What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-02-28 compared with 2022-02-28 · 316 added, 332 removed, 950 unchanged (41% of the section changed)

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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, 2022.

Based on this evaluation, our Chief

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.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, 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

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

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

Under the supervisi on 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, 2022 .

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.

KPMG, LLP, our independent registered public accounting firm, has audited management's assertion on the effectiveness of our internal control over financial reporting as of December 31, 2022, 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

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Other Information.

Departure of Directors or Certain Officers;

Election of Directors;

Appointment of Certain Officers;

Compensatory Arrangements of Certain Officers.

On February 27, 2023, the Company entered into letter agreements (“Special Award Letters”) with each of Rati Sahi Levesque, the Company’s President and Chief Operating Officer, and Robert Julian, the Company’s Chief Financial Officer (together, the “Executives”), pursuant to which each Executive is eligible to receive a one-time, special cash bonus in the amount of $250,000.

Under the Special Award Letters, the cash bonuses will be paid within fifteen (15) days following December 31, 2023 (the “Award Date”), subject to the applicable Executive’s continued employment with the Company through the Award Date.

In the event that an Executive’s employment is terminated by the Company without “cause” or by the Executive for “good reason” (each as defined in his or her severance and change in control agreement with the Company), in either case, prior to the Award Date, then, subject to the applicable Executive’s execution and non-revocation of a general release of claims in favor of the Company, the Executive will be entitled to payment of his or her cash award.

The foregoing description of the one-time, special cash bonuses does not purport to be complete and is qualified in its entirety by full text of the Form of Special Award Letter, a copy of which is filed herewith as Exhibit 10.36.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

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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”).

Information required by this Item is incorporated herein by reference to our 2022 proxy statement to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022 (the “Proxy Statement”).

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.

The information required by this Item is incorporated herein by reference to our Proxy Statement.

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.

The information required by this Item is incorporated herein by reference to our Proxy Statement.

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.

The information required by this Item is incorporated herein by reference to our Proxy Statement.

Principal Accounting Fees and Services.

Our independent registered public accounting firm is KPMG LLP , San Francisco, CA , Auditor ID:

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.

The information required by this Item is incorporated herein by reference to our Proxy Statement.

Exhibits, Financial Statement Schedules.

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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

10.2# Loan and Security Agreement dated as of September 19, 2013 by and between The RealReal, Inc.

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S-1 333-231891 10.6 May 31, 2019

Incorporated by Reference

Description Form File No.

Exhibit Filing Date Filed

10.6# Fourth Amendment to Loan and Security Agreement dated as of December 28, 2015 by and between The RealReal, Inc.

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S-1 333-231891 10.7 May 31, 2019

Incorporated by Reference

Description Form File No.

Exhibit Filing Date Filed

10.7# Fifth Amendment to Loan and Security Agreement dated as of July 18, 2016 by and between The RealReal, Inc.

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S-1 333-231891 10.17 May 31, 2019

10.18# Lease Agreement dated as of March 14, 2016 by and between The RealReal, Inc.

and M&L Associates.

S-1 333-231891 10.2 May 31, 2019

10.17# Lease Agreement dated as of June 5, 2018 by and between The RealReal, Inc.

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S-1 333-231891 10.19 May 31, 2019

Incorporated by Reference

Description Form File No.

Exhibit Filing Date Filed

10.18# Lease Agreement dated as of September 14, 2018 by and between The RealReal, Inc.

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S-1 333-231891 10.21 June 17, 2019

Incorporated by Reference

Description Form File No.

Exhibit Filing Date Filed

10.20+ The RealReal, Inc.

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10.22+ 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.

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

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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

10.29+ Offer Letter dated September 15, 2021 between the Company and Robert Julian.

10-Q 001-38953 10.1 November 8, 2021

10.30+ The RealReal, Inc.

201 9 Equity Incentive Plan Performance-Based Restricted Stock Unit Award Agreement

10-K 001-38953 10.34 February 28, 2022

10.31+ The RealReal, Inc.

