real-20210930
TheRealReal, 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________________
FORM 10-Q
___________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
___________________________________________________
Delaware45-1234222
( 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 classTrading
Symbol(s)
Name of each exchange on which registered
Common stock, $0.00001 par valueREALThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 October 31, 2021, the registrant had 92,387,816 shares of common stock, $0.00001 par value per share, outstanding.


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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
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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.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
THE REALREAL, INC.
Condensed Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
September 30,
2021
December 31,
2020
Assets
Current assets
Cash and cash equivalents$444,809 $350,846 
Short-term investments 4,017 
Accounts receivable, net6,770 7,213 
Inventory63,876 42,321 
Prepaid expenses and other current assets22,319 17,072 
Total current assets537,774 421,469 
Property and equipment, net83,928 63,454 
Operating lease right-of-use assets146,852 118,136 
Other assets2,857 2,050 
Total assets$771,411 $605,109 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$8,246 $14,346 
Accrued consignor payable60,366 57,053 
Operating lease liabilities, current portion15,229 14,999 
Other accrued and current liabilities84,921 61,862 
Total current liabilities168,762 148,260 
Operating lease liabilities, net of current portion145,787 115,084 
Convertible senior notes, net344,245 149,188 
Other noncurrent liabilities1,900 1,284 
Total liabilities660,694 413,816 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $0.00001 par value; 500,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 92,289,799 and 89,301,664 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
1 1 
Additional paid-in capital826,649 723,302 
Accumulated other comprehensive income 11 
Accumulated deficit(715,933)(532,021)
Total stockholders’ equity110,717 191,293 
Total liabilities and stockholders’ equity$771,411 $605,109 
The accompanying notes are an integral part of these unaudited condensed financial statements.
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THE REALREAL, INC.
Condensed Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenue:
Consignment and service revenue$89,451 $64,152 $246,985 $176,006 
Direct revenue29,387 13,645 75,582 37,111 
Total revenue118,838 77,797 322,567 213,117 
Cost of revenue:
Cost of consignment and service revenue22,714 16,304 64,352 47,253 
Cost of direct revenue25,025 11,964 65,365 31,678 
Total cost of revenue47,739 28,268 129,717 78,931 
Gross profit71,099 49,529 192,850 134,186 
Operating expenses:
Marketing15,708 15,186 44,378 37,747 
Operations and technology61,135 40,578 172,906 117,858 
Selling, general and administrative44,912 35,384 132,504 101,937 
Legal settlement500  11,788 1,110 
Total operating expenses122,255 91,148 361,576 258,652 
Loss from operations(51,156)(41,619)(168,726)(124,466)
Interest income55 448 249 2,350 
Interest expense(6,072)(2,406)(15,374)(2,810)
Other income (expense), net5  22 (89)
Loss before provision for income taxes(57,168)(43,577)(183,829)(125,015)
Provision (benefit) for income taxes28 (17)83 38 
Net loss attributable to common stockholders$(57,196)$(43,560)$(183,912)$(125,053)
Net loss per share attributable to common stockholders, basic and diluted
$(0.62)$(0.50)$(2.02)$(1.43)
Shares used to compute net loss per share attributable to common stockholders, basic and diluted91,859,603 87,869,321 90,995,285 87,176,677 
The accompanying notes are an integral part of these unaudited condensed financial statements.
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THE REALREAL, INC.
Condensed Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net loss$(57,196)$(43,560)$(183,912)$(125,053)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investments (294)(11)100 
Comprehensive loss$(57,196)$(43,854)$(183,923)$(124,953)
The accompanying notes are an integral part of these unaudited condensed financial statements.
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THE REALREAL, INC.
