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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 June 30, 2022


☐			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 July 31, 2022, the registrant had 95,537,035 shares of common stock, $0.00001 par value per share, outstanding.

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		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Balance Sheets as of June 30, 2022 and December 31, 2021	1
	Condensed Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	2
	Condensed Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2022 and 2021	3
	Condensed Statements of Stockholders’ Equity (Deficit) as of June 30, 2022 and 2021	4
	Condensed Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	6
	Notes to Unaudited Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
	Signatures	64

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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 our future results of operations and financial position, business strategy and plans, objectives of management for future operations, long term operating expenses, the opening of additional retail stores in the future, the development of our automation technology, expectations for capital requirements and the use of proceeds from our initial public offering, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” included under Part II, Item 1A below and elsewhere in this Quarterly Report on Form 10-Q, 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

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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.

iii

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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)


	June 30, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	315,890	$	418,171
Accounts receivable, net	6,364		7,767
Inventory, net	74,030		71,015
Prepaid expenses and other current assets	20,715		20,859
Total current assets	416,999		517,812
Property and equipment, net	92,991		89,286
Operating lease right-of-use assets	135,634		145,311
Other assets	2,790		2,535
Total assets	$	648,414	$	754,944
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	8,052	$	4,503
Accrued consignor payable	64,443		71,042
Operating lease liabilities, current portion	19,970		18,253
Other accrued and current liabilities	79,733		94,188
Total current liabilities	172,198		187,986
Operating lease liabilities, net of current portion	133,039		143,159
Convertible senior notes, net	448,305		348,380
Other noncurrent liabilities	1,985		2,291
Total liabilities	755,527		681,816
Commitments and contingencies (Note 10)
Stockholders’ equity (deficit):
Common stock, $0.00001 par value; 500,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 95,525,577 and 92,960,066 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively	1		1
Additional paid-in capital	758,171		841,255

Accumulated deficit	(865,285)		(768,128)
Total stockholders’ equity (deficit)	(107,113)		73,128
Total liabilities and stockholders’ equity (deficit)	$	648,414	$	754,944

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue:
Consignment revenue	$	96,917	$	72,452	$	180,906	$	137,339
Direct revenue	42,646		22,460		91,469		46,195
Shipping services revenue	14,872		10,000		28,760		20,195
Total revenue	154,435		104,912		301,135		203,729
Cost of revenue:
Cost of consignment revenue	14,254		10,506		27,987		19,710
Cost of direct revenue	36,660		19,975		76,694		40,340
Cost of shipping services revenue	15,834		11,018		30,150		21,928
Total cost of revenue	66,748		41,499		134,831		81,978
Gross profit	87,687		63,413		166,304		121,751
Operating expenses:
Marketing	16,997		13,109		34,958		28,670
Operations and technology	69,428		59,837		136,529		111,771
Selling, general and administrative	52,245		44,264		100,203		87,592
Legal settlement	—		11,000		304		11,288
Total operating expenses	138,670		128,210		271,994		239,321
Loss from operations	(50,983)		(64,797)		(105,690)		(117,570)
Interest income	260		107		358		194
Interest expense	(2,675)		(6,006)		(5,339)		(9,302)
Other income, net	266		—		127		17
Loss before provision for income taxes	(53,132)		(70,696)		(110,544)		(126,661)
Provision for income taxes	33		27		33		55
Net loss attributable to common stockholders	$	(53,165)	$	(70,723)	$	(110,577)	$	(126,716)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.56)	$	(0.78)	$	(1.17)	$	(1.40)
Shares used to compute net loss per share attributable to common stockholders, basic and diluted	94,901,943		91,062,220		94,192,963		90,555,963

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net loss	$	(53,165)	$	(70,723)	$	(110,577)	$	(126,716)
Other comprehensive loss, net of tax:
Unrealized loss on investments	—		—		—		(11)
Comprehensive loss	$	(53,165)	$	(70,723)	$	(110,577)	$	(126,727)

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 (Deficit)