2019 Equity Incentive Plan Restricted Stock Unit Award

10-Q 001-38953 10.1 August 9, 2022

10.32+ Transition and Separation Agreement between the Company and Julie Wainwright dated June 7, 2022

8-K 001-38953 10.1 June 7, 2022

10.33+ Form of Special Award Letter

8-K 001-38953 10.2 June 7, 2022

10.34+ Offer Letter dated January 24, 2023 between the Company and John E.

8-K 001-38953 10.1 January 25, 2023

Incorporated by Reference

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Exhibit Filing Date Filed

10.34+ The RealReal, Inc.

Performance-Based Restricted Stock Unit Award Agreement

10.35+ Form of Indemnification Agreement entered into by and between The RealReal, Inc.

and its directors and executive officers.

10.36+ Form of Special Award Letter

23.1 Consent of KPMG, LLP, Independent Registered Public Accounting Firm

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Name Title Date

/s/ Julie Wainwright

Chairperson and Chief Executive Officer February 28, 2022

Julie Wainwright (Principal Executive Officer)

/s/ John Koryl

Chief Executive Officer and Director February 28, 2023

John Koryl (Principal Executive Officer)

/s/ Robert Julian

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Statements of Comprehensive Loss for the Years ended December 31, 202 2 , 202 1 , and 2 0 20

Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2021, 2020, and 2019

Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 202 2 , 202 1 , and 20 20

Statements of Cash Flows for the Years ended December 31, 202 2 , 202 1 , and 20 20

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

To the Stockholders and the Board of Directors

The RealReal, Inc.:

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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).

(the Company) as of December 31, 2022 and 2021, the related statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S.

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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 ).

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for convertible senior notes effective January 1, 2022, due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , using the modified retrospective adoption method.

Basis for Opinion

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(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

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 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 separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Sufficiency of the audit evidence over the IT elements of revenue recognition

As discussed in Note 2 to the financial statements, the Company recognizes consignment revenue by providing a service to sell pre-owned luxury goods on behalf of consignors to buyers through its online marketplace and retail stores.

Direct revenue is recognized from the sale of Company-owned inventory on its online marketplace and retail stores.

The Company reported $603 million in total revenue for the year ended December 31, 2022.

We identified the evaluation of the sufficiency of audit evidence over the information technology (IT) elements of revenue recognition as a critical audit matter.

A high degree of complex auditor judgment was required to evaluate the nature and extent of audit evidence obtained related to consignment and direct revenue due to the complexity and number of IT systems.

IT professionals with specialized skills and knowledge were required to understand and assess the Company’s internally developed IT systems used in the revenue recognition process.

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.

We applied auditor judgment to determine the nature and extent of procedures to be performed over the IT elements of revenue recognition.

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

• gaining an understanding of the systems used in the Company’s recognition of revenue

• evaluating the design and testing the operating effectiveness of certain internal controls related to the IT applications used in the revenue recognition process.

This included general IT controls, IT application controls, data configurations, and interface controls over the transfer of relevant data between systems.

We performed a software-assisted data analysis to test the relationships among certain revenue transactions.

On a sample basis, we also tested certain revenue transactions by comparing the recorded amounts to underlying documentation.

We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence.

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

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

To the Stockholders and the Board of Directors

The RealReal, Inc.:

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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.

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, 2022 and 2021, the related statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the financial statements), and our report dated February 28, 2023 expressed an unqualified opinion on those financial statements.

Basis for Opinion

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$ 293,793 $ 418,171

Short-term investments

Accounts receivable

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Commitments and contingencies (Note 11)

Stockholders’ equity:

Stockholders’ equity (deficit):

Common stock, $ 0.00001 par value;

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781,060 841,255

Accumulated other comprehensive income

Accumulated deficit

( 951,153 ) ( 768,128 )

Total stockholders’ equity

73,128 191,293

Total liabilities and stockholders’ equity

$ 754,944 $ 605,109

Total stockholders’ equity (deficit) ( 170,092 ) 73,128

Total liabilities and stockholders’ equity (deficit) $ 615,641 $ 754,944

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

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2022 2021 2020

Consignment and service revenue $ 346,848 $ 247,326 $ 265,729

Consignment revenue $ 384,979 $ 302,221 $ 213,312

Direct revenue 158,726 120,844 52,623

Shipping services revenue 59,788 44,627 34,014

Total revenue 603,493 467,692 299,949

Cost of revenue:

