TheRealReal, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information included in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the section titled “Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are the world’s largest online marketplace for authenticated, consigned luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply from consignors and creates a trusted, curated online marketplace for buyers globally. Since our inception in 2011, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people. We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers. We offer products across multiple categories including women’s, men’s, kids’, jewelry and watches, and home and art. We have built a vibrant online marketplace that we believe expands the overall luxury market, promotes the recirculation of luxury goods and contributes to a more sustainable world. We have transformed the luxury consignment experience by removing the friction and pain points inherent in the traditional consignment model. For consignors, we offer White Glove in-home consultation and pickup, subject to safety requirements related to the COVID pandemic, and meetings with consignors via online face-to-face platforms, or Virtual Consultations. Consignors may also drop off items at our luxury consignment offices. Our Flagship and Neighborhood Stores provide an alternative location to drop off consigned items and an opportunity to interact with our experts. Consignors may also utilize our complimentary shipping directly to our authentication centers. We leverage our proprietary transactional database and market insights from approximately 17.1 million item sales since inception to deliver optimal pricing and rapid sell-through. For buyers, we offer highly coveted and exclusive authenticated pre-owned luxury goods at attractive values, as well as a high-quality experience befitting the products we offer. Our online marketplace is powered by our proprietary technology platform, including consumer facing applications and purpose-built software that supports our complex, single-SKU inventory management system. The substantial majority of our revenue is generated by consignment sales. We also generate revenue from other services and direct sales. • Consignment and service revenue . When we sell goods through our online marketplace or retail stores on behalf of our consignors, we retain a percentage of the proceeds, which we refer to as our take rate. Take rates vary depending on the total value of goods sold through our online marketplace on behalf of a particular consignor as well as the category and price point of the items. In 2020 and 2019, our take rate on consigned goods was 35.7% and 36.3% respectively. The decrease in our take rate was due to the higher sales mix of lower take rate categories such as handbags and jewelry, and a higher mix of consignors earning higher commissions. Additionally, we earn revenue from shipping fees and from our subscription program, First Look, in which we offer buyers early access to the items we sell in exchange for a monthly fee. • Direct revenue . In certain cases, such as when we accept out of policy returns from buyers, or when we make direct purchases from businesses and consignors, we take ownership of goods and retain 100% of the proceeds when the goods subsequently sell through our online marketplace or retail stores. We generate revenue from orders processed through our website, mobile app and retail stores located in New York City, Los Angeles, Chicago, Palo Alto, Newport Beach, and San Francisco. Our omni-channel experience enables buyers to purchase anytime and anywhere. We have a global base of more than 21 million members as of December 31, 2020. We count as a member any user who has registered an email address on our website or downloaded our mobile app, thereby agreeing to our terms of service. 35 Through December 31, 2020, we have cumulatively paid more than $1.8 billion in commissions to our consignors. Our GMV was $1.0 billion in 2020 and decreased 2% from 2019. However, NMV increased slightly as returns decreased year over year primarily due to a higher mix of non-returnable items, including handbags and certain promoted items. In 2020 and 2019, our total revenue was $299.9 million and $316.4 million, respectively, representing a decrease of 5% in 2020. In 2020 and 2019, our gross profit was $187.6 million and $201.5 million, respectively, representing a decrease of 7% in 2020. See “Impact of COVID-19 on our Business” below. Impact of COVID-19 on Our Business In March 2020, the World Health Organization categorized the outbreak of a novel coronavirus (COVID-19) as a pandemic. The COVID-19 pandemic has adversely impacted our business operations and results of operations in 2020 as described in more detail under “ Comparison of 2020 and 2019” below. Operations in the Company’s authentication centers were initially limited in accordance with shelter-in-place orders resulting in operations below full capacity . However, operations capacity was no longer limited by restrictions related to COVID-19 during the second half of 2020. Additionally, our retail stores and luxury consignment offices were temporarily closed for varying periods of time, but have been open during the second half of 2020 . In-person white glove consignment appointments were temporarily suspended and augmented with virtual appointments but remain an option for our consignor base. At the beginning of the pandemic , GMV was significantly impacted due to adverse impacts of the COVID-19 pandemic on our business. When many shelter-in-place directives went into effect in March 2020, and continuing through mid-April 2020, GMV declined approximately 45% year over year. T he rates of decline in GMV have since improved . For the three months ended June 30, 2020, the decrease in GMV was 20% compared to same period last year. GMV continued to recover such that