Condensed Statements of Stockholders’ Equity
(In thousands, except share amounts)
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance as of December 31, 202089,301,664 $1 $723,302 $11 $(532,021)$191,293 
Issuance of common stock upon exercise of options543,963 — 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, 202190,675,268 $1 $797,918 $ $(588,014)$209,905 
Issuance of common stock upon exercise of options153,414 — 786 — — 786 
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
532,468 — — — —  
Issuance of common stock for exercises under ESPP98,355 — 1,092 — — 1,092 
Stock-based compensation expense— — 13,219 — — 13,219 
Net loss— — — — (70,723)(70,723)
Balance as of June 30, 202191,459,505 $1 $813,015 $ $(658,737)$154,279 
Issuance of common stock upon exercise of options145,217 — 693 — — 693 
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
685,077 — (7)— — (7)
Stock-based compensation expense— — 12,948 — — 12,948 
Net loss— — — — (57,196)(57,196)
Balance as of September 30, 202192,289,799 $1 $826,649 $ $(715,933)$110,717 
The accompanying notes are an integral part of these unaudited condensed financial statements.
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THE REALREAL, INC.
Condensed Statements of Stockholders’ Equity
(In thousands, except share amounts)
(Unaudited)
Common StockAdditional
 Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance as of December 31, 201985,872,320 $1 $693,426 $7 $(356,189)$337,245 
Issuance of common stock upon exercise of options964,085 — 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, 202086,850,694 $1 $699,249 $321 $(394,692)$304,879 
Issuance of common stock upon exercise of options429,339 — 1,790 — — 1,790 
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
68,208 — (453)— — (453)
Stock-based compensation expense— — 6,129 — — 6,129 
Purchase of capped calls— — (22,546)— — (22,546)
Equity component of convertible senior notes, net of issuance costs of $767
— — 19,020 — — 19,020 
Other comprehensive income— — — 80 — 80 
Net loss— — — — (42,990)(42,990)
Balance as of June 30, 202087,348,241 $1 $703,189 $401 $(437,682)$265,909 
Issuance of common stock upon exercise of options720,682 — 2,781 — — 2,781 
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
463,534 — (147)— — (147)
Stock-based compensation expense— — 7,372 — — 7,372 
Other comprehensive income— — — (294)— (294)
Net loss— — — — (43,560)(43,560)
Balance as of September 30, 202088,532,457 $1 $713,195 $107 $(481,242)$232,061 
The accompanying notes are an integral part of these unaudited condensed financial statements.
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THE REALREAL, INC.
Condensed Statements of Cash Flows

(In thousands)
(Unaudited)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:
Net loss$(183,912)$(125,053)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization17,840 13,673 
Stock-based compensation expense36,324 16,911 
Reduction of operating lease right-of-use assets14,765 12,003 
Bad debt expense637 661 
Accrued interest on convertible notes1,525 1,496 
Accretion of debt discounts and issuance costs9,854 1,268 
Loss on retirement of property and equipment404  
Other adjustments10 (75)
Changes in operating assets and liabilities:
Accounts receivable, net(194)2,559 
Inventory(21,555)4,927 
Prepaid expenses and other current assets(5,330)(4,626)
Other assets(807)578 
Operating lease liability(12,548)(8,710)
Accounts payable(6,220)(4,164)
Accrued consignor payable3,313 (8,330)
Other accrued and current liabilities21,951 1,015 
Other noncurrent liabilities556 (150)
Net cash used in operating activities(123,387)(96,017)
Cash flow from investing activities:
Purchases of short-term investments (73,280)
Proceeds from maturities of short-term investments4,000 222,217 
Proceeds from sale of short-term investments 7,932 
Capitalized proprietary software development costs(7,455)(6,640)
Purchases of property and equipment(30,303)(15,685)
Net cash provided by (used in) investing activities(33,758)134,544 
Cash flow from financing activities:
Proceeds from issuance of 2025 convertible senior notes, net of issuance costs 166,278 
Purchase of capped calls in conjunction with the issuance of the 2025 convertible senior notes (22,546)
Proceeds from issuance of 2028 convertible senior notes, net of issuance costs278,234  
Purchase of capped calls in conjunction with the issuance of the 2028 convertible senior notes(33,666) 
Proceeds from exercise of stock options5,452 7,135 
Proceeds from issuance of stock in connection with the Employee Stock Purchase Program1,092  
Taxes paid related to restricted stock vesting(4)(748)
Net cash provided by financing activities251,108 150,119 
Net increase in cash and cash equivalents 93,963 188,646 
Cash and cash equivalents
Beginning of period350,846 154,446 
End of period$444,809 $343,092 



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THE REALREAL, INC.