Cost of consignment and service revenue 92,788 66,976 73,579

Cost of consignment revenue 56,963 44,985 30,389

Cost of direct revenue 141,661 101,427 45,406

Cost of shipping services revenue 56,178 47,803 36,587

Total cost of revenue 254,802 194,215 112,382

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Selling, general and administrative 195,160 176,418 140,652

Legal settlement 13,389 1,110 —

Legal settlements 456 13,389 1,110

Total operating expenses 537,854 488,385 360,383

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Provision for income taxes 172 56 101

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

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THE REALREAL, INC.

Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Statements of Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

Redeemable Convertible

Preferred Stock Convertible

Preferred Stock Common Stock Additional

Common Stock Additional

Capital Accumulated

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Stockholders’

Shares Amount Shares Amount Shares Amount

Shares Amount

Balance as of December 31, 2019 85,872,320 $ 1 $ 693,426 $ 7 $ ( 356,189 ) $ 337,245

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

Purchase of capped calls — — ( 22,546 ) — — ( 22,546 )

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

— — 19,020 — — 19,020

Issuance of common stock upon exercise of options 2,604,494 — 8,859 — — 8,859

Issuance of common stock upon exercise of warrants — — — — 10,677 — 33 — — 33

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 cashless exercise of warrants — — — — 89,542 — — — — —

Compensation expense related to stock sales by current and former employees — — — — — — 819 — — 819

Issuance of common stock for exercises under ESPP 91,465 — 972 — — 972

Stock-based compensation expense — — 24,322 — — 24,322

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Stock-based compensation expense — — 50,246 — — 50,246

Other comprehensive income — — — — — — — 4 — 4

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

Purchase of capped calls — — — — — — ( 33,666 ) — — ( 33,666 )

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

— — — — — — 93,031 — — 93,031

Cumulative effect adjustment due to adoption of ASU 2020-06 (Note 2) — — ( 112,052 ) — 13,420 ( 98,632 )

Issuance of common stock upon exercise of options 1,929,265 — 2,906 — — 2,906

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Stock-based compensation expense — — 47,767 — — 47,767

Other comprehensive loss — — — — — — — ( 11 ) — ( 11 )

Net loss — — — — ( 196,445 ) ( 196,445 )

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Bad debt expense 1,680 1,034 903

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 —

Loss on disposal of property and equipment and impairment of capitalized proprietary software 702 546 280

Accretion of debt discounts and issuance costs 2,368 13,989 2,399

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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

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Taxes paid related to restricted stock vesting ( 205 ) ( 5 ) ( 748 )

Repayment of debt — — ( 9,250 )

Net cash provided by financing activities 4,101 252,913 152,815

Net increase in cash, cash equivalents and restricted cash 67,325 196,400 108,819

Cash, cash equivalents, and restricted cash

Net increase (decrease) in cash and cash equivalents ( 124,378 ) 67,325 196,400

Cash and cash equivalents

Beginning of period 418,171 350,846 154,446

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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 13,860 1,922 2,638

Purchases of capitalized proprietary software development costs included in accounts payable and other accrued and current liabilities 1,590 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

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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”) is an online marketplace for authenticated, consigned luxury goods across multiple categories, including women’s fashion, men’s fashion, and jewelry and watches.

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.

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, stockholders’ equity (deficit), and cash flows for the periods presented.

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

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.

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.

The Company adopted ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity as of January 1, 2022 using the modified retrospective adoption method with a cumulative effect adjustment.

Refer to Note 2 "Recently Adopted Accounting Pronouncements" for further details on the adoption of ASU 2020-6.

The Company had a change in accounting policy from those disclosed in the audited financial statements and related notes for the year ended December 31, 2021 related to shipping services revenue.

Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation, as described in Note 2 " Change in Accounting Principle" below.

Summary of Significant Accounting Policies

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

Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve, 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.

Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve, standalone selling price related to consignment transactions, valuation of inventory, software development costs, stock-based compensation, incremental borrowing rates related to lease liability, valuation of deferred taxes, and other contingencies.