the year over year decreases were 3% and 1% for the three months ended September 30, 2020, and December 31, 2020, respectively compared to the same periods last year. We expect the evolving COVID-19 pandemic to continue to have a materially adverse impact on our business operations and results of operations, including our net revenues, earnings and cash flows. The negative COVID-19 impacts on our business could be a result of further spread of the disease, potential disruption in our authentication centers , further temporary closures of retail stores and luxury consignment offices, disruption to our supply acquisition, decreased productivity due to shelter-in-place orders, changes in buyer and consignor behaviors, and a slowdown in the U.S. economy and uncertain global economic outlook. It may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending on our e-commerce site and in our retail stores. Travel and border closures do not significantly affect our business as we operate a U.S. focused marketplace. For further discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Part I, Item 1A. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers. We have enforced social distancing in our authentication centers , enabled virtual consignment appointments, implemented curbside pick-up of products from our consignors, and enabled our corporate employees to work remotely. The impact of these actions on our workforce are difficult to assess. However, we do not believe that these remote work arrangements have adversely affected our ability to maintain our financial reporting systems, internal control over financial reporting and disclosure controls and procedures. In addition, we do not expect to encounter any significant challenges to our ability to maintain these systems and controls. We also do not expect the pandemic to affect the assets on our balance sheet and our ability to timely account for those assets. We evaluate our estimates and assumptions used in preparing our financial statements on an ongoing basis . We do not anticipate any material impairments with respect to inventory, long-lived assets, right-of-use assets or investments, or changes in accounting judgments that would have a material impact on our financial statements. 36 Other Factors Affecting Our Performance Other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, impact our business. To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we focus on the factors described below. While each of these factors presents significant opportunity for our business, collectively, they also pose important challenges that we must successfully address in order to sustain our growth, improve our operating results and achieve and maintain our profitability. Consignors and Buyers Consignor growth and retention . We grow our sales by increasing the supply of luxury goods offered through our consignment online marketplace. In the first three quarters of 2020 and for the full year 2019, approximately 60% and 80% of the products on our online marketplace sold within 30 days and 90 days, respectively. In addition to sales velocity, we measure the ratio of demand versus supply in a given period, which we refer to as our online marketplace sell-through ratio. Sell-through ratio is defined as GMV in the period divided by the aggregate initial value of items added to our online marketplace in the period. In 2020 and 2019, our marketplace sell-through ratios were 99% and 94%, respectively. Our growth has been driven in significant part by repeat sales by existing consignors concurrent with growth of our consignor base. In 2020 and 2019, repeat consignors accounted for approximately 83% and 81% of GMV, respectively. Buyer growth and retention . We grow our business by attracting and retaining buyers. We attract and retain buyers by offering highly coveted, authenticated, pre-owned luxury goods at attractive values and delivering a high-quality, luxury experience. We measure our success in attracting and retaining buyers by tracking buyer satisfaction and purchasing activity over time. We have experienced high buyer satisfaction, as evidenced by our buyer net promoter score of 71 in 2020, and compared to our online shopping industry average of 40 according to NICE Satmetrix U.S. Consumer 2020 data. If we fail to continue to attract and retain our buyer base to our online marketplace, our operating results would be adversely affected. The graph on the left shows trends in purchasing activity for buyer cohorts for each year beginning in 2014. Each cohort represents all buyers that first purchased across our online marketplace in the designated year and the aggregate GMV purchased by such cohort for the initial year and each year thereafter. As illustrated in the graph below, we have seen consistent retention of buyer activity across cohorts through 2019. In 2020, buyer retention was impacted by the adverse impacts of COVID-19 on supply, and as a result, GMV. The graph on the right shows the percentage of GMV in each year from our repeat buyers. GMV from repeat buyers reflects purchases made after their initial purchase month. 37 We believe there is substantial opportunity to grow our business by having buyers also become consignors and vice versa. As of December 31, 2020, 13% of our buyers had become consignors and 56% of our consignors had become buyers. The graph below shows the percentage of GMV in each year from buyers who have participated as both buyers and consignors on our online marketplace. GMV attributable to consigning activity of such buyers is not included. Buyer acquisition cost. Our financial performance depends on effectively managing the expenses we incur to attract and retain buyers. We closely monitor our efficiency in acquiring new buyers. Our buyer acquisition cost (“BAC”) for a given period is comprised of our total advertising spend, which is principally the cost of television, digital and direct mail advertising, divided by the number of buyers acquired in that period. We adjust or re-allocate our advertising in real-time to optimize our spend across channels, buyer demographics and geographies to improve our return on advertising spend. With the exception of 2020, our BAC has declined over time driven by improving acquisition efficiencies. In 2020, we experienced volatility with our marketing efficiency due to the adverse impacts of COVID-19 on our business, and we began to increase investments in advertising to position the company for future growth. 