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, 2021. Based on this evaluation, our Chief 48 Table of Contents Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, 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 evaluatio n under these criteria, management determined that our internal control over financial reporting was effective as of December 31, 2021. KPMG, LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2021, as stated in their report which is included in Part IV —Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2021 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. 49 Table of Contents Item 9B. Other Information. None. 50 Table of Contents Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 51 Table of Contents 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, 2021 (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. Our independent registered public accounting firm is KPMG LLP, San Francisco, CA, Auditor ID: 185 . 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. 52 Table of Contents 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. 53 Table of Contents 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 4.5 Indenture dated March 8, 2021, between The RealReal, Inc. and U.S. Bank National Association as Trustee, including form of 1.00% Convertible Senior Note due 2028. 8-K 001-38953 4.1 March 8, 2021 4.6 Form of 1.00% Convertible Senior Note due 2028 (included in Exhibit 4.1). 8-K 001-38953 4.2 March 8, 2021 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 54 Table of Contents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 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 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 10.1 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 10.1 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 10.1 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 10.1 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 10.1 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 10.2 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 10.2 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 10.2 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 10.2 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 10.2 May 31, 2019 55 Table of Contents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 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 10.2 May 31, 2019 10.21+ The RealReal, Inc. 2019 Equity Incentive Plan. S-1 333-231891 10.2 June 17, 2019 10.22+ The RealReal, Inc. 2019 Employee Stock Purchase Plan. S-1 333-231891 10.2 June 17, 2019 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 10.29 Form of Base Capped Call Confirmation, dated March 8, 2021 between The RealReal, Inc. and each of the Counterparties. 8-K 001-38953 10.1 March 8, 2021 10.30 Form of Additional Capped Call Confirmation, dated March 12, 2021 between The RealReal, Inc. and each of the Capped Call Counterparties. 8-K 001-38953 10.1 March 16, 2021 10.31+ Form of Severance and Change in Control Agreement approved by the Company’s board of directors on May 5, 2021. 10-Q 001-38953 10.1 May 10, 2021 10.32+ Transition and Separation Agreement between the Company and Matt Gustke dated August 6, 2021. 10-Q 001-38953 10.1 August 9, 2021 10.33+ Offer Letter dated September 15, 2021 between the Company and Robert Julian. 10-Q 001-38953 10.1 November 8, 2021 56 Table of Contents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.34+ The RealReal, Inc. Performance-Based Restricted Stock Unit Award Agreement X 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 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE). ___________________________________________ + 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. 57 Table of Contents SIGNATURES 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: February 28, 2022 By: /s/ Robert Julian Robert Julian 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 February 28, 2022 Julie Wainwright (Principal Executive Officer) /s/ Robert Julian Chief Financial Officer February 28, 2022 Robert Julian (Principal Financial Officer) /s/ Steve Lo Senior Vice President, Chief Accounting Officer February 28, 2022 Steve Lo (Principal Accounting Officer) /s/ Chip Baird Director February 28, 2022 Chip Baird /s/ Caretha Coleman Director February 28, 2022 Caretha Coleman /s/ Karen Katz Director February 28, 2022 Karen Katz /s/ Rob Krolik Director February 28, 2022 Rob Krolik /s/ Niki Leondakis Director February 28, 2022 Niki Leondakis /s/ Carol Melton Director February 28, 2022 Carol Melton /s/ James Miller Director February 28, 2022 James Miller 58 Table of Contents INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm 60 Balance Sheets as of December 31, 2021 and 2020 63 Statements of Operations for the Years ended December 31, 2021, 2020, and 2019 64 Statements of Comprehensive Loss for the Years ended December 31, 2021, 2020, and 2019 65 Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2021, 2020, and 2019 66 Statements of Cash Flows for the Years ended December 31, 2021, 2020, and 2019 68 Notes to Financial Statements 70 59 Table of Contents 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021, 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 February 28, 2022 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. Evaluation of the initial value of the liability component of the 2028 convertible senior notes As discussed in Note 7 of the financial statements, in March 2021, the Company issued 1.00% convertible senior notes due in 2028 (the 2028 Notes) for an aggregate principal amount of $287.5 million. The Company separately accounted for the liability and equity components by allocating the proceeds between the liability component and the embedded conversion options, or equity components. The initial value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated 60 Table of Contents conversion feature. As a result, the Company recorded the initial fair value of the liability component of $191.3 million. We identified the evaluation of the initial value of the liability component of the 2028 Notes as a critical audit matter. A high degree of auditor judgment was required in assessing the interest rate that would be available to the Company for a similar debt instrument that does not have a conversion feature. The audit effort associated with the evaluation of the interest rate estimate required valuation professionals with specialized skills and knowledge. 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 over the Company's process to determine the interest rate that would be available to the Company for a similar debt instrument that does not have a conversion feature. We involved our valuation professionals with specialized skills and knowledge, who assisted in: • evaluating the reasonableness of the valuation model used by the Company in estimating an interest rate available to the Company for a similar debt instrument that does not have a conversion feature • evaluating the relevance of a historical debt transaction entered into by the Company for a lending arrangement that did not have a conversion feature. /s/ KPMG We have served as the Company’s auditor since 2013. San Francisco, California February 28, 2022 61 Table of Contents 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, 2021, 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, 2021, 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, 2021 and December 31, 2020, 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, 2021, and the related notes (collectively, the financial statements), and our report dated February 28, 2022 expressed an unqualified opinion on those financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 February 28, 2022 62 Table of Contents THE REALREAL, INC. Balance Sheets (In thousands, except share and per