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

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

Consignment and Service Revenue

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

The Company enters into contracts that include products and services that are capable of being distinct and accounted for as separate performance obligations as described below.

The transaction price requires an allocation across consignment services, sales of Company-owned inventory, and shipping services.

Estimation is required in the determination of the services' stand-alone selling price ("SSP").

Consignment 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.

SSP is estimated using observable stand-alone consignment sales which are conducted without shipping services.

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

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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.

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

SSP is estimated using observable stand-alone sales of Company-owned inventory which are conducted without shipping services, when available, or a market assessment approach.

Direct revenue is recognized net of estimated returns, buyer incentives and adjustments.

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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.

Shipping Services Revenue

The Company provides a service to ship purchased items to buyers and a service to ship items from buyers back to the Company.

The Company determines itself to be the principal in this arrangement.

The Company charges a fee to buyers

for this service and has elected to treat shipping and handling activities performed as a separate performance obligation.

For shipping services revenue, the Company's SSP is estimated using a market approach considering external and internal data points on the stand-alone sales price of the shipping service.

All outbound shipping and handling costs for buyers are accounted for as cost of shipping services and recognized as the shipping activity occurs.

The Company also generates shipping services revenue from the shipping fees for consigned products returned by buyers to the Company within policy.

The Company recognizes shipping revenue and associated costs over time as the shipping activity occurs, which is generally one to three days after shipment.

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

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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.

These are treated as a reduction of consignment 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.

These are treated as a reduction of consignment 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.

The Company’s contractual liabilities primarily 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 buyer incentives, which were immaterial as of December 31, 2022 and December 31, 2021.

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

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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 consignment revenue consist of 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.

Cost of shipping services revenue consists of the outbound shipping and handling costs to deliver purchased items to buyers, the shipping costs for consigned products returned by buyers to the Company within policy, and an allocation of the credit card fees associated with the shipping fee charged.

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

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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.

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

In 2022, 2021, and 2020, the Company capitalized proprietary software developments costs of $ 15.6 million, $ 12.7 million, and $ 9.0 million, respectively.

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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.

Selling, general and

administrative expense also includes allocated facility and overhead costs and professional services, including accounting and legal advisors.

Stock-based Compensation

The Company incurs stock-based compensation expense from stock options, restricted stock units (“RSUs”), performance based restricted stock units (“PSUs”), and employee stock purchase plan (“ESPP”) purchase rights.

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.

The Company estimates the fair value of stock options granted and the purchase rights issued under the ESPP using the Black-Scholes option pricing model.

The fair value of 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 PSUs are measured using the fair market value of the Company’s common stock on the date of grant.

The stock-based compensation expense for PSUs is recognized based on the estimated number of shares that the Company expects will vest and is adjusted on a quarterly basis using the estimated achievement of financial performance targets.

The Company accounts for forfeitures as they occur.

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.

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.

Cash equivalents primarily consist of investments in short-term money market funds.

Accounts Receivable

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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.

Inventory is valued at the lower of cost or 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.

Our provisions to write down obsolete and excess inventory to net realizable value were $ 3.7 million and $ 0.2 million as of December 31, 2022 and 2021, respectively.

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 $ 22.2 million and $ 23.6 million as of December 31, 2022 and 2021.

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.

Included in inventory on the Company’s balance sheets are assets totaling $ 6.1 million and $ 9.1 million as of December 31, 2022 and 2021, respectively, for the rights to recover products from customers associated with its liabilities for return reserves.

Property and Equipment, Net

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The carrying amounts of long-lived assets, including property and equipment, net and capitalized proprietary software, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.

Recoverability of

assets to be held and used is measured by comparing the carrying amount of assets to future undiscounted net cash flows the assets are expected to generate over their remaining life.

Recoverability of assets to be held and used is measured by comparing the carrying amount of assets to future undiscounted net cash flows the assets are expected to generate over their remaining life.

If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.

If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the revised shorter useful life.

Deferred Offering Costs

Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the anticipated equity offering, are capitalized and offset against proceeds upon the consummation of the offering.

