What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-11 · 162 added, 129 removed, 323 unchanged (47% of the section changed)

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We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply from consignors and creates a trusted, curated online marketplace for buyers globally.

Over the past nine years, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people.

We aggregate and curate unique, pre-owned luxury supply that is exclusive to The RealReal across multiple categories, including women’s, men’s, kids’, jewelry and watches, and home and art.

Since our inception in 2011, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people.

We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers.

We offer products across multiple categories including women’s, men’s, kids’, jewelry and watches, and home and art.

We have built a vibrant online marketplace that we believe expands the overall luxury market, promotes the recirculation of luxury goods and contributes to a more sustainable world.

We have transformed the luxury consignment experience by removing the friction and pain points inherent in the traditional consignment model.

For consignors, we provide White Glove in-home consultation and pickup, drop off at one of our ten LCOs, four of which are located in our retail stores, or complimentary shipping directly to our merchandising and fulfillment facilities.

For consignors, we offer White Glove in-home consultation and pickup, subject to safety requirements related to the COVID pandemic, and meetings with consignors via online face-to-face platforms, or Virtual Consultations.

Consignors may also drop off items at our luxury consignment offices.

Our Flagship and Neighborhood Stores provide an alternative location to drop off consigned items and an opportunity to interact with our experts.

Consignors may also utilize our complimentary shipping directly to our authentication centers.

We leverage our proprietary transactional database and market insights from approximately 17.1 million item sales since inception to deliver optimal pricing and rapid sell-through.

For buyers, we offer highly coveted and exclusive authenticated pre-owned luxury goods at attractive values, as well as a high-quality experience befitting the products we offer.

Our online marketplace is powered by our proprietary technology platform, including consumer facing applications and purpose-built software that supports our complex, single-SKU inventory model and merchandising operations.

The substantial majority of our revenue is generated by consignment sales.

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Consignment and service revenue .

When we sell goods through our online marketplace on behalf of our consignors, we retain a percentage of the proceeds, which we refer to as our take rate.

When we sell goods through our online marketplace or retail stores on behalf of our consignors, we retain a percentage of the proceeds, which we refer to as our take rate.

Take rates vary depending on the total value of goods sold through our online marketplace on behalf of a particular consignor as well as the category and price point of the items.

In 2020 and 2019, our take rate on consigned goods was 35.7% and 36.3% respectively.

The decrease in our take rate was due to the higher sales mix of lower take rate categories such as handbags and jewelry, and a higher mix of consignors earning higher commissions.

Additionally, we earn revenue from shipping fees and from our subscription program, First Look, in which we offer buyers early access to the items we sell in exchange for a monthly fee.

Direct revenue .

In certain cases, such as when we accept an out of policy returns from buyers, we take ownership of goods and retain 100% of the proceeds when the goods subsequently resell through our online marketplace.

We generate revenue from orders processed through our website, mobile app and four retail stores located in New York, Los Angeles, and San Francisco.

In certain cases, such as when we accept out of policy returns from buyers, or when we make direct purchases from businesses and consignors, we take ownership of goods and retain 100% of the proceeds when the goods subsequently sell through our online marketplace or retail stores.

We generate revenue from orders processed through our website, mobile app and retail stores located in New York City, Los Angeles, Chicago, Palo Alto, Newport Beach, and San Francisco.

Our omni-channel experience enables buyers to purchase anytime and anywhere.

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Through December 31, 2020, we have cumulatively paid more than $1.8 billion in commissions to our consignors.

In 2019 and 2018, our GMV was $1.0 billion and $710.8 million, respectively, representing an annual growth rate of 42% in 2019.

In 2019 and 2018, our total revenue was $318.0 million and $213.7 million, respectively, representing an annual growth rate of 49% in 2019.

In 2019 and 2018, our gross profit was $203.2 million and $136.9 million, respectively, representing an annual growth rate of 48% in 2019.

Factors Affecting Our Performance

Our GMV was $1.0 billion in 2020 and decreased 2% from 2019.

However, NMV increased slightly as returns decreased year over year primarily due to a higher mix of non-returnable items, including handbags and certain promoted items.

In 2020 and 2019, our total revenue was $299.9 million and $316.4 million, respectively, representing a decrease of 5% in 2020.

In 2020 and 2019, our gross profit was $187.6 million and $201.5 million, respectively, representing a decrease of 7% in 2020.

See “Impact of COVID-19 on our Business” below.

Impact of COVID-19 on Our Business

In March 2020, the World Health Organization categorized the outbreak of a novel coronavirus (COVID-19) as a pandemic.

The COVID-19 pandemic has adversely impacted our business operations and results of operations in 2020 as described in more detail under “ Comparison of 2020 and 2019” below.

Operations in the Company’s authentication centers were initially limited in accordance with shelter-in-place orders resulting in operations below full capacity .

However, operations capacity was no longer limited by restrictions related to COVID-19 during the second half of 2020.