38 We also evaluate the success of our buyer acquisition activity by comparing the lifetime value of buyers (“BLTV”) attracted in a given period to the aggregate BAC in that same period. We calculate BLTV as the cumulative gross profit attributable to purchases by such buyers. The BLTV to BAC ratio in excess of 1.0 for all cohorts presented after 12 months reflects that each cohort has achieved payback at least equal to BAC within 1 year after acquisition. We have observed that BLTV for buyers who are also consignors is significantly higher than for buyers who have not also consigned. The following graphs depict the BLTV to BAC ratio by annual cohort since 2015 in the aggregate and for buyers who are also consignors, respectively. BLTV in the graph on the right includes only gross profit attributable to transactions in which the members participated as buyers who are also consignors and does not include gross profit attributable to transactions in which the member participated as a consignor. The 2020 cohorts in the graphs reflect buyers that first purchased across our online marketplace through June 30, 2020 for the six month period and September 30, 2020 for the three month period. Scaling operations and technology. To support the future growth of our business, we are expanding our capacity through investments in physical infrastructure, talent and technology. We principally conduct our intake, authentication, merchandising and fulfillment operations in our four leased authentication centers located in California and New Jersey comprising an aggregate of approximately 1 million square feet of space. We secured leases on more than half of this space in 2018. In October 2020, we secured a lease in Arizona for an additional authentication center. The market for real estate to support operations centers such as ours is competitive, and we plan to continue to secure and efficiently bring online additional capacity to support future growth. In 2017 and 2018, we opened our flagship retail stores in New York and Los Angeles. We opened a second retail store with a smaller footprint in New York in May 2019. We opened two additional flagship stores in 2020 in San Francisco and Chicago, and a neighborhood store in Palo Alto. We intend to open additional retail stores in the future. In addition to scaling our physical infrastructure, growing our single-SKU business operations and developing our SKU-depth capabilities require that we attract, train and retain highly-skilled personnel for purposes of authentication, copywriting, merchandising, pricing and fulfilling orders. We invest substantially in technology to automate our operations and support growth. We continue to strategically invest in technology despite the difficult operating environment resulting from COVID-19, as innovation positions us to scale and support growth once the economy normalizes. Seasonality. Before the COVID-19 pandemic, we have observed trends in seasonality of supply and demand in our business. Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter. As a result of this seasonality, we typically see stronger AOV and more rapid sell-through in the fourth quarter. We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes. However, the adverse impacts of COVID-19 on our business has made it difficult to evaluate the impact of 39 seasonality in our business. While we expect supply will continue to be negatively impacted by COVID-19, we believe its growth will accelerate in 2021. Key Financial and Operating Metrics The key operating and financial metrics that we use to assess the performance of our business are set forth below for 2020, 2019, and 2018. Year Ended December 31, 2020 2019 2018 (In thousands, except AOV and percentages) GMV $ 986,951 $ 1,008,344 $ 710,750 NMV $ 736,872 $ 731,445 $ 506,589 Number of orders 2,233 2,217 1,595 Take rate 35.7 % 36.3 % 35.5 % Active buyers 649 582 416 AOV $ 442 $ 455 $ 446 Adjusted EBITDA $ (128,025 ) $ (74,719 ) $ (58,856 ) GMV GMV represents the total amount paid for goods across our online marketplace in a given period. We do not reduce GMV to reflect product returns or order cancellations, which totaled 25.3%, 27.5%, and 28.7% of GMV in 2020, 2019, and 2018, respectively. GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of buyer incentives, shipping fees and sales tax. Platform-wide discounts are made available to all buyers on the online marketplace, and impact commissions paid to consignors. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on our platform. We believe this is the primary measure of the scale and growth of our online marketplace and the key indicator of the health of our consignor ecosystem. We monitor trends in GMV to inform budgeting and operational decisions to support and promote growth in our business and to monitor our success in adapting our business to meet the needs of our consignors and buyers. While GMV is the primary driver of our revenue, it is not a proxy for revenue or revenue growth. See Note 2 - Summary of Significant Accounting Policies -Revenue Recognition - Consignment and Service Revenue. NMV NMV, or net merchandise value, represents the value of sales from both consigned goods and our inventory net of platform-wide discounts less product returns and order cancellations and excludes the effect of buyer incentives, shipping fees and sales tax. We believe NMV is a supplemental measure of the scale and growth of our online marketplace. Like GMV, NMV is not a proxy for revenue or revenue growth. Number of Orders Number of orders means the total number of orders placed across our online marketplace and retail stores in a given period. We do not reduce number of orders to reflect product returns or order cancellations. 