share data) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 418,171 $ 350,846 Short-term investments — 4,017 Accounts receivable 7,767 7,213 Inventory, net 71,015 42,321 Prepaid expenses and other current assets 20,859 17,072 Total current assets 517,812 421,469 Property and equipment, net 89,286 63,454 Operating lease right-of-use assets 145,311 118,136 Other assets 2,535 2,050 Total assets $ 754,944 $ 605,109 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 4,503 $ 14,346 Accrued consignor payable 71,042 57,053 Operating lease liabilities, current portion 18,253 14,999 Other accrued and current liabilities 94,188 61,862 Total current liabilities 187,986 148,260 Operating lease liabilities, net of current portion 143,159 115,084 Convertible senior notes, net 348,380 149,188 Other noncurrent liabilities 2,291 1,284 Total liabilities 681,816 413,816 Commitments and contingencies (Note 11) — — Stockholders’ equity: Common stock, $ 0.00001 par value; 500,000,000 shares authorized as of December 31, 2021 and December 31, 2020; 92,960,066 and 89,301,664 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 1 1 Additional paid-in capital 841,255 723,302 Accumulated other comprehensive income 0 11 Accumulated deficit ( 768,128 ) ( 532,021 ) Total stockholders’ equity 73,128 191,293 Total liabilities and stockholders’ equity $ 754,944 $ 605,109 The accompanying notes are an integral part of these financial statements. 63 Table of Contents THE REALREAL, INC. Statements of Operations (In thousands, except share and per share data) Years Ended December 31, 2021 2020 2019 Revenue: Consignment and service revenue $ 346,848 $ 247,326 $ 265,729 Direct revenue 120,844 52,623 50,625 Total revenue 467,692 299,949 316,354 Cost of revenue: Cost of consignment and service revenue 92,788 66,976 73,579 Cost of direct revenue 101,427 45,406 41,252 Total cost of revenue 194,215 112,382 114,831 Gross profit 273,477 187,567 201,523 Operating expenses: Marketing 62,749 54,813 47,734 Operations and technology 235,829 163,808 143,231 Selling, general and administrative 176,418 140,652 110,663 Legal settlement 13,389 1,110 — Total operating expenses 488,385 360,383 301,628 Loss from operations ( 214,908 ) ( 172,816 ) ( 100,105 ) Interest income 365 2,518 4,593 Interest expense ( 21,531 ) ( 5,264 ) ( 616 ) Other income (expense), net 23 ( 169 ) ( 2,102 ) Loss before provision for income taxes ( 236,051 ) ( 175,731 ) ( 98,230 ) Provision for income taxes 56 101 199 Net loss $ ( 236,107 ) $ ( 175,832 ) $ ( 98,429 ) Accretion of redeemable convertible preferred stock to redemption value $ — $ — $ ( 3,355 ) Net loss attributable to common stockholders $ ( 236,107 ) $ ( 175,832 ) $ ( 101,784 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 2.58 ) $ ( 2.01 ) $ ( 2.14 ) Shares used to compute net loss per share attributable to common stockholders, basic and diluted 91,409,624 87,587,409 47,478,544 The accompanying notes are an integral part of these financial statements. 64 Table of Contents THE REALREAL, INC. Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 236,107 ) $ ( 175,832 ) $ ( 98,429 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on investments ( 11 ) 4 32 Comprehensive loss $ ( 236,118 ) $ ( 175,828 ) $ ( 98,397 ) The accompanying notes are an integral part of these financial statements. 65 Table of Contents THE REALREAL, INC. Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share amounts) Redeemable Convertible Preferred Stock Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Shares Amount 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 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 66 Table of Contents 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 Purchase of capped calls — — — — — — ( 33,666 ) — — ( 33,666 ) Equity component of convertible senior notes, net of issuance costs of $ 767 — — — — — — 93,031 — — 93,031 Issuance of common stock upon exercise of options — — — — 1,221,365 — 6,009 — — 6,009 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes — — — — 2,237,748 — ( 8 ) — — ( 8 ) Issuance of common stock for exercises under ESPP — — — — 199,289 — 2,341 — — 2,341 Stock-based compensation expense — — — — — — 50,246 — — 50,246 Other comprehensive loss — — — — — — — ( 11 ) — ( 11 ) Net loss — — — — — — — — ( 236,107 ) ( 236,107 ) Balance as of December 31, 2021 — $ — — $ — 92,960,066 $ 1 $ 841,255 $ — $ ( 768,128 ) $ 73,128 The accompanying notes are an integral part of these financial statements. 67 Table of Contents THE REALREAL, INC. Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net loss $ ( 236,107 ) $ ( 175,832 ) $ ( 98,429 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 23,531 18,845 13,408 Stock-based compensation expense 48,802 24,322 7,711 Reduction of operating lease right-of-use assets 19,439 16,062 — Bad debt expense 1,034 903 1,371 Compensation expense related to stock sales by current and former employees — — 819 Change in fair value of convertible preferred stock warrant liability — — 2,100 Accrued interest on convertible notes 950 216 — Loss on retirement of property and equipment 546 280 — Accretion of debt discounts and issuance costs 13,989 2,399 11 Other adjustments 10 ( 86 ) ( 226 ) Changes in operating assets and liabilities: Accounts receivable ( 1,588 ) ( 337 ) ( 1,579 ) Inventory, net ( 28,694 ) ( 20,405 ) ( 11,561 ) Prepaid expenses and other current assets ( 4,009 ) ( 3,443 ) ( 4,108 ) Other assets ( 638 ) 548 ( 1,026 ) Operating lease liability ( 15,285 ) ( 12,752 ) — Accounts payable ( 9,989 ) 2,800 6,010 Accrued consignor payable 13,989 4,233 17,561 Other accrued and current liabilities 30,922 7,994 10,686 Other noncurrent liabilities 947 ( 166 ) 2,762 Net cash used in operating activities ( 142,151 ) ( 134,419 ) ( 54,490 ) Cash flow from investing activities: Purchases of short-term investments — ( 73,280 ) ( 220,609 ) Proceeds from maturities of short-term investments 4,000 278,215 39,281 Capitalized proprietary software development costs ( 9,967 ) ( 8,678 ) ( 9,267 ) Purchases of property and equipment ( 37,470 ) ( 18,253 ) ( 24,761 ) Net cash provided by (used in) investing activities ( 43,437 ) 178,004 ( 215,356 ) 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 Proceeds from issuance of convertible preferred stock, net of issuance costs — — 26,283 Proceeds from issuance of 2025 convertible notes, net of issuance costs — 166,278 — Purchase of capped calls in conjunction with the issuance of the 2025 convertible senior notes — ( 22,546 ) — Proceeds from issuance of 2028 convertible notes, net of issuance costs 278,234 — — Purchase of capped calls in conjunction with the issuance of the 2028 convertible senior notes ( 33,666 ) — — Proceeds from exercise of stock options and common stock warrants 6,009 8,859 2,729 Proceeds from issuance of stock in connection with the Employee Stock Purchase Program 2,341 972 — Taxes paid related to restricted stock vesting ( 5 ) ( 748 ) ( 130 ) Repayment of debt — — ( 9,250 ) Net cash provided by financing activities 252,913 152,815 378,665 Net increase in cash, cash equivalents and restricted cash 67,325 196,400 108,819 Cash, cash equivalents, and restricted cash Beginning of period 350,846 154,446 45,627 End of period $ 418,171 $ 350,846 $ 154,446 Supplemental disclosures of cash flow information Cash paid for interest $ 6,584 $ 11 $ 553 68 Table of Contents Cash paid for income taxes 94 90 102 Supplemental disclosures of non-cash investing and financing activities Accretion of redeemable convertible preferred stock to redemption value — — 3,355 Purchases of property and equipment included in accounts payable and other accrued and current liabilities 1,922 2,638 4,878 Purchases of capitalized proprietary software development costs included in accounts payable and other accrued and current liabilities 1,647 338 — 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 — Stock-based compensation capitalized to proprietary software development costs 1,444 — — Tax withholding liability for restricted stock 3 — — The accompanying notes are an integral part of these financial statements. 