What changed in this filing

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Item 9A. Controls and Procedures

2021-03-01 compared with 2020-03-11 · 471 added, 229 removed, 758 unchanged (48% of the section changed)

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Management’s Annual Report on Internal Control Over Financial Reporting

This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

Additionally, our auditors will not be required to formally opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act .

Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on evaluation under these criteria, management determined that our internal control over financial reporting was effective as of December 31, 2020.

In connection with completing our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020, we identified certain General Information Technology Controls (GITC) in interim periods prior to August 31, 2020 that were not designed at a sufficient level of precision to support the effective operation of underlying process level controls and to establish minimum documentation requirements to

evidence control performance.

We considered the nature of these GITC control deficiencies, in the aggregate, to represent a material weakness in our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

As we prepared for our assessment, we improved the design of controls and formally implemented GITCs related to (i) access security, (ii) change management, and (iii) IT operations throughout the course of the third quarter.

The material weakness identified as part of our assessment did not result in any misstatements to our financial statements during the fiscal year, nor does it require a restatement of or change in our financial statements for any prior annual or interim period.

Based on our evaluation under the COSO framework, we believe these steps we have taken have remediated the material weakness as of December 31, 2020.

KPMG, LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2020.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Other than implementing the remediation steps noted in the previous section, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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and certain holders of its capital stock.

Indenture dated June 15, 2020, between The RealReal, Inc.

Bank National Association as Trustee, including form of 3.00% Convertible Senior Note due 2025.

June 16, 2020

Description of Securities.

August 7, 2020

The RealReal, Inc.

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and Pacific Western Bank.

Incorporated by Reference

Sixth Amendment to Loan and Security Agreement dated as of September 16, 2016 by and between The RealReal, Inc.

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and Pacific Western Bank.

Incorporated by Reference

Eighth Amendment to Loan and Security Agreement dated as of July 27, 2017 by and between The RealReal, Inc.

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June 17, 2019

Incorporated by Reference

The RealReal, Inc.

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August 14, 2019

Incorporated by Reference

The RealReal, Inc.

2019 Employee Stock Purchase Plan, as amended and restated on February 19, 2020.

March 11, 2020

Form of Base Capped Call Confirmation, dated June 10, 2020 between The RealReal, Inc.

and each of the Counterparties.

June 16, 2020

Form of Additional Capped Call Confirmation, dated June 18, 2020 between The RealReal, Inc.

and each of the Capped Call Counterparties.

June 23, 2020

Lease Agreement dated as of November 2, 2020 by and between The RealReal, Inc.

and Liberty Property Limited Partnership.

November 10, 2020

Consent of KPMG, LLP, Independent Registered Public Accounting Firm

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XBRL Taxonomy Extension Definition Linkbase Document

Incorporated by Reference

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

Indicates management contract or compensatory plan.

Portions of the exhibit have been excluded because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed.

Certain information contained in this agreement has been omitted because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized .

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(Principal Financial Officer)

Vice President, Corporate Controller

Vice President, Chief Accounting Officer

March 1, 2021

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March 1, 2021

/s/ Maha Ibrahim

/s/ Caretha Coleman

March 1, 2021

Caretha Coleman

/s/ Emma Grede

March 1, 2021

/s/ Karen Katz

March 1, 2021

/s/ Rob Krolik

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Michael Kumin

/s/ Stefan Larsson

March 11, 2020

Stefan Larsson

/s/ Niki Leondakis

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Niki Leondakis

/s/ Carol Melton

March 1, 2021

/s/ James Miller

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INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2020 and 2019

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Notes to Financial Statements

Report of Independent Regist ered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2020 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842).

Basis for Opinion

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Our responsibility is to express an opinion on these financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Incremental borrowing rate used to measure operating lease liabilities upon adoption of Topic 842

As discussed in Notes 2 and 11 to the financial statements, the Company adopted Topic 842 on January 1, 2020.

At adoption, Topic 842 requires, amongst other things, the Company to measure the lease liability at the present value of the future lease payments as of January 1, 2020, using the applicable incremental borrowing rate for each lease.

The Company derived the incremental borrowing rate based on its own estimated synthetic credit rating, corresponding yield curve, and the remaining terms of each lease at the adoption date.

As a result of the adoption of Topic 842, the Company recognized $12.8 million in current operating leases liabilities and $106.2 million in operating lease liabilities, net of the current portion as of January 1, 2020.

We identified the evaluation of the incremental borrowing rates used to measure the Company’s operating lease liabilities upon adoption of Topic 842 as a critical audit matter.

Given the lack of a directly observable Company specific credit rating as of the adoption date, subjective auditor judgment was required to evaluate the appropriateness of the methodology used to develop the incremental borrowing rates, including the development of the synthetic credit rating.

In addition, specialized skills and knowledge were required to assist in the evaluation of the incremental borrowing rates determined by the Company.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of an internal control related to evaluating the appropriateness of the methodology used and the development of the synthetic credit rating.

We involved valuation professionals with specialized skills and knowledge, who assisted in:

● evaluating the appropri ateness of the methodology used to estimate the synthetic credit rating,

developing an independent estimate of the synthetic credit rating and comparing it with the synthetic credit rating used by the Company in developing their incremental borrowing rates, and

obtaining market yield curves associated with our estimated synthetic credit rating used to derive incremental borrowing rates associated with different lease terms and comparing them to the estimated incremental borrowing rates developed by the Company for the same lease terms.

We have served as the Company’s auditor since 2013.

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March 1, 2021

THE REALREAL, IN C .

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

The RealReal, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited The RealReal, Inc.'s (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of the Company as of December 31, 2020 and 2019, the related statements of operations, comprehensive loss, redeemable convertible preferred stock, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the financial statements), and our report dated March 1, 2021 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectivene ss to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

San Francisco, California

March 1, 2021

THE REALREAL, INC.

Balance Sheets

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Property and equipment, net

Restricted cash

Liabilities, Redeemable Convertible Preferred Stock, Convertible

Preferred Stock and Stockholders’ Equity (Deficit)

Operating lease right-of-use assets

Liabilities and Stockholders’ Equity

Current liabilities

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Accrued consignor payable

Operating lease liabilities, current portion

Other accrued and current liabilities

Long-term debt, current portion

Total current liabilities

Long-term debt, net of current portion

Operating lease liabilities, net of current portion

Convertible senior notes, net

Other noncurrent liabilities

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Commitments and contingencies (Note 12)

Redeemable convertible preferred stock, $0.00001 par value;

31,053,601 shares authorized as of December 31, 2019 and December 31,

2018, respectively;

no and 31,053,601 shares issued and outstanding

as of December 31, 2019 and December 31, 2018, respectively

Convertible preferred stock $0.00001 par value;

no and 73,950,153

shares authorized as of December 31, 2019 and December 31, 2018,

respectively;

no and 73,724,645 shares issued and outstanding

as of December 31, 2019 and December 31, 2018, respectively

Stockholders’ equity (deficit):

Stockholders’ equity:

Common stock, $0.00001 par value;