40 Take Rate Take rate is a key driver of our revenue and provides comparability to other marketplaces. The numerator used to calculate our take rate is equal to net consignment sales and the denominator is equal to the numerator plus consignor commissions. Net consignment sales represents the value of sales from consigned goods net of platform-wide discounts less consignor commission, product returns and order cancellations. We exclude direct revenue from our calculation of take rate because direct revenue represents the sale of inventory owned by us, which costs are included in cost of direct revenue. Our take rate reflects the high level of service that we provide to our consignors across multiple touch points and the consistently high velocity of sales for their goods. Our take rate structure is a tiered commission structure for consignors, where the more they sell the higher percent commission they earn. Consignors start at a 55% commission (which equals a 45% take rate for us) and can earn up to a 70% commission. This tiered structure applies unless it is overridden by a commission exception. Commission exceptions from the tiered commission structure optimize supply and drive take rate changes. Examples of current commission exceptions include a flat 40% commission on all items under $145, and an 85% commission on watches over $2,495. Management assesses changes in take rates by monitoring the volume of GMV and take rate across each discrete commission grouping, encompassing commission tiers and exceptions. Active Buyers Active buyers include buyers who purchased goods through our online marketplace during the 12 months ended on the last day of the period presented, irrespective of returns or cancellations. We believe this metric reflects scale, brand awareness, buyer acquisition and engagement. Average Order Value (“AOV”) Average order value (“AOV”) means the average value of all orders placed across our online marketplace and retail stores, excluding shipping fees and sales taxes. Our focus on luxury goods across multiple categories drives a consistently high AOV. Our AOV reflects both the average price of items sold as well as the number of items per order. Our high AOV is a key driver of our operating leverage. Adjusted EBITDA Adjusted EBITDA means net loss before interest income, interest expense, other (income) expense net, provision for income taxes, and depreciation and amortization, further adjusted to exclude stock-based compensation and certain one-time expenses. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA is a non-GAAP measure. Please see the section titled “Selected Financial and Other Data—Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA and its reconciliation to net loss. Components of our Operating Results Revenue Our revenue is comprised of consignment and service revenue and direct revenue. • Consignment and service revenue. We generate the substantial majority of our revenue from the sale of pre-owned luxury goods through our online marketplace and retail stores on behalf of consignors. For consignment sales, we retain a percentage of the proceeds received, which we refer to as our take rate. We recognize consignment revenue, net of allowances for product returns, order cancellations, buyer incentives and adjustments. Additionally, we generate revenue from shipping fees we charge to buyers. We also generate service revenue from subscription fees paid by buyers for early access to products, but to date our subscription revenue has not been material. 41 • Direct revenue. We generate direct revenue from the sale of items that we own, which we refer to as our inventory. We generally acquire inventory when we accept out of policy returns from buyers. Additionally, we make direct purchases from businesses and consignors and our mix of direct purchases as a percentage of total GMV could increase in 2021. We recognize direct revenue upon shipment based on the gross purchase price paid by buyers, net of allowances for product returns, buyer incentives and adjustments. Cost of Revenue Cost of consignment and services revenue consists of shipping costs, credit card fees, packaging, customer service personnel-related costs, website hosting services, and consignor inventory adjustments related to lost or damaged products. Cost of direct revenue consists of the cost of goods sold, credit card fees, packaging, customer service personnel-related costs, website hosting services, and inventory adjustments. Marketing Marketing expense comprises the cost of acquiring and retaining consignors and buyers, including the cost of television, digital and direct mail advertising. Marketing expense also includes personnel-related costs for employees engaged in these activities. Operations and Technology Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as our general information technology expense. Operations and technology expense also includes allocated facility and overhead costs, costs related to our retail stores, facility supplies and depreciation of hardware and equipment, as well as research and development expense for technology associated with managing and improving our operations. We capitalize a portion of our proprietary software and technology development costs. As such, operations and technology expense also includes amortization of capitalized technology development costs. While we have implemented cost saving measures to address the challenges from the COVID-19 pandemic, we expect operations and technology expense to increase