Additionally, our retail stores and luxury consignment offices were temporarily closed for varying periods of time, but have been open during the second half of 2020 .

In-person white glove consignment appointments were temporarily suspended and augmented with virtual appointments but remain an option for our consignor base.

At the beginning of the pandemic , GMV was significantly impacted due to adverse impacts of the COVID-19 pandemic on our business.

When many shelter-in-place directives went into effect in March 2020, and continuing through mid-April 2020, GMV declined approximately 45% year over year.

T he rates of decline in GMV have since improved .

For the three months ended June 30, 2020, the decrease in GMV was 20% compared to same period last year.

GMV continued to recover such that the year over year decreases were 3% and 1% for the three months ended September 30, 2020, and December 31, 2020, respectively compared to the same periods last year.

We expect the evolving COVID-19 pandemic to continue to have a materially adverse impact on our business operations and results of operations, including our net revenues, earnings and cash flows.

The negative COVID-19 impacts on our business could be a result of further spread of the disease, potential disruption in our authentication centers , further temporary closures of retail stores and luxury consignment offices, disruption to our supply acquisition, decreased productivity due to shelter-in-place orders, changes in buyer and consignor behaviors, and a slowdown in the U.S.

economy and uncertain global economic outlook.

It may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending on our e-commerce site and in our retail stores.

Travel and border closures do not significantly affect our business as we operate a U.S.

focused marketplace.

For further discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Part I, Item 1A.

Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers.

We have enforced social distancing in our authentication centers , enabled virtual consignment appointments, implemented curbside pick-up of products from our consignors, and enabled our corporate employees to work remotely.

The impact of these actions on our workforce are difficult to assess.

However, we do not believe that these remote work arrangements have adversely affected our ability to maintain our financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

In addition, we do not expect to encounter any significant challenges to our ability to maintain these systems and controls.

We also do not expect the pandemic to affect the assets on our balance sheet and our ability to timely account for those assets.

We evaluate our estimates and assumptions used in preparing our financial statements on an ongoing basis .

We do not anticipate any material impairments with respect to inventory, long-lived assets, right-of-use assets or investments, or changes in accounting judgments that would have a material impact on our financial statements.

Other Factors Affecting Our Performance

Other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, impact our business.

To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we focus on the factors described below.

While each of these factors presents significant opportunity for our business, collectively, they also pose important challenges that we must successfully address in order to sustain our growth, improve our operating results and achieve and maintain our profitability.

Supply and Demand

Consignors and Buyers

Consignor growth and retention .

We grow our sales by increasing the supply of luxury goods offered through our consignment online marketplace.

In 2019 and 2018, approximately 60% and 80% of the products on our online marketplace sold within 30 days and 90 days, respectively.

In the first three quarters of 2020 and for the full year 2019, approximately 60% and 80% of the products on our online marketplace sold within 30 days and 90 days, respectively.

In addition to sales velocity, we measure the ratio of demand versus supply in a given period, which we refer to as our online marketplace sell-through ratio.

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Our growth has been driven in significant part by repeat sales by existing consignors concurrent with growth of our consignor base.

In 2019, repeat consignors accounted for approximately 81% of GMV.

In 2020 and 2019, repeat consignors accounted for approximately 83% and 81% of GMV, respectively.

Buyer growth and retention .

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We measure our success in attracting and retaining buyers by tracking buyer satisfaction and purchasing activity over time.

We have experienced high buyer satisfaction, as evidenced by our buyer net promoter score of 71 in 2019.

We have experienced high buyer satisfaction, as evidenced by our buyer net promoter score of 71 in 2020, and compared to our online shopping industry average of 40 according to NICE Satmetrix U.S.

Consumer 2020 data.

If we fail to continue to attract and retain our buyer base to our online marketplace, our operating results would be adversely affected.

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Each cohort represents all buyers that first purchased across our online marketplace in the designated year and the aggregate GMV purchased by such cohort for the initial year and each year thereafter.

As illustrated in the graph below, we have seen consistent retention of buyer activity across cohorts for all periods presented.

As illustrated in the graph below, we have seen consistent retention of buyer activity across cohorts through 2019.

In 2020, buyer retention was impacted by the adverse impacts of COVID-19 on supply, and as a result, GMV.

The graph on the right shows the percentage of GMV in each year from our repeat buyers.

GMV from repeat buyers reflects purchases made after their initial purchase month.

Annual GMV by Buyer Cohort Year

($ in millions)

We believe there is substantial opportunity to grow our business by having buyers also become consignors and vice versa.

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The graph below shows the percentage of GMV in each year from buyers who have participated as both buyers and consignors on our online marketplace.

GMV attributable to consigning activity of such buye rs is not included.

Buyers Who Are Also Consignors

GMV attributable to consigning activity of such buyers is not included.

Buyer acquisition cost.

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We adjust or re-allocate our advertising in real-time to optimize our spend across channels, buyer demographics and geographies to improve our return on advertising spend.