500,000,000 and 145,467,774 shares

500,000,000 shares

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

respectively;

89,301,664 and 85,872,320 shares issued and outstanding

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Additional paid-in capital

Accumulated comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

Total stockholders’ equity (deficit)

Total liabilities, redeemable convertible preferred stock, convertible

preferred stock and stockholders’ equity (deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

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Comprehensive

Balances as of December 31, 2016

Impact of adopting new accounting standard

Issuance of Series F redeemable convertible

preferred stock, net of issuance costs of $2,243

Accretion of redeemable convertible preferred

stock to redemption value

Issuance of common stock upon exercise of options

Issuance of common stock warrants

Stock-based compensation expense

Other comprehensive income

Income (Loss)

Balances as of December 31, 2017

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stock net of issuance costs of $59

Redeemable Convertible

Stockholders’

Preferred Stock

Comprehensive

Accretion of redeemable convertible preferred

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Stock-based compensation expense

Other comprehensive gain

Other comprehensive income

Balance as of December 31, 2019

Purchase of capped calls

Equity component of convertible senior notes, net of issuance costs of $767

Issuance of common stock upon exercise of options

Issuance of common stock upon vesting of

restricted stock units, net of shares withheld

for employee taxes

Issuance of common stock for exercises under ESPP

Stock-based compensation expense

Other comprehensive income

Balance as of December 31, 2020

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

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Stock-based compensation expense

Reduction of operating lease right-of-use assets

Change in fair value of convertible note derivative liability

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Accretion of unconditional endowment grant liability

Accretion of debt discounts

Accretion of debt discounts and issuance costs

Amortization of premiums (discounts) on short-term investments

Issuance of common stock warrant to third-party service provider

Changes in operating assets and liabilities:

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Prepaid expenses and other current assets

Operating lease liability

Accounts payable

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Purchases of property and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flow from financing activities:

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Proceeds from issuance of convertible notes, net of issuance costs

Purchase of capped calls

Proceeds from exercise of stock options and common stock warrants

Proceeds from issuance of Employee Stock Purchase Program

Payment of deferred offering costs

Taxes paid related to net share settlement of equity awards

Taxes paid related to restricted stock vesting

Issuance cost paid related to conversion of convertible notes

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Loss on extinguishment of convertible notes

Purchases of property and equipment included in accounts payable

Deferred offering costs in accounts payable and accrued liabilities

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

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

Reclassification of deferred offering costs

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Conversion of convertible preferred stock in connection with IPO

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

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

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The Company was incorporated in the state of Delaware on March 29, 2011 and is headquartered in San Francisco, California.

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

The COVID-19 pandemic has materially impacted the Company's business operations and results of operations in 2020.

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 the year ended December 31, 2020.

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

All luxury consignment offices and retail stores were temporarily closed for varying periods of time but were all open during the entirety of the second half of the year.

The Company believes that its financial resources will allow it to manage the anticipated impact of COVID-19 on the Company’s business operations for the foreseeable future.

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

Basis of Presentation

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generally accepted accounting principles (“GAAP”) and, in the opinion of management, reflect all adjustments necessary to state fairly the Company’s financial position, results of operations, comprehensive loss, redeemable convertible preferred stock, convertible preferred stock, and stockholders’ equity (deficit), and cash flows for the periods presented.

Certain corrections to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2.

Certain corrections to the prior periods have been made to conform to the current period presentation, as described in Note 2.

The Company’s functional and reporting currency is the U.S.

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On June 13, 2019, the Company effected a reverse split of shares of the Company’s common stock on a 1-for-2 basis (the “Reverse Stock Split”).

All issued and outstanding shares of common stock, warrants for common stock, options to purchase common stock and the related per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

All issued and outstanding shares of common stock, warrants for common stock,

options to purchase common stock and the related per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

The par value and authorized shares of common stock were not adjusted as a result of the Reverse Stock Split.

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period.

Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve and material right related to the Company’s tiered consignor commission plan, valuation of inventory, stock-based compensation, redemption value of redeemable convertible preferred stock, valuation of deferred taxes, and other contingencies.

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, redemption value of redeemable convertible preferred stock, incremental borrowing rates related to lease liability, fair value of the liability component of convertible senior notes, valuation of deferred taxes, and other contingencies.

The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate.

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However, the holders of such shares did not have a contractual obligation to participate in the Company’s losses.

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

The Company’s convertible senior notes are participating securities as they give the holders the right to receive dividends if dividend or distribution 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.

The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance.

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Revenue Recognition

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

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

Consignment and Service Revenue

The Company provides a service to sell pre-owned luxury goods on behalf of consignors to buyers through its online marketplace and retail locations.

The Company provides a service to sell pre-owned luxury goods on behalf of consignors to buyers through its online marketplace and retail stores.

The Company retains a percentage of the proceeds received as payment for its consignment service, which the Company refers to as its take rate.

The Company reports consignment revenue on a net basis as an agent and not the gross amount collected from the buyer.

Title to the consigned goods remain with the consignor until transferred to the buyer subsequent to purchase of the consigned goods and expiration of the allotted return period.

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 co nsignment services to the consignor is satisfied at that point.

Consignment revenue is recognized net of certain buyer incentives and estimated returns and cancellations.

The Company recognizes a returns reserve based on historical experience, which is rec orded in other accrued and current liabilities on the balance sheets (see Note 5).

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 balance sheets (see Note 5).

Sales tax assessed by governmental authorities is excluded from revenue.

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

The impact of the deferral has not been material to the financial statements.

The Company charges shipping fees to buyers and has elected to treat shipping and handling activities performed after control transfers to the buyer as fulfillment activities.

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The Company recognizes direct revenue on a gross basis upon shipment of the purchased good to the buyer as the Company acts as the principal in the transaction.

Direct revenue is recognized net of incentives and estimated returns.

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.

Promotional incentives, which include basket promotional code discounts and other credits, may periodically be offered to consignors and buyers.

Cost of direct revenue is also recognized upon shipment to the buyer in an amount equal to that paid to the consignor from the original consignment sale, an amount equal to that paid as a direct purchase from a third party, or the lower of cost of the inventory purchased and its net realizable value.

Incentives, which include platform-wide discounts and buyer incentives, may periodically be offered to buyers.

Platform-wide discounts are made available to all buyers on the online marketplace.

Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on the Company’s platform, and do not impact the commissions paid to consignors.

These are treated as a reduction of consignment and service revenue and direct revenue.

Additionally, the Company may offer site credits to buyers on current transactions to be applied towards future transactions, which are accounted as deferred revenue and included in other accrued and current liabilities on the balance sheets.

Additionally, the Company periodically offers commission exceptions to consignors to optimize its supply.

These are treated as reduction of consignment and service revenue,

and are reflected in the Company’s take rate.

The Company may offer a certain type of buyer incentive in the form of site credits to buyers on current transactions to be applied towards future transactions, which are included in other accrued and current liabilities on the balance sheets.