Condensed Statements of Cash Flows

(In thousands)
(Unaudited)


Nine Months Ended September 30,
20212020
Supplemental disclosures of cash flow information
Cash paid for interest$3,988 $7 
Cash paid for income taxes9490 
Supplemental disclosures of non-cash investing and financing activities
Property and equipment additions not yet paid in cash1,425 1,776 
Capitalized proprietary software development costs additions not yet paid in cash1,247 501 
Issuance costs associated with issuance of 2025 and 2028 convertible senior notes included in other accrued and current liabilities 469 
Stock-based compensation capitalized to proprietary software development costs1,121  
Tax withholding liability for restricted stock3 3 




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

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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 March 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 also reopened its corporate offices, including our corporate headquarters in San Francisco.
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 September 30, 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 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. We have also made certain presentation changes to reclassify accrued interest on convertible notes from other current and accrued liabilities to a separate line item within operating cash flows in the Condensed Statements of Cash Flows. Additionally, we have made certain presentation changes to reclassify legal settlement expenses from Selling, general and administrative to Legal settlement within operating expenses in the Condensed Statements of Operations.
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
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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.
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
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the monthly subscription period. Subscription revenue was not material in the three and nine months ended September 30, 2021 and 2020.
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 September 30, 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 September 30, 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 and Cash Equivalents
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.
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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.
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 September 30, 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 (expense), net. As of September 30, 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 nine months ended September 30, 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 $16.5 million and $18.3 million as of September 30, 2021 and December 31, 2020, respectively. Included in inventory on the Company’s condensed balance sheets are assets totaling $4.5 million and $7.4 million as of September 30, 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.
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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 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 7). 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, 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, and investments with major financial institutions within the United States.
As of September 30, 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 nine months ended September 30, 2021 and 2020.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-6, 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 2020-6 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.
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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):
September 30, 2021
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair
Value
Cash and cash equivalents:
Cash$305,415 $— $— $305,415 
Money market funds139,394 — — 139,394 
Total cash and cash equivalents$444,809 $— $— $444,809 
December 31, 2020
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair
Value
Cash and cash equivalents:
Cash$150,520 $— $— $150,520 
Money market funds200,326 — — 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 nine months ended September 30, 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 September 30, 2021, the Company’s cash equivalents solely consisted of money market funds, which amounted to $139.4 million. Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table.
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The following table provides the financial instruments measured at fair value (in thousands) as of December 31, 2020:
December 31, 2020
Level 1Level 2Level 3Total
Assets (1)
Short-term investments:
Corporate bonds$ $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):
September 30, 2021
Net Carrying AmountEstimated Fair Value
2025 Convertible senior notes$152.7 $185.1 
2028 Convertible senior notes$191.6 $289.0 
The principal amounts of the 2025 convertible senior notes and the 2028 convertible senior notes are $172.5 million and $287.5 million, respectively. The difference between the principal amounts of the convertible senior notes and their respective net carrying amounts are the unamortized debt issuance costs and the unamortized debt discount (See Note 7).
As of September 30, 2021, the fair value of the 2025 convertible senior notes and the 2028 convertible senior notes, which differs from their carrying value is determined by prices for the convertible senior notes observed in market trading. The market for trading of the convertible senior notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs, such as interest rates based on the market price on the last trading day for the period.
Note 5. Condensed Balance Sheet Components
Property and Equipment, Net
Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Property and equipment, net consists of the following (in thousands):
September 30,
2021
December 31,
2020
Proprietary software$31,822 $24,218 
Furniture and equipment38,393 27,687 
Automobiles668 668 
Leasehold improvements61,824 52,828 
Property and equipment, gross132,707 105,401 
Less: accumulated depreciation and amortization(48,779)(41,947)
Property and equipment, net$83,928 $63,454 
Depreciation and amortization expense on property and equipment was $6.0 million and $4.9 million for the three months ended September 30, 2021 and 2020, respectively, and $17.8 million and $13.7 million for the nine months ended September 30, 2021 and 2020, respectively. Property and equipment taken out of service as part of the closure of the Brisbane authentication center during the three and nine months ended September 30, 2021 was $0.9 million and $8.7 million, respectively. The company recorded $0.3 million of loss on disposal of property and equipment from the closure of the Brisbane authentication center within the 'Operations and Technology' line of the Condensed Statements of Operations during the three and nine months ended September 30, 2021.