Our BAC has declined over time as we have achieved greater efficiency from our marketing spend.

Buyer Acquisition Cost

With the exception of 2020, our BAC has declined over time driven by improving acquisition efficiencies.

In 2020, we experienced volatility with our marketing efficiency due to the adverse impacts of COVID-19 on our business, and we began to increase investments in advertising to position the company for future growth.

We also evaluate the success of our buyer acquisition activity by comparing the lifetime value of buyers (“BLTV”) attracted in a given period to the aggregate BAC in that same period.

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BLTV in the graph on the right includes only gross profit attributable to transactions in which the members participated as buyers who are also consignors and does not include gross profit attributable to transactions in which the member participated as a consignor.

BAC – All Buyers

BAC – Buyers who are also Consignors

The 2020 cohorts in the graphs reflect buyers that first purchased across our online marketplace through June 30, 2020 for the six month period and September 30, 2020 for the three month period.

Scaling operations and technology.

To support the future growth of our business, we are expanding our capacity through investments in physical infrastructure, talent and technology.

We principally conduct our intake, authentication, merchandising and fulfillment operations in our four leased merchandising and fulfillment facilities located in California and New Jersey comprising an aggregate of approximately 1 million square feet of space.

We principally conduct our intake, authentication, merchandising and fulfillment operations in our four leased authentication centers located in California and New Jersey comprising an aggregate of approximately 1 million square feet of space.

We secured leases on more than half of this space in 2018.

The market for real estate to support operations centers such as ours is competitive, and we will need to continue to secure and efficiently bring online additional capacity to support future growth.

The opening of our retail stores in New York in late 2017 and Los Angeles in mid-2018 significantly contributed to the increase in operations and technology expense in 2018.

We opened a second retail store in New York in May 2019.

We opened our fourth retail store in San Francisco in March 2020 and we intend to open additional retail stores in the future.

In addition to scaling our physical infrastructure, growing our single-SKU business operations requires that we attract, train and retain highly-skilled personnel for purposes of authentication, copywriting, merchandising, pricing and fulfilling orders.

We are also investing substantially in technology to automate our operations and support growth.

While we expect our operations and technology development expenses to increase in absolute dollars as we continue to grow, we expect such expenses to decrease as a percentage of total revenue over the longer-term.

We have observed trends in seasonality of supply and demand in our business that we believe will continue.

Specifically, our supply increases in the third and fourth quarters, and our dem and increases in the fourth quarter.

In October 2020, we secured a lease in Arizona for an additional authentication center.

The market for real estate to support operations centers such as ours is competitive, and we plan to continue to secure and efficiently bring online additional capacity to support future growth.

In 2017 and 2018, we opened our flagship retail stores in New York and Los Angeles.

We opened a second retail store with a smaller footprint in New York in May 2019.

We opened two additional flagship stores in 2020 in San Francisco and Chicago, and a neighborhood store in Palo Alto.

We intend to open additional retail stores in the future.

In addition to scaling our physical infrastructure, growing our single-SKU business operations and developing our SKU-depth capabilities require that we attract, train and retain highly-skilled personnel for purposes of authentication, copywriting, merchandising, pricing and fulfilling orders.

We invest substantially in technology to automate our operations and support growth.

We continue to strategically invest in technology despite the difficult operating environment resulting from COVID-19, as innovation positions us to scale and support growth once the economy normalizes.

Before the COVID-19 pandemic, we have observed trends in seasonality of supply and demand in our business.

Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter.

As a result of this seasonality, we typically see stronger AOV and more rapid sell-through in the fourth quarter.

We also incur higher operating expenses in the last four months of the year as we increase advertising sp end to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes.

We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes.

However, the adverse impacts of COVID-19 on our business has made it difficult to evaluate the impact of

seasonality in our business.

While we expect supply will continue to be negatively impacted by COVID-19, we believe its growth will accelerate in 2021.

Key Financial and Operating Metrics

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We do not reduce GMV to reflect product returns or order cancellations, which totaled 25.3%, 27.5%, and 28.7% of GMV in 2020, 2019, and 2018, respectively.

GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of direct buyer incentives, shipping fees and sales tax.

Buyer incentives consist of coupons or promotions that offer credits in connection with purchases on our platform.

GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of buyer incentives, shipping fees and sales tax.

Platform-wide discounts are made available to all buyers on the online marketplace, and impact commissions paid to consignors.

Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on our platform.

We believe this is the primary measure of the scale and growth of our online marketplace and the key indicator of the health of our consignor ecosystem.

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While GMV is the primary driver of our revenue, it is not a proxy for revenue or revenue growth.

NMV, or net merchandise value, represents GMV less product returns and order cancellations and directed buyer incentives.

NMV includes amounts paid for both consigned goods and our inventory.

We believe NMV is a useful supplemental measure of the scale and growth of our online marketplace as it is the basis for calculating consignor commissions and is therefore an important indicator of the health of our consignor ecosystem for investors.