Contract Liabilities

The Company’s contractual liabilities consist of deferred revenue for material rights primarily related to the tiered consignor commission plan totaling $3.5 million and $2.7 million as of December 31, 2019 and 2018, respectively, 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 December 31, 2019 and December 31, 2018.

The Company’s contractual liabilities consist of deferred revenue for material rights primarily related to the tiered consignor commission plan, which are recognized as revenue using a portfolio approach based on the pattern of exercise, and certain unredeemed site credits, which were immaterial as of December 31, 2020 and December 31, 2019.

Contract liabilities are recorded in other accrued and current liabilities on the balance sheets and are generally expected to be recognized within one year.

Contract liabilities were immaterial as of December 31, 2020 and December 31, 2019.

Cost of Revenue

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

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

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

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

Marketing expense is comprised of the cost of acquiring new consignors and buyers for our online platform and physical stores, including the cost of television, digital and direct mail advertising.

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Operations and Technology

Operations and technology expense is comprised of costs associated with the authentication, merchandising and fulfillment of goods sold through our online marketplace, as well as general information technology expense.

Operations and technology expense is comprised of costs associated with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as general information technology expense.

The principal component of operations and technology expense is personnel-related costs, including stock-based compensation, of employees engaged in these activities.

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Stock-based Compensation

Stock-based compensation expense related to employees is measured based on the grant-date fair value of the awards.

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.

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The fair value of restricted stock units (“RSUs”) is estimated based on the fair market value of the Company’s common stock on the date of grant, which is determined based on the closing price of the Company’s common stock.

Certain employees have sold their shares of the Company’s common stock to the Company’s existing investors.

In such secondary sale transactions, the Company recorded the difference in purchase price and the fair value of such shares as compensation expense in the statements of operations and a corresponding credit to additional paid-in capital.

The fair value of each

purchase under the employee stoc k purchase plan (ESPP) is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

Prior to the IPO, certain employees have sold their shares of the Company’s common stock to the Company’s existing investors.

In such secondary sale transactions, the Company recorded the difference in purchase price and the fair value of such shares as compensation expense within selling, general and administrative in the statements of operations and a corresponding credit to additional paid-in capital.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents.

Cash equivalents consist primarily of amounts invested in U.S.

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

treasury securities.

Restricted cash consists of cash deposited with a financial institution as collateral for the Company’s letters of credit for its facility leases and the Company’s credit cards.

As of December 31, 2019 and December 31, 2018, the Company had restricted cash in the amounts of zero and $11.2 million, respectively.

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

As of December 31, 2020 and December 31, 2019, the Company had no restricted cash.

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

December 31, 2020

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Available-for-sale securities with remaining maturities of 12 months or less are classified as short term and available-for-sale securities with remaining maturities greater than 12 months are classified as long term.

The Company records any unrealized gains and losses within accumulated other comprehensive gain (loss) as a component of stockholders’ equity (deficit), except for unrealized losses determined to be other than temporary, of which there were none as of December 31, 2019 and 2018.

The Company evaluates its short-term investments periodically for possible impairment.

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

Available-for-sale investments are reported at fair value based on quoted market prices and other observable market data.

The Company records any unrealized gains and losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit), of which there were none as of December 31, 2020 and 2019.

The Company adopted Accounting Standards Update (ASU) 2016-13 described below under "Recent Adopted Accounting Pronouncements." In accordance with the adopted guidance, the Company replaced the incurred loss approach with an expected loss model and the Company records allowances for available-for-sale debt securities rather than to reduce the carrying amount for other-than-temporary impairment as was followed under the other-than-temporary impairment model prior to January 1, 2020.

Realized gains and losses and other-than-temporary impairments on investments are included in Other income and expense, net.

As of December 31, 2020, the Company had not recorded any impairments due to credit loss.

Accounts Receivable

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Inventory, Net

Inventory primarily consists of finished goods arising from goods returned after the title has transferred from the buyer to the Company in an amount equal to that paid to the consignor.

The Company also periodically purchases finished goods directly from vendors.

Inventory is valued at the lower of cost and net realizable value using the specific identification method and the Company records provisions, as appropriate, to write down obsolete and excess inventory to estimated net realizable value.

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 and net

realizable value using the specific identification method and the Company records provisions, as appropriate, to write down obsolete and excess inventory to estimated net realizable value.

After the inventory value is reduced, adjustments are not made to increase it from the estimated net realizable value.

Our provisions to write down obsolete and excess inventory to net realizable value have not been material for 2019 and 2018.

Our provisions to write down obsolete and excess inventory to net realizable value have not been materia l for 2020 and 2019.

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 balance sheets and were $18.3 million and $17.0 million as of December 31, 2020 and 2019.

Included in inventory on the Company’s balance sheets are assets totaling $7.4 million and $7.1 million as of December 31, 2020 and 2019, for the rights to recover products from customers associated with its liabilities for return reserves.

Property and Equipment, Net

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In the event an anticipated offering is abandoned, deferred offering costs will be expensed.

In 2020, offering costs of $6.7 million related to the issuance of convertible notes was allocated to the liability and equity components based on the allocation of the proceeds.

Of the total offering costs, $0.8 million was recorded as a

r eduction to additional paid-in capital and $ 5.9 million was recorded as a reduction in the carrying value of the debt on the balance sheet.

In 2019, offering costs of $ 0.3 million were expensed.

As of December 31, 2019, $5.3 million deferred offering costs were offset against the offering proceeds within stockholders’ equity (deficit) on the balance sheets.

As of December 31, 2018 deferred offering costs of $34,000 were capitalized and included in other assets on the balance sheets.

As of December 31, 2019, $ 5.3 million deferred offering costs were offset against the IPO proceeds withi n stockholders’ equity (deficit) on the balance sheets.

Accretion of Redeemable Convertible Preferred Stock

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Upon conversion of the convertible preferred stock warrants, the related convertible preferred stock warrant liability was reclassified to additional paid-in capital.

Prior to the adoption of ASC 842 on January 1, 2020

Leases are reviewed for classification as operating or capital leases.

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Incentives granted under the Company’s facility leases, including allowances to fund leasehold improvements, are deferred and are recognized as adjustments to rental expense on a straight-line basis over the term of the lease.

Subsequent to the adoption of ASC 842 on January 1, 2020

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 balance sheet.

The Company has elected the practical expedients that allows for the combination of lease components and non-lease components and to record short-term leases as lease expense on a straight-line basis on the 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

Convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, are separately accounted for as long-term debt and equity components (or conversion feature).

The accounting applies to the Company’s convertible senior notes (the “Notes”) issued in June 2020.

The debt component represents the Company’s contractual obligation to pay principal and interest and the equity component represents the Company’s option to convert the debt security into equity of the Company or the equivalent amount of cash.

Upon issuance, the Company allocated the debt component on the basis of the estimated fair value of an identical debt instrument that it would issue excluding the conversion option 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 interest method to amortize the debt discount to interest expense over the amortization period which is the expected life of the debt.

Capped Call Transactions

In June 2020, 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 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, with such reduction and/or offset subject to a cap based on the cap price.