69 Table of Contents 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 In the year ended December 31, 2020, the COVID-19 pandemic materially impacted the Company's business operations and results of operations. Operations in the Company’s authentication centers were initially limited in accordance with shelter-in-place orders resulting in operations below full capacity. In-person concierge consignment appointments were temporarily suspended. Luxury consignment offices and retail stores were temporarily closed. During the second half of the fiscal year 2020, operations capacity was no longer limited by restrictions related to COVID-19 and all luxury consignment offices and retail stores were open. In-person concierge consignment appointments were available as an option for our consignor base and were augmented with virtual appointments. In March 2021, the Company resumed in-person concierge consignment appointments in various areas. The authentication centers and retail stores experience intermittent closures to perform safety and cleaning procedures. The Company also reopened its corporate offices, including our corporate headquarters in San Francisco. 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 as of December 31, 2021 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. The Company’s functional and reporting currency is the U.S. dollar. Certain changes in presentation have been made to conform the prior period presentation to the current period reporting. Such reclassifications did not affect total revenues, operating income, or net income. We have made certain presentation changes to reclassify accretion of unconditional grant liability, and amortization of premiums (discounts) on short-term investments to other adjustments within operating cash flows in the Statements of Cash Flows. We have also made certain presentation changes to reclassify accrued interest on convertible notes from other current and accrued liabilities to a separate line item within operating cash flows in the Statements of Cash Flows. Additionally, we have made certain presentation changes to reclassify legal settlement expenses from Selling, general and administrative to Legal settlement within operating expenses in the Statements of Operations. 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 prior 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. 70 Table of Contents 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, 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, 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. The Company’s convertible senior notes are participating securities as they give the holders the right to receive dividends if dividends or distributions declared to the common stockholders is equal to or greater than the last reported sale price of the Company’s common stock on the trading day immediately preceding the ex-dividend date for such dividend or distribution as if the instruments had been converted into shares of common stock. No undistributed earnings were allocated to the participating securities as the contingent event is not satisfied as of the reporting date. For periods in which the Company reports net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because potentially dilutive common shares and assumed conversion of the convertible senior notes are not assumed to have been issued within the calculation, if their effect is anti-dilutive. 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. Revenue Recognition The Company generates revenue from the sale of pre-owned luxury goods through its online marketplace and retail stores. 71 Table of Contents 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 2021, 2020, and 2019. 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 the standard consignment rates to consignors to optimize its supply. These are treated as a reduction of consignment and service revenue at the time of sale. The Company may offer a certain type of buyer incentive in the form of site credits to buyers on current transactions to be applied towards future transactions, which are included in other accrued and current liabilities on the 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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020. 72 Table of Contents 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 $ 46.2 million, $ 45.8 million, and $ 40.5 million in 2021, 2020, and 2019, 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 2021, 2020, and 2019, the Company capitalized proprietary software developments costs of $ 12.7 million, $ 9.0 million, and $ 9.3 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 purchase under the 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 and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents primarily consist of investments in short-term money market funds and amounts invested in U.S. treasury securities. 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 m aturities of 12 months or less are classified as short term and available-for-sale securities with remaining maturities greater than 12 months a re classified as long term. 73 Table of Contents 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). The unrealized gains and losses recorded within accumulated other comprehensive income (loss) have not been material for 2021 and 2020. In accordance with Accounting Standards Update (ASU) 2016-13, 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 (expense), net. As of December 31, 2021 and 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 realizable value using the specific identification method and the Company records provisions, as appropriate, to write down obsolete and excess inventory to estimated net realizable value. After the inventory value is reduced, adjustments are not made to increase it from the estimated net realizable value. Our provisions to write down obsolete and excess inventory to net realizable value have not been material for 2021 and 2020. 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 $ 23.6 million and $ 18.3 million as of December 31, 2021 and 2020. Included in inventory on the Company’s balance sheets are assets totaling $ 9.1 million and $ 7.4 million as of December 31, 2021 and 2020, 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 74 Table of Contents 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 2021, offering costs of $ 9.4 million related to the issuance of the 2028 Notes was allocated to the liability and equity components of the 2028 Notes based on the allocation of the proceeds. Of the total offering costs, $ 3.1 million was recorded as a reduction to additional paid-in capital and $ 6.3 million was recorded as a reduction in the carrying value of the debt on the balance sheet. In 2020, offering costs of $ 6.7 million related to the issuance of the 2025 Notes was allocated to the liability and equity components of the 2025 Notes based on the allocation of the proceeds. Of the total offering costs, $ 0.8 million was recorded as a reduction 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 within 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. Leases Prior to the adoption of ASC 842 on January 1, 2020 Leases were reviewed for classification as operating or capital leases. For operating leases, the Company recognized rent on a straight-line basis over the term of the lease. The Company recorded 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, were deferred and are recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The Company 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). 