in future periods to support our growth, including bringing on additional authentication centers and continuing to invest in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from year to year as a percentage of revenue, depending primarily upon when we choose to make more significant investments. We expect these expenses to decrease as a percentage of revenue over the longer term. Selling, General and Administrative Selling, general and administrative expense is principally comprised of personnel-related costs for our sales professionals and employees involved in finance and administration. Selling, general and administrative expense also includes allocated facilities and overhead costs and professional services, including accounting and legal advisors. We expect to increase selling, general and administrative expense as we grow our infrastructure to support operating as a public company and the overall growth in our business. While these expenses may vary from year to year as a percentage of revenue, we expect them to decrease as a percentage of revenue over the longer term. Income Tax Provision Our provision for income taxes consists primarily of state minimum taxes in the United States. We have a full valuation allowance for our net deferred tax assets primarily consisting of net operating loss carryforwards, accruals and reserves. We expect to maintain this full valuation allowance for the foreseeable future. 42 Results of Operations The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in the Annual Report. Prior year comparisons are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The following tables set forth our results of operations and such data as a percentage of revenue for the periods presented: Year Ended December 31, 2020 2019 2018 (In thousands) Revenue: Consignment and service revenue (1) $ 247,326 $ 265,729 $ 180,607 Direct revenue 52,623 50,625 33,125 Total revenue 299,949 316,354 213,732 Cost of revenue: Cost of consignment and service revenue 66,976 73,579 50,855 Cost of direct revenue 45,406 41,252 25,959 Total cost of revenue 112,382 114,831 76,814 Gross profit 187,567 201,523 136,918 Operating expenses: Marketing 54,813 47,734 42,165 Operations and technology 163,808 143,231 104,929 Selling, general and administrative 141,762 110,663 63,728 Total operating expenses 360,383 301,628 210,822 Loss from operations (172,816 ) (100,105 ) (73,904 ) Interest income 2,518 4,593 1,046 Interest expense (5,264 ) (616 ) (1,152 ) Other expense, net (169 ) (2,102 ) (1,656 ) Loss before provision for income taxes (175,731 ) (98,230 ) (75,666 ) Provision for income taxes 101 199 99 Net loss $ (175,832 ) $ (98,429 ) $ (75,765 ) (1) See Note 2 to our financial statements for an explanation of the immaterial correction of errors in 2019 related to inventory associated with commissions paid outside of our normal payment cycle to consignors for returned merchandise which have been corrected within consignment revenue. 43 Year Ended December 31, 2020 2019 2018 Revenue: Consignment and service revenue 82 % 84 % 85 % Direct revenue 18 16 15 Total revenue 100 100 100 Cost of Revenue: Cost of consignment and service revenue 22 23 24 Cost of direct revenue 15 13 12 Total cost of revenue 37 36 36 Gross profit 63 64 64 Operating expenses: Marketing 18 15 20 Operations and technology 55 45 49 Selling, general and administrative 47 35 30 Total operating expenses 120 95 99 Loss from operations (58 ) (32 ) (35 ) Interest income 1 1 — Interest expense (2 ) — — Other expense, net — — — Loss before provision for income taxes (59 ) (31 ) (35 ) Provision for income taxes — — — Net loss (59 )% (31 )% (35 )% Comparison of 2020 and 2019 Consignment and Service Revenue Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Consignment and service revenue, net $ 247,326 $ 265,729 $ (18,403 ) -7 % Consignment and service revenue decreased by $18.4 million, or 7%, in 2020 compared to 2019. The decrease in revenue was driven primarily by a 2% decrease in GMV resulting from the adverse effects of COVID-19 on supply, as well as a decrease from 36.3% to 35.7% in our take rate due to the higher sales mix of lower take rate categories such as handbags and jewelry, and a higher mix of consignors earning higher commissions. Supply was negatively impacted in certain major markets, due to the impact of COVID-19 closures and disruptions, contributing to the decrease in GMV. NMV increased as returns decreased year over year primarily due to a higher mix of non-returnable items, including handbags and certain promoted items. While NMV increased slightly, revenue was lower year over year due to the decrease in our take rate and increased buyer incentives, particularly in the fourth quarter. As part our effort to accelerate our GMV recovery, buyer incentives increased by $9.7 million, or 73%, to $23.0 million in 2020 from $13.3 million in 2019, which also contributed to the decrease in revenue. Direct Revenue Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Direct revenue $ 52,623 $ 50,625 $ 1,998 4 % 44 Direct revenue increased by $2.0 million, or 4%, in 2020 compared to 2019. The increase was driven in part by the higher sales mix of company-owned inventory, including a focus on aged inventory. The sales of our owned-inventory drove the increase in direct revenue both on an absolute basis and as a percent of total revenue. Cost of Consignment and Service Revenue Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Cost of consignment and service revenue $ 66,976 $ 73,579 $ (6,603 ) -9 % As a percent of consignment and service revenue 27 % 28 % Cost of consignment and service revenue decreased by $6.6 million, or 9%, in 2020 compared to 2019. The decrease was primarily due to lower revenue in connection with COVID-19 related business interruptions. Gross margin increased by 0.6% in 2020 compared to 2019. The increase was primarily attributable to overall improvement in shipping costs relating to more favorable terms with our shipping carrier, partially offset by decreases in our take rate and increased buyer incentives . Cost of Direct Revenue Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Cost of direct revenue $ 45,406 $ 41,252 $ 4,154 10 % As a percent of direct revenue 86 % 81 % Cost of direct revenue increased by $4.2 million, or 10%, in 2020 compared to 2019, consistent with the increase in direct revenue. Gross margin decreased by 4.8% in 2020 compared to 2019, primarily due to lower product margins on sales of discounted aged inventory. As a percentage of direct revenue, cost of direct revenue increased to 86% in 2020 from 81% in 2019. Marketing Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Marketing $ 54,813 $ 47,734 $ 7,079 15 % Marketing expense increased by $7.1 million, or 15%, in 2020 compared to 2019. The increase was primarily due to increases in advertising costs and marketing program expenses as we seek to grow the number of buyers and consignors using our online marketplace. As a percent of revenue, marketing expense increased to 18% in 2020 from 15% in 2019 due to the significant adverse impact of COVID-19 on our revenue. Operations and Technology Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Operations and technology $ 163,808 $ 143,231 $ 20,577 14 % 45 Operations and technology expense increased by $20.6 million, or 14%, in 2020 compared to 2019. The increase was primarily due to investments to support our growth and drive long-term operational efficiencies, including investments to grow our talent including authentication and technology expertise and support our retail operations. The opening of our retail stores in San Francisco, Chicago, and Palo Alto contributed to the increase in expense. As a percent of revenue, operations and technology expense increased to 55% in 2020 from 45% in 2019. This increase is primarily due to higher personnel-related costs, including stock-based compensation expense compared to lower revenue as a result of COVID-19’s negative impact on revenue. While we have implemented cost saving measures to address the challenges from the COVID-19 pandemic, we continued to invest in automation, consignor services including virtual appointments and self-scheduling, and other technology improvements to support and drive efficiency in our operations and to support our growth. We expect these expenses to continue to decrease as a percentage of revenue over the longer term. Selling, General and Administrative Year Ended December 31, Change 2020 2019 Amount % (In thousands, except percentage) Selling, general and administrative $ 141,762 $ 110,663 $ 31,099 28 % Selling, general and administrative expense increased by $31.1 million, or 28%, in 2020 compared to 2019. The increase was due to higher personnel-related costs, including stock-based compensation expense and investments to support the growth of our sales organization and scale our general and administrative functions as necessary to operate as a public company including accounting, consulting and legal fees, insurance and software costs. Additionally, there were COVID-19 related charges of $6.2 million inclusive of higher payroll expenses, personal protective equipment, deep cleanings, medical personnel at our facilities and transportation services. As a percent of revenue, selling, general and administrative expense increased to 47% in 2020 from 35% in 2019 as we invested in the growth of the sales organization and expanded our administrative functions. We expect these expenses to decrease as a percentage of revenue over the long term. 46 Quarterly Results of Operations and Key Metrics The following tables set forth certain unaudited financial data for each fiscal quarter for the periods indicated in dollars and as a percentage of revenue. The information for each quarter has been prepared on a basis consistent with our audited financial statements included in this Annual Report and reflect all adjustments that we consider necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected for the full year or any other period in the future. The following quarterly financial information should be read in conjunction with our audited financial statements and related notes included in this Annual Report. Quarter Ended December 31, 2020 September 30, 2020 (1) June 30, 2020 (1) March 31, 2020 (1) December 31, 2019 (1) (2) September 30, 2019 (1) June 30, 2019 (1) March 31, 2019 (1) (In thousands) Revenue: Consignment and service revenue (a) $ 71,320 $ 64,152 $ 46,768 $ 65,086 $ 81,386 $ 69,067 $ 59,890 $ 55,386 Direct revenue 15,512 13,645 10,523 12,942 11,209 12,271 12,139 15,007 Total revenue 86,832 77,797 57,291 78,028 92,595 81,338 72,029 70,393 Cost of revenue: Cost of consignment and service revenue 19,723 16,304 12,860 18,088 20,987 19,446 17,200 15,946 Cost of direct revenue 13,728 11,964 8,760 10,954 10,197 9,842 8,959 12,254 Total cost of revenue 33,451 28,268 21,620 29,042 31,184 29,288 26,159 28,200 Gross profit 53,381 49,529 35,671 48,986 61,411 52,050 45,870 42,193 Operating expenses: Marketing 17,066 15,186 9,639 12,922 10,896 13,390 11,715 11,733 Operations and technology 45,950 40,578 36,543 40,737 39,960 37,407 34,320 31,544 Selling, general and administrative 38,715 35,384 32,559 35,104 34,553 28,436 25,355 22,319 Total operating expenses 101,731 91,148 78,741 88,763 85,409 79,233 71,390 65,596 Loss from operations (48,350 ) (41,619 ) (43,070 ) (39,777 ) (23,998 ) (27,183 ) (25,520 ) (23,403 ) Interest income 168 448 616 1,286 1,675 1,902 610 405 Interest expense (2,454 ) (2,406 ) (384 ) (20 ) (45 ) (60 ) (380 ) (131 ) Other income (expense), net (80 ) — (97 ) 8 5 (119 ) (1,706 ) (282 ) Loss before provision for income taxes (50,716 ) (43,577 ) (42,935 ) (38,503 ) (22,363 ) (25,460 ) (26,996 ) (23,411 ) Provision (benefit) for income taxes 63 (17 ) 55 — 147 (8 ) 59 — Net loss $ (50,779 ) $ (43,560 ) $ (42,990 ) $ (38,503 ) $ (22,510 ) $ (25,452 ) $ (27,055 ) $ (23,411 ) Accretion of redeemable convertible preferred stock to redemption value — — — — — — — (3,355 ) Net loss attributable to common stockholders $ (50,779 ) $ (43,560 ) $ (42,990 ) $ (38,503 ) $ (22,510 ) $ (25,452 ) $ (27,055 ) $ (26,766 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.57 ) $ (0.50 ) $ (0.49 ) $ (0.44 ) $ (0.26 ) $ (0.30 ) $ (2.85 ) $ (3.07 ) Shares used to compute net loss per share attributable to common stockholders, basic and diluted 88,810,674 87,869,321 87,064,384 86,588,796 85,823,352 84,634,956 9,494,447 8,705,664 (1) During the quarter ended December 31, 2020, the Company identified an overstatement of consignment and service revenue and inventory, net as a result of an error in accounting for inventory associated with commissions paid outside of our normal payment cycle to consignors for returned merchandise. In accordance with Financial Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives, and concluded that the errors were immaterial to the Company’s prior period interim and annual financial statements. Since these errors were not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periods reports are required. Consequently, the Company has adjusted for these errors by revising its historical financial periods presented herein for the quarterly periods from March 31, 2019 through September 30, 2020. The correction of these immaterial errors resulted in the following: (a) Consignment and service revenue reflects a decrease of $0.3 million, $0.1 million, $0.2 million, $1.1 million, $0.2 million, $0.2 million, and $0.2 million for the interim periods ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, respectively. (2) Including the adjustment noted in (1)(a) above, consignment and service revenue for the quarter ended December 31, 2019, includes the correction of certain out of period errors in the quarter ended December 31, 2019 resulting in a net increase in consignment and service revenue of $2.0 million, of which, $1.4 million related to periods prior to 2019. 47 Quarter Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 Revenue: Consignment and service revenue 82 % 82 % 82 % 83 % 88 % 85 % 83 % 79 % Direct revenue 18 18 18 17 12 15 17 21 Total revenue 100 100 100 100 100 100 100 100 Cost of revenue: Cost of consignment and service revenue 23 21 23 23 23 24 24 23 Cost of direct revenue 16 15 15 14 11 12 12 17 Total cost of revenue 39 36 38 37 34 36 36 40 Gross profit 61 64 62 63 66 64 64 60 Operating expenses: Marketing 20 20 17 17 11 16 16 17 Operations and technology 53 52 63 52 43 46 48 45 Selling, general and administrative 44 45 57 45 38 35 35 31 Total operating expenses 117 117 137 114 92 97 99 93 Loss from operations (56 ) (53 ) (75 ) (51 ) (26 ) (33 ) (35 ) (33 ) Interest income — — — 2 2 2 1 — Interest expense (2 ) (3 ) — — — — (1 ) — Other income (expense), net — — — — — — (2 ) — Loss before provision for income taxes (58 ) (56 ) (75 ) (49 ) (24 ) (31 ) (37 ) (33 ) Provision (benefit) for income taxes — — — — — — — — Net loss (58 ) % (56 ) % (75 ) % (49 ) % (24 ) % (31 ) % (37 ) % (33 ) % Key Financial and Operating Metrics 2020 2019 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (In thousands, except AOV and percentages) GMV $ 301,219 $ 245,355 $ 182,771 $ 257,606 $ 302,975 $ 252,766 $ 228,487 $ 224,116 NMV $ 223,390 $ 189,059 $ 139,797 $ 184,625 $ 219,508 $ 186,617 $ 164,782 $ 160,538 Number of Orders 671 550 438 574 637 577 505 498 Take Rate 35.7 % 35.4 % 36.0 % 36.2 % 36.2 % 36.8 % 36.6 % 35.3 % Active Buyers 649 617 612 602 582 543 492 456 AOV $ 449 $ 446 $ 417 $ 449 $ 476 $ 438 $ 453 $ 450 Adjusted EBITDA $ (35,767 ) $ (29,258 ) $ (31,888 ) $ (31,112 ) $ (13,885 ) $ (21,118 ) $ (21,048 ) $ (18,667 ) 48 The following table presents a reconciliation of Adjusted EBITDA from net loss: Quarter Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (In thousands) Adjusted EBITDA Reconciliation: Net loss $ (50,779 ) $ (43,560 ) $ (42,990 ) $ (38,503 ) $ (22,510 ) $ (25,452 ) $ (27,055 ) $ (23,411 ) Add (deduct): Depreciation and amortization 5,172 4,917 4,611 4,145 3,870 3,545 3,185 2,808 Stock-based compensation 7,411 7,372 6,129 3,410 2,795 2,520 1,287 1,109 Legal settlement — — — 1,110 — — — — Restructuring charges — 72 442 — — — — — Abandoned offering costs — — — — 293 — — — Donation to TRR Foundation — — — — 3,155 — — — Compensation expense related to stock sales by current and former employees — — — — — — — 819 Interest income (168 ) (448 ) (616 ) (1,286 ) (1,675 ) (1,902 ) (610 ) (405 ) Interest expense 2,454 2,406 384 20 45 60 380 131 Other (income) expense, net 80 — 97 (8 ) (5 ) 119 1,706 282 Provision (benefit) for income taxes 63 (17 ) 55 — 147 (8 ) 59 — Adjusted EBITDA $ (35,767 ) $ (29,258 ) $ (31,888 ) $ (31,112 ) $ (13,885 ) $ (21,118 ) $ (21,048 ) $ (18,667 ) Liquidity and Capital Resources As of December 31, 2020, we had cash, cash equivalents and short-term investments of $354.9 million and an accumulated deficit of $529.5 million. Since inception, we have generated negative cash flows from operations and have primarily financed our operations through equity financings. In July 2019, we received net proceeds of $315.5 million upon completion of our IPO on July 2, 2019. In June 2020, we received net proceeds of $143.3 million from the issuance of 3% convertible senior notes due 2025 and the related cap call transactions. We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we navigate the challenges presented by COVID-19 and invest in expansion activities in the longer term. At the beginning of the pandemic, we implemented measures to realign our cost structure and preserve liquidity including deferring certain capital investments, renegotiating certain vendor contracts, and reducing payroll costs, including through headcount reductions, employee furloughs and reduced executive salaries. With improving GMV trends we began to strategically reinvest in growth; however, we continue to monitor opportunities to strengthen our financial flexibility and preserve liquidity. We believe our existing cash and cash equivalents and short-term investments as of December 31, 2020 will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements will depend on many factors, including, but not limited to, our ability to grow our revenues and the timing of investments to support growth in our business, such as the build-out of new authentication centers and, to a lesser extent, the opening of new retail stores. We may seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected. 49 Cash Flows The following table summarizes our cash flows for the periods indicated. Prior year comparisons are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Year Ended December 31, 2020 2019 2018 (In thousands) Net cash (used in) provided by: Operating activities $ (134,419 ) $ (54,490 ) $ (47,195 ) Investing activities 178,004 (215,356 ) (33,923 ) Financing activities 152,815 378,665 106,085 Net increase in cash, cash equivalents and restricted cash $ 196,400 $ 108,819 $ 24,967 Net Cash Used in Operating Activities During 2020, net cash used in operating activities was $134.4 million, which consisted of a net loss of $175.8 million, adjusted by non-cash charges of $62.9 million and cash outflows due to a net change of $21.5 million in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of cash outflows due to increases of $20.4 million in inventory and a $12.8 million decrease in operating lease liability, partially offset by cash inflows due to increases of $8.0 million in other accrued and current liabilities and $4.2 million in accrued consignor payable. Net Cash Provided by (Used in) Investing Activities During 2020, net cash provided by investing activities was $178.0 million, which consisted of $278.2 million in proceeds from maturities of short-term investments, offset by $73.3 million for purchases of short-term investments, $18.3 million for purchases of property and equipment, net, including leasehold improvements, and $8.7 million for capitalized proprietary software costs. Net Cash Provided by Financing Activities During 2020, net cash provided by financing activities was $152.8 million, which primarily consisted of proceeds of $166.3 million from the issuance of the convertible senior notes, net of issuance costs, $8.9 million from the exercise of stock options and warrants partially offset by $22.5 million for the purchase of capped calls related to the Notes issuance. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2020: Payment Due by Period Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years (In thousands) Operating leases $ 203,516 $ 25,301 $ 50,644 $ 49,049 $ 78,522 Convertible Senior Notes, including interest 195,788 5,175 15,525 175,088 — Unconditional endowment grant (1) 500 500 — — — Capital leases 24 20 4 — — Non-cancellable purchase commitments 5,562 2,569 2,993 — — Total $ 405,390 $ 33,565 $ 69,166 $ 224,137 $ 78,522 (1) In January 2018, we entered into an agreement with the University of Arizona Foundation to endow a gemology degree program in the Department of Geosciences. We committed to endow a total of $2.0 million, of which $0.5 million remained to be funded as of December 31, 2020. 50 Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Revenue Recognition Consignment and Service Revenue We generate the majority of our revenue from consignment services for the sale of pre-owned luxury goods on behalf of consignors through our online consignment marketplace and retail stores. For consignment sales, we retain a portion of the proceeds received, which we refer to as our take rate, and remit the balance to the consignors. We recognize consignment revenue upon purchase of the goods by the buyer based on our take rate, net of allowances for product returns, order cancellations, buyer incentives and adjustments. Direct Revenue We also generate revenue from the sales of company-owned inventory. We recognize direct revenue upon shipment of the goods sold through our online marketplace and retail stores, based on the gross purchase price net of allowances for product returns, buyer incentives and adjustments. Recent Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies” to our financial statements included elsewhere in this Annual Report on Form 10-K for recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K. JOBS Act Accounting Election We were an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) were no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements while we were an emerging growth company may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Because the market value of the Company’s common stock held by non-affiliates exceeded $700 million as of June 30, 2020, the Company was deemed a “large accelerated filer” under the Exchange Act ceased to be an emerging growth company as of December 31, 2020. As a result, the Company adopted all applicable standards retrospectively as of January 1, 2020 in this Annual Report on Form 10-K. 51 Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. We are exposed to market risks in the ordinary course of our business, including fluctuations in interest rates. Such fluctuations to date have not been significant. As of December 31, 2020, we had unrestricted cash, cash equivalents and short-term investments of approximately $354.9 million, which carry a degree of interest rate risk. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our investment portfolio. We do not believe that inflation has had a material effect on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial condition. Item 8. Financial Statements and Supplementary Data. Please refer to the Financial Statements and Notes to Financial Statements in this Form 10-K which is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.