The capped calls are classified in stockholders’ equity as a reduction to additional paid-in capital and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

Debt Issuance Costs

Debt issuance costs are amortized to interest expense over the estimated life of the related debt based on the effective interest method.

The Company presents debt issuance costs on the balance sheet as a direct deduction from the associated debt.

A portion of debt issuance costs incurred in connection with the Notes issued in June 2020 was related to the equity component and was recorded as a reduction to additional paid in capital and is not amortized to interest expense over the estimated life of the related debt.

Income taxes are accounted for under the asset and liability method.

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The Company reduces credit risk by placing its cash and cash equivalents, restricted cash, and investments with major financial institutions within the United States.

As of December 31, 2019 and December 31, 2018, 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 years ended December 31, 2019, 2018, and 2017.

As of December 31, 2020 and December 31, 2019, there we re 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 years ended December 31, 2020, 2019, and 2018.

Immaterial Correction of an Error in Prior Periods

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.

During the quarter ended December 31, 2020, the Company identified an overstatement of consignment and services 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 FASB 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 periodic reports are required.

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

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

The Company recognized the effect of the error in 2018 by increasing direct revenue and cost of revenue by approximately $9.7 million and $6.4 million, respectively, and recording a corresponding decrease in consignment and service revenue of $3.4 million.

The effect of the error correction in 2017 was an increase in direct revenue and cost of revenue by approximately $5.5 million and $3.7 million, respectively, with a corresponding decrease in consignment and service revenue of $1.9 million.

The following table presents the effects of the immaterial error correction on the statements of operations for the period indicated (in thousands):

The Company recognized the effect of the error in 2019 by decreasing inventory, net consignment and services revenue by approximately $1.7 million.

The following table presents the effects of the immaterial error correction on the balance sheet and related statements of redeemable convertible preferred stock, convertible preferred stock, and stockholders’ equity (deficit) for the period indicated (in thousands):

As of December 31, 2019

As previously

Current Assets:

Inventory, net

Total current assets

Stockholders' equity (deficit):

Accumulated deficit

Total stockholders' equity (deficit)

Total liabilities and stockholders’ equity (deficit)

The following table presents the effects of the immaterial error correction on the statements of operations and net loss per share attributable to common stockholders, basic and diluted for the period indicated (in thousands):

Year Ended December 31, 2019

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Total revenue

Cost of revenue:

Cost of consignment and service

Cost of direct revenue

Total cost of revenue

Loss from operations

Loss before provision for income taxes

Net loss attributable to common stockholders

Net loss per share attributable to common stockholders, basic and diluted

Shares used to compute net loss per share attributable to common stockholders, basic and diluted

The following table presents the effects of the immaterial error correction on the statements of comprehensive loss (in thousands):

Year Ended December 31, 2019

As previously

Consignment and service revenue

Direct revenue

Total revenue

Cost of revenue:

Cost of consignment and service

Cost of direct revenue

Total cost of revenue

The Company's statements of comprehensive loss, statements of redeemable convertible preferred stock, convertible preferred stock, and stockholders’ equity (deficit), and statements of cash flows for the above periods were not impacted by this immaterial correction of an error.

Recently Issued Accounting Pronouncements

Other comprehensive income (loss), net of tax

Unrealized gain (loss) on investments

Comprehensive loss

The following table presents the effects of the immaterial error correction on the statements of cash flows (in thousands):

Year ended December 31, 2019

As previously

Cash flows from operating activities:

Changes in operating activities and liabilities:

Inventory, net

Net cash used in operating activities

Recently Adopted Accounting Pronouncements

The Company was an emerging growth company “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012 (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.

The Company had elected to use this extended transition period to enable it to comply with new or revised accountin g standards that have different effective dates for public and private companies until the earlier of the date it (1) was no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JO BS Act.

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

As a resul t, our financial statements 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 ceased to be an emerging growth company and was deemed a “large accelerated filer” under the Exchange Act 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.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

ASU 2016-02 is aimed at making leasing activities more transparent and comparable and requires substantially all leases to be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases.

The new standard is effective for non-public entities in fiscal years beginning after December 15, 2020 and interim periods in fiscal years beginning after December 15, 2021.

Early adoption is permitted for all entities.

As an “emerging growth company” as defined in the JOBS Act, the new standard is effective for the Company beginning January 1, 2021.

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.

The Company will adopt the standard on January 1, 2020 using the modified retrospective approach whereby the new standard will be applied to all existing leases as of the adoption date.

Results and disclosures for reporting periods beginning after January 1, 2020 will be presented under Topic 842, while prior period amounts will remain unadjusted in accordance with legacy accounting under Topic 840.

In addition, the Company plans to elect the package of practical expedients permitted under the transition guidance within the new standard which allows it to carry forward historical lease classification.

The Company has completed the process of identifying the arrangements subject to the new standard and is currently in the process of applying the new guidance to those arrangements, including the determination of the incremental borrowing rate for each arrangement.

Based on the adoption process completed to date, the Company expects to record a material increase to total assets and total liabilities on the Company’s balance sheets upon adoption resulting from the recording of right of use assets and lease liabilities for operating leases.

The Company does not believe the new standard will have a material impact on the statements of operations.

ASU 2016-02 is aimed at making leasing activities more transparent and comparable.

This new standard requires substantially all leases to be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, includin g leases currently accounted for as operating leases.

The Company early adopted the standard on January 1, 2020.

The Company adopted Topic 842 on January 1, 2020 using the modified retrospective approach and applied it to all existing leases as of the adoption date, which allows for a cumulative-effect adjustment to retained earnings on the adoption date.

The Company will continue to present prior period amounts under ASC 840.

In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which does not require the Company to reassess whether contracts that expired prior to the adoption date contained an embedded lease, reassess historical lease classification, or evaluate direct costs for leases that were in effect at the adoption date.

As a result of implementing this guidance, the Company recognized $110.3 million in right of use assets as of January 1, 2020.

The Company also recorded $12.8 million in current operating lease liabilities and $106.2 million in operating lease liabilities, net of current portion in its balance sheet as of January 1, 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments (Topic 326) .

The standard amend s guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For available fo r sale debt securities, credit losses will be presented as an allowance rather than as a write-down.

This standard is effective for fiscal years beginning after December 15, 202 2 , including interim periods within those fiscal years.

Early adoption is permi tted for all entities.

The Company does not expect the adoption of this standard to have a material impact on the operating results.

The standard amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For available for sale debt securities, credit losses will be presented as an allowance rather than as a write-down.

The Company adopted Topic 326 retrospectively of January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors.

The Company also assessed the impact of COVID-19 on expected credit losses and it was also not material.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.

The standard is effective for fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020.

Early adoption is permitted, but no earlier than the Company’s adoption date of ASC 606.

The Company does not expect the adoption of this standard to have a material impact on the operating results.

The Company adopted Topic 718 retrospectively of January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) .

This standard modifies disclosure requirements related to fair value measurement and is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted.

Implementation on a prospective or retrospective basis varies by specific disclosure requirement.