See Note 2 - Summary of Significant Accounting Policies -Revenue Recognition - Consignment and Service Revenue.

NMV, or net merchandise value, represents the value of sales from both consigned goods and our inventory net of platform-wide discounts less product returns and order cancellations and excludes the effect of buyer incentives, shipping fees and sales tax.

We believe NMV is a supplemental measure of the scale and growth of our online marketplace.

Like GMV, NMV is not a proxy for revenue or revenue growth.

Number of Orders

Number of orders means the total number of orders placed across our online marketplace in a given period.

Number of orders means the total number of orders placed across our online marketplace and retail stores in a given period.

We do not reduce number of orders to reflect product returns or order cancellations.

Take rate is a key driver of our revenue and provides comparability to other marketplaces.

The numerator used to calculate our take rate is equal to GAAP consignment and service revenue, excluding certain buyer incentives, shipping and subscription service revenue, and other adjustments.

The denominator is equal to the numerator plus consignor commissions.

The numerator used to calculate our take rate is equal to net consignment sales and the denominator is equal to the numerator plus consignor commissions.

Net consignment sales represents the value of sales from consigned goods net of platform-wide discounts less consignor commission, product returns and order cancellations.

We exclude direct revenue from our calculation of take rate because direct revenue represents the sale of inventory owned by us, which costs are included in cost of direct revenue.

See the subsection titled “—Components of our Operating Results—Revenue” for further discussion of consignment and service revenue and direct revenue.

Our take rate reflects the high level of service that we provide to our consignors across multiple touch points and the consistently high velocity of sales for their goods.

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This tiered structure applies unless it is overridden by a commission exception.

Commission exceptions are used to incentivize our sales team, optimize supply and drive take rate changes.

Commission exceptions from the tiered commission structure optimize supply and drive take rate changes.

Examples of current commission exceptions include a flat 40% commission on all items under $145, and an 85% commission on watches over $2,495.

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Average Order Value (“AOV”)

Average order value (“AOV”) means the average value of all orders placed across our online marketplace, excluding shipping fees and sales taxes.

Average order value (“AOV”) means the average value of all orders placed across our online marketplace and retail stores, excluding shipping fees and sales taxes.

Our focus on luxury goods across multiple categories drives a consistently high AOV.

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Adjusted EBITDA

Adjusted EBITDA means net loss before interest income, interest expense, net other expense, income tax provision and depreciation and amortization, further adjusted to exclude stock-based compensation and certain one-time expenses.

Adjusted EBITDA means net loss before interest income, interest expense, other (income) expense net, provision for income taxes, and depreciation and amortization, further adjusted to exclude stock-based compensation and certain one-time expenses.

Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

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Consignment and service revenue.

We generate the substantial majority of our revenue from the sale of pre-owned luxury goods through our online marketplace on behalf of consignors.

We generate the substantial majority of our revenue from the sale of pre-owned luxury goods through our online marketplace and retail stores on behalf of consignors.

For consignment sales, we retain a percentage of the proceeds received, which we refer to as our take rate.

We recognize consignment revenue, net of allowances for product returns, order cancellations and certain buyer incentives.

We recognize consignment revenue, net of allowances for product returns, order cancellations, buyer incentives and adjustments.

Additionally, we generate revenue from shipping fees we charge to buyers.

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We generate direct revenue from the sale of items that we own, which we refer to as our inventory.

We generally acquire inventory when we accept returns from buyers after title has transferred for returned goods from the consignor to the buyer .

As such, growth in direct sales is generally a byproduct of growth in our consignment business.

We recognize direct revenue based on the gross purchase price paid by buyers, net of allowan ces for product returns and certain buyer incentives.

We generally acquire inventory when we accept out of policy returns from buyers.

Additionally, we make direct purchases from businesses and consignors and our mix of direct purchases as a percentage of total GMV could increase in 2021.

We recognize direct revenue upon shipment based on the gross purchase price paid by buyers, net of allowances for product returns, buyer incentives and adjustments.

Cost of Revenue

Cost of consignment and services revenue consists of shipping costs, credit card fees, packaging, customer service personnel-related costs, and website hosting services.

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

Marketing expense comprises the cost of acquiring new consignors and buyers, including the cost of television, digital and direct mail advertising.

Cost of consignment and services revenue consists of shipping costs, credit card fees, packaging, customer service personnel-related costs, website hosting services, and consignor inventory adjustments related 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.

Marketing expense comprises the cost of acquiring and retaining consignors and buyers, including the cost of television, digital and direct mail advertising.

Marketing expense also includes personnel-related costs for employees engaged in these activities.

We intend to increase marketing spend as we invest to drive the growth of our business, though these expenses are expected to decrease as a percentage of revenue over the longer term.

Operations and Technology

Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace, as well as our general information technology expense.

Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as our general information technology expense.

Operations and technology expense also includes allocated facility and overhead costs, costs related to our retail stores, facility supplies and depreciation of hardware and equipment, as well as research and development expense for technology associated with managing and improving our operations.