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. 75 Table of Contents The Company has finance leases for vehicles and equipment, and the amounts of finance lease right-of-use assets and finance lease liabilities have been immaterial to date. Convertible Senior Notes, net 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 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 of the 2025 Notes and the 2028 Notes, the Company allocated the debt components on the basis of the estimated fair value of a similar liability that does not have an associated convertible feature and the remaining proceeds are allocated to the equity component. The bifurcation of the debt and equity components resulted in a debt discount for the aforementioned notes. The Company uses the effective interest method to amortize the debt discount to interest expense over the amortization period which is the expected life of the debt. Capped Call Transactions In June 2020 and March 2021, in connection with the issuance of its convertible senior notes, the Company entered into Capped Call Transactions (see Note 7). The Capped Call Transactions are expected generally to reduce the potential dilution to the holders of the Company’s common stock upon any conversion of the 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 convertible senior notes issued in June 2020 and March 2021 was related to the equity component and was recorded as a reduction to additional paid in capital and 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. As of December 31, 2021 and December 31, 2020, there were no customers that represented 10% or more of the Company’s accounts receivable balance and there were no customers that individually exceeded 10% of the Company’s total revenue for each of the years ended December 31, 2021, 2020, and 2019. Recently Adopted Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes, primarily by removing certain exceptions to ASC 740. The 76 Table of Contents ASU also simplifies areas such as franchise taxes and interim recognition of enactment of tax laws and rate changes. The standard is effective for fiscal periods beginning after December 15, 2020. We adopted this standard as of January 1, 2021. The adoption of this standard did not have a material impact on our financial statements. Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU 2020-6, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting fo r convertible instruments. Under this ASU, the embedded conversion features will no longer be separated from the host contract for convertible ins truments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible 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 bifurcation and recognition as derivatives. ASU 2020-6 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 adopting this ASU using the modified retrospective method beginning January 1, 2022. While the adoption remains in progress, the Company expects that upon adoption, 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. The Company also expects that the adoption will result in a decrease to our accumulated deficit as of January 1, 2022 related to the interest expense from the amortization of the debt discount. 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, 2021 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 278,769 $ — $ — $ 278,769 Money market funds 139,402 — — 139,402 Total cash and cash equivalents $ 418,171 $ — $ — $ 418,171 December 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 150,520 $ — $ — $ 150,520 Money market funds 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 As of December 31, 2020, the contractual maturity for the short-term investments is less than one year. For the years ended December 31, 2021, 2020, and 2019 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 77 Table of Contents price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented. Assets and Liabilities Measured at Fair Value on a Recurring Basis As of December 31, 2021, the Company’s cash equivalents solely consisted of money market funds, which amounted to $ 139.4 million. Money market funds are measured at net asset value per share and are excluded from cash equivalents in the fair value hierarchy table. The following table provides the financial instruments measured at fair value (in thousands) as of December 31, 2020: 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 (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) was $ 200,326 as of December 31, 2020. Fair Value Measurements of Other Financial Instruments The following table presents the carrying amounts and estimated fair values of the financial instruments that are not recorded at fair value on the balance sheets (in millions): December 31, 2021 Net Carrying Amount Estimated Fair Value 2025 Convertible senior notes $ 153.9 $ 185.5 2028 Convertible senior notes $ 194.5 $ 288.7 The principal amounts of the 2025 Notes and the 2028 Notes are $ 172.5 million and $ 287.5 million, respectively. The difference between the principal amounts of the convertible senior notes and their respective net carrying amounts are the unamortized debt issuance costs and the unamortized debt discount (See Note 7). As of December 31, 2021, the fair value of the 2025 Notes and 2028 Notes, which differs from its carrying value is determined by prices for the Notes observed in market trading. The market for trading of the 2025 Notes and 2028 Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs, such as interest rates based on the market price on the last trading day for the period. 78 Table of Contents 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, 2021 December 31, 2020 Proprietary software $ 31,799 $ 24,218 Furniture and equipment 40,176 27,687 Automobiles 1,505 668 Leasehold improvements 66,154 52,828 Property and equipment, gross 139,634 105,401 Less: accumulated depreciation and amortization ( 50,348 ) ( 41,947 ) Property and equipment, net $ 89,286 $ 63,454 Depreciation and amortization expense on property and equipment was $ 23.5 million, $ 18.8 million, and $ 13.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. Property and equipment taken out of service as part of the closure of the Brisbane authentication center during the year ended December 31, 2021 was $ 8.7 million and a related $ 0.3 million of loss on disposal of property and equipment was recorded within the 'Operations and Technology' line of the Statements of Operations during the year ended December 31, 2021. The company also recorded $ 0.2 million of loss on impairment of capitalized propriety software within the 'Operations and Technology' line of the Statements of Operations during the year ended December 31, 2021. During the year ended December 31, 2020, fully depreciated proprietary software in the amount of $ 7.9 million was taken out of service. Other Accrued and Current Liabilities Other accrued and current liabilities consist of the following (in thousands): December 31, 2021 December 31, 2020 Returns reserve $ 23,577 $ 18,327 Accrued compensation 14,258 13,406 Accrued legal 14,417 2,537 Accrued sales tax and other taxes 8,935 6,870 Site credit liability 8,738 5,475 Accrued marketing and outside services 7,897 8,253 Accrued interest 1,166 216 Deferred revenue 3,387 1,617 Accrued inventory 3,513 470 Other 8,300 4,691 Other accrued and current liabilities $ 94,188 $ 61,862 Note 6. Debt 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. 