The standard also allows for early adoption of any removed or modified disclosures upon issuance while delaying adoption of the additional disclosures until their effective date.

The Company does not expect the adoption of this standard to have a material impact on its financial statements.

The Company adopted this guidance effective January 1, 2020, which did not have a material impact on its financial statements.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments.

Under this ASU, the embedded conversion features will no longer be separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that

do not result in substantial premiums accounted for as paid-in capital.

Consequently, a converti ble debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifur cation and recognition as derivatives.

ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas .

The ASU will be effective for annual reporting periods beginning after December 15, 2021 and early adoption is permitted.

The Company is currently evaluating the timing and impact of this standard on its financial statements.

It is expected that upon a doption, the Company’s Convertible Senior Notes, as discussed in Note 7, will no longer be bifurcated into an equity and a debt component, but rather accounted for as a single liability.

Cash, Cash Equivalents and Short-term Investments

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Cash and cash equivalents:

Treasury securities

Money market fund

Corporate bonds

Commercial paper

Total cash and cash equivalents

Short-term investments:

Treasury securities

Corporate bonds

Commercial paper

Total short-term investments

1 unchanged sentence

Cash and cash equivalents:

Treasury securities

Money market fund

Reverse repurchase agreements

Corporate bonds

Commercial paper

Total cash and cash equivalents

Short-term investments:

Treasury securities

Corporate bonds

Commercial paper

Total short-term investments

3 unchanged sentences

Assets and liabilities recorded at fair value on a recurring basis on the 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.

on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservab le inputs.

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

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December 31, 2020

Short-term investments:

Corporate bonds

Total short-term investments

December 31, 2019

Cash equivalents:

Treasury securities

Money market fund

Corporate bonds

6 unchanged sentences

Total short-term investments

December 31, 2018

Cash equivalents:

Money market fund

Reverse repurchase agreements

Total cash equivalents

Short-term investments:

Corporate bonds

Total short-term investments

Convertible preferred stock warrant

Total liabilities

The fair value of the convertible preferred stock warrant liability on the date of issuance and each re-measurement date was estimated using the Black ‑Scholes opt ion pricing model.

Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table.

The amounts of the money market funds (in thousands) were $200,326 and $5,399 at 12/31/20 and 12/31/19, respectively.

On June 15, 2020, the Company issued 3.00% convertible senior notes due 2025 with embedded conversion features.

The Company estimated the fair value of the Notes using a discounted cash flow approach to derive the value of a debt instrument using the expected cash flows and the estimated yield related to the convertible senior notes.

The significant assumptions used in estimating the expected cash flows were the estimated market yield based on an implied yield and credit quality analysis of a term loan with similar attributes.

The Company recorded approximately $152.7 million as the fair value of the liability on June 15, 2020, with a corresponding amount recorded as a discount on the initial issuance of the Notes of approximately $19.8 million.

The debt discount was recorded to equity and is being amortized to the debt liability over the life of the Notes using the effective interest method.

As of December 31, 2020, the fair value of the Notes, which differs from its carrying value is determined by prices for the Notes observed in market trading.

The market for trading of the 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.

As of December 31, 2020, the estimated fair value of the Notes, which has an aggregate face value of $172.5 million, was $184.4 million based on the market price on the last trading day for the period.

The fair value of the convertible preferred stock warrant liability on the date of issuance and each re-measurement date was estimated using the Black‑Scholes option pricing model.

Inputs used to determine the estimated fair value as of each valuation date included expected term of the warrants, the risk-free interest rate, volatility, and the fair value of underlying shares.

The fair value of the convertible note s derivative liability on the date of issuance , each re-measurement date , and immediately prior to extinguishment was estimated using a probability weighted expected return.

Due to the nature of these valuation models , the valuation s of the warrants and the convertible notes derivative liability are considered a Level 3 measurement s .

The following table presents a rollforward of the fair value of the level 3 liabilities recorded at fair value (in thousands):

Due to the nature of these valuation models, the valuation of the warrants is considered a Level 3 measurement.

The following table presents a rollforward of the fair value of the Level 3 liability recorded at fair value (in thousands):

Stock Warrant

Balance as of December 31, 2018

Recognition of derivative liability in

connection with issuance of convertible notes

Changes in estimated fair value

Extinguishment of derivative liability on

conversion of convertible notes

Balance as of December 31, 2018

Changes in estimated fair value

Reclass to additional paid-in capital upon

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Depreciation and amortization expense on property and equipment was $18.8 million, $13.4 million, and $9.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

During the year ended December 31, 2020, fully depreciated proprietary software in the amount of $7.9 million was taken out of service.

Other Accrued and Current Liabilities

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The Eleventh Amendment provided an additional letter of credit of $1.5 million for corporate credit cards with a maturity date of August 1, 2019.

On July 26, 2019 the Company fully repaid the principal of its Terms Loans in the amount of $6.5 million.

On July 26, 2019 the Company fully repaid the principal of its Term Loans in the amount of $6.5 million.

With the repayment of the term loans, the Company was no longer subject to debt covenants as of December 31, 2020.

During the years ended December 31, 2019, 2018 and 2017, the Company recorded interest expense related to the Term Loans of $0.3 million, $0.7 million, and $0.6 million, respectively.

During the years ended December 31, 2020, 2019 and 2018, the Company recorded interest expense related to the Term Loans of zero, $0.3 million, and $0.7 million, respectively.

Warrants Issued with Term Loan Facility

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All convertible Preferred Stock Warrants were converted to common stock warrants and exercised through net share settlement in July 2019.

No warrants were outstanding as of December 31, 2019.

No warrants were outstanding as of December 31, 2020 and 2019.

Convertible Notes

In April 2018, the Company issued $14.4 million in convertible notes (“Convertible Notes”) to existing shareholders of redeemable convertible and convertible preferred stock.

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 (the “Notes”), pursuant to an indenture (the “Indenture”) between the Company and U.S.

Bank National Association, as trustee, in a private offering (the “Note Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The Notes issued in the Note Offering include $22.5 million in aggregate principal amount of the Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes.

The Notes will mature on June 15, 2025, unless earlier redeemed or repurchased by the Company or converted.

The Company received net proceeds from the 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 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 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 Notes is 56.2635 shares of common stock per $1,000 principal amount of 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 Notes in connection with such corporate event.

The 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 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 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 No tes 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;

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 Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances.

Upon conversion, the 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 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 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 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 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 ours) 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 Notes then outstanding to become due and payable immediately.

In accounting for the issuance of the Notes, the Company separately accounted for the liability and equity components of the 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 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.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

The net carrying amount of the liability component of the Notes was as follows:

Unamortized debt discount

Unamortized debt issuance costs

Net carrying amount

The net carrying amount of the equity component of the Notes was as follows:

Proceeds allocated to the conversion options (debt discount)

Issuance costs

Net carrying amount

In connection with the issuance of the Notes, the Company incurred approximately $6.7 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees.

The Company allocated these costs to the liability and equity components based on the allocation of the proceeds.