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

In 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.

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.

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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.

Prior to the adoption of ASU 2020-06 on January 1, 2022, convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, were separately accounted for as long-term debt and equity components (or conversion feature).

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

Upon issuance, the Company allocated the debt component on the basis of the estimated fair value of 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.

Following the adoption of ASU 2020-06, there is no bifurcation of the liability and equity components of the Notes, and the entire principal of the Notes are accounted for as long-term 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 Call Transactions are expected generally to reduce the potential dilution to the holders of the Company’s common stock upon any conversion of the convertible senior notes and/

or offset any cash payments the Company is required to make in excess of the principal amount of converted convertible senior 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.

Debt issuance costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the anticipated debt offering, 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 sheets as a direct deduction from the associated debt.

The Company adopted ASU 2020-06 as of January 1, 2022 using the modified retrospective method.

Prior to the adoption of ASU 2020-06 on January 1, 2022, a portion of debt issuance costs incurred in connection with the convertible senior notes issued in June 2020 and March 2021 was allocated to the equity component and was recorded as a reduction to additional paid in capital and was not amortized to interest expense over the estimated life of the related debt.

Following the adoption of ASU 2020-06, the debt issuance costs previously allocated to the equity component of both the 2025 and 2028 Notes were reclassified to debt.

As such, all of the debt issuance costs are recorded as a direct deduction from the related principal debt amounts on the balance sheet, and are all amortized to interest expense over the estimated remaining life of the related debt.

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

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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.

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable.

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.

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

As of December 31, 2022 and December 31, 2021, 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, 2022, 2021, and 2020.

Change in Accounting Principle

During the three months ended June 30, 2022, the Company changed its method of accounting for shipping and handling activities from applying the policy election to account for shipping services as fulfillment activities to recognizing shipping services as a promised service to customers which the Company determined to be a separate performance obligation.

The Company believes that this change in accounting method is preferable, as it results in a disaggregation of revenue and related costs that provides more transparency to the users of its financial statements and is more consistent with the nature of the Company's promises made in arrangements with its customers.

The effects of this change to the disaggregation and presentation of revenue and costs of revenue have been retroactively applied to all periods presented.

This change had an immaterial impact to the Company's loss from operations and as such the Company did not retroactively adjust prior periods for these immaterial effects.

Certain financial statement line items included in the Statement of Operations for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively were adjusted as follows (in thousands):

Year Ended December 31, 2022

As Computed Under Previous Method Effect of Change As Reported Under Preferable Method

Consignment revenue $ 444,767 $ ( 59,788 ) $ 384,979

Shipping services revenue — 59,788 59,788

Cost of revenue:

Cost of consignment revenue 113,141 ( 56,178 ) 56,963

Cost of shipping services revenue — 56,178 56,178

Year Ended December 31, 2021

As Previously Reported Effect of Change As Reported Under Preferable Method

Consignment revenue $ 346,848 $ ( 44,627 ) $ 302,221

Shipping services revenue — 44,627 44,627

Cost of revenue:

Cost of consignment revenue 92,788 ( 47,803 ) 44,985

Cost of shipping services revenue — 47,803 47,803

Year Ended December 31, 2020

As Previously Reported Effect of Change As Reported Under Preferable Method

Consignment revenue $ 247,326 ( 34,014 ) 213,312

Shipping services revenue — 34,014 34,014

Cost of revenue:

Cost of consignment revenue 66,976 ( 36,587 ) 30,389

Cost of shipping services revenue — 36,587 36,587

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.

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.

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):

In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, Government Assistance (Topic 832):

Disclosure by Business Entities about Government Assistance , which improves the transparency of government assistance received by requiring the disclosure of the nature of the transactions, the accounting for the transactions, and the effect of the transactions on the financial statements.

The Company adopted this standard during the year ended December 31, 2022.

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

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments.

The Company adopted this guidance as of January 1, 2022 using the modified retrospective method.

As a result of the adoption, the Convertible Senior Notes due 2025 (the "2025 Notes") and the Convertible Senior Notes due 2028 (the "2028 Notes" and together with the 2025 Notes, the "Notes") are no longer bifurcated into separate liability and equity components, but rather are classified as a single liability in the balance sheets.