(In thousands, except share amounts)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
Balance as of December 31, 2021	92,960,066	$	1	$	841,255	$	(768,128)	$	73,128
Cumulative effect adjustment due to adoption of ASU 2020-06 (Note 2)	—	—		(112,052)		13,420		(98,632)
Issuance of common stock upon exercise of options	417,428	—		637		—		637
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes	922,610	—		(2)		—		(2)
Stock-based compensation expense	—	—		12,964		—		12,964
Net loss	—	—		—		(57,412)		(57,412)
Balance as of March 31, 2022	94,300,104	$	1	$	742,802	$	(812,120)	$	(69,317)
Issuance of common stock upon exercise of options	94,601	$	—	$	328	$	—	$	328
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes	848,646	—		(23)		—		(23)
Issuance of common stock for exercises under ESPP	282,226	—		900		—		900
Stock-based compensation expense	—	—		14,164		—		14,164
Net loss	—	—		—		(53,165)		(53,165)
Balance as of June 30, 2022	95,525,577	$	1	$	758,171	$	(865,285)	$	(107,113)

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 (Deficit)

(In thousands, except share amounts)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
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
Issuance of common stock upon exercise of options	153,414	—		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 ESPP	98,355	—		1,092		—		—		1,092
Stock-based compensation expense	—	—		13,219		—		—		13,219
Net loss	—	—		—		—		(70,723)		(70,723)
Balance as of June 30, 2021	91,459,505	$	1	$	813,015	$	—	$	(658,737)	$	154,279

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)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(110,577)	$	(126,716)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	13,060		11,806
Stock-based compensation expense	26,179		23,732
Reduction of operating lease right-of-use assets	9,669		9,788
Bad debt expense	680		482
Accrued interest on convertible notes	—		894
Accretion of debt discounts and issuance costs	1,293		5,803
Loss on disposal/sale of property and equipment and impairment of capitalized proprietary software	229		—
Other adjustments	—		46
Changes in operating assets and liabilities:
Accounts receivable, net	723		923
Inventory, net	(3,015)		(16,757)
Prepaid expenses and other current assets	238		(633)
Other assets	(351)		(766)
Operating lease liability	(8,395)		(8,066)
Accounts payable	3,567		(1,873)
Accrued consignor payable	(6,599)		(2,018)
Other accrued and current liabilities	(14,421)		14,621
Other noncurrent liabilities	(184)		418
Net cash used in operating activities	(87,904)		(88,316)
Cash flow from investing activities:
Proceeds from maturities of short-term investments	—		4,000
Capitalized proprietary software development costs	(6,620)		(4,821)
Purchases of property and equipment	(9,599)		(20,642)
Net cash used in investing activities	(16,219)		(21,463)
Cash flow from financing activities:
Proceeds from issuance of 2028 convertible senior notes, net of issuance costs	—		278,396
Purchase of capped calls in conjunction with the issuance of the 2028 convertible senior notes	—		(33,666)
Proceeds from exercise of stock options	965		4,759

Proceeds from issuance of stock in connection with the Employee Stock Purchase Program	900		1,092
Taxes paid related to restricted stock vesting	(23)		—
Net cash provided by financing activities	1,842		250,581
Net increase (decrease) in cash and cash equivalents	(102,281)		140,802
Cash and cash equivalents
Beginning of period	418,171		350,846
End of period	$	315,890	$	491,648

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THE REALREAL, INC.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2022		2021
Supplemental disclosures of cash flow information
Cash paid for interest	$	4,045	$	2,600
Cash paid for income taxes	256		82
Supplemental disclosures of non-cash investing and financing activities
Property and equipment additions not yet paid in cash	1,347		2,552
Capitalized proprietary software development costs additions not yet paid in cash	2,213		610
Issuance costs associated with issuance of 2025 and 2028 convertible senior notes included in other accrued and current liabilities	—		630
Stock-based compensation capitalized to proprietary software development costs	949		765

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.

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, 2021 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. The Company had a change in accounting policy from those disclosed in the audited financial statements and related notes for the year ended December 31, 2021 related to shipping services revenue. Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2 “Change in Accounting Principle” below.

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 February 28, 2022.

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, stock-based compensation, incremental borrowing rates related to lease liability, 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.

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Revenue Recognition

The Company generates revenue from the sale of pre-owned luxury goods through its online marketplace and retail stores. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that include products and services that are capable of being distinct and accounted for as separate performance obligations as described below. The transaction price requires an allocation across consignment services, sales of Company-owned inventory, and shipping services. Estimation is required in the determination of the services stand-alone selling price ("SSP").