The portion of these costs allocated to the equity component totaling approximately $0.8 million was recorded as a reduction to additional paid-in capital.

The portion of these costs allocated to the liability component totaling approximately $5.9 million was recorded as a reduction in the carrying value of the debt on the balance sheets and is amortized to interest expense using the effective interest method over the expected life of the Notes or approximately its five-year term.

The effective interest rate on the liability component of the Notes for the period from the date of issuance through December 31, 2020 was 6.4%.

The following table sets forth the amounts recorded in interest expense related to the Notes from the date of issuance through December 31, 2020:

Contractual interest expense

Amortization of debt discount

Amortization of debt issuance costs

Total interest and amortization expense

Future minimum payments under the Notes as of December 31, 2020, are as follows:

Total future payments

Less amounts representing interest

Total principal amount

Capped Call Transactions with Respect to the Notes

In June 2020, in connection with the issuance of the 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 (the “Purchased Calls”) with certain financial institutions (collectively, the “Counterparties”).

The Company paid an aggregate amount of approximately $22.5 million to the Counterparties for the Purchased Calls.

The Purchased Calls cover, subject to anti-dilution adjustments that are intended to be substantially identical to those in the Notes, approximately 9,705,454 shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes.

The Purchased Call 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 Purchase Calls are subject to certain specified additional disruption events that may give rise to a termination of the Purchased Calls, including nationalizat ion, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions.

The Purchased Calls settle in components commencing on April 16, 2025 with the last component scheduled to expire on June 12, 2025 .

The cap price of the capped call transactions 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 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 Purchased 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 during the year ended December 31, 2020 related to the premium payments for the Capped Call Transactions.

2018 Convertible Notes

In April 2018, the Company issued $14.4 million in convertible notes (“2018 Notes”) to existing shareholders of redeemable convertible and convertible preferred stock.

Interest accrued on the principal balance at an annual rate of 8%.

Principal and accrued interest were due at the earliest of (1) the one-year anniversary of the issuance date, (2) event of default and (3) a change of control, defined as either a merger, sale of stock or assets or other form of transaction.

The Convertible Notes contained certain qualified financing and non-qualified financing redemption features which were determined to be a compound embedded derivative requiring bifurcation and separate accounting at its estimated fair value.

On issuance of the Convertible Notes, the Company recognized a liability of $0.4 million for the estimated fair value of the embedded derivative and incurred $0.1 million in debt issuance costs, both of which were recorded as a debt discount associated with the Convertible Notes.

In June 2018, the outstanding balance of principal and accrued interest on the Convertible Notes of $14.6 million converted into 1,067,550 and 1,997,709 shares of the Company’s Series G redeemable convertible and convertible preferred stock, respectively, at a price of $4.7565 per share.

The conversion of the Convertible Notes into Series G redeemable convertible preferred stock and Series G convertible preferred stock was accounted for as an extinguishment.

The extinguishment of the Convertible Notes was considered a capital transaction and accordingly, the Company recognized a $0.4 million loss on extinguishment through additional paid in capital equal to the unamortized debt discount at the date of conversion.

The 2018 Notes contained certain qualified financing and non-qualified financing redemption features which were determined to be a compound embedded derivative requiring bifurcation and separate accounting at its estimated fair value.

On issuance of the 2018 Notes, the Company recognized a liability of $0.4 million for the estimated fair value of the embedded derivative and incurred $0.1 million in debt issuance costs, both of which were recorded as a debt discount associated with the 2018 Notes.

In June 2018, the outstanding balance of principal and accrued interest on the 2018 Notes of $14.6 million converted into 1,067,550 and 1,997,709 shares of the Company’s Series G redeemable convertible and convertible preferred stock, respectively, at a price of $4.7565 per share.

The conversion of the 2018 Notes into Series G redeemable convertible preferred stock and Series G convertible preferred stock was accounted for as an extinguishment.

The extinguishment of the 2018 Notes was considered a capital transaction and accordingly, the Company recognized a $0.4 million loss on extinguishment through additional paid in capital equal to the unamortized debt discount at the date of conversion.

Convertible Preferred Stock and Redeemable Convertible Preferred Stock

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December 31, 2018

In March 2019, the Company sold 6,350,345 shares of Series H redeemable convertible preferred stock and 3,831,766 shares of Series H convertible preferred stoc k at $6.8748 per share to new and existing investors for aggregate gross proceeds of $70.0 million.

In March 2019, the Company sold 6,350,345 shares of Series H redeemable convertible preferred stock and 3,831,766 shares of Series H convertible preferred stock at $6.8748 per share to new and existing investors for aggregate gross proceeds of $70.0 million.

On July 2, 2019 and immediately prior to the completion of the IPO, all outstanding shares of convertible preferred stock and redeemable convertible preferred stock then outstanding converted into 58,363,606 shares of common stock.

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The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows:

Convertible preferred stock outstanding

Redeemable convertible preferred stock outstanding

Options issued and outstanding

Shares available for future stock option issuances

Restricted stock units

Warrants to purchase convertible preferred stock

Warrants to purchase common stock

Shares available for grant under the 2019 equity incentive plan

Outstanding restricted stock units

Shares available for issuance under 2019 ESPP

Share-based Compensation Plans

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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.

Activity under the Company’s stock option plan is set forth below:

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Balances at December 31, 2019

Options authorized

Options granted

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Options vested and exercisable— December 31, 2020

The weighted average grant date fair value of options granted during the years ended December 31, 2019, 2018, and 2017 was $8.60 per share, $3.36 per share, and $1.26 per share, respectively.

There were no stock options granted in 2020.

The weighted average grant date fair value of options granted during the years ended December 31, 2019 and 2018 was $8.60 per share and $3.36 per share, respectively.

The aggregate intrinsic value of options exercised for the years ended December 31, 2020, 2019, and 2018 was $32.2 million, $16.2 million, and $1.4 million, respectively.

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Unvested December 31, 2020

The total fair value of RSUs vested during the year ended December 31, 2019 wa s $0.5 million .

The total fair value of RSUs vested during the year ended December 31, 2020 was $12.5 million .

Employee Stock Purchase Plan

In connection with the Company’s initial public offering, the Company adopted the 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 stock-based compensation expense.

As of December 31, 2019, the maximum number of shares of common stock that can be issued under the employee stock purchase plan was 1,750,000 shares.

No offering period started during the year ended December 31, 2019 and thus there was no activity associated with the plan in 2019.

The initial number of shares of common stock that could be issued under the employee stock purchase plan was 1,750,000 shares.

These available shares increase by an amount equal to the lesser of 1,750,000 shares, 1% of the number of shares of common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors.

On August 4, 2020, the Company’s board of directors approved an increase in the shares available for grant under the ESPP by 858,723 shares.

The initial offering period ran from May 15, 2020 through November 14, 2020.

Employees purchased 91,465 shares at an average price of $10.63 for the year ended December 31, 2020.

There were no shares purchased by employees during the year ended 2019.

The intrinsic value of shares purchased during the year ended 2020 was $0.2 million.