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As such, operations and technology expense also includes amortization of capitalized technology development costs.

We expect operations and technology expense to increase in future periods to support our growth, including bringing on additional merchandising and fulfillment facilities and continuing to invest in automation and other technology improvements to support and drive efficiency in our operations.

While we have implemented cost saving measures to address the challenges from the COVID-19 pandemic, we expect operations and technology expense to increase in future periods to support our growth, including bringing on additional authentication centers and continuing to invest in automation and other technology improvements to support and drive efficiency in our operations.

These expenses may vary from year to year as a percentage of revenue, depending primarily upon when we choose to make more significant investments.

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The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in the Annual Report.

Prior year comparisons are included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 28, 2019.

Prior year comparisons are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The following tables set forth our results of operations and such data as a percentage of revenue for the periods presented:

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Provision for income taxes

(1) See Note 2 to our financial statements for an explanation of the immaterial correction of errors in 2018 and 2017 related to the presentation of certain sale transactions recorded on a net basis within consignment and service revenue which have been corrected to be presented on a gross basis within direct revenue and related cost of direct revenue.

(1) See Note 2 to our financial statements for an explanation of the immaterial correction of errors in 2019 related to inventory associated with commissions paid outside of our normal payment cycle to consignors for returned merchandise which have been corrected within consignment revenue.

Year Ended December 31,

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Consignment and service revenue, net

Consignment and service revenue increased by $86.8 million, or 48%, in 2019 compared to 2018.

The growth in revenue was driven primarily by a 42% increase in GMV resulting from growth in both active consignors and active buyers in 2019 compared to 2018, as well as an improvement from 35.5% to 36.3% in our take rate due to changes to our commission structure that yielded a higher take rate on lower-priced items.

GMV growth was driven by a 40% increase in active buyers, as well as a 2% increase in AOV.

Active buyer growth was driven by an increase in new buyers due to the combination of our effective marketing spend and consignors becoming buyers, and an increase in repeat buyer orders as a percentage of total orders.

Consignment and service revenue decreased by $18.4 million, or 7%, in 2020 compared to 2019.

The decrease in revenue was driven primarily by a 2% decrease in GMV resulting from the adverse effects of COVID-19 on supply, as well as a decrease from 36.3% to 35.7% in our take rate due to the higher sales mix of lower take rate categories such as handbags and jewelry, and a higher mix of consignors earning higher commissions.

Supply was negatively impacted in certain major markets, due to the impact of COVID-19 closures and disruptions, contributing to the decrease in GMV.

NMV increased as returns decreased year over year primarily due to a higher mix of non-returnable items, including handbags and certain promoted items.

While NMV increased slightly, revenue was lower year over year due to the decrease in our take rate and increased buyer incentives, particularly in the fourth quarter.

As part our effort to accelerate our GMV recovery, buyer incentives increased by $9.7 million, or 73%, to $23.0 million in 2020 from $13.3 million in 2019, which also contributed to the decrease in revenue.

Direct Revenue

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Direct revenue increased by $2.0 million, or 4%, in 2020 compared to 2019.

The increase was driven in part by an increase in our owned-inventory as a result of a higher volume of returns received after title had transferred from the consignor to the buyer.

The subsequent sale of our owned-inventory drove the increase in direct revenue both on an absolute basis and as a percent of total revenue.

The increase was driven in part by the higher sales mix of company-owned inventory, including a focus on aged inventory.

The sales of our owned-inventory drove the increase in direct revenue both on an absolute basis and as a percent of total revenue.

Cost of Consignment and Service Revenue

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As a percent of consignment and service revenue

Cost of consignment and service revenue increased by $22.7 million, or 45%, in 2019 compared to 2018.

The increase was primarily attributable to the fulfillment of a larger number of orders driven by growth in our business.

Cost of consignment and service revenue decreased by $6.6 million, or 9%, in 2020 compared to 2019.

The decrease was primarily due to lower revenue in connection with COVID-19 related business interruptions.

Gross margin increased by 0.6% in 2020 compared to 2019.

The increase was primarily attributable to overall improvement in shipping costs relating to more favorable terms with our shipping carrier, partially offset by decreases in our take rate and increased buyer incentives .

Cost of Direct Revenue

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Cost of direct revenue increased by $4.2 million, or 10%, in 2020 compared to 2019, consistent with the increase in direct revenue.

Gross margin decreased by 4.8% in 2020 compared to 2019, primarily due to lower product margins on sales of discounted aged inventory.

As a percentage of direct revenue, cost of direct revenue increased to 86% in 2020 from 81% in 2019.

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The increase was primarily due to increases in advertising costs and marketing program expenses as we seek to grow the number of buyers and consignors using our online marketplace.

As a percent of revenue, marketing expense decreased to 15% in 2019 from 20% in 2018, reflecting greater scale in our business and efficiency in our buyer and consignor acquisition and retention activities.

