventory is valued at the lower of cost or 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 were not material for the three months ended March 31, 2021 and 2020.

Return reserves, which reduce revenue and cost of sales, are estimated using historical experience. Liabilities for return allowances are included in other accrued and current liabilities on the condensed balance sheets and were $14.5 million and $18.3 million as of March 31, 2021 and December 31, 2020, respectively. Included in inventory on the Company’s condensed balance sheets are assets totaling $3.4 million and $7.4 million as of March 31, 2021 and December 31, 2020, respectively, for the rights to recover products from customers associated with its liabilities for return reserves.

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.

Leases

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 by developing its own synthetic credit rating, corresponding yield curve, and the terms of each lease 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, current portion of operating lease liabilities, and operating lease liabilities, net of current portion are included on the Company’s condensed balance sheets.

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 vehicles and equipment, and the amounts of finance lease right-of-use assets and finance lease liabilities have been immaterial to date.

 

 

Convertible Senior Notes, net

 

Convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, are separately accounted for as long-term debt and equity components (or conversion feature). The debt component represents the Company’s contractual obligation to pay principal and interest and the equity component represents the Company’s option to convert the debt security into equity of the Company or the equivalent amount of cash. Upon issuance, the Company allocated the debt component on the basis of the estimated fair value of a similar liability that does not have an associated convertible feature and the remaining

10


 

proceeds are allocated to the equity component. The bifurcation of the debt and equity components resulted in a debt discount for the aforementioned notes. The Company uses the effective interest method to amortize the debt discount to interest expense over the amortization period which is the expected life of the debt.

Capped Call Transactions

In June 2020 and March 2021, in connection with the issuance of its convertible senior notes, the Company entered into Capped Call Transactions (see Note 6). The Capped Call Transactions are expected generally to reduce the potential dilution to the holders of the Company’s common stock upon any conversion of the convertible senior notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted convertible senior notes, with such reduction and/or offset subject to a cap based on the cap price. The capped calls are classified in stockholders’ equity as a reduction to additional paid-in capital and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

Debt Issuance Costs

Debt issuance costs are amortized to interest expense over the estimated life of the related debt based on the effective interest method. The Company presents debt issuance costs on the condensed balance sheets as a direct deduction from the associated debt. A portion of debt issuance costs incurred in connection with the convertible senior notes issued in June 2020 and March 2021 was related to the equity component and was recorded as a reduction to additional paid in capital and is not amortized to interest expense over the estimated life of the related debt.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash, 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, 2021 and December 31, 2020, 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, 2021 and 2020.

Recently Issued Accounting Pronouncements

 

 In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments. Under this ASU, the embedded conversion features will no longer be separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU will be effective for annual reporting periods beginning after December 15, 2021 and early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements. It is expected that upon adoption, the Company’s Convertible Senior Notes, as discussed in Note 7, will no longer be bifurcated into an equity and a debt component, but rather accounted for as a single liability.

 

11


 

 

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, 2021

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

343,491

 

 

$

 

 

$

 

 

$

343,491

 

Money market funds

 

 

204,368

 

 

 

 

 

 

 

 

 

204,368

 

Total cash and cash equivalents

 

$

547,859

 

 

$

 

 

$

 

 

$

547,859

 

 

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

150,520

 

 

$

 

 

$

 

 

$

150,520

 

Money market funds

 

 

200,326

 

 

 

 

 

 

 

 

 

200,326

 

Total cash and cash equivalents

 

$

350,846

 

 

$

 

 

$

 

 

$

350,846

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

4,006

 

 

$

11

 

 

$

 

 

$

4,017

 

Total short-term investments

 

$

4,006

 

 

$

11

 

 

$

 

 

$

4,017

 

 

As of December 31, 2020, the contractual maturity for the short-term investments is less than one year. For the three months ended March 31, 2021 and 2020, the Company recognized no material realized gains or losses on short-term investments.

Note 4. Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis on the condensed balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2021, the Company’s cash equivalents solely consisted of money market funds, which amounted to $204.4 million. Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table.

12


 

The following table provides the financial instruments measured at fair value (in thousands) as of December 31, 2020:

 

 

 

December 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

 

$

4,017

 

 

$

 

 

$

4,017

 

Total short-term investments

 

$

 

 

$

4,017

 

 

$

 

 

$

4,017

 

 

 

(1)

Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table. The amounts of the money market funds (in thousands) was $200,326 at 12/31/20.

Fair Value Measurements of Other Financial Instruments

 

The following table presents the carrying amounts and estimated fair values of the financial instruments that are not recorded at fair value on the condensed balance sheets (in millions):