The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

As of December 31, 2020, the Company had approximately $0.3 million of unrecognized stock-based compensation cost related to purchase rights under the employee stock purchase plan, which the Company expects to recognize over a weighted average period of 0.4 years.

Stock-based Compensation

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Therefore, the Company uses an expected dividend yield of zero.

The following assumptions were used to estimate the fair value of stock options granted:

The following assumptions were used to estimate the fair value of stock options granted in 2019 and 2018, as there were no stock options granted i n 2020:

Year Ended December 31,

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46.6% – 48.1%

47.0% – 50.3%

Average risk-free rate

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The Company determined that the purchase price was in excess of the fair value of such shares.

As a result, during the year ended December 31, 2018, the Company recorded the excess of the purchase price above fair value of $0.8 million as compensation expense in the statements of operations and a corresponding credit to additional paid-in capital.

As a result, during the year ended December 31, 2018, the Company recorded the excess of the purchase price above fair value of $0.8 million as compensation expense within selling, general and administrative in the statements of operations and a corresponding credit to additional paid-in capital.

Additionally , in March 2019, executives of the Company sold an aggregate of 382,477 shares of the Company’s common stock at a price of $12.72 per share for an aggregate amount of $4.9 million to certain of the Company’s existing investors.

The Company determined that the purchase price was in excess of the fair value of such shares.

As a result, during the year ended December 31, 2019, the Company recorded the excess of the purchase price above fair value of $0.8 million as compensation expense in the statement of operations and a corresponding credit to additional paid-in capital.

Commitments and Contingencies

The Company leases its corporate offices, retail spaces and merchandising and fulfillment facilities under various noncancelable operating leases with terms ranging from one year to eleven years.

Rent expense from operating leases totaled $18.1 million, $10.4 million, and $7.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The current portion of deferred rent was $0.8 million and $0.7 million as of December 31, 2019 and 2018, respectively and is included in other accrued and current liabilities on the balance sheets.

The noncurrent portion of deferred rent was $8.0 million and $5.3 million as of December 31, 2019 and 2018, respectively and is included in other noncurrent liabilities on the balance sheets.

The Company has capital lease obligations for certain vehicles and equipment which totaled $0.4 million and $0.4 million as of December 31, 2019 and 2018, respectively.

Interest expense related to capital leases was not material in the years ended December 31, 2019, 2018, and 2017 .

As of December 31, 2019, the Company’s future minimum lease payments under the noncancelable leases are as follows (in thousands):

As a result, during the year ended December 31, 2019, the Company recorded the excess of the purchase price above fair value of $0.8 million as compensation expense within selling, general and administrative in the statement of operations and a corresponding credit to additional paid-in capital.

The Company leases its corporate offices, retail spaces and authentication centers under various noncancelable operating leases with terms ranging from one year to fifteen years.

The Company adopted ASU 2016-02 on January 1, 2020.

At adoption, t he Company measured the lease liability at the present value of the future lease payments as of January 1, 2020, using the Company’s incremental borrowing rate for each lease.

The Company derived the incremental borrowing rate by developing its own synthetic credit rating, corresponding yield cur ve, and the terms of each lease at the adoption date .

The corresponding right-of-use asset is valued at the amount of the lease liability adjusted for the remaining balance of unamortized lease incentives, prepaid rent and deferred rent as of the adoption date.

The Company recorded operating lease costs of $ 24.7 million for the year ended December 31, 2020.

The Company incurred $ 3.9 million of variable lease costs for the year ended December 31, 2020, which is comprised primarily of the Company’s propor tionate share of operating expenses, property taxes and insurance.

Rent expense under ASC 840 was $ 18.1 million and 10.4 million for the years ended December 31, 20 19 and 2018, respectively.

Maturities of operating lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):

Total future minimum payments

Imputed interest

Present value of operating lease liabilities

As of December 31, 2020, the Company has entered into operating lease agreements that have not yet commenced.

The Company will determine the classification at the commencement date for each lease, but currently expects these leases to be classified as operating leases.

Pending execution of the landlord's obligations to prepare leased spaces for occupancy, the Company expects these leases to commence on various dates in the year ended December 31, 2021.

The Company expects to receive a Tenant Improvement Allowance of approximately $1.8 million in the year ended December 31, 2021.

As of December 31, 2020, the Company’s estimated undiscounted lease payments for leases that have not yet commenced were as follows (in thousands):

Lease payments for leases not yet commenced

Total undiscounted lease payments expected to be capitalized

As of December 31, 2019, the Company’s future minimum lease payments under the noncancelable operating leases were as follows (in thousands):

Year Ending December 31,

Total future minimum payments

Supplemental cash flow information related to the Company’s operating leases are as follows (in thousands):

December 31, 2020

Operating cash flows used for operating leases

Operating lease assets obtained in exchange for

operating lease liabilities

The weighted average remaining lease term and discount rate for the Company’s operating leases are as follows:

December 31, 2020

Weighted average remaining lease term

Weighted average discount rate

The Company has leases for certain vehicles and equipment that are classified as finance leases.

The finance lease right-of-use asset and finance lease liabilities for these vehicle and equipment leases are not material as of December 31, 2020.

Commitments and Contingencies

Noncancelable Purchase Commitments

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In January 2018, the Company and the University of Arizona Foundation entered into an endowment agreement (the “Endowment Agreement”) to establish a fund (the “Fund”) to create and grow a gemology degree program in the Department of Geosciences at the University of Arizona (the “University”).

The Company agreed to donate a total of $2.0 million, payable in four annual installments of $0.5 million.

The first installment was paid in January 2018 on execution of the Endowment Agreement.

The second installment was made in 2019.

The Company agreed to donate a total of $2.0 million, payable in four annual installments of $0.5 million starting in January 2018.

There are no conditions that the University must meet to receive the funds nor any penalties to the University for nonperformance.

The Endowment Agreement directs the use of the funds but contains no binding restrictions on the use of the funds.

On the execution of the Endowment Agreement, the Company recognized $1.7 million expense for the estimated fair value of the grant, using a discount rate of 10%, to selling, general and administrative expenses in the statements of operations.

On the execution of the Endowment Agreement, the Company recognized $ 1.7 million expense for the estimated fair value of t he grant, using a discount rate of 10 %, to selling, general and administrative expenses in the statements of operations.

The Company recognized a corresponding liability for the remaining installment payments and will recognize accretion of the liability as interest expense over the remaining term of the Endowment Agreement.

Interest expense related to the accretion of the grant liability was not material in the years ended December 31, 2020, 2019, and 2018.

As of December 31, 2019, the outstanding liability was $0.9 million, of which $0.5 million is included in other accrued and current liabilities on the balance sheets and $0.4 million is included in other noncurrent liabilities on the balance sheets.

As of December 31, 2020, the outstanding liability was $0.5 million, which is included in other accrued and current liabilities on the balance sheets on the balance sheets.

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(“Chanel”) filed a lawsuit against the Company in the U.S.

District Court for the Southern District of New York bringing various trademark and advertising-related claims under the Lanham Act and New York state law analog ues.