Upon adoption, the Company recorded a cumulative effect of $ 13.4 million as a reduction to accumulated deficit and a reduction to additional paid in capital of $ 112.1 million related to amounts attributable to the value of the conversion options that had previously been recorded in equity.

Additionally, the Company recorded an increase to its convertible

notes balance by an aggregate amount of $ 98.6 million as a result of the reversal of the separation of the convertible debt between debt and equity.

As a result of the adoption, there was a net increase in deferred tax assets of $ 27.7 million and a corresponding increase of $ 27.7 million in the offsetting valuation allowance.

The Company also reclassified the issuance costs previously allocated to the conversion feature to debt, so that all issuance costs are now presented as a direct deduction of the long-term debt line on the balance sheet.

The adoption of this standard also significantly decreased the amount of non-cash interest expense to be recognized in future periods as a result of eliminating the discount on debt associated with the conversion feature.

The adoption did not affect the Company's statements of cash flows.

When calculating net loss per share attributable to common stockholders, the Company uses the if-converted method as required under ASU 2020-06 to determine the dilutive effect of the Notes;

however there was no impact because including the assumed conversion of the convertible debt would have been anti-dilutive.

Cash and Cash Equivalents

The following tables summarize the estimated value of the Company’s cash and cash equivalents (in thousands):

December 31, 2022

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Total cash and cash equivalents $ 418,171 $ — $ — $ 418,171

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.

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values.

Fair value is defined as the exchange

price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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

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As of December 31, 2022, the Company’s cash equivalents solely consisted of money market funds, which amounted to $ 18.1 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

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.

Money market funds are measured at net asset value per share.

Fair Value Measurements of Other Financial Instruments

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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.

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.

Upon adoption of ASU 2020-06 as of January 1, 2022, the unamortized debt discount balance was derecognized (See Note 7).

As of December 31, 2022, the fair value of the 2025 Notes and 2028 Notes, which differs from their carrying value is determined by prices for the convertible senior notes observed in market trading.

The market for trading of the convertible senior 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.

Balance Sheet Components

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Depreciation and amortization expense on property and equipment was $ 26.9 million, $ 23.5 million, and $ 18.8 million for the years ended December 31, 2022, 2021 and 2020, 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

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Accrued marketing and outside services 8,729 7,897

Accrued shipping 5,715 2,006

Accrued interest 1,166 1,166

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Accrued inventory — 3,513

Accrued property and equipment 11,417 1,427

Other 4,544 4,867

Other accrued and current liabilities $ 93,292 $ 94,188

In 2013, the Company entered into an agreement to obtain a term loan facility (“Term Loan Facility”) in the amount of $ 5.0 million for general corporate purposes and working capital expenditures.

In 2014, 2015 and 2016, the Company amended its Term Loan Facility to increase the amount borrowed under the facility by $ 11.6 million.

The Term Loan Facility is secured by liens on substantially all of the Company’s present and future assets.

The Term Loan Facility includes affirmative, negative and financial covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, make investments, sell or otherwise dispose of assets, pay dividends or repurchase stock.

The Term Loan Facility’s financial covenants required the Company to achieve at least 80 % of its forecasted gross revenue and a liquidity ratio on a monthly basis.

In 2017, the Company executed the eighth amendment (“Eight Amendment”) to the Term Loan Facility.

The Eighth Amendment refinanced the $ 15.0 million repayment schedule to be two term loans, which included a $ 7.5 million interest only term loan with a maturity date of January 31, 2019 (“Term Loan I”), and the remaining $ 7.5 million under the existing Term Loan Facility with a maturity date of January 1, 2020 (“Term Loan II”) (together the “Term Loans”).

In 2018, the Company entered into the ninth, tenth, eleventh, and twelfth amendment (“Ninth Amendment,” “Tenth Amendment,” “Eleventh Amendment” and “Twelfth Amendment”) to the existing Term Loans.