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Other Accrued and Current Liabilities
Other accrued and current liabilities consist of the following (in thousands):
September 30,
2021
December 31,
2020
Accrued compensation$20,914 $13,406 
Returns reserve16,506 18,327 
Accrued legal settlement11,500  
Accrued marketing and outside services12,377 10,790 
Site credit liability7,423 5,475 
Accrued sales tax and other taxes8,093 6,870 
Deferred revenue2,511 1,617 
Accrued interest1,741 216 
Other3,856 5,161 
Other accrued and current liabilities$84,921 $61,862 

Note 6. Debt
Revolving Credit Agreement
In April 2021, the Company entered into a loan and security agreement ("Revolving Credit Agreement") with a lender, to provide a revolving line of credit of up to $50 million. Advances on the line of credit bear interest payable monthly at a variable annual rate equal to the greater of the prime rate plus 0.50% or 4.25%. The credit facility expires in April 2023. The Revolving Credit Agreement contains affirmative, negative and financial covenants, including covenants that require maintaining minimum cash and investment balances over specified periods of time and covenants that restrict, among other things, the Company’s ability to change its name, business, management, ownership or business locations, enter into mergers or acquisitions or incur additional indebtedness. As of September 30, 2021 (unaudited), the Company was in compliance with all covenants.
As of September 30, 2021, $0 had been drawn on the Revolving Credit Agreement.
Note 7. Convertible Senior Notes, Net
2025 Convertible Senior Notes
In June 2020, the Company issued an aggregate principal of $172.5 million of its 3.00% Convertible Senior Notes due 2025 (2025 Notes), pursuant to an indenture between the Company and U.S. Bank National Association, as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes include $22.5 million in aggregate principal amount of the 2025 Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes. The 2025 Notes will mature on June 15, 2025, unless earlier redeemed or repurchased by the Company or converted.
The Company received net proceeds from the 2025 Notes offering of approximately $165.8 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $22.5 million of the net proceeds from the 2025 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes.
The 2025 Notes accrue interest at a rate of 3.00% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The initial conversion rate applicable to the 2025 Notes is 56.2635 shares of common stock per $1,000 principal amount of 2025 Notes (which is equivalent to an initial conversion price of approximately $17.77 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a corporate event, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2025 Notes in connection with such corporate event.
The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 20, 2023 if the last reported sale price per share of the Company’s common stock exceeds 130% of the
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conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
Prior to March 15, 2025, the 2025 Notes will be convertible only under the following circumstances:
During any calendar quarter (and only during such calendar quarter) beginning after September 30, 2020, if, the last reported sale price per share of the Company’s common stock exceeds 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter;
During the five business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day;
Upon the occurrence of specified corporate transactions; or
If the Company calls any notes for redemption.
On and after March 15, 2025, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2025 Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances. Upon conversion, the 2025 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. It is the Company’s current intent to settle conversions of the 2025 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. The conditions allowing holders of the 2025 Notes to convert were not met as of September 30, 2021.
The 2025 Notes are unsecured and unsubordinated obligations of the Company and will rank senior in right of payment to any of future indebtedness of the Company that is expressly subordinated in right of payment to the 2025 Notes; rank equal in right of payment to any existing and future unsecured indebtedness of the Company that is not so subordinated; be effectively subordinated in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all existing and future indebtedness and other liabilities and obligations incurred by future subsidiaries of the Company.
If bankruptcy, insolvency, or reorganization occurs with respect to the Company (and not solely with respect to a significant subsidiary of the Company), then the principal amount of, and all accrued and unpaid interest on, all of the 2025 Notes then outstanding will immediately become due and payable without any further action or notice by any person. If an event of default (other than bankruptcy, insolvency, or reorganization with respect to the Company and not solely with respect to a significant subsidiary of the Company) occurs and is continuing, then, with the exception of certain reporting events of default, the trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of notes then outstanding, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the 2025 Notes then outstanding to become due and payable immediately.