District Court for the Southern District of New York bringing various trademark and advertising-related claims under the Lanham Act and New York state law analogues.

Chanel alleges, among other things, that the Company has misrepresented certain counterfeit Chanel products as authentic Chanel products, that the Company’s resale of Chanel products confuses consumers into believing that Chanel is affiliated with the Company and involved in authenticating consignors ’ goods and that only Chanel is capable of authenticating second-hand Chanel goods.

This litigation is in its early stages and the final outcome, including the Company’s liability, if any, with respect to C hanel ’ s claims, is uncertain.

The Court issued an Opinion & Order on March 30, 2020 denying in part and granting in part the Company’s motion to dismiss.

The Company filed its answer and affirmative defenses on May 29, 2020.

Chanel’s claims are now in the discovery phase.

On November 3, 2020, with the court’s permission, the Company filed a motion to amend its answer to add counterclaims against Chanel alleging anticompetitive conduct in violation of the federal and state antitrust laws as well as tortious interference.

That motion was granted on February 24, 2021, permitting the Company to file its amended pleading.

This litigation is in its early stages and the final outcome, including the Company’s liability, if any, with respect to Chanel ’ s claims, is uncertain.

Chanel could in the future assert additional trademark and advertising or other claims against the Company in this or other proceedings.

An unfavorable outcome in this or similar litigation could adversely affect our business and could lead to other similar lawsuits.

An unfavorable outcome in this or similar litigation could adversely affect the Company’s business and could lead to other similar lawsuits.

The Company is not able to predict or reasonably estimate the ultimate outcome or possible losses relating to this claim.

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The San Mateo case was voluntarily dismissed, refiled in Marin County Superior Court and consolidated with the cases there.

On January 10, 2020, the Marin County plaintiffs filed a consolidated amended complaint and defendants’ demurrer is due on March 13, 2020.

On January 10, 2020, the Marin County plaintiffs filed a consolidated amended complaint.

The plaintiffs in the San Francisco Superior Court case have filed a request for dismissal.

Separately an additional purported class action was filed in the United States District Court for the Northern District of California on November 25, 2019.

On February 12, 2020, a lead plaintiff was appointed in the federal action and on February 18, 2020, the Court ordered a schedule for the filing of an amended complaint and any motion to dismiss that amended complaint.

These complaints allege claims under the Securities Act of 1933 , as amended (“Securities Act”) on behalf of a purported class of those who acquired the Company’s stock pursuant to or traceable to the registration statement for the Company’s IPO.

The complaints allege, among other things, that the defendants violated federal securities laws by issuing false or misleading statements in the registration statement regarding certain of the Company’s key financial and operating metrics, and related to the Company’s authentication processes.

The complaints seek, among other things, damages and interest, rescission, and attorneys’ fees and costs.

While the Company intends to vigorously defend against this litigation, the cases are at a very early stage and there can be no assurance that the Company will be successful in its defense.

For this same reason, the Company cannot currently estimate the loss or the range of possible losses it may experience in connection with this litigation.

On February 12, 2020, a lead plaintiff was appointed in the federal action and an Amended Consolidated Complaint was filed on March 31, 2020.

Defendants’ filed a demurrer and motion to strike in the state court action on March 13, 2020 and filed a motion to stay the proceedings in favor of the federal action on May 1, 2020.

On August 4, 2020, the court granted defendants’ motion to stay the state court action and deferred ruling on the demurrer and motion to strike pending the outcome of the federal court action.

A motion to dismiss the federal court action was filed on May 15, 2020, which motion remains pending.

The state and federal complaints each allege claims under the Securities Act of

1933 on behalf of a purported class of shareholders who acquired the Company’s stock pursuant to or traceable to the registration statement for the Company’s IPO.

The federal complaint also alleges claims und er the Securities Exchange Act of 1934 on behalf of a purported class of shareholders who purchased the Company’s stock from June 27, 2019 through November 20, 2019.

The complaints each allege, among other things, that the defendants violated federal secur ities laws by issuing false or misleading statements in the registration statement regarding certain of the Company’s key financial and operating metrics, and related to the Company’s authentication processes.

The complaints seek, among other things, dama ges and interest, rescission, and attorneys’ fees and costs.

On September 10, 2020 and December 7, 2020, purported shareholders filed putative derivative actions in the United States District Court for the District of Delaware.

The derivative complaints allege factual allegations largely tracking the above referenced lawsuits.

The two derivative cases have been consolidated and the consolidated case has been stayed pending a ruling on the motion to dismiss in the federal securities case.

While the Compa ny intends to vigorously defend against the litigation described above, the cases are at a very early stage and there can be no assurance that the Company will be successful in its defense.

For this same reason, the Company cannot currently estimate the lo ss or the range of possible losses it may experience in connection with this litigation.

Indemnifications

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Accruals and reserves

Operating lease liabilities

Gross deferred tax assets

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Deferred tax liabilities:

Fixed assets and intangibles

Operating lease right-of-use assets

Gross deferred tax liabilities

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The net change in the valuation allowance for the years ended December 31, 2020 and December 31, 2019 was an increase of $54.8 million and an increase of $22.8 million, respectively.

As of December 31, 201 9 and 2018, the Company has a net operating loss carryforward of $ 3 0 2 .

2 million and $2 32 .

2 million for federal tax purposes, respectively, and $ 26 0 .

7 mill ion and $1 99.8 million for state tax purposes, respectively.

As of December 31, 2020 and 2019, the Company has a net operating loss carryforward of $485.1 million and $302.2 million for federal tax purposes, respectively, and $458.9 million and $260.7 million for state tax purposes, respectively.

If not utilized, these losses will expire beginning in 2032 for California purposes.

Based on the available positive and negative evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable.

However, beginning in tax year 2018 and forward, the Federal law has changed such that net operating losses generated after December 31, 2017 may be carried forward indefinitely.

Accordingly, $16 8 .

2 mi llion of the federal net operating losses will begin to expire in 2032.

However, $ 1 34 .

0 million of the federal net operating losses will not expire.

Accordingly, $168.2 million of the federal net operating losses will begin to expire in 2032.

However, $316.9 million of the federal net operating losses will not expire.

The Tax Reform Act of 1986 limits the use of net operating losses and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company.

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stockholders, basic and diluted

The following securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis):

Convertible preferred stock

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Restricted stock units

Estimated shares issuable under the Employee Stock Purchase Plan

Assumed conversion of the Convertible Senior Notes

Warrants to purchase convertible preferred stock

Warrant to purchase common stock

The Notes issued in June 2020 are convertible, based on the applicable conversion rate, into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election.

The impact of the assumed conversion to diluted net income per share is computed using the treasury stock method.

Retirement Plan

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During the year ended December 31, 2019, the Company donated $3.2 million to the RealReal Foundation.

Subsequent Events

In January 2020, the Company signed a noncancelable operating lease to extend and expand the existing lease in New York, NY to a 96-month term ending January 2028.

The minimum lease payments for the extension are $14.7 million.

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 9A. Controls and Procedures