Consignment 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. SSP is estimated using observable stand-alone consignment sales which are conducted without shipping services. 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 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 and six months ended June 30, 2022 and 2021.

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. SSP is estimated using observable stand-alone sales of Company-owned inventory which are conducted without shipping services, when available, or a market assessment approach. 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.

Shipping Services Revenue

The Company provides a service to ship purchased items to buyers and a service to ship items from buyers back to the Company. The Company determines itself to be the principal in this arrangement. The Company charges a fee to buyers for this service and elected to treat shipping and handling activities performed as a separate performance obligation. For shipping services revenue, the Company's SSP is estimated using a market approach considering external and internal data points on the stand-alone sales price of the shipping service. All outbound shipping and handling costs for buyers are accounted for as cost of shipping services and recognized as the shipping activity occurs. The Company recognizes shipping revenue over time as the shipping activity occurs, which is generally one to three days after shipment.

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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 revenue and direct revenue. Additionally, the Company periodically offers commission exceptions to the standard consignment rates to consignors to optimize its supply. These are treated as a reduction of consignment revenue at the time of sale. 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 condensed balance sheets.

Contract Liabilities

The Company’s contractual liabilities primarily 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 June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021.

Cost of Revenue

Cost of consignment revenue consist of 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. Cost of shipping services revenue consists of the outbound shipping and handling costs to deliver purchased items to buyers and an allocation of the credit card fees associated with the shipping fee charged.

Stock-based Compensation

The Company incurs stock-based compensation expense from stock options, restricted stock units (“RSUs”), performance based restricted stock units (“PSUs”), and employee stock purchase plan (“ESPP”) purchase rights. 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 for awards with only a service condition and on a tranche by tranche basis for PSUs. The Company estimates the fair value of stock options granted and the purchase rights issued under the ESPP using the Black-Scholes option pricing model. The fair value of 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 PSUs are measured using the fair market value of the Company’s common stock on the date of grant. The stock-based compensation expense for PSUs is recognized based on the estimated number of shares that the Company expects will vest and is adjusted on a quarterly basis using the estimated achievement of financial performance targets. The Company accounts for forfeitures as they occur.

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.

Inventory, Net

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 and six months ended June 30, 2022 and 2021.

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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 $17.8 million and $23.6 million as of June 30, 2022 and December 31, 2021, respectively. Included in inventory on the Company’s condensed balance sheets are assets totaling $4.4 million and $9.1 million as of June 30, 2022 and December 31, 2021, 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

Prior to the adoption of ASU 2020-06 on January 1, 2022, convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, were separately accounted for as long-term debt and equity components (or conversion feature). The debt component represented the Company’s contractual obligation to pay principal and interest and the equity component represented 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. Following the adoption of ASU 2020-06, there is no bifurcation of the liability and equity components of the Notes, and the entire principal of the Notes are accounted for as long-term 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.

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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. Prior to the adoption of ASU 2020-06 on January 1, 2022, 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 was not amortized to interest expense over the estimated life of the related debt. Following the adoption of ASU 2020-06, the debt issuance costs previously allocated to the equity component of both the 2025 and 2028 Notes were reclassified to debt. As such, all of the debt issuance costs are recorded as a direct deduction from the related principal debt amounts on the balance sheet, and are all amortized to interest expense over the estimated remaining 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, and accounts receivable. 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 June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and 2021.

Change in Accounting Principle

During the three months ended June 30, 2022, the Company changed its method of accounting for shipping and handling activities from applying the policy election to account for shipping services as fulfillment activities to recognizing shipping services as a promised service to customers which the Company determined to be a separate performance obligation to its customers. The Company believes that this change in accounting method is preferable, as it results in a disaggregation of revenue and related costs that provides more transparency to users of its financial statements and is more consistent with the nature of the Company's promises made in arrangements with its customers. The effects of this change to the disaggregation and presentation of revenue and costs of revenue have been retroactively applied to all periods presented. This change had an immaterial impact to the Company's loss from operations and as such the Company did not retroactively adjust prior periods for these immaterial effects.