79 Table of Contents 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, 2021, 2020 and 2019, the Company recorded interest expense related to the Term Loans of zero , zero , and $ 0.3 million, respectively. Revolving Credit Agreement In April 2021, the Company entered into a loan and security agreement ("Revolving Credit Agreement") with a lender, to provide a revolving line of credit of up to $ 50 million. Advances on the line of credit bear interest payable monthly at a variable annual rate equal to the greater of the prime rate plus 0.50 % or 4.25 %. The credit facility expires in April 2023. The Revolving Credit Agreement contains affirmative, negative and financial covenants, including covenants that require maintaining minimum cash and investment balances over specified periods of time and covenants that restrict, among other things, the Company’s ability to change its name, business, management, ownership or business locations, enter into mergers or acquisitions or incur additional indebtedness. As of December 31, 2021, the Company was in compliance with all covenants. As of December 31, 2021, $ 0 had been drawn on the Revolving Credit Agreement. Note 7. Convertible Senior Notes, Net 2025 Convertible Senior Notes In June 2020, the Company issued an aggregate principal of $ 172.5 million of its 3.00 % Convertible Senior Notes due 2025 (the “2025 Notes”), pursuant to an 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 2025 Notes issued in the Note Offering include $ 22.5 million in aggregate principal amount of the 2025 Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes. The 2025 Notes will mature on June 15, 2025, unless earlier redeemed or repurchased by the Company or converted. 80 Table of Contents The Company received net proceeds from the 2025 Notes offering of approximately $ 165.8 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $ 22.5 million of the net proceeds from the 2025 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes. The 2025 Notes accrue interest at a rate of 3.00 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The initial conversion rate applicable to the 2025 Notes is 56.2635 shares of common stock per $1,000 principal amount of 2025 Notes (which is equivalent to an initial conversion price of approximately $ 17.77 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a corporate event, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2025 Notes in connection with such corporate event. The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 20, 2023 if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. Prior to March 15, 2025, the 2025 Notes will be convertible only under the following circumstances: • During any calendar quarter (and only during such calendar quarter) beginning after September 30, 2020, if, the last reported sale price per share of the Company’s common stock exceeds 130 % of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter. • During the five business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; • Upon the occurrence of specified corporate transactions; or • If the Company calls any notes for redemption. On and after March 15, 2025, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2025 Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances. Upon conversion, the 2025 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. It is the Company’s current intent to settle conversions of the 2025 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. The conditions allowing holders of the 2025 Notes to convert were not met as of December 31, 2021. The 2025 Notes are unsecured and unsubordinated obligations of the Company and will rank senior in right of payment to any of future indebtedness of the Company that is expressly subordinated in right of payment to the 2025 Notes; rank equal in right of payment to any existing and future unsecured indebtedness of the Company that is not so subordinated; be effectively subordinated in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all existing and future indebtedness and other liabilities and obligations incurred by future subsidiaries of the Company. If bankruptcy, insolvency, or reorganization occurs with respect to the Company (and not solely with respect to a significant subsidiary of the Company), then the principal amount of, and all accrued and unpaid interest on, all of the 2025 Notes then outstanding will immediately become due and payable without any further action or notice by any person. If an event of default (other than bankruptcy, insolvency, or reorganization with respect to the Company and not solely with respect to a significant subsidiary of the Company) occurs and is continuing, then, with the exception of certain reporting 81 Table of Contents events of default, the trustee, by notice to the Company, or noteholders of at least 25 % of the aggregate principal amount of notes then outstanding, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the 2025 Notes then outstanding to become due and payable immediately. In accounting for the issuance of the 2025 Notes, the Company separately accounted for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion options, or equity component, due to Company’s ability to settle the 2025 Notes in cash, its common stock, or a combination of cash and common stock at Company’s option. The allocation was done by first estimating the fair value of the liability component and the residual value was assigned to the equity component. The value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The interest rate of 5.67 % was used to compute the initial fair value of the liability component of $ 152.7 million. 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 2025 Notes was as follows (in thousands): December 31, 2021 December 31, 2020 Principal $ 172,500 $ 172,500 Unamortized debt discount ( 14,350 ) ( 17,945 ) Unamortized debt issuance costs ( 4,286 ) ( 5,367 ) Net carrying amount $ 153,864 $ 149,188 The net carrying amount of the equity component of the 2025 Notes was as follows (in thousands): December 31, 2021 Proceeds allocated to the conversion options (debt discount) $ 19,787 Issuance costs ( 767 ) Net carrying amount $ 19,020 In connection with the issuance of the 2025 Notes, the Company incurred approximately $ 6.7 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. 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 2025 Notes or approximately its five-year term. The effective interest rate on the liability component of the 2025 Notes for the period from the date of issuance through December 31, 2021 was 6.4 %. The following table sets forth the amounts recorded in interest expense related to the 2025 Notes (in thousands): Year Ended December 31, 2021 2020 Contractual interest expense $ 5,175 $ 2,803 Amortization of debt discount 3,594 1,843 Amortization of debt issuance costs 1,082 556 Total interest and amortization expense $ 9,851 $ 5,202 82 Table of Contents Future minimum payments under the 2025 Notes as of December 31, 2021, are as follows (in thousands): Fiscal Year Amount 2022 $ 5,175 2023 5,175 2024 5,175 2025 175,088 Total future payments 190,613 Less amounts representing interest ( 18,113 ) Total principal amount $ 172,500 2028 Convertible Senior Notes In March 2021, the Company issued an aggregate principal of $ 287.5 million of its 1.00 % Convertible Senior Notes due 2028, pursuant to an indenture between the Company and U.S. Bank National Association, as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2028 Notes issued in the Note Offering include $ 37.5 million in aggregate principal amount of the 2028 Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes. The 2028 Notes will mature on March 1, 2028, unless earlier redeemed or repurchased by the Company or converted. The Company received net proceeds from the 2028 Notes offering of approximately $ 278.1 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $ 33.7 million of the net proceeds from the 2028 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes. The 2028 Notes accrue interest at a rate of 1.00 % per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021. The initial conversion rate applicable to the 2028 Notes is 31.4465 shares of common