In accounting for the issuance of the 2025 Notes, the Company separately accounted for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion options, or equity component, due to Company’s ability to settle the 2025 Notes in cash, its common stock, or a combination of cash and common stock at Company’s option. The allocation was done by first estimating the fair value of the liability component and the residual value was assigned to the equity component. The value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using a discounted cash flow approach to derive the value of a debt instrument using the expected cash flows and the estimated yield related to the convertible notes. The interest rate of 5.67% was used to compute the initial fair value of the liability component of $152.7 million, with a corresponding amount recorded as a discount on the initial issuance of the 2025 Notes of approximately $19.8 million. The debt discount was recorded to equity and is being amortized to the debt liability over the life of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
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The net carrying amount of the liability component of the 2025 Notes was as follows:
September 30,
2021
December 31,
2020
Principal$172,500 $172,500 
Unamortized debt discount(15,277)(17,945)
Unamortized debt issuance costs(4,564)(5,367)
Net carrying amount$152,659 $149,188 
The net carrying amount of the equity component of the 2025 Notes was as follows:
September 30,
2021
Proceeds allocated to the conversion options (debt discount)$19,787 
Issuance costs(767)
Net carrying amount$19,020 
In connection with the issuance of the 2025 Notes, the Company incurred approximately $6.7 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. The Company allocated these costs to the liability and equity components based on the allocation of the proceeds. The portion of these costs allocated to the equity component totaling approximately $0.8 million was recorded as a reduction to additional paid-in capital. The portion of these costs initially allocated to the liability component totaling approximately $5.9 million was recorded as a reduction in the carrying value of the debt on the condensed balance sheets and is amortized to interest expense using the effective interest method over the expected life of the 2025 Notes or approximately its five-year term. The effective interest rate on the liability component of the 2025 Notes for the period from the date of issuance through September 30, 2021 was 6.4%.
The following table sets forth the amounts recorded in interest expense related to the 2025 Notes:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Contractual interest expense$1,294 $1,293 $3,881 $1,496 
Amortization of debt discount900 844 2,669 974 
Amortization of debt issuance costs271 255 803 294 
Total interest and amortization expense$2,465 $2,392 $7,353 $2,764 
Future minimum payments under the 2025 Notes as of September 30, 2021, are as follows:
Fiscal YearAmount
Remainder of 2021$2,587 
20225,175 
20235,175 
20245,175 
2025175,088 
Total future payments193,200 
Less amounts representing interest(20,700)
Total principal amount$172,500 
2028 Convertible Senior Notes
In March 2021, the Company issued an aggregate principal of $287.5 million of its 1.00% Convertible Senior Notes due 2028, pursuant to an indenture between the Company and U.S. Bank National Association, as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2028 Notes issued in the Note Offering include $37.5 million in aggregate principal amount of the 2028 Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes. The 2028 Notes will mature on March 1, 2028, unless earlier redeemed or repurchased by the Company or converted.
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The Company received net proceeds from the 2028 Notes offering of approximately $278.1 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $33.7 million of the net proceeds from the 2028 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes.
The 2028 Notes accrue interest at a rate of 1.00% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021. The initial conversion rate applicable to the 2028 Notes is 31.4465 shares of common stock per $1,000 principal amount of 2028 Notes (which is equivalent to an initial conversion price of approximately $31.80 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a corporate event, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2028 Notes in connection with such corporate event.
The 2028 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after March 5, 2025 if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
Prior to December 1, 2027, the 2028 Notes will be convertible only under the following circumstances:
During any calendar quarter (and only during such calendar quarter) beginning after June 30, 2021, if, the last reported sale price per share of the Company’s common stock exceeds 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter;
During the five business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day;
Upon the occurrence of specified corporate transactions; or
If the Company calls any notes for redemption.
On and after December 1, 2027, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2028 Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances. Upon conversion, the 2028 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. It is the Company’s current intent to settle conversions of the 2028 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. The conditions allowing holders of the 2028 Notes to convert were not met as of September 30, 2021.