Certain financial statement line items included in the Statement of Operations for the three and six month periods ended June 30, 2022 and June 30, 2021, respectively were adjusted as follows (in thousands):


	Three Months Ended June 30, 2022
	As Computed Under Previous Method		Effect of Change		As Reported Under Preferable Method
Revenue:
Consignment revenue	$	111,789	$	(14,872)	$	96,917
Shipping services revenue	—		14,872		14,872
Cost of revenue:
Cost of consignment revenue	30,088		(15,834)		14,254
Cost of shipping services revenue	—		15,834		15,834

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	Six Months Ended June 30, 2022
	As Computed Under Previous Method		Effect of Change		As Reported Under Preferable Method
Revenue:
Consignment revenue	$	209,666	$	(28,760)	$	180,906
Shipping services revenue	—		28,760		28,760
Cost of revenue:
Cost of consignment revenue	58,137		(30,150)		27,987
Cost of shipping services revenue	—		30,150		30,150


	Three Months Ended June 30, 2021
	As Previously Reported		Effect of Change		As Reported Under Preferable Method
Revenue:
Consignment revenue	$	82,452	$	(10,000)	$	72,452
Shipping services revenue	—		10,000		10,000
Cost of revenue:
Cost of consignment revenue	21,524		(11,018)		10,506
Cost of shipping services revenue	—		11,018		11,018


	Six Months Ended June 30, 2021
	As Previously Reported		Effect of Change		As Reported Under Preferable Method
Revenue:
Consignment revenue	$	157,534	$	(20,195)	$	137,339
Shipping services revenue	—		20,195		20,195
Cost of revenue:
Cost of consignment revenue	41,638		(21,928)		19,710
Cost of shipping services revenue	—		21,928		21,928

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board ("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. The Company adopted this guidance as of January 1, 2022 using the modified retrospective method. As a result of the adoption, the Convertible Senior Notes due 2025 (the "2025 Notes") and the Convertible Senior Notes due 2028 (the "2028 Notes" and together with the 2025 Notes, the "Notes") are no longer bifurcated into separate liability and equity components, but rather are classified as a single liability in the condensed balance sheets.

Upon adoption, the Company recorded a cumulative effect of $13.4 million as a reduction to accumulated deficit and a reduction to additional paid in capital of $112.1 million related to amounts attributable to the value of the conversion options that had previously been recorded in equity. Additionally, the Company recorded an increase to its convertible notes balance by an aggregate amount of $98.6 million as a result of the reversal of the separation of the convertible debt between debt and equity. As a result of the adoption, there was a net increase in deferred tax assets of $27.7 million and a corresponding increase of $27.7 million in the offsetting valuation allowance.

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The Company also reclassified the issuance costs previously allocated to the conversion feature to debt, so that all issuance costs are now presented as a direct deduction of the long-term debt line on the condensed balance sheet. The adoption of this standard also significantly decreased the amount of non-cash interest expense to be recognized in future periods as a result of eliminating the discount on debt associated with the conversion feature. The adoption did not affect the Company's condensed statements of cash flows. When calculating net loss per share attributable to common stockholders, the Company uses the if-converted method as required under ASU 2020-06 to determine the dilutive effect of the Notes; however there was no impact because including the assumed conversion of the convertible debt would have been anti-dilutive.

Note 3. Cash and Cash Equivalents

The following tables summarize the estimated value of the Company’s cash and cash equivalents (in thousands):


	June 30, 2022
	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash and cash equivalents:
Cash	$	246,394	$	—	$	—	$	246,394
Money market funds	69,496		—		—		69,496
Total cash and cash equivalents	$	315,890	$	—	$	—	$	315,890


	December 31, 2021
	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash and cash equivalents:
Cash	$	278,769	$	—	$	—	$	278,769
Money market funds	139,402		—		—		139,402
Total cash and cash equivalents	$	418,171	$	—	$	—	$	418,171

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 June 30, 2022 and December 31, 2021, the Company’s cash equivalents solely consisted of money market funds, which amounted to $69.5 million and $139.4 million, respectively. Money market funds are measured at net asset value per share and are excluded from the fair value hierarchy.