stock per $1,000 principal amount of 2028 Notes (which is equivalent to an initial conversion price of approximately $ 31.80 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a corporate event, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2028 Notes in connection with such corporate event. The 2028 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after March 5, 2025 if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. Prior to December 1, 2027, the 2028 Notes will be convertible only under the following circumstances: • During any calendar quarter (and only during such calendar quarter) beginning after June 30, 2021, if, the last reported sale price per share of the Company’s common stock exceeds 130 % of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter; • During the five business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98 % of the 83 Table of Contents 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 December 1, 2027, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2028 Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances. Upon conversion, the 2028 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. It is the Company’s current intent to settle conversions of the 2028 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. The conditions allowing holders of the 2028 Notes to convert were not met as of December 31, 2021. The 2028 Notes are unsecured and unsubordinated obligations of the Company and will rank senior in right of payment to any of future indebtedness of the Company that is expressly subordinated in right of payment to the 2028 Notes; rank equal in right of payment to any existing and future unsecured indebtedness of the Company that is not so subordinated; be effectively subordinated in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all existing and future indebtedness and other liabilities and obligations incurred by future subsidiaries of the Company. If bankruptcy, insolvency, or reorganization occurs with respect to the Company (and not solely with respect to a significant subsidiary of the Company), then the principal amount of, and all accrued and unpaid interest on, all of the 2028 Notes then outstanding will immediately become due and payable without any further action or notice by any person. If an event of default (other than bankruptcy, insolvency, or reorganization with respect to the Company and not solely with respect to a significant subsidiary of the Company) occurs and is continuing, then, with the exception of certain reporting events of default, the trustee, by notice to the Company, or noteholders of at least 25 % of the aggregate principal amount of notes then outstanding, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the 2028 Notes then outstanding to become due and payable immediately. In accounting for the issuance of the 2028 Notes, the Company separately accounted for the liability and equity components of the 2028 Notes by allocating the proceeds between the liability component and the embedded conversion options, or equity component, due to Company’s ability to settle the 2028 Notes in cash, its common stock, or a combination of cash and common stock at Company’s option. The allocation was done by first estimating the fair value of the liability component and the residual value was assigned to the equity component. The value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The interest rate of 7.18 % was used to compute the initial fair value of the liability component of $ 191.3 million, with a corresponding amount recorded as a discount on the initial issuance of the 2028 Notes of approximately $ 96.2 million. The 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 2028 Notes was as follows (in thousands): December 31, 2021 Principal $ 287,500 Unamortized debt discount ( 87,403 ) Unamortized debt issuance costs ( 5,581 ) Net carrying amount $ 194,516 The net carrying amount of the equity component of the 2028 Notes was as follows (in thousands): December 31, 2021 Proceeds allocated to the conversion options (debt discount) $ 96,162 Issuance costs ( 3,131 ) Net carrying amount $ 93,031 84 Table of Contents In connection with the issuance of the 2028 Notes, the Company incurred approximately $ 9.4 million of debt issuance costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. The Company allocated these costs to the liability and equity components based on the allocation of the proceeds. The portion of these costs allocated to the equity component totaling approximately $ 3.1 million was recorded as a reduction to additional paid-in capital. The portion of these costs allocated to the liability component totaling approximately $ 6.3 million was recorded as a reduction in the carrying value of the debt on the condensed balance sheets and is amortized to interest expense using the effective interest method over the expected life of the 2028 Notes or approximately its seven-year term. The effective interest rate on the liability component of the 2028 Notes for the period from the date of issuance through December 31, 2021 was 7.5 %. The following table sets forth the amounts recorded in interest expense related to the 2028 Notes (in thousands): Year Ended December 31, 2021 Contractual interest expense $ 2,332 Amortization of debt discount 8,759 Amortization of debt issuance costs 554 Total interest and amortization expense $ 11,645 Future minimum payments under the 2028 Notes as of December 31, 2021, are as follows (in thousands): Fiscal Year Amount 2022 $ 2,875 2023 2,875 2024 2,875 2025 2,875 2026 2,875 2027 2,875 2028 288,937 Total future payments 306,187 Less amounts representing interest ( 18,687 ) Total principal amount $ 287,500 Capped Call Transactions with Respect to the 2025 Notes and 2028 Notes In connection with the issuance of the 2025 Notes and 2028 Notes, including the initial purchasers’ exercise of the option to purchase additional Notes, the Company entered into capped call transactions with respect to its common stock with certain financial institutions (collectively, the “Counterparties”). The Company paid an aggregate amount of approximately $ 22.5 million to the Counterparties in connection with the 2025 capped call transactions (the "2025 Capped Calls") and $ 33.7 million to the Counterparties in connection with the 2028 capped call transactions and (the "2028 Capped Calls" and, together with the 2025 Capped Calls, the "Capped Calls"). The 2025 Capped Calls and 2028 Capped Calls cover approximately 9,705,454 and 9,040,869 shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2025 Notes and the 2028 Notes, respectively. The 2025 Capped Calls and the 2028 Capped Calls are subject to anti-dilution adjustments that are intended to be substantially identical to those in the 2025 Notes and the 2028 Notes, as applicable, and are exercisable upon conversion of the 2025 Notes or the 2028 Notes, as applicable. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offer and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. The 2025 Capped Calls settle in components commencing on April 16, 2025 with the last component scheduled to expire 85 Table of Contents on June 12, 2025. The 2028 Capped Calls settle in components commencing on December 31, 2027 with the last component scheduled to expire on February 28, 2028. The cap price of the 2025 Capped Call is initially $ 27.88 per share, which represents a premium of 100.0 % over the closing price of the Company’s common stock of $ 13.94 per share on June 10, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The cap price of the 2028 Capped Call is initially $ 48.00 per share, which represents a premium of 100.0 % over the closing price of the Company’s common stock of $ 24.00 per share on March 3, 2021, and is subject to certain adjustments under the terms of the Capped Calls. 