As a percent of revenue, marketing expense increased to 18% in 2020 from 15% in 2019 due to the significant adverse impact of COVID-19 on our revenue.

Operations and Technology

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Operations and technology expense increased by $20.6 million, or 14%, in 2020 compared to 2019.

The increase was primarily due to investments to support our growth and drive long-term operational efficiencies, including investments to significantly expand our merchandising and fulfillment facilities, grow our talent including authentication and technology expertise and support our retail operations.

As a percent of revenue, operations and technology expense decreased to 45% in 2019 from 49% in 2018, reflecting improved efficiencies from inbound and outbound operations and fixed expense leverage.

The increase was primarily due to investments to support our growth and drive long-term operational efficiencies, including investments to grow our talent including authentication and technology expertise and support our retail operations.

The opening of our retail stores in San Francisco, Chicago, and Palo Alto contributed to the increase in expense.

As a percent of revenue, operations and technology expense increased to 55% in 2020 from 45% in 2019.

This increase is primarily due to higher personnel-related costs, including stock-based compensation expense compared to lower revenue as a result of COVID-19’s negative impact on revenue.

While we have implemented cost saving measures to address the challenges from the COVID-19 pandemic, we continued to invest in automation, consignor services including virtual appointments and self-scheduling, and other technology improvements to support and drive efficiency in our operations and to support our growth.

We expect these expenses to continue to decrease as a percentage of revenue over the longer term.

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Selling, general and administrative expense increased by $31.1 million, or 28%, in 2020 compared to 2019.

The increase was due to investments to support the growth of our sales organization and scale our general and administrative functions as necessary to operate as a public company including accounting, consulting and legal fees and insurance costs.

The increase also includes a $3.2 million donation to The RealReal Foundation.

The increase was due to higher personnel-related costs, including stock-based compensation expense and investments to support the growth of our sales organization and scale our general and administrative functions as necessary to operate as a public company including accounting, consulting and legal fees, insurance and software costs.

Additionally, there were COVID-19 related charges of $6.2 million inclusive of higher payroll expenses, personal protective equipment, deep cleanings, medical personnel at our facilities and transportation services.

As a percent of revenue, selling, general and administrative expense increased to 47% in 2020 from 35% in 2019 as we invested in the growth of the sales organization and expanded our administrative functions.

We expect these expenses to decrease as a percentage of revenue over the long term.

Qu arterly Results of Operations and Key Metrics

Quarterly Results of Operations and Key Metrics

The following tables set forth certain unaudited financial data for each fiscal quarter for the periods indicated in dollars and as a percentage of revenue.

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Consignment and service

revenue (a)(c)

Direct revenue (b)

Direct revenue

Total revenue

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service revenue

Cost of direct revenue (b)

Cost of direct revenue

Total cost of revenue

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stockholders, basic and diluted

(1) During the quarter ended December 31, 2019, the Company identified errors related to the presentation of certain sale transactions recorded on a net basis within consignment and service revenue which have been corrected to be presented on a gross basis within direct revenue and related cost of direct revenue.

(1) During the quarter ended December 31, 2020, the Company identified an overstatement of consignment and service revenue and inventory, net as a result of an error in accounting for inventory associated with commissions paid outside of our normal payment cycle to consignors for returned merchandise.

In accordance with Financial Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives, and concluded that the errors were immaterial to the Company’s prior period interim and annual financial statements.

Since these revisions were not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periods reports are required.

Consequently, the Company has adjusted for these errors by revising its historical financial periods presented herein.

Since these errors were not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periods reports are required.

Consequently, the Company has adjusted for these errors by revising its historical financial periods presented herein for the quarterly periods from March 31, 2019 through September 30, 2020.

The correction of these immaterial errors resulted in the following:

(a) Consignment and service revenue reflects a decrease of $0.3 million, $0.1 million, $0.2 million, $1.1 million, $0.2 million, $0.2 million, and $0.2 million for the interim periods ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, respectively.

(b) Direct revenue include an increase of approximately $1.6 million, $1.9 million, $2.0 million, $3.4 million, $2.2 million, $2.2 million, and $1.9 million, with a corresponding increase in cost of direct revenue of approximately $1.0 million, $1.2 million, $1.3 million, $2.3 million, $1.4 million, $1.5 million and $1.3 million for the interim periods ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018, respectively.

(2)(c) During the quarter ended December 31, 2019, we corrected certain immaterial errors resulting in an increase in consignment and service revenue of $2.8 million, of which, $2.2 million related to periods prior to 2019.

(2) Including the adjustment noted in (1)(a) above, consignment and service revenue for the quarter ended December 31, 2019, includes the correction of certain out of period errors in the quarter ended December 31, 2019 resulting in a net increase in consignment and service revenue of $2.0 million, of which, $1.4 million related to periods prior to 2019.

Quarter Ended

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Stock-based compensation

Vendor services settlement

Legal settlement

Restructuring charges

Abandoned offering costs

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In July 2019, we received net proceeds of $315.5 million upon completion of our IPO on July 2, 2019.