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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):


	June 30, 2022
	Net Carrying Amount		Estimated Fair Value
2025 Convertible senior notes	$	168.4	$	149.3
2028 Convertible senior notes	$	279.9	$	212.9

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 (See Note 7).

As of June 30, 2022, 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):


	June 30, 2022		December 31, 2021
Proprietary software	$	36,679	$	31,799
Furniture and equipment	44,704		40,176
Automobiles	1,419		1,505
Leasehold improvements	65,226		66,154
Property and equipment, gross	148,028		139,634
Less: accumulated depreciation and amortization	(55,037)		(50,348)
Property and equipment, net	$	92,991	$	89,286

Depreciation and amortization expense on property and equipment was $6.7 million and $6.4 million for the three months ended June 30, 2022 and 2021, respectively, and $13.1 million and $11.8 million for the six months ended June 30, 2022 and 2021, respectively.

Other Accrued and Current Liabilities

Other accrued and current liabilities consist of the following (in thousands):

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	June 30, 2022		December 31, 2021
Returns reserve	$	17,778	$	23,577
Accrued compensation	16,086		14,258
Accrued legal	1,655		14,417
Accrued sales tax and other taxes	7,137		8,935
Site credit liability	10,526		8,738
Accrued marketing and outside services	6,940		7,897
Accrued inventory	2,769		3,513
Accrued shipping	5,838		2,006
Deferred revenue	3,541		3,387
Accrued interest	1,166		1,166
Other	6,297		6,294
Other accrued and current liabilities	$	79,733	$	94,188

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 June 30, 2022 (unaudited), the Company was in compliance with all covenants.

As of June 30, 2022, $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, 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 June 30, 2022.

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.

Prior to the adoption of ASU 2020-06 on January 1, 2022 and 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. The allocation was performed in a manner that reflected the Company's non-convertible debt borrowing rate for similar debt. 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 was amortized to the debt liability over the life of the Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

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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. Prior to the adoption of ASU 2020-06 on January 1, 2022, 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 was 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 December 31, 2021 was 6.4%.

On January 1, 2022, the Company adopted ASU 2020-06 based on a modified retrospective transition method. Under such transition, prior period information for both the 2025 and 2028 Notes has not been retrospectively adjusted.

In accounting for the 2025 Notes after the adoption of ASU 2020-06, the 2025 Notes are accounted for as a single liability, and the carrying amount of the Notes is $168.4 million as of June 30, 2022, with principal of $172.5 million, net of unamortized issuance costs of $4.1 million. The 2025 Notes were classified as long term liabilities as of June 30, 2022. The issuance costs related to the 2025 Notes are being amortized to interest expense over the expected life of the 2025 Notes or approximately its five-year term at an effective interest rate of 3.74%.

The net carrying amount of the liability component of the 2025 Notes was as follows (in thousands):


	June 30, 2022		December 31, 2021
Principal	$	172,500	$	172,500
Unamortized debt discount (1)	—		(14,350)
Unamortized debt issuance costs	(4,101)		(4,286)
Net carrying amount	$	168,399	$	153,864

(1) Upon adoption of ASU 2020-06 as of January 1, 2022, the unamortized debt discount balance was derecognized, as described in "Note 2— Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements."

As discussed above, upon the adoption of ASU 2020-06, the Company reversed the separation of the debt and equity components of the Notes, and accounted for the Notes wholly as debt. Additionally, the issuance costs of the Notes were accounted for as debt issuance costs in its entirety. The net carrying amount of the equity component of the 2025 Notes as of December 31, 2021 was as follows (in thousands):


	December 31, 2021
Proceeds allocated to the conversion options (debt discount)	$	19,787
Issuance costs	(767)
Net carrying amount	$	19,020

The following table sets forth the amounts recorded in interest expense related to the 2025 Notes:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Contractual interest expense	$	1,294	$	1,294	$	2,588	$	2,587
Amortization of debt discount	—		897		—		1,769
Amortization of debt issuance costs	332		270		652		533
Total interest and amortization expense	$	1,626	$	2,461	$	3,240	$	4,889

Future minimum payments under the 2025 Notes as of June 30, 2022, are as follows:

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Fiscal Year	Amount
Remainder of 2022	$	2,587
2023	5,175
2024	5,175
2025	175,088
Total future payments	188,025
Less amounts representing interest	(15,525)
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.