The Ninth Amendment removed the liquidity ratio covenant, amended Term Loan I to be due in 30 equal monthly installments , plus all accrued interest, beginning July 31, 2018, increased the variable annual interest rate from 0.10 % above the prime rate to 0.35 % above the prime rate and extended the maturity date of Term Loan I to January 31, 2021.

The Eighth Amendment and Ninth Amendment required the Company to pay a combined success fee of $ 0.3 million upon (1) any sale or licensing of all or substantially all of the Company’s assets, (2) any change in control of the Company, or (3) an initial public offering of the Company’s equity securities.

The Ninth Amendment also required the Company to pay an additional success fee of $ 0.1 million upon the sale or issuance of the Company’s equity securities or subordinated debt securities for net cash proceeds of at least $ 50.0 million on or prior to June 30, 2018.

The Company paid the $ 0.1 million success fee upon the Series G convertible preferred stock financing in June 2018 and the $ 0.3 million success fee related to its IPO in July 2019.

The Tenth and Twelfth Amendments adjusted and waived certain covenant violations which were subsequently amended and met.

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

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

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

During the years ended December 31, 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

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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.

In June 2020, the Company issued an aggregate principal of $ 172.5 million of its 3.00 % Convertible Senior Notes due 2025, 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 of 1933, as amended (the “Securities Act”).

The 2025 Notes 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.

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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.

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.

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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.

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.

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 2025 Notes then outstanding to become due and payable immediately.

Prior to the adoption of ASU 2020-06 on January 1, 2022 and 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 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 interest rate of 5.67 % was used to compute the initial fair value of the liability component of $ 152.7 million, with a corresponding amount recorded as a discount on the initial issuance of the 2025 Notes of approximately $ 19.8 million.

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

The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

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.

Prior to the adoption of ASU 2020-06 on January 1, 2022, 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 initially 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 was 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 %.

On January 1, 2022, the Company adopted ASU 2020-06 based on a modified retrospective transition method.

Under such transition, prior period information for both the 2025 and 2028 Notes has not been retrospectively adjusted.

In accounting for the 2025 Notes after the adoption of ASU 2020-06, the 2025 Notes are accounted for as a single liability, and the carrying amount of the Notes is $ 169.3 million as of December 31, 2022, with principal of $ 172.5 million, net of unamortized issuance costs of $ 3.2 million.

The 2025 Notes were classified as long term liabilities as of December 31, 2022.

The issuance costs related to the 2025 Notes are being amortized to interest expense over the expected life of the 2025 Notes or approximately its five-year term at an effective interest rate of 3.74 %.

The net carrying amount of the liability component of the 2025 Notes was as follows (in thousands):

2022 December 31,

$ 172,500 $ 172,500

Principal $ 172,500 $ 172,500

Unamortized debt discount (1)

( 14,350 ) ( 17,945 )

Unamortized debt issuance costs ( 3,204 ) ( 4,286 )

( 4,286 ) ( 5,367 )

Net carrying amount $ 169,296 $ 153,864

$ 153,864 $ 149,188

The net carrying amount of the equity component of the 2025 Notes was as follows (in thousands):

(1) Upon adoption of ASU 2020-06 as of January 1, 2022, the unamortized debt discount balance was derecognized, as described in "Note 2— Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements."

As discussed above, upon the adoption of ASU 2020-06, the Company reversed the separation of the debt and equity components of the Notes, and accounted for the Notes wholly as debt.

Additionally, the issuance costs of the Notes were accounted for as debt issuance costs in its entirety.

The net carrying amount of the equity component of the 2025 Notes as of December 31, 2021 was as follows (in thousands):

Proceeds allocated to the conversion options (debt discount) $ 19,787

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Net carrying amount $ 19,020

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,

2022 2021 2020

Contractual interest expense $ 5,175 $ 5,175 $ 2,803

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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 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.

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• 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;

product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day;

• 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;

• 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.

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.

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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.

Prior to the adoption of ASU 2020-06 on January 1, 2022 and 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.

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

The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

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 balance sheets and was 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 %.

In accounting for the 2028 Notes after the adoption of ASU 2020-06, the 2028 Notes are accounted for as a single liability, and the carrying amount of the Notes is $ 280.6 million as of December 31, 2022, with principal of $ 287.5 million, net of unamortized issuance costs of $ 6.9 million.