The 2028 Notes are unsecured and unsubordinated obligations of the Company and will rank senior in right of payment to any of future indebtedness of the Company that is expressly subordinated in right of payment to the 2028 Notes; rank equal in right of payment to any existing and future unsecured indebtedness of the Company that is not so subordinated; be effectively subordinated in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all existing and future indebtedness and other liabilities and obligations incurred by future subsidiaries of the Company.
If bankruptcy, insolvency, or reorganization occurs with respect to the Company (and not solely with respect to a significant subsidiary of the Company), then the principal amount of, and all accrued and unpaid interest on, all of the 2028 Notes then outstanding will immediately become due and payable without any further action or notice by any person. If an event of default (other than bankruptcy, insolvency, or reorganization with respect to the Company and not solely with respect to a significant subsidiary of the Company) occurs and is continuing, then, with the exception of certain reporting events of default, the trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of notes then
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outstanding, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the 2028 Notes then outstanding to become due and payable immediately.
In accounting for the issuance of the 2028 Notes, the Company separately accounted for the liability and equity components of the 2028 Notes by allocating the proceeds between the liability component and the embedded conversion options, or equity component, due to Company’s ability to settle the 2028 Notes in cash, its common stock, or a combination of cash and common stock at Company’s option. The allocation was done by first estimating the fair value of the liability component and the residual value was assigned to the equity component. The value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The interest rate of 7.18% was used to compute the initial fair value of the liability component of $191.3 million, with a corresponding amount recorded as a discount on the initial issuance of the 2028 Notes of approximately $96.2 million. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The net carrying amount of the liability component of the 2028 Notes was as follows:
September 30,
2021
Principal$287,500 
Unamortized debt discount(90,159)
Unamortized debt issuance costs(5,756)
Net carrying amount$191,585 
The net carrying amount of the equity component of the 2028 Notes was as follows:
September 30,
2021
Proceeds allocated to the conversion options (debt discount)$96,162 
Issuance costs(3,131)
Net carrying amount$93,031 
In connection with the issuance of the 2028 Notes, the Company incurred approximately $9.4 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. The Company allocated these costs to the liability and equity components based on the allocation of the proceeds. The portion of these costs allocated to the equity component totaling approximately $3.1 million was recorded as a reduction to additional paid-in capital. The portion of these costs allocated to the liability component totaling approximately $6.2 million was recorded as a reduction in the carrying value of the debt on the condensed balance sheets and is amortized to interest expense using the effective interest method over the expected life of the 2028 Notes or approximately its seven-year term. The effective interest rate on the liability component of the 2028 Notes for the period from the date of issuance through September 30, 2021 was 7.5%.
The following table sets forth the amounts recorded in interest expense related to the 2028 Notes for the three and nine months ended September 30, 2021:
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
Contractual interest expense$719 $1,613 
Amortization of debt discount2,709 6,003 
Amortization of debt issuance costs171 380 
Total interest and amortization expense$3,599 $7,996 
Future minimum payments under the 2028 Notes as of September 30, 2021, are as follows:
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Fiscal YearAmount
Remainder of 2021$ 
20222,875 
20232,875 
20242,875 
20252,875 
20262,875 
20272,875 
2028288,938 
Total future payments306,188 
Less amounts representing interest(18,688)
Total principal amount$287,500 
Capped Call Transactions with Respect to the 2025 and 2028 Notes
In connection with the issuance of the 2025 Notes and 2028 Notes, including the initial purchasers’ exercise of the option to purchase additional Notes, the Company entered into capped call transactions (2025 Capped Calls and 2028 Capped Calls) with respect to its common stock with certain financial institutions (collectively, the “Counterparties”). The Company paid an aggregate amount of approximately $22.5 million and $33.7 million in connection with the 2025 Capped Calls and 2028 Capped Calls to the Counterparties, respectively. The 2025 Capped Calls and 2028 Capped Calls cover approximately 9,705,454 shares and 9,040,869 shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2025 and 2028 Notes, respectively. The 2025 and 2028 Capped Calls are subject to anti-dilution adjustments that are intended to be substantially identical to those in the 2025 and 2028 Notes, and are exercisable upon conversion of the 2025 and 2028 Notes. The 2025 and 2028 Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offer and announcement events. In addition, the 2025 and 2028 Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the 2025 and 2028 Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. The 2025 Capped Calls settle in components commencing on April 16, 2025 with the last component scheduled to expire on June 12, 2025. The 2028 Capped Calls settle in components commencing on December 31, 2027 with the last component scheduled to expire on February 28, 2028.