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;

•Upon the occurrence of specified corporate transactions; or

•If the Company calls any notes for redemption.

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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 June 30, 2022.

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 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.

Prior to the adoption of ASU 2020-06 on January 1, 2022 and 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 debt discount was recorded to equity and was amortized to the debt liability over the life of the Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

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 $6.3 million was recorded as a reduction in the carrying value of the debt on the condensed balance sheets and was 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 December 31, 2021 was 7.5%.

In accounting for the 2028 Notes after the adoption of ASU 2020-06, the 2028 Notes are accounted for as a single liability, and the carrying amount of the Notes is $279.9 million as of June 30, 2022, with principal of $287.5 million, net of unamortized issuance costs of $7.6 million. The 2028 Notes were classified as long term liabilities as of June 30, 2022. The issuance costs related to the 2028 Notes are being amortized to interest expense over the expected life of the 2028 Notes or approximately its seven-year term at an effective interest rate of 1.45%.

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The net carrying amount of the liability component of the 2028 Notes was as follows (in thousands):


	June 30, 2022		December 31, 2021
Principal	$	287,500	$	287,500
Unamortized debt discount (1)	—		(87,403)
Unamortized debt issuance costs	(7,594)		(5,581)
Net carrying amount	$	279,906	$	194,516

As discussed above, upon the adoption of ASU 2020-06, the Company reversed the separation of the debt and equity components of the Notes, and accounted for the Notes wholly as debt. Additionally, the issuance costs of the Notes were accounted for as debt issuance costs in its entirety. The net carrying amount of the equity component of the 2028 Notes as of December 31, 2021 was as follows (in thousands):


	December 31, 2021
Proceeds allocated to the conversion options (debt discount)	$	96,162
Issuance costs	(3,131)
Net carrying amount	$	93,031

The following table sets forth the amounts recorded in interest expense related to the 2028 Notes:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Contractual interest expense	$	719	$	719	$	1,438	$	894
Amortization of debt discount	—		2,654		—		3,294
Amortization of debt issuance costs	321		167		641		208
Total interest and amortization expense	$	1,040	$	3,540	$	2,079	$	4,396

Future minimum payments under the 2028 Notes as of June 30, 2022, are as follows:


Fiscal Year	Amount
Remainder of 2022	$	1,438
2023	2,875
2024	2,875
2025	2,875
2026	2,875
2027	2,875
2028	288,937
Total future payments	304,750
Less amounts representing interest	(17,250)
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 with respect to its common stock with certain financial institutions (collectively, the “Counterparties”). The Company paid an aggregate amount of approximately $22.5 million to the Counterparties in connection with the 2025 capped call transactions (the "2025 Capped Calls") and $33.7 million to the Counterparties in connection with the 2028 capped call transactions and (the "2028 Capped Calls" and, together with the 2025 Capped Calls, the "Capped Calls"). 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

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conversion price of the 2025 Notes and the 2028 Notes, respectively. The 2025 Capped Calls and the 2028 Capped Calls are subject to anti-dilution adjustments that are intended to be substantially identical to those in the 2025 Notes and the 2028 Notes, as applicable, and are exercisable upon conversion of the 2025 Notes or the 2028 Notes, as applicable. The 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 Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the 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 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. On February 23, 2022, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,648,003 shares.

In February 2022, the Company granted PSUs with financial performance targets to certain employees of the Company. The number of units issued will depend on the achievement of financial metrics relative to the approved performance targets, and can range from 0% to 150% of the target amount. The PSUs are subject to continuous service with the Company and will vest after approximately three years. The PSUs are measured using the fair value at the date of grant. The compensation expense associated with PSUs is recognized based on the estimated number of shares that the Company expects will vest and may be adjusted based on interim estimates of performance against the performance condition. During the three and six months ended June 30, 2022, the Company recorded stock-based compensation expense for the number of PSUs considered probable of vesting based on the attainment of the performance targets.

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As of June 30, 2022, total unrecognized compensation expense of approximately $1.2 million related to options and $111.0 million was related to RSUs and PSUs, which will be recognized over the remaining weighted-average vesting period of approximately 0.8 years and 3.0 years, respectively.

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