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 Capped Calls being exercised. These capped call instruments meet the conditions outlined in ASC 815-40 to be classified in stockholders’ equity, are not accounted for as derivatives, and are not subsequently remeasured as long as the conditions for equity classification continue to be met. The Company recorded a reduction to additional paid-in capital of approximately $ 22.5 million and $ 33.7 million related to the premium payments for the 2025 Capped Calls and the 2028 Capped Calls, respectively. Note 8. Common Stock The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows: December 31, 2021 December 31, 2020 Options issued and outstanding 4,131,501 5,809,376 Outstanding restricted stock units 8,182,649 5,103,727 Shares available for grant under the 2019 equity incentive plan 6,709,676 7,104,498 Shares available for issuance under 2019 ESPP 3,210,985 2,517,258 Total 22,234,811 20,534,859 Note 9. 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. 2019 Equity Incentive Plan In connection with the Company’s initial public offering, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to participants. Subject to the terms and conditions of the 2019 Plan, the initial number of shares authorized for grants under the 2019 Plan is 8,000,000 . These available shares increase annually by an amount equal to the lesser of 8,000,000 shares, 5 % of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. On August 4, 2020, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,293,616 shares. On May 5, 2021, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,465,083 shares. 86 Table of Contents 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, 2020 5,809,376 5.64 5.9 $ 82,717 Options granted — — Options exercised ( 1,221,365 ) 4.93 Options cancelled ( 456,510 ) 11.49 Balances at December 31, 2021 4,131,501 5.19 4.3 30,382 Options vested and exercisable— December 31, 2021 3,627,255 4.19 3.9 29,182 There were no stock options granted in 2021 and in 2020. The weighted average grant date fair value of options granted during the year ended December 31, 2019 was $ 8.60 per share. The aggregate intrinsic value of options exercised for the years ended December 31, 2021, 2020, and 2019 was $ 20.5 million, $ 32.2 million, and $ 16.2 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, 2021 is as follows: Number of Shares Restricted Stock Units Weighted- Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested December 31, 2020 5,103,727 $ 13.40 $ 99,640 Granted 7,928,232 18.69 Vested ( 2,238,553 ) 17.03 Forfeited ( 2,610,757 ) 16.88 Unvested December 31, 2021 8,182,649 $ 16.42 $ 94,972 The total fair value of RSUs v ested during the year ended December 31, 2021 was $ 38.1 million . 2019 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. On May 5, 2021, the Company's board of directors approved an increase in the shares available for grant under the ESPP by 893,016 shares. During the years ended December 31, 2021 and 2020, employees purchased 199,289 and 91,465 shares, respectively, at an average price of $ 11.74 and $ 10.63 , respectively. There were no shares purchased by employees during the year ended December 31, 2019. The intrinsic value of shares purchased during the years December 31, 2021 and 2020 was $ 0.7 million and $ 0.2 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares. 87 Table of Contents As of December 31, 2021, the Company had approximately $ 0.4 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. The following assumptions were used to estimate the fair value of stock options granted in 2019, as there were no stock options granted in 2021 and 2020: Year Ended December 31, 2019 Expected term (in years) 5.0 – 6.1 Expected volatility 44.2 % – 47.8 % Average risk-free rate 1.9 % – 2.6 % Dividend yield — As of December 31, 2021, total unrecognized stock-based compensation expense related to options was $ 3.6 million. These costs are expected to be recognized over a weighted average period of 1.2 years as of December 31, 2021. As of December 31, 2021, the Company had approximately $ 120.2 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 2.9 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, 2021 2020 2019 Marketing $ 2,557 $ 1,755 $ 392 Operations and technology 21,395 10,241 3,148 Selling, general and administrative 24,850 12,326 4,171 Total $ 48,802 $ 24,322 $ 7,711 The amounts presented in the above table exclude compensation expense related to the stock sales by current and former employees. 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 88 Table of Contents 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 10. 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 recorded operating lease costs of $ 29.7 million and $ 24.7 million for the years ended December 31, 2021 and 2020, respectively. The Company incurred $ 5.3 million and $ 3.9 million of variable lease costs for the years ended December 31, 2021 and 2020, respectively, which is comprised primarily of the Company’s proportionate share of operating expenses, property taxes and insurance. Rent expense under ASC 840 was $ 18.1 million for the year ended December 31, 2019. Maturities of operating lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year Amount 2022 27,436 2023 28,268 2024 27,998 2025 28,648 2026 28,201 Thereafter 58,806 Total future minimum payments $ 199,357 Less: Imputed interest ( 37,946 ) Present value of operating lease liabilities $ 161,411 Supplemental cash flow information related to the Company’s operating leases are as follows (in thousands): Year Ended December 31, 2021 Year Ended December 31, 2020 Operating cash flows used for operating leases $ 25,386 $ 21,381 Operating lease assets obtained in exchange for operating lease liabilities $ 46,614 $ 23,853 The weighted average remaining lease term and discount rate for the Company’s operating leases are as follows: As of December 31, 2021 As of December 31, 2020 Weighted average remaining lease term 7.1 years 7.3 years Weighted average discount rate 6.2 % 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, 2021 and 2020. 89 Table of Contents Note 11. Commitments and Contingencies Noncancelable Purchase Commitments As of December 31, 2021, the future minimum payments under the Company’s noncancelable purchase commitments were as follows (in thousands): Year Ending December 31, Purchase Commitments 2022 $ 7,431 2023 4,423 2024 1,139 2025 — 2026 — Total future minimum payments $ 12,993 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. There are no conditions that the University must meet to receive the funds nor any penalties to the University for nonperformance. The Endowment Agreement directs the use of the funds but contains no binding restrictions on the use of the funds. On the execution of the Endowment Agreement, the Company recognized $ 1.7 million expense for the estimated fair value of the grant, using a discount rate of 10 %, to selling, general and administrative expenses in the statements of operations. 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, 2021, 2020, and 2019. As of December 31, 2021, there was no outstanding liability, as the final annual installment of $ 0.5 million was made during the year ended December 31, 2021. 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. 