We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we continue to invest in expansion activities.

In June 2020, we received net proceeds of $143.3 million from the issuance of 3% convertible senior notes due 2025 and the related cap call transactions.

We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we navigate the challenges presented by COVID-19 and invest in expansion activities in the longer term.

At the beginning of the pandemic, we implemented measures to realign our cost structure and preserve liquidity including deferring certain capital investments, renegotiating certain vendor contracts, and reducing payroll costs, including through headcount reductions, employee furloughs and reduced executive salaries.

With improving GMV trends we began to strategically reinvest in growth;

however, we continue to monitor opportunities to strengthen our financial flexibility and preserve liquidity.

We believe our existing cash and cash equivalents and short-term investments as of December 31, 2020 will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.

Our future capital requirements will depend on many factors, including, but not limited to, our ability to grow our revenues and the timing of investments to support growth in our business, such as the build-out of new fulfillment centers and, to a lesser extent, the opening of new retail stores.

Our future capital requirements will depend on many factors, including, but not limited to, our ability to grow our revenues and the timing of investments to support growth in our business, such as the build-out of new authentication centers and, to a lesser extent, the opening of new retail stores.

We may seek additional equity or debt financing.

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The following table summarizes our cash flows for the periods indicated.

Prior year comparisons are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Year Ended December 31,

(In thousands)

Net cash (used in) provide by:

Net cash (used in) provided by:

Operating activities

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Financing activities

Net (decrease) increase in cash, cash equivalents and

Net increase in cash, cash equivalents and

restricted cash

Net Cash Used in Operating Activities

During 2019, net cash used in operating activities was $54.5 million, which consisted of a net loss of $96.7 million, adjusted by non-cash charges of $25.2 million and cash inflows due to a net change of $17.1 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily the result of cash inflows due to increases of $17.6 million in accrued consignor payable, $10.7 million in other accrued and current liabilities, and a $6.2 million in accounts payable as a result of our growth, partially offset by cash outflows due to increases of $13.2 million in inventory and $4.1 million in prepaid expenses and other current assets.

During 2018, net cash used in operating activities was $47.2 million, which consisted of a net loss of $75.8 million, partially offset by non-cash charges of $16.5 million and cash inflows due to a net change of $12.1 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily the result of cash inflows due to an increases of $15.7 million in other accrued and current liabilities driven by our growth, $6.6 million in accrued consignor payable, and $3.4 million in other non-current liabilities, partially offset by cash outflows due to increases of $5.3 million in prepaid expenses and other current assets and $3.7 million in inventory, net.

Net Cash Used in Investing Activities

During 2019, net cash used in investing activities was $215.4 million, which consisted of $220.6 million for purchases of investments, $24.8 million for purchases of property and equipment, net, including leasehold improvements, and $9.3 million for capitalized proprietary software costs offset by the proceeds of $39.3 million from maturities of short-term investments.

During 2018, net cash used in investing activities was $33.9 million, which consisted of $31.5 million for purchases of short-term investments, $13.4 million for purchases of property and equipment, net, including leasehold improvements, and $5.7 million for capitalized proprietary software costs, partially offset by the proceeds of $9.6 million from maturities on short-term investments and proceeds of $7.0 million from the sale of short-term investments.

During 2020, net cash used in operating activities was $134.4 million, which consisted of a net loss of $175.8 million, adjusted by non-cash charges of $62.9 million and cash outflows due to a net change of $21.5 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily the result of cash outflows due to increases of $20.4 million in inventory and a $12.8 million decrease in operating lease liability, partially offset by cash inflows due to increases of $8.0 million in other accrued and current liabilities and $4.2 million in accrued consignor payable.

Net Cash Provided by (Used in) Investing Activities

During 2020, net cash provided by investing activities was $178.0 million, which consisted of $278.2 million in proceeds from maturities of short-term investments, offset by $73.3 million for purchases of short-term investments, $18.3 million for purchases of property and equipment, net, including leasehold improvements, and $8.7 million for capitalized proprietary software costs.

Net Cash Provided by Financing Activities

During 2019, net cash provided by financing activities was $378.7 million, which primarily consisted of proceeds of $315.5 million from the initial public offering, net of issuance costs, $ 69.8 million from the issuance of redeemable convertible preferred stock and convertible preferred stock, net of issuance costs, and proceeds of $2.7 million from the exercise of stock options and warrants partially offset $9.3 million for repayment of debt .

During 2018, net cash provided by financing activities was $106.1 million, which primarily consisted of proceeds of $96.3 million from the issuance of convertible and redeemable convertible preferred stock, net of issuance costs, and proceeds of $14.3 million from the issuance of convertible notes, net of issuance costs, partially offset by $4.5 million for repayments of debt.