The cap price of the 2025 Capped Call is initially $27.88 per share, which represents a premium of 100.0% over the closing price of the Company’s common stock of $13.94 per share on June 10, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The cap price of the 2028 Capped Call is initially $48.00 per share, which represents a premium of 100.0% over the closing price of the Company’s common stock of $24.00 per share on March 3, 2021, and is subject to certain adjustments under the terms of the capped call transactions. The Company expects to receive from the Counterparties a number of shares of the Company’s common stock or, at the Company’s election (subject to certain conditions), cash, with an aggregate market value (or, in the case of cash settlement, in an amount) approximately equal to the product of such excess times the number of shares of the Company’s common stock relating to the 2025 and 2028 Capped Calls being exercised.
These Capped Call instruments meet the conditions outlined in ASC 815-40 to be classified in stockholders’ equity, are not accounted for as derivatives, and are not subsequently remeasured as long as the conditions for equity classification continue to be met. The Company recorded a reduction to additional paid-in capital of approximately $22.5 million and $33.7 million related to the premium payments for the 2025 and 2028 Capped Call transactions.
Note 8. Share-based Compensation Plans
2011 Equity Incentive Plan
In 2011, the Company adopted the Equity Incentive Plan (2011 Plan) authorizing the granting of incentive stock options (ISOs) and non-statutory stock options (NSOs) to eligible participants for up to 12,987,255 shares of common stock. Under the 2011 Plan, incentive stock options and non-statutory stock options are to be granted at an exercise price that is no less than 100% of the fair value of the stock at the date of grant. Options generally vest over 4 years and are exercisable for up to 10 years after the date of grant. Incentive stock options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on
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the date of grant. The 2011 Plan has been replaced by the Company’s 2019 Plan as defined below with respect to future equity awards.
2019 Equity Incentive Plan
In connection with the Company’s initial public offering, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to participants. Subject to the terms and conditions of the 2019 Plan, the initial number of shares authorized for grants under the 2019 Plan is 8,000,000. These available shares increase annually by an amount equal to the lesser of 8,000,000 shares, 5% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. On August 4, 2020, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,293,616 shares. On May 5, 2021, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,465,083 shares.
Employee Stock Purchase Plan
In connection with the Company’s initial public offering, the Company adopted the Employee Stock Purchase Plan (ESPP). The Employee Stock Purchase Plan permits employees to purchase shares of common stock during six-month offering periods at a purchase price equal to the lesser of (1) 85% of the fair market value of a share of common stock on the first business day of such offering period and (2) 85% of the fair market value of a share of common stock on the last business day of such offering period. The plan is considered compensatory and, as such, the purchase discount from market price purchased by employees will be recorded as compensation expense. The initial number of shares of common stock that could be issued under the employee stock purchase plan was 1,750,000 shares. These available shares increase by an amount equal to the lesser of 1,750,000 shares, 1% of the number of shares of common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. On August 4, 2020, the Company’s board of directors approved an increase in the shares available for grant under the ESPP by 858,723 shares. On May 5, 2021, the Company's board of directors approved an increase in the shares available for grant under the ESPP by 893,016 shares. There were 98,355 shares purchased by employees under the ESPP during the nine months ended September 30, 2021. There were no shares purchased by employees under the ESPP during the three months ended September 30, 2021 and during the three and nine months ended September 30, 2020. The Company selected the Black-Scholes option-pricing model as the method for determining the estimated fair value for the Company’s 2019 ESPP. As of September 30, 2021, total unrecognized compensation costs related to the 2019 ESPP was $0.1 million which will be amortized over a weighted average period of 0.1 years.
Stock-based Compensation
Total stock-based compensation expense by function was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Marketing$628 $705 $1,924 $1,228 
Operations and technology5,543 2,892 15,789 7,222 
Selling, general and administrative6,421 3,775 18,611 8,461 
Total$12,592 $