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. sued the Company in the U.S. District Court for the Southern District of New York. The Complaint alleged federal and state law claims of trademark infringement, unfair competition, and false advertising. On February 1, 2019, Chanel, Inc. filed its First Amended Complaint that included substantially similar claims against the Company. On March 4, 2019, the Company filed a Motion to Dismiss the First Amended Complaint, which was granted in part and dismissed in part on March 30, 2020. The surviving claims against the Company include trademark infringement under 15 U.S.C. § 1114, false advertising under 15 U.S.C. § 1125, and unfair competition under New York common law. On May 29, 2020, the Company filed its Answer to the Amended Complaint. On October 30, 2020, the Company sought leave to amend its Answer to assert counterclaims against Chanel, Inc. for violations of the Sherman Act, 15 U.S.C. §§ 1 & 2, the Donnelly Act, N.Y. Gen. Bus. Law. § 340, and New York common law. The motion for leave to amend was granted on February 24, 2021. Chanel, Inc. moved to dismiss the Company’s counterclaims; the motion to dismiss remains pending. The parties agreed to a stay in April 2021 to engage in settlement discussions. After several mediation sessions, the parties were unable to reach a resolution, and the stay was lifted in November 2021. The Court entered an Amended Scheduling Order on December 20, 2021. Under the Amended Scheduling Order, all fact discovery is to be completed by August 1, 2022 and all discovery is to be completed by November 14, 2022. Fact discovery is underway, and the parties are actively working to resolve several ongoing discovery disputes. 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. 90 Table of Contents 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. On March 31, 2021, the court entered an order on the motion to dismiss, dismissing the Securities Exchange Act of 1934 (the “Exchange Act”) claims and some of the claims alleged under the Securities Act of 1933 (the “Securities Act”). The court provided plaintiffs with an opportunity to amend the complaint and, on April 30, 2021, plaintiffs filed a Second Amended Complaint in federal court. The state court complaint, and the Second Amended Complaint in federal court each allege claims under the Securities Act of 1933 on behalf of a purported class of shareholders who acquired the Company’s stock pursuant to or traceable to the registration statement for the Company’s IPO. The federal complaint also alleges claims under the Exchange Act on behalf of a purported class of shareholders who purchased the Company’s stock from June 27, 2019 through November 20, 2019. The complaints seek, among other things, damages and interest, rescission, and attorneys’ fees and costs. On July 27, 2021, the Company reached an agreement in principle to settle this shareholder class action. On November 5, 2021, plaintiff filed the executed stipulation of settlement and motion for preliminary approval of the settlement with the federal court. The stipulation of settlement is subject to preliminary and final approval by the court. The financial terms of the stipulation of settlement provide that the Company will pay $ 11.0 million within thirty ( 30 ) days of the later of preliminary approval of the settlement or plaintiff’s counsel providing payment instructions. In connection with the settlement, the Company recorded approximately $ 11.0 million during the year ended December 31, 2021 under our Operating expenses as a Legal settlement. The Company intends to pay for the settlement with available resources. 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 purported shareholder class actions. The two derivative cases have been consolidated. On September 13, 2021, the parties reached a settlement in principle of the derivative case. The settlement in principle provides for certain corporate governance reforms in exchange for a release and dismissal of the lawsuit. On October 21, 2021, the parties reached agreement to pay up to $ 0.5 million in attorneys’ fees and costs to plaintiffs’ counsel in the derivative case. On November 5, 2021, the parties entered into a stipulation of settlement, and on February 11, 2022, the court entered an order and final judgment approving the settlement. In connection with the derivative settlement, the Company recorded approximately $ 0.5 million for the year ended December 31, 2021 under our Operating expenses as a Legal settlement. The stipulation of settlement was preliminarily approved on December 8, 2021, and the $ 0.5 million was paid within thirty ( 30 ) days of the preliminary approval, or on January 7, 2022, with available resources. 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. 91 Table of Contents Note 12. Income Taxes The components of the Company’s income tax provision consisted of (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ — — — State 56 101 199 Total current tax expense 56 101 199 Deferred: — — Federal — — — State — — — Total deferred tax expense — — — Total provision for income taxes $ 56 $ 101 $ 199 The reconciliation of the Federal statutory income tax provision for the Company’s effective income tax provision (in thousands): Year Ended December 31, 2021 2020 2019 Tax at federal statutory rate $ ( 49,480 ) $ ( 36,559 ) $ ( 20,272 ) State taxes, net of federal effect ( 13,704 ) ( 10,315 ) ( 5,170 ) Stock-based compensation ( 2,698 ) ( 6,261 ) 750 Non-deductible items 3,661 402 679 Convertible Notes 16,782 — — Valuation allowance 42,327 52,834 24,212 Other 3,168 — — Provision for income taxes $ 56 $ 101 $ 199 The Company’s deferred tax assets and liabilities (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 178,558 $ 129,333 Fixed assets and intangibles 2,915 3,794 Accruals and reserves 8,202 6,008 Stock options 5,007 3,147 Operating lease liabilities 43,345 35,267 Capped calls 15,095 — Gross deferred tax assets 253,122 177,549 Less: valuation allowance ( 185,541 ) ( 143,214 ) Total deferred tax assets 67,581 34,335 Deferred tax liabilities: Operating lease right-of-use assets ( 39,021 ) ( 32,028 ) Convertible debt ( 26,477 ) — Other ( 2,083 ) ( 2,307 ) Gross deferred tax liabilities ( 67,581 ) ( 34,335 ) 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 92 Table of Contents 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, 2021 and December 31, 2020 was an increase of $ 42.3 million and an increase of $ 54.8 million, respectively. As of December 31, 2021 and 2020, the Company has a net operating loss carryforward of $ 674.9 million and $ 485.1 million for federal tax purposes, respectively, and $ 609.7 million and $ 458.9 million for state tax purposes, respectively. If not utilized, these losses will expire beginning in 2024 for state tax 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, $ 506.7 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, 2021 and 2020, 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, 2021 and 2020, 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, 2021, 2020, and 2019. Note 13. 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, 2021 2020 2019 Numerator Net loss attributable to common stockholders $ ( 236,107 ) $ ( 175,832 ) $ ( 101,784 ) Denominator Weighted-average common shares outstanding used to calculate net loss per share attributable to common stockholders, basic and diluted 91,409,624 87,587,409 47,478,544 Net loss per share attributable to common stockholders, basic and diluted $ ( 2.58 ) $ ( 2.01 ) $ ( 2.14 ) 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): December 31, 2021 2020 2019 Options to purchase common stock 4,131,501 5,809,376 9,171,756 Restricted stock units 8,187,586 5,103,727 789,817 Estimated shares issuable under the Employee Stock Purchase Plan 147,871 109,729 — Assumed conversion of the Convertible Senior Notes 18,746,323 9,705,454 — Total 31,213,281 20,728,286 9,961,573 93 Table of Contents The Convertible Senior Notes issued in June 2020 and in March 2021 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 on an as-converted basis. Note 14. 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 $ 1.1 million, $ 0.8 million, and $ 0.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. 94 Table of Contents Note 15. 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. 95