During 2020, net cash provided by financing activities was $152.8 million, which primarily consisted of proceeds of $166.3 million from the issuance of the convertible senior notes, net of issuance costs, $8.9 million from the exercise of stock options and warrants partially offset by $22.5 million for the purchase of capped calls related to the Notes issuance.

Contractual Obligations and Commitments

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Operating leases

Convertible Senior Notes, including interest

Unconditional endowment grant (1)

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Non-cancellable purchase commitments

This table does not include the noncancelable operating lease we entered into in January 2020 to extend and expand the existing lease in New York, NY.

The additional minimum lease payments over the eight-year term total $14.7 million.

In January 2018, we entered into an agreement with the University of Arizona Foundation to endow a gemology degree program in the Department of Geosciences.

We committed to endow a total of $2.0 million, of which $1.

0 million remained to be funded as of December 31, 201 9 .

We committed to endow a total of $2.0 million, of which $0.5 million remained to be funded as of December 31, 2020.

Off-Balance Sheet Arrangements

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Consignment and Service Revenue

We generate the majority of our revenue from consignment services for the sale of pre-owned luxury goods on behalf of consignors through our online consignment marketplace.

We generate the majority of our revenue from consignment services for the sale of pre-owned luxury goods on behalf of consignors through our online consignment marketplace and retail stores.

For consignment sales, we retain a portion of the proceeds received, which we refer to as our take rate, and remit the balance to the consignors.

We recognize consignment revenue upon purchase of the goods by the buyer based on our take rate, net of allowances for product returns and order cancellations and certain incentives.

We also generate revenue from shipping fees to buyers and have elected to treat shipping and handling activities performed after control transfers to the buyer as fulfillment activities.

Accordingly, we recognized shipping fees as revenue upon the first shipment associated with an order.

We also generate service revenue from our First Look subscription program, through which buyers pay a monthly fee for early access to our listings.

Subscription fees are recognized on a monthly basis.

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.

Accordingly, in certain consignment transactions, a small portion of our consignment service revenue is allocated to such material right using the portfolio method, as applicable.

Such deferred revenue is recorded as deferred revenue and recognized based on the pattern of exercise.

We recognize a returns reserve in the period that the related revenue is recorded based on historical experience.

Historically, our estimate for returns has not varied materially from our actual returns.

We monitor changes in returns activity and they are adjusted prospectively based upon such periodic evaluation.

We recognize consignment revenue upon purchase of the goods by the buyer based on our take rate, net of allowances for product returns, order cancellations, buyer incentives and adjustments.

Direct Revenue

We also generate revenue from the sales of company-owned inventory.

We recognize direct revenue upon shipment of the goods through our online marketplace, based on the gross purchase price net of allowances for product returns and certain buyer incentives.

Stock-based Compensation

We estimate the fair value of stock options granted to employees, non-employees and directors using the Black-Scholes option-pricing model.

The fair value of stock options that is expected to vest is recognized as compensation expense on a straight-line basis over the requisite service period.

The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards.

These variables include per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term.

For all stock options granted to date, we calculated the expected term using the simplified method for “plain vanilla” stock option awards.

We determine volatility using the historical volatility of the stock price of similar publicly traded peer companies.

The risk-free interest rate is based on the yield available on U.S.

Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

Prior to our initial public offering, the fair value of the shares of common stock underlying the stock options was determined by our board of directors, with assistance by management and using contemporaneous third-party valuations, as there was no public market for the common stock.

Following the closing of our initial public offering, the fair value per share of our common stock for purposes of determining stock-based compensation is the closing price of our common stock as reported on the applicable grant date.

We recognize direct revenue upon shipment of the goods sold through our online marketplace and retail stores, based on the gross purchase price net of allowances for product returns, buyer incentives and adjustments.

Recent Accounting Pronouncements

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JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the JOBS Act.

We were an “emerging growth company,” as defined in the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

We can choose to adopt new or revised accounting standards earlier than such time those standards apply to private companies and retain our election for the extended transition period, if early adoption is permitted for all entities.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We elected to use this extended transition period to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) were no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements while we were an emerging growth company may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Because the market value of the Company’s common stock held by non-affiliates exceeded $700 million as of June 30, 2020, the Company was deemed a “large accelerated filer” under the Exchange Act ceased to be an emerging growth company as of December 31, 2020.

As a result, the Company adopted all applicable standards retrospectively as of January 1, 2020 in this Annual Report on Form 10-K.

Quantitative and Qualitati ve Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business, including fluctuations in interest rates.

Such fluctuations to date have not been significant.

As of December 31, 2020, we had unrestricted cash, cash equivalents and short-term investments of approximately $354.9 million, which carry a degree of interest rate risk.

A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our investment portfolio.

We do not believe that inflation has had a material effect on our business, results of operations or financial condition.

Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs.

Our inability or failure to do so could harm our business, results of operations or financial condition.

Financial Statements and Supplementary Data.

Please refer to the Financial Statements and Notes to Financial Statements in this Form 10-K which is incorporated herein by reference.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis