TheRealReal, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting 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. GAAP. 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 52 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 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 Our management, including our Chief Executive Officer and our Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by the collusion of two or more people or by management override of controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information. None. 53 PART III Item 10. Directors, Executive Officers and Corporate Governance. Information required by this Item is incorporated by reference to the information set forth under the captions “Directors,” “Corporate Governance,” “Executive Officers” and “Security Ownership of Certain Beneficial Owners and Management” in our 2021 proxy statement to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020 (the “Proxy Statement”). Item 11. Executive Compensation. The information required by this Item is incorporated by reference to the information set forth under the caption “Executive Compensation,” in our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item is incorporated by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item is incorporated by reference to the information set forth under the captions “Certain Relationships and Related Party Transactions” and “Corporate Governance” in our Proxy Statement. Item 14. Principal Accounting Fees and Services. The information required by this Item is incorporated by reference to the information set forth under the caption “Proposal No. 2—Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement. 54 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Please refer to the Financial Statements, Notes to Financial Statements and the Exhibit Index in this Form 10-K which is incorporated herein by reference. (b) Please refer to the Exhibit Index in this Form 10-K which is incorporated herein by reference. Item 16. Form 10-K Summary None. 55 Exhibit Index Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 3.1 Form of Amended and Restated Certificate of Incorporation of The RealReal, Inc., as currently in effect. S-1 333-231891 3.2 June 17, 2019 3.2 Form of Amended and Restated Bylaws of The RealReal, Inc. as currently in effect. S-1 333-231891 3.4 June 6, 2019 4.1 Form of Common Stock Certificate. S-1 333-231891 4.1 June 17, 2019 4.2 Seventh Amended and Restated Investor Rights Agreement, dated March 22, 2019 among The RealReal, Inc. and certain holders of its capital stock. S-1 333-231891 4.7 May 31, 2019 4.3 Indenture dated June 15, 2020, between The RealReal, Inc. and U.S. Bank National Association as Trustee, including form of 3.00% Convertible Senior Note due 2025. 8-K 001-38953 4.1 June 16, 2020 4.4 Description of Securities. 10-Q 001-38953 4.2 August 7, 2020 10.1+ The RealReal, Inc. 2011 Equity Incentive Plan and related form agreements. S-1 333-231891 10.1 May 31, 2019 10.2+ Form of Indemnification Agreement entered into by and between The RealReal, Inc. and its directors and executive officers. S-1 333-231891 10.2 June 17, 2019 10.3# Loan and Security Agreement dated as of September 19, 2013 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.3 May 31, 2019 10.4# First Amendment to Loan and Security Agreement dated as of March 13, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.4 May 31, 2019 10.5# Second Amendment to Loan and Security Agreement dated as of August 5, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.5 May 31, 2019 10.6# Third Amendment to Loan and Security Agreement dated as of September 25, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.6 May 31, 2019 10.7# Fourth Amendment to Loan and Security Agreement dated as of December 28, 2015 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.7 May 31, 2019 10.8# Fifth Amendment to Loan and Security Agreement dated as of July 18, 2016 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.8 May 31, 2019 56 Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.9# Sixth Amendment to Loan and Security Agreement dated as of September 16, 2016 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.9 May 31, 2019 10.10# Seventh Amendment to Loan and Security Agreement dated as of March 28, 2017 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.10 May 31, 2019 10.11# Eighth Amendment to Loan and Security Agreement dated as of July 27, 2017 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.11 May 31, 2019 10.12# Ninth Amendment to Loan and Security Agreement dated as of March 5, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.12 May 31, 2019 10.13# Tenth Amendment to Loan and Security Agreement dated as of July 25, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.13 May 31, 2019 10.14# Eleventh Amendment to Loan and Security Agreement dated as of August 9, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.14 May 31, 2019 10.15# Twelfth Amendment to Loan and Security Agreement dated as of December 19, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.15 May 31, 2019 10.16# Lease Agreement dated as of March 18, 2014 by and between The RealReal, Inc. and 35 Enterprise Avenue, L.L.C. S-1 333-231891 10.16 May 31, 2019 10.17# Lease Modification Agreement dated as of March 8, 2018 by and between The RealReal, Inc. and 35 Enterprise Avenue, L.L.C. S-1 333-231891 10.17 May 31, 2019 10.18# Lease Agreement dated as of March 14, 2016 by and between The RealReal, Inc. and M&L Associates. S-1 333-231891 10.18 May 31, 2019 10.19# Lease Agreement dated as of June 5, 2018 by and between The RealReal, Inc. and Hartz Enterprise LLC. S-1 333-231891 10.19 May 31, 2019 10.20# Lease Agreement dated as of September 14, 2018 by and between The RealReal, Inc. and Prologis Perth Amboy Associates, LLC. S-1 333-231891 10.20 May 31, 2019 10.21+ The RealReal, Inc. 2019 Equity Incentive Plan. S-1 333-231891 10.21 June 17, 2019 10.22+ The RealReal, Inc. 2019 Employee Stock Purchase Plan. S-1 333-231891 10.22 June 17, 2019 57 Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.23+ The RealReal, Inc. 2019 Equity Incentive Plan Stock Option Agreement and related form agreements. 10-Q 001-38953 10.1 August 14, 2019 10.24+ The RealReal, Inc. 2019 Equity Incentive Plan Restricted Stock Unit Award Agreement and related form agreements. 10-Q 001-38953 10.2 August 14, 2019 10.25+ The RealReal, Inc. 2019 Employee Stock Purchase Plan, as amended and restated on February 19, 2020. 10-K 001-38953 10.2 March 11, 2020 10.26 Form of Base Capped Call Confirmation, dated June 10, 2020 between The RealReal, Inc. and each of the Counterparties. 8-K 001-38953 10.1 June 16, 2020 10.27 Form of Additional Capped Call Confirmation, dated June 18, 2020 between The RealReal, Inc. and each of the Capped Call Counterparties. 8-K 001-38953 10.1 June 23, 2020 10.28# Lease Agreement dated as of November 2, 2020 by and between The RealReal, Inc. and Liberty Property Limited Partnership. 10-Q 001-38953 10.1 November 10, 2020 23.1 Consent of KPMG, LLP, Independent Registered Public Accounting Firm X 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 58 Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X + Indicates management contract or compensatory plan. # 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. 59 SIGNAT URES 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 . The RealReal, Inc. Date: March 1, 2021 By: /s/ Matt Gustke Matt Gustke Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Julie Wainwright Chairperson and Chief Executive Officer March 1, 2021 Julie Wainwright (Principal Executive Officer) /s/ Matt Gustke Chief Financial Officer March 1, 2021 Matt Gustke (Principal Financial Officer) /s/ Steve Lo Vice President, Chief Accounting Officer March 1, 2021 Steve Lo (Principal Accounting Officer) /s/ Chip Baird Director March 1, 2021 Chip Baird /s/ Caretha Coleman Director March 1, 2021 Caretha Coleman /s/ Emma Grede Director March 1, 2021 Emma Grede /s/ Karen Katz Director March 1, 2021 Karen Katz /s/ Rob Krolik Director March 1, 2021 Rob Krolik /s/ Michael Kumin Director March 1, 2021 Michael Kumin /s/ Niki Leondakis Director March 1, 2021 Niki Leondakis /s/ Carol Melton Director March 1, 2021 Carol Melton /s/ James Miller Director March 1, 2021 James Miller 60 INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm F-2 Balance Sheets as of December 31, 2020 and 2019 F-6 Statements of Operations for the Years ended December 31, 2020, 2019, and 2018 F-7 Statements of Comprehensive Loss for the Years ended December 31, 2020, 2019, and 2018 F-8 Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2020, 2019, and 2018 F-9 Statements of Cash Flows for the Years ended December 31, 2020, 2019, and 2018 F-11 Notes to Financial Statements F-12 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors The RealReal, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of The RealReal, Inc. (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). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 F-2 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. /s/ KPMG We have served as the Company’s auditor since 2013. San Francisco, California March 1, 2021 F-3 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. F-4 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. /s/ KPMG San Francisco, California March 1, 2021 F-5 THE REALREAL, INC. Balance Sheets (In thousands, except share and per share data) December 31, 2020 December 31, 2019 Assets Current assets Cash and cash equivalents $ 350,846 $ 154,446 Short-term investments 4,017 208,811 Accounts receivable 7,213 7,779 Inventory, net 42,321 21,916 Prepaid expenses and other current assets 17,072 13,804 Total current assets 421,469 406,756 Property and equipment, net 63,454 55,831 Operating lease right-of-use assets 118,136 — Other assets 2,050 2,660 Total assets $ 605,109 $ 465,247 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 14,346 $ 11,159 Accrued consignor payable 57,053 52,820 Operating lease liabilities, current portion 14,999 — Other accrued and current liabilities 61,862 54,567 Total current liabilities 148,260 118,546 Operating lease liabilities, net of current portion 115,084 — Convertible senior notes, net 149,188 — Other noncurrent liabilities 1,284 9,456 Total liabilities 413,816 128,002 Commitments and contingencies (Note 12) Stockholders’ equity: Common stock, $0.00001 par value; 500,000,000 shares authorized as of December 31, 2020 and December 31, 2019; 89,301,664 and 85,872,320 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 1 1 Additional paid-in capital 723,302 693,426 Accumulated other comprehensive income 11 7 Accumulated deficit (532,021 ) (356,189 ) Total stockholders’ equity 191,293 337,245 Total liabilities and stockholders’ equity $ 605,109 $ 465,247 The accompanying notes are an integral part of these financial statements. F-6 THE REALREAL, IN C . Statements of Operations (In thousands, except share and per share data) Years Ended December 31, 2020 2019 2018 Revenue: Consignment and service revenue $ 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 ) Accretion of redeemable convertible preferred stock to redemption value $ — $ (3,355 ) $ (8,922 ) Net loss attributable to common stockholders $ (175,832 ) $ (101,784 ) $ (84,687 ) Net loss per share attributable to common stockholders, basic and diluted $ (2.01 ) $ (2.14 ) $ (10.12 ) Shares used to compute net loss per share attributable to common stockholders, basic and diluted 87,587,409 47,478,544 8,365,344 The accompanying notes are an integral part of these financial statements. F-7 THE REALREAL, INC. Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2020 2019 2018 Net loss $ (175,832 ) $ (98,429 ) $ (75,765 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on investments 4 32 (19 ) Comprehensive loss $ (175,828 ) $ (98,397 ) $ (75,784 ) The accompanying notes are an integral part of these financial statements. F-8 THE REALREAL, INC. Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share amounts) Redeemable Convertible Convertible Additional Accumulated Other Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Comprehensive Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit (Deficit) Balances as of December 31, 2017 12,956,724 50,367 69,834,789 122,990 8,287,983 — 4,591 (6 ) (181,571 ) (176,986 ) Issuance of Series G redeemable convertible preferred stock upon conversion of notes, net of issuance costs of $190 1,067,550 5,452 — — — — — — — — Issuance of Series G convertible preferred stock upon conversion of notes, net of issuance costs of $355 — — 1,997,709 10,202 — — — — — — Loss on extinguishment of convertible notes (Note 7) — — — — — — (370 ) — — (370 ) Issuance of Series G redeemable convertible preferred stock, net of issuance costs of $3,360 17,029,327 86,640 — — — — — — — — Issuance of Series G convertible preferred stock, net of issuance costs of $373 — — 1,892,147 9,627 — — — — — — Accretion of redeemable convertible preferred stock to redemption value — 8,922 — — — — (8,593 ) — (329 ) (8,922 ) Issuance of common stock upon exercise of options — — — — 247,797 — 481 — — 481 Issuance of common stock upon exercise of warrants — — — — 57,297 — 133 — — 133 Compensation expense related to stock sales by current and former employees — — — — — — 847 — — 847 Stock-based compensation expense — — — — — — 2,911 — — 2,911 Other comprehensive loss — — — — — — — (19 ) — (19 ) Net loss — — — — — — — — (75,765 ) (75,765 ) Balance as of December 31, 2018 31,053,601 151,381 73,724,645 142,819 8,593,077 — — (25 ) (257,665 ) (257,690 ) Issuance of Series H redeemable convertible preferred stock net of issuance costs of $166 6,350,345 43,492 — — — — — — — — Issuance of Series H convertible preferred stock net of issuance costs of $59 — — 3,831,766 26,283 — — — — — — Accretion of redeemable convertible preferred stock to redemption value — 3,355 — — — — (3,260 ) — (95 ) (3,355 ) Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering (37,403,946 ) (198,228 ) — — 19,585,426 — 198,228 — — 198,228 Conversion of convertible preferred stock to common stock in connection with initial public offering — — (77,556,411 ) (169,102 ) 38,778,180 — 169,102 — — 169,102 Conversion of convertible preferred stock warrants to common stock warrants in connection with initial public offering — — — — — — 2,710 — — 2,710 Issuance of common stock in connection with initial public offering, net of issuance costs of $5,333 — — — — 17,250,000 — 315,518 — — 315,518 F-9 Issuance of common stock upon exercise of options — — — — 1,551,313 1 2,695 — — 2,696 Issuance of common stock upon exercise of warrants — — — — 10,677 — 33 — — 33 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes — — — — 14,105 — (130 ) — — (130 ) Issuance of common stock for cashless exercise of warrants — — — — 89,542 — — — — — Compensation expense related to stock sales by current and former employees — — — — — — 819 — — 819 Stock-based compensation expense — — — — — — 7,711 — — 7,711 Other comprehensive income — — — — — — — 32 — 32 Net loss — — — — — — — — (98,429 ) (98,429 ) Balance as of December 31, 2019 — $ — — $ — 85,872,320 $ 1 $ 693,426 $ 7 $ (356,189 ) $ 337,245 Purchase of capped calls — — — — — — (22,546 ) — — (22,546 ) Equity component of convertible senior notes, net of issuance costs of $767 — — — — — — 19,020 — — 19,020 Issuance of common stock upon exercise of options — — — — 2,604,494 — 8,859 — — 8,859 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes — — — — 733,385 — (751 ) — — (751 ) Issuance of common stock for exercises under ESPP — — — — 91,465 — 972 — — 972 Stock-based compensation expense — — — — — — 24,322 — — 24,322 Other comprehensive income — — — — — — — 4 — 4 Net loss — — — — — — — — (175,832 ) (175,832 ) Balance as of December 31, 2020 — $ — — $ — 89,301,664 $ 1 $ 723,302 $ 11 $ (532,021 ) $ 191,293 The accompanying notes are an integral part of these financial statements. F-10 THE REALREAL, INC. Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net loss $ (175,832 ) $ (98,429 ) $ (75,765 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 18,845 13,408 9,290 Stock-based compensation expense 24,322 7,711 2,911 Reduction of operating lease right-of-use assets 16,062 — — Change in fair value of convertible note derivative liability — — 1,248 Bad debt expense 903 1,371 999 Compensation expense related to stock sales by current and former employees — 819 847 Change in fair value of convertible preferred stock warrant liability — 2,100 450 Accrued interest on convertible notes 216 — 223 Loss on retirement of property and equipment 280 — 203 Accretion of unconditional endowment grant liability 51 94 118 Accretion of debt discounts and issuance costs 2,399 11 104 Amortization of premiums (discounts) on short-term investments (137 ) (320 ) 78 Changes in operating assets and liabilities: Accounts receivable (337 ) (1,579 ) (1,572 ) Inventory, net (20,405 ) (11,561 ) (3,741 ) Prepaid expenses and other current assets (3,443 ) (4,108 ) (5,338 ) Other assets 548 (1,026 ) (318 ) Operating lease liability (12,752 ) — — Accounts payable 2,800 6,010 (2,576 ) Accrued consignor payable 4,233 17,561 6,587 Other accrued and current liabilities 7,994 10,686 15,681 Other noncurrent liabilities (166 ) 2,762 3,376 Net cash used in operating activities (134,419 ) (54,490 ) (47,195 ) Cash flow from investing activities: Purchases of short-term investments (73,280 ) (220,609 ) (31,454 ) Proceeds from maturities of short-term investments 278,215 39,281 9,624 Proceeds from sale of short-term investments — — 7,023 Capitalized proprietary software development costs (8,678 ) (9,267 ) (5,724 ) Purchases of property and equipment (18,253 ) (24,761 ) (13,392 ) Net cash provided by (used in) investing activities 178,004 (215,356 ) (33,923 ) Cash flow from financing activities: Proceeds from issuance of common stock in initial public offering, net of issuance costs — 315,541 — Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — 43,492 86,640 Proceeds from issuance of convertible preferred stock, net of issuance costs — 26,283 9,627 Proceeds from issuance of convertible notes, net of issuance costs 166,278 — 14,273 Purchase of capped calls (22,546 ) — — Proceeds from exercise of stock options and common stock warrants 8,859 2,729 614 Proceeds from issuance of Employee Stock Purchase Program 972 — — Payment of deferred offering costs — — (24 ) Taxes paid related to restricted stock vesting (748 ) (130 ) — Issuance cost paid related to conversion of convertible notes — — (545 ) Repayment of debt — (9,250 ) (4,500 ) Net cash provided by financing activities 152,815 378,665 106,085 Net increase in cash, cash equivalents and restricted cash 196,400 108,819 24,967 Cash, cash equivalents, and restricted cash Beginning of period 154,446 45,627 20,660 End of period $ 350,846 $ 154,446 $ 45,627 Supplemental disclosures of cash flow information Cash paid for interest $ 11 $ 553 $ 666 Cash paid for income taxes 90 102 49 Supplemental disclosures of non-cash investing and financing activities Issuance of convertible preferred stock upon extinguishment of convertible notes — — 10,557 Issuance of redeemable convertible preferred stock upon extinguishment of convertible notes — — 5,642 Accretion of redeemable convertible preferred stock to redemption value — 3,355 8,922 Loss on extinguishment of convertible notes — — 370 Purchases of property and equipment included in accounts payable and other accrued and current liabilities (583 ) 1,841 158 Purchases of capitalized proprietary software development costs included in accounts payable and other accrued and current liabilities 338 — — Reclassification of deferred offering costs — 5,333 — Conversion of convertible preferred stock warrants in connection with IPO — 2,710 — Conversion of redeemable convertible preferred stock in connection with IPO — 198,228 — Conversion of convertible preferred stock in connection with IPO — 169,102 — Issuance costs associated with issuance of convertible senior notes included in other accrued and current liabilities 469 — — The accompanying notes are an integral part of these financial statements. F-11 THE REALREAL, INC. Notes to Financial Statements Note 1. Description of Business and Basis of Presentation Organization and Description of Business The RealReal, Inc. (the “Company”) is an online marketplace for authenticated, consigned luxury goods across multiple categories, including women’s, men’s, kids’, jewelry and watches, and home and art. The Company was incorporated in the state of Delaware on March 29, 2011 and is headquartered in San Francisco, California. Impact of the Coronavirus (“COVID-19”) Pandemic 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 The accompanying financial statements have been prepared in accordance with U.S. 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 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. dollar. Initial Public Offering The Company’s registration statement on Form S-1 (the “IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on June 27, 2019, and the Company’s common stock began trading on the Nasdaq Global Select Market on June 28, 2019. On July 2, 2019, the Company completed its IPO, selling 15,000,000 shares of common stock at a price to the public of $20.00 per share, plus an additional 2,250,000 shares of common stock at a price to the public of $20.00 per share pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company received aggregate net proceeds of $315.5 million after deducting underwriting discounts and commissions of $24.1 million and issuance costs of $5.3 million. Immediately p rior to the completion of the IPO, the Company filed its Amended and Restated Certificate of Incorporation, which authorizes a total of 500,000,000 shares of common stock and 50,000,000 shares of undesignated preferred stock. The Company recorded the conversion of 114,960,357 shares of convertible preferred stock and redeemable convertible preferred stock then outstanding into 58,363,606 shares of common stock to additional paid-in capital. All outstanding preferred stock warrants converted into an aggregate of 103,563 common stock warrants . Reverse Stock Split 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, F-12 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. Additionally, the authorized, issued and outstanding shares of redeemable convertible preferred stock and convertible preferred stock and their related per share amounts, other than the conversion price per share, were not adjusted as a result of the Reverse Stock Split. Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve, valuation of inventory, software development costs, stock-based compensation, 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. Actual results could differ from those estimates. Net Loss per Share Attributable to Common Stockholders The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method determines net loss per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available or attributable to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Before the IPO, the Company’s redeemable convertible preferred stock and convertible preferred stock were considered participating securities. However, the holders of such shares did not have a contractual obligation to participate in the Company’s losses. 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. Segments 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. All long-lived assets are located in the United States and substantially all revenue is attributed to consignors and buyers based in the United States. F-13 Revenue Recognition The Company generates revenue from the sale of pre-owned luxury goods through its online marketplace and retail stores. Consignment and Service Revenue The Company provides a service to sell pre-owned luxury goods on behalf of consignors to buyers through its online marketplace and retail stores. The Company retains a percentage of the proceeds received as payment for its consignment service, which the Company refers to as its take rate. The Company reports consignment revenue on a net basis as an agent and not the gross amount collected from the buyer. Title to the consigned goods remains with the consignor until transferred to the buyer upon purchase of the consigned goods and expiration of the allotted return period. The Company does not take title of consigned goods at any time except in certain cases where returned goods become Company-owned inventory. The Company recognizes consignment revenue upon purchase of the consigned good by the buyer as its performance obligation of providing consignment services to the consignor is satisfied at that point. Consignment revenue is recognized net of estimated returns, cancellations, buyer incentives and adjustments. The Company recognizes a returns reserve based on historical experience, which is recorded in other accrued and current liabilities on the balance sheets (see Note 5). Sales tax assessed by governmental authorities is excluded from revenue. Certain transactions provide consignors with a material right resulting from the tiered consignor commission plan. Under this plan, the amount an individual consignor receives for future sales of consigned goods may be dependent on previous consignment sales for that consignor within his/her consignment period. Accordingly, in certain consignment transactions, a small portion of the Company’s consignment revenue is allocated to such material right using the portfolio method and recorded as deferred revenue, which is recorded in other accrued and current liabilities on the balance sheets. The impact of the deferral has not been material to the financial statements. The Company charges shipping fees to buyers and has elected to treat shipping and handling activities performed after control transfers to the buyer as fulfillment activities. All outbound shipping and handling costs are accounted for as fulfillment costs in cost of consignment and service revenue at the time revenue is recognized. The Company also generates subscription revenue from monthly memberships allowing buyers early access to shop for luxury goods. The buyers receive the early access and other benefits over the term of the subscription period, which represents a single stand-ready performance obligation. Therefore, the subscription fees paid by the buyer are recognized over the monthly subscription period. Subscription revenue was not material in 2020, 2019, and 2018. Direct Revenue The Company generates direct revenue from the sale of Company-owned inventory. The Company recognizes direct revenue on a gross basis upon shipment of the purchased good to the buyer as the Company acts as the principal in the transaction. Direct revenue is recognized net of estimated returns, buyer incentives and adjustments. Sales tax assessed by governmental authorities is excluded from revenue. Cost of direct revenue is also recognized upon shipment to the buyer in an amount equal to that paid to the consignor from the original consignment sale, an amount equal to that paid as a direct purchase from a third party, or the lower of cost of the inventory purchased and its net realizable value. Incentives Incentives, which include platform-wide discounts and buyer incentives, may periodically be offered to buyers. Platform-wide discounts are made available to all buyers on the online marketplace. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on the Company’s platform, and do not impact the commissions paid to consignors. These are treated as a reduction of consignment and service revenue and direct revenue. Additionally, the Company periodically offers commission exceptions to consignors to optimize its supply. These are treated as reduction of consignment and service revenue, F-14 and are reflected in the Company’s take rate. The Company may offer a certain type of buyer incentive in the form of site credits to buyers on current transactions to be applied towards future transactions, which are included in other accrued and current liabilities on the balance sheets. Contract Liabilities The Company’s contractual liabilities consist of deferred revenue for material rights primarily related to the tiered consignor commission plan, which are recognized as revenue using a portfolio approach based on the pattern of exercise, and certain unredeemed site credits, which were immaterial as of 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, 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 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. Marketing expense also includes personnel-related costs, including stock-based compensation, of employees engaged in these activities. Advertising costs are expensed as incurred and were $45.8 million, $40.5 million, and $36.6 million in 2020, 2019, and 2018, respectively. 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 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. 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. In 2020, 2019, and 2018, the Company capitalized proprietary software developments costs of $9.0 million, $9.3 million, and $5.7 million, respectively. As such, operations and technology expense also includes amortization of capitalized technology development costs, which is taken on straight-line basis over three years once the technology is ready for its intended use. Selling, General and Administrative Selling, general and administrative expense is principally comprised of the personnel-related costs for employees involved in sales, finance and administration, and includes stock-based compensation expense. Selling, general and administrative expense also includes allocated facility and overhead costs and professional services, including accounting and legal advisors. Stock-based Compensation Stock-based compensation expense related to employees and nonemployees is measured based on the grant-date fair value of the awards. Compensation expense is recognized in the statements of operations over the period during which the employee is required to perform services in exchange for the award (the vesting period of the applicable award) using the straight-line method. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model and accounts for forfeitures as they occur. The fair value of restricted stock units (“RSUs”) is estimated based on the fair market value of the Company’s common stock on the date of grant, which is determined based on the closing price of the Company’s common stock. The fair value of each F-15 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 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, 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 December 31, 2019 December 31, 2018 Cash and cash equivalents $ 350,846 $ 154,446 $ 34,393 Restricted cash — — 11,234 Total cash, cash equivalents and restricted cash $ 350,846 $ 154,446 $ 45,627 Short-term Investments The Company has classified and accounted for its short-term investments as available-for-sale which are carried at fair value on its balance sheets. Available-for-sale securities with remaining maturities of 12 months or less are classified as short term and available-for-sale securities with remaining maturities greater than 12 months are classified as long term. Available-for-sale investments are reported at fair value based on quoted market prices and other observable market data. The Company records any unrealized gains and losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity (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 Accounts receivables are recorded at the amounts billed to buyers and do not bear interest. Accounts receivables result from credit card transactions, the majority of which are settled within two business days. Inventory, Net Inventory consists of finished goods arising from goods returned after the title has transferred from the buyer to the Company as well as finished goods from direct purchases from vendors and consignors. The cost of inventory is an amount equal to that paid to the consignor or vendors. Inventory is valued at the lower of cost and net F-16 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 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 Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Repair and maintenance costs are expensed as incurred. The estimated useful lives of our assets are as follows: Proprietary software 3 years Furniture and equipment 3-5 years Vehicles 5 years Leasehold improvements Shorter of lease term or estimated useful life Software Development Costs Proprietary software includes the costs of developing the Company’s internal proprietary business platform and automation projects. The Company capitalizes qualifying proprietary software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (1) the preliminary project stage is completed and (2) it is probable that the software will be completed and used for its intended function. Such costs are capitalized in the period incurred. Capitalization ceases and amortization begins when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. Impairment of Long-lived Assets The carrying amounts of long-lived assets, including property and equipment, net and capitalized proprietary software, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of assets to future undiscounted net cash flows the assets are expected to generate over their remaining life. If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the revised shorter useful life. Deferred Offering Costs Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the anticipated equity offering, are capitalized and offset against proceeds upon the consummation of the offering. 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 F-17 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 IPO proceeds withi n stockholders’ equity (deficit) on the balance sheets. Accretion of Redeemable Convertible Preferred Stock The carrying value of the redeemable convertible preferred stock that is probable of redemption is accreted to redemption value from the date of issuance to the earliest redemption date using the effective interest method until redemption is no longer probable. Increases to the carrying value of redeemable convertible preferred stock recognized in each period are charged to additional paid-in capital, or in the absence of additional paid-in capital, charged to accumulated deficit. Convertible Preferred Stock Warrant Liability The Company issued convertible preferred stock warrants in conjunction with the issuance of debt. Such warrants were recorded as other noncurrent liabilities on the balance sheets at their estimated fair value because the shares underlying the warrants may obligate the Company to transfer assets to the holders at a future date under certain circumstances such as a deemed liquidation event. The warrants are subject to re-measurement at each balance sheet date and the change in fair value, if any, is included in other expense, net. The Company continued to remeasure these warrants until the earlier of the expiration, exercise or conversion of the convertible preferred stock warrants into common warrants, which occurred upon the completion of the IPO on July 2, 2019. In connection with the completion of the IPO, the convertible preferred stock warrants automatically converted into common stock warrants. Upon conversion of the convertible preferred stock warrants, the related convertible preferred stock warrant liability was reclassified to additional paid-in capital. Leases Prior to the adoption of ASC 842 on January 1, 2020 Leases are reviewed for classification as operating or capital leases. For operating leases, the Company recognizes rent on a straight-line basis over the term of the lease. The Company records the difference between cash payments and rent expense recognized as a deferred rent liability included in other accrued and current liabilities and other noncurrent liabilities on the balance sheets. 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. F-18 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 Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in loss in the period of enactment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Concentrations of Credit Risks Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash, accounts receivable, and investments. At times, such amount may exceed federally-insured limits. The Company reduces credit risk by placing its cash and cash equivalents, restricted cash, and investments with major financial institutions within the United States. F-19 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, 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 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 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 reported Adjustments As Adjusted Current Assets: Inventory, net $ 23,599 $ (1,683 ) $ 21,916 Total current assets 408,439 (1,683 ) 406,756 Total assets $ 466,930 $ (1,683 ) $ 465,247 Stockholders' equity (deficit): Accumulated deficit (354,506 ) (1,683 ) (356,189 ) Total stockholders' equity (deficit) 338,928 (1,683 ) 337,245 Total liabilities and stockholders’ equity (deficit) $ 466,930 $ (1,683 ) 465,247 F-20 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 As previously reported Adjustments As Adjusted Revenue: Consignment and service revenue $ 267,412 $ (1,683 ) $ 265,729 Direct revenue 50,625 — 50,625 Total revenue 318,037 (1,683 ) 316,354 Gross profit 203,206 (1,683 ) 201,523 Loss from operations (98,422 ) (1,683 ) (100,105 ) Loss before provision for income taxes (96,547 ) (1,683 ) (98,230 ) Net loss $ (96,746 ) $ (1,683 ) $ (98,429 ) Net loss attributable to common stockholders $ (100,101 ) $ (1,683 ) $ (101,784 ) Net loss per share attributable to common stockholders, basic and diluted $ (2.11 ) (0.03 ) $ (2.14 ) Shares used to compute net loss per share attributable to common stockholders, basic and diluted 47,478,544 — 47,478,544 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 reported Adjustments As Adjusted Net loss $ (96,746 ) $ (1,683 ) $ (98,429 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on investments 32 — 32 Comprehensive loss $ (96,714 ) $ (1,683 ) (98,397 ) 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 reported Adjustments As Adjusted Cash flows from operating activities: Net loss $ (96,746 ) $ (1,683 ) $ (98,429 ) Changes in operating activities and liabilities: Inventory, net (13,244 ) 1,683 (11,561 ) Net cash used in operating activities $ (54,490 ) $ — (54,490 ) 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 F-21 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. 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 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 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. 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 F-22 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. Note 3. Cash, Cash Equivalents and Short-term Investments The following tables summarize the estimated value of the Company’s cash, cash equivalents and short-term investments (in thousands): December 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 150,520 $ — $ — $ 150,520 Money market fund 200,326 — — 200,326 Total cash and cash equivalents $ 350,846 $ — $ — $ 350,846 Short-term investments: Corporate bonds $ 4,006 $ 11 $ — $ 4,017 Total short-term investments $ 4,006 $ 11 $ — $ 4,017 December 31, 2019 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 111,319 $ — $ — $ 111,319 U.S. Treasury securities 29,981 — — 29,981 Money market fund 5,399 — — 5,399 Corporate bonds 3,749 — — 3,749 Agency bonds 2,000 — — 2,000 Commercial paper 1,998 — — 1,998 Total cash and cash equivalents $ 154,446 $ — $ — $ 154,446 Short-term investments: U.S. Treasury securities $ 151,857 $ 13 $ — $ 151,870 Corporate bonds 38,149 — (5 ) 38,144 Agency bonds 11,028 — (2 ) 11,026 Commercial paper 7,770 1 — 7,771 Total short-term investments $ 208,804 $ 14 $ (7 ) $ 208,811 As of December 31, 2020 and December 31, 2019, the contractual maturity for the short-term investments is less than one year. For the years ended December 31, 2020, 2019, and 2018 the Company recognized no material realized gains or losses on short-term investments. Note 4. Fair Value Measurement Assets and liabilities recorded at fair value on a recurring basis on the 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 F-23 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: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented. The following tables provide the financial instruments measured at fair value (in thousands): December 31, 2020 Level 1 Level 2 Level 3 Total Assets (1) Short-term investments: Corporate bonds $ — $ 4,017 $ — $ 4,017 Total short-term investments $ — $ 4,017 $ — $ 4,017 December 31, 2019 Level 1 Level 2 Level 3 Total Assets Cash equivalents: (1) U.S. Treasury securities $ 29,981 $ — $ — $ 29,981 Corporate bonds — 3,749 — 3,749 Agency bonds — 2,000 — 2,000 Commercial paper — 1,998 — 1,998 Total cash equivalents $ 29,981 $ 7,747 $ — $ 37,728 Short-term investments: U.S. Treasury securities $ 151,870 $ — $ — $ 151,870 Corporate bonds — 38,144 — 38,144 Agency bonds — 11,026 — 11,026 Commercial paper — 7,771 — 7,771 Total short-term investments $ 151,870 $ 56,941 $ — $ 208,811 (1) Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table. The amounts of the money market funds (in thousands) were $200,326 and $5,399 at 12/31/20 and 12/31/19, respectively. F-24 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. 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): Convertible Preferred Stock Warrant Liability Balance as of December 31, 2018 610 Changes in estimated fair value 2,100 Reclass to additional paid-in capital upon conversion to common stock warrants (2,710 ) Balance as of December 31, 2019 $ — Note 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Property and equipment, net consists of the following (in thousands): December 31, 2020 December 31, 2019 Proprietary software $ 24,218 $ 23,318 Furniture and equipment 27,687 21,083 Automobiles 668 718 Leasehold improvements 52,828 43,505 105,401 88,624 Less: accumulated depreciation and amortization (41,947 ) (32,793 ) Property and equipment, net $ 63,454 $ 55,831 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. F-25 Other Accrued and Current Liabilities Other accrued and current liabilities consist of the following (in thousands): December 31, 2020 December 31, 2019 Returns reserve $ 18,327 $ 17,005 Accrued compensation 13,406 11,626 Accrued marketing and outside services 10,790 6,830 Site credit liability 5,475 5,080 Accrued sales tax and other taxes 6,870 6,132 Deferred revenue 1,617 4,767 Other 5,377 3,127 Other accrued and current liabilities $ 61,862 $ 54,567 Note 6. Debt and Convertible Preferred Stock Warrants Term Loans In 2013, the Company entered into an agreement to obtain a term loan facility (“Term Loan Facility”) in the amount of $5.0 million for general corporate purposes and working capital expenditures. In 2014, 2015 and 2016, the Company amended its Term Loan Facility to increase the amount borrowed under the facility by $11.6 million. The Term Loan Facility is secured by liens on substantially all of the Company’s present and future assets. The Term Loan Facility includes affirmative, negative and financial covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, make investments, sell or otherwise dispose of assets, pay dividends or repurchase stock. The Term Loan Facility’s financial covenants required the Company to achieve at least 80% of its forecasted gross revenue and a liquidity ratio on a monthly basis. In 2017, the Company executed the eighth amendment (“Eight Amendment”) to the Term Loan Facility. The Eighth Amendment refinanced the $15.0 million repayment schedule to be two term loans, which included a $7.5 million interest only term loan with a maturity date of January 31, 2019 (“Term Loan I”), and the remaining $7.5 million under the existing Term Loan Facility with a maturity date of January 1, 2020 (“Term Loan II”) (together the “Term Loans”). In 2018, the Company entered into the ninth, tenth, eleventh, and twelfth amendment (“Ninth Amendment,” “Tenth Amendment,” “Eleventh Amendment” and “Twelfth Amendment”) to the existing Term Loans. The Ninth Amendment removed the liquidity ratio covenant, amended Term Loan I to be due in 30 equal monthly installments, plus all accrued interest, beginning July 31, 2018, increased the variable annual interest rate from 0.10% above the prime rate to 0.35% above the prime rate and extended the maturity date of Term Loan I to January 31, 2021. The Eighth Amendment and Ninth Amendment required the Company to pay a combined success fee of $0.3 million upon (1) any sale or licensing of all or substantially all of the Company’s assets, (2) any change in control of the Company, or (3) an initial public offering of the Company’s equity securities. The Ninth Amendment also required the Company to pay an additional success fee of $0.1 million upon the sale or issuance of the Company’s equity securities or subordinated debt securities for net cash proceeds of at least $50.0 million on or prior to June 30, 2018. The Company paid the $0.1 million success fee upon the Series G convertible preferred stock financing in June 2018 and the $0.3 million success fee related to its IPO in July 2019. The Tenth and Twelfth Amendments adjusted and waived certain covenant violations which were subsequently amended and met. 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 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, 2020, 2019 and 2018, the Company recorded interest expense related to the Term Loans of zero, $0.3 million, and $0.7 million, respectively. F-26 Warrants Issued with Term Loan Facility During the period from 2013 to 2016, in connection with the Term Loan Facility, the Company issued convertible preferred stock warrants, which included warrants to purchase 131,652 shares of its Series B convertible preferred stock with an exercise price of $1.03 per share, 6,868 shares of its Series C convertible preferred stock with an exercise price of $2.18 per share, 43,010 shares of its Series D convertible preferred stock with an exercise price of $2.79 per share and 25,597 shares of its Series E convertible preferred stock with an exercise price of $2.93 per share (together the “Convertible Preferred Stock Warrants”). The Convertible Preferred Stock Warrants were exercisable from the date of issuance and have a 10-year term. The initial estimated fair value of the Convertible Preferred Stock Warrants was recorded as convertible preferred stock warrant liability with an offset to the debt discount associated with the Term Loan Facility. The debt discount is amortized to interest expense over the repayment period of the loan using the effective-interest method. 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, 2020 and 2019. Note 7. Convertible Notes 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. F-27 • 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; or • If the Company calls any notes for redemption. On and after March 15, 2025, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 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: December 31, 2020 Principal $ 172,500 Unamortized debt discount (17,945 ) Unamortized debt issuance costs (5,367 ) Net carrying amount $ 149,188 F-28 The net carrying amount of the equity component of the Notes was as follows: December 31, 2020 Proceeds allocated to the conversion options (debt discount) $ 19,787 Issuance costs (767 ) Net carrying amount $ 19,020 In connection with the issuance of the 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: Amount Contractual interest expense $ 2,803 Amortization of debt discount 1,843 Amortization of debt issuance costs 556 Total interest and amortization expense $ 5,202 Future minimum payments under the Notes as of December 31, 2020, are as follows: Fiscal Year Amount 2021 $ 5,175 2022 5,175 2023 5,175 2024 5,175 2025 175,088 Total future payments 195,788 Less amounts representing interest (23,288 ) Total principal amount $ 172,500 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 F-29 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 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. F-30 Note 8. Convertible Preferred Stock and Redeemable Convertible Preferred Stock At December 31, 2018, convertible preferred stock and redeemable convertible preferred stock consisted of the following (in thousands, except share amounts): December 31, 2018 Shares Authorized Shares Issued and Outstanding Net Carrying Value Aggregate Liquidation Preference Series A 18,960,000 18,941,619 $ 9,161 $ 9,217 Series B 13,784,443 13,652,791 13,774 14,000 Series C 9,335,659 9,328,791 20,289 20,374 Series D 14,367,652 14,324,642 39,886 40,000 Series E 13,612,543 13,586,946 39,880 40,000 Series F 12,956,724 12,956,724 54,968 57,211 Series G 21,986,733 21,986,733 116,242 120,544 Total 105,003,754 104,778,246 $ 294,200 $ 301,346 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. The carrying value of the redeemable convertible preferred stock was accreted to redemption value from the date of issuance to the earliest redemption date using the effective interest method. As of March 31, 2019, the Company determined that redemption of the redeemable convertible preferred stock was not probable and as such, did not record any additional accretion after March 31, 2019. Note 9. Common Stock The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows: December 31, December 31, 2020 2019 Options issued and outstanding 5,809,376 9,171,756 Shares available for grant under the 2019 equity incentive plan 7,104,498 7,269,593 Outstanding restricted stock units 5,103,727 789,817 Shares available for issuance under 2019 ESPP 2,517,258 — Total 20,534,859 17,231,166 Note 10. Share-based Compensation Plans 2011 Equity Incentive Plan In 2011, the Company adopted the Equity Incentive Plan (2011 Plan) authorizing the granting of incentive stock options (ISOs) and non-statutory stock options (NSOs) to eligible participants for up to 12,987,255 shares of common stock. Under the 2011 Plan, incentive stock options and non-statutory stock options are to be granted at an exercise price that is no less than 100% of the fair value of the stock at the date of grant. Options generally vest over four years and are exercisable for up to 10 years after the date of grant. Incentive stock options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on the date of grant. The 2011 Plan has been replaced by the Company’s 2019 Plan as defined below with respect to future equity awards. F-31 2019 Equity Incentive Plan In connection with the Company’s initial public offering, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to participants. Subject to the terms and conditions of the 2019 Plan, the initial number of shares authorized for grants under the 2019 Plan is 8,000,000. These available shares increase annually by an amount equal to the lesser of 8,000,000 shares, 5% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. On August 4, 2020, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,293,616 shares. Activity under the Company’s stock option plan is set forth below: Number of Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Balances at December 31, 2019 9,171,756 5.14 6.8 $ 128,079 Options granted — — Options exercised (2,604,494 ) 3.40 Options cancelled (757,886 ) 7.40 Balances at December 31, 2020 5,809,376 5.64 5.9 82,717 Options vested and exercisable— December 31, 2020 4,232,813 3.72 5.2 67,601 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. The aggregate intrinsic value of options exercised is the difference between the fair value of the underlying common stock on the date of exercise and the exercise price for in-the-money stock options. RSUs A summary of RSU activity for the year ended December 31, 2020 is as follows: Restricted Stock Units Number of Shares Weighted- Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested December 31, 2019 789,817 $ 23.59 $ 14,888 Granted 5,688,318 12.54 Vested (789,853 ) 15.75 Forfeited (584,555 ) 15.64 Unvested December 31, 2020 5,103,727 $ 13.40 $ 99,640 F-32 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 (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 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 In determining the fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. Fair Value of Common Stock— The fair value of the shares of common stock has historically been determined by the Company’s board of directors as there was no public market for the common stock. Subsequent to our IPO, the fair value per share of common stock is the closing price of the Company’s common stock as reported on the applicable grant date. Expected Term —The expected term represents the period that the Company’s stock options are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term . Volatility —Because the Company was privately held and did not have an active trading market for its common stock for a sufficient period of time, the expected volatility was estimated based on the average volatility for comparable publicly-traded companies, over a period equal to the expected term of the stock option grants. Risk-free Rate —The risk-free rate assumption is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Dividends —The Company has never paid dividends on its common stock and does not anticipate paying dividends on common stock. Therefore, the Company uses an expected dividend yield of zero. F-33 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, 2019 2018 Expected term (in years) 5.0 – 6.1 5.2 – 6.2 Expected volatility 44.2% – 47.8% 46.6% – 48.1% Average risk-free rate 1.9% – 2.6% 2.7% – 2.9% Dividend yield — — As of December 31, 2020, total unrecognized stock-based compensation expense related to options was $9.9 million, respectively. These costs are expected to be recognized over a weighted average period of 2.0 years as of December 31, 2020. As of December 31, 2020, the Company had approximately $61.7 million of unrecognized stock-based compensation expense related to RSUs, which the Company expects to recognize over the remaining weighted-average vesting period of approximately 3.1 years. Total stock-based compensation expense, excluding compensation expense related to stock sales by current and former employees, by function was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Marketing $ 1,755 $ 392 $ 164 Operations and technology 10,241 3,148 1,160 Selling, general and administrative 12,326 4,171 1,587 Total $ 24,322 $ 7,711 $ 2,911 The amounts presented in the above table exclude compensation expense related to the stock sales by current and former employees. In September 2018, executives of the Company sold an aggregate of 432,270 shares of the Company’s common stock at a price of $9.0902 per share for an aggregate amount of $3.9 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, 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 within selling, general and administrative in the statement of operations and a corresponding credit to additional paid-in capital. Note 11. Leases 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. F-34 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): Fiscal Year Amount 2021 23,030 2022 22,560 2023 21,168 2024 20,759 2025 21,300 Thereafter 57,458 Total future minimum payments $ 166,275 Less: Imputed interest (36,192 ) Present value of operating lease liabilities $ 130,083 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): Fiscal Year Lease payments for leases not yet commenced 2021 2,271 2022 3,551 2023 3,364 2024 3,445 2025 3,545 Thereafter 21,065 Total undiscounted lease payments expected to be capitalized $ 37,241 F-35 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, Amount 2020 $ 20,530 2021 22,059 2022 19,610 2023 18,307 2024 17,957 Thereafter 67,208 Total future minimum payments $ 165,671 Supplemental cash flow information related to the Company’s operating leases are as follows (in thousands): Year Ended December 31, 2020 Operating cash flows used for operating leases $ 21,381 Operating lease assets obtained in exchange for operating lease liabilities $ 23,853 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 7.3 years Weighted average discount rate 6.6 % 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. Note 12. Commitments and Contingencies Noncancelable Purchase Commitments As of December 31, 2020, the future minimum payments under the Company’s noncancelable purchase commitments were as follows (in thousands): Year Ending December 31, Purchase Commitments 2021 $ 2,569 2022 2,420 2023 573 2024 — 2025 — Total future minimum payments $ 5,562 Other Commitments 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 starting in January 2018. F-36 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 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, 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. 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. Contingencies From time to time, the Company is subject to, and it is presently involved in, litigation and other legal proceedings and from time to time, the Company receives inquiries from government agencies. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. The Company records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company discloses material contingencies when a loss is not probable but reasonably possible. On November 14, 2018, Chanel, Inc. (“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 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. 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 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. On September 10, 2019, a purported shareholder class action complaint was filed against the Company, its officers and directors and the underwriters of its IPO in the Superior Court of the State of California in the County of San Mateo. Three additional purported class actions, also alleging claims arising from the IPO were subsequently filed in Marin County and San Francisco County Superior Courts. 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. 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 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 F-37 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 In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company's various services, or its acts or omissions. The Company has not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in its financial statements. Note 13. Income Taxes The components of the Company’s income tax provision consisted of (in thousands): Year Ended December 31, 2020 2019 2018 Current: Federal $ — $ — $ — State 101 199 99 Total current tax expense 101 199 99 Deferred: — — — Federal — — — State — — — Total deferred tax expense — — — Total provision for income taxes $ 101 $ 199 $ 99 The reconciliation of the Federal statutory income tax provision for the Company’s effective income tax provision (in thousands): Year Ended December 31, 2020 2019 2018 Tax at federal statutory rate $ (43,259 ) $ (20,272 ) $ (15,890 ) State taxes, net of federal effect (10,315 ) (5,170 ) (4,280 ) Non-deductible items 841 1,429 537 Valuation allowance 52,834 24,212 19,732 Provision for income taxes $ 101 $ 199 $ 99 F-38 The Company’s deferred tax assets and liabilities (in thousands): December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 129,333 $ 78,875 Fixed assets and intangibles 3,794 2,747 Accruals and reserves 9,155 8,430 Operating lease liabilities 35,267 — Gross deferred tax assets 177,549 90,052 Less: valuation allowance (143,214 ) (88,450 ) Total deferred tax assets 34,335 1,602 Deferred tax liabilities: Operating lease right-of-use assets (32,028 ) — Other (2,307 ) (1,602 ) Gross deferred tax liabilities (34,335 ) (1,602 ) Net deferred tax assets $ — $ — In assessing the realizability of deferred tax assets, the Company evaluates all available positive and negative evidence by considering whether it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon future taxable income, future reversals of existing taxable temporary difference, taxable income in carryback years and tax-planning strategies. The Company believes it is more likely than not that the deferred tax assets in the U.S. will not be realized; accordingly, a valuation allowance has been established against our U.S. deferred tax assets. 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, 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. 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, $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. During 2019, we analyzed whether any of the reported net operating losses would be limited because of these rules. Based on our analysis we believe $3.3 million of the Federal and $2.1 million of California net operating losses will not be available to offset future taxable income because of the limitation. The reported net operating losses have been adjusted based on this analysis. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local, jurisdictions, where applicable. As of December 31, 2020 and 2019, all years generally remain open to examination. Additionally, net operating loss carryforwards are subject to examination by the Internal Revenue Service and the California Franchise Tax Board for up to three years after utilization. As of December 31, 2020 and 2019, the Company does not have uncertain tax positions for which it has recorded as a liability. The Company’s policy is to include interest and penalties as a component to the statements of operations. There were no material tax penalties or interest during the years ended December 31, 2020, 2019, and 2018. F-39 Note 14. Net Loss Per Share Attributable to Common Stockholders A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share attributable to common stockholders is as follows (in thousands, except share and per share data): Year Ended December 31, 2020 2019 2018 Numerator Net loss attributable to common stockholders $ (175,832 ) $ (101,784 ) $ (84,687 ) Denominator Weighted-average common shares outstanding used to calculate net loss per share attributable to common stockholders, basic and diluted 87,587,409 47,478,544 8,365,344 Net loss per share attributable to common stockholders, basic and diluted $ (2.01 ) $ (2.14 ) $ (10.12 ) 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, except the Convertible Senior Notes): December 31, 2020 2019 2018 Convertible preferred stock — — 36,862,298 Redeemable convertible preferred stock — — 16,410,256 Options to purchase common stock 5,809,376 9,171,756 9,672,102 Restricted stock units 5,103,727 789,817 — Estimated shares issuable under the Employee Stock Purchase Plan 109,729 — — Assumed conversion of the Convertible Senior Notes 9,705,454 — — Warrants to purchase convertible preferred stock — — 103,563 Warrant to purchase common stock — — 10,677 Total 20,728,286 9,961,573 63,058,896 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. 15. Retirement Plan The Company has a defined-contribution 401(k) retirement plan covering substantially all of its employees. Eligible employees are permitted to contribute up to an amount not to exceed an annual statutory maximum. The Company matches employee contributions at a rate of 25% of vested contributions, up to a maximum of $1,000 per participant per year. The Company’s contributions to the 401(k) plan were immaterial for the years ended December 31, 2020, 2019, and 2018. 16. Related Parties Julie Wainwright, President and Chief Executive Offer, is a board member of the RealReal Foundation, a 501(c)(3) organization, which is not a consolidated entity of the Company. During the year ended December 31, 2019, the Company donated $3.2 million to the RealReal Foundation. F-40