The 2028 Notes were classified as long term liabilities as of December 31, 2022.

The issuance costs related to the 2028 Notes are being amortized to interest expense over the expected life of the 2028 Notes or approximately its seven-year term at an effective interest rate of 1.45 %.

The net carrying amount of the liability component of the 2028 Notes was as follows (in thousands):

2022 December 31, 2021

$ 287,500 $ 287,500

Unamortized debt discount (1)

Unamortized debt issuance costs

( 6,948 ) ( 5,581 )

Net carrying amount

The net carrying amount of the equity component of the 2028 Notes was as follows (in thousands):

$ 280,552 $ 194,516

As discussed above, upon the adoption of ASU 2020-06, the Company reversed the separation of the debt and equity components of the Notes, and accounted for the Notes wholly as debt.

Additionally, the issuance costs of the Notes were accounted for as debt issuance costs in its entirety.

The net carrying amount of the equity component of the 2028 Notes as of December 31, 2021 was as follows (in thousands):

December 31, 2021

Proceeds allocated to the conversion options (debt discount) $ 96,162

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Net carrying amount

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

2022 December 31, 2021

Contractual interest expense $ 2,875 $ 2,332

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Total interest and amortization expense

$ 4,163 $ 11,645

Future minimum payments under the 2028 Notes as of December 31, 2022, are as follows (in thousands):

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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 2028 Capped Calls cover approximately 9,705,454 shares 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.

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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.

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 2028 Capped Calls transactions.

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

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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.

On February 23, 2022, the Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,648,003 shares.

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

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There were no stock options granted in 2022 and in 2021.

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, 2022, 2021, and 2020 was $ 5.3 million, $ 20.5 million, and $ 32.2 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.

In February 2022, the Company granted PSUs with financial performance targets to certain employees of the Company.

The number of units issued will depend on the achievement of financial metrics relative to the approved performance targets, and can range from 0 % to 150 % of the target amount.

The PSUs are subject to continuous service with the Company and will vest after approximately three years .

The PSUs are measured using the fair value at the date of grant.

The compensation expense associated with PSUs is recognized based on the estimated number of shares that the Company expects will vest and may be adjusted based on interim estimates of performance against the performance condition.

During the year ended December 31, 2022, the Company recorded $ 0.1 million of stock-based compensation expense for the number of PSUs considered probable of vesting based on the attainment of the performance targets.

A summary of RSU activity for the year ended December 31, 2022 is as follows:

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Unvested December 31, 2022 11,369,021 $ 8.39 $ 14,178

The total fair value of RSUs v ested during the year ended December 31, 2021 was $ 38.1 million .

Included in the table above for the year ended December 31, 2022 are approximately 544,000 PSUs granted and 268,000 PSUs forfeited.

The weighted average grant date fair value per share of the PSUs granted in the year ended December 31, 2022 was $ 7.70 .

The weighted average grant date fair value per share of the PSUs forfeited in the year ended December 31, 2022 was $ 7.28 .

The total fair value as of the respective vesting dates of RSUs that vested during the year ended December 31, 2022 was $ 14.5 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.

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.

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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.

On February 23, 2022, the Company’s board of directors approved an increase of shares available for grant under the ESPP by 929,601 shares.

During the years ended December 31, 2022 and 2021, employees purchased 610,877 and 199,289 shares, respectively, at an average price of $ 2.29 and $ 11.74 , 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.

As of December 31, 2022, 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.

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These costs are expected to be recognized over a weighted average period of 0.4 years as of December 31, 2022.

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):

As of December 31, 2022, the Company had approximately $ 82.9 million of unrecognized stock-based compensation expense related to RSUs and PSUs, which the Company expects to recognize over the remaining weighted-average vesting period of approximately 2.7 years.

Total stock-based compensation expense by function was as follows (in thousands):

Year Ended December 31,

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$ 46,138 $ 48,802 $ 24,322

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

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.

During the year ended December 31, 2022, the Company recognized compensation expense of $ 1.0 million within selling, general and administrative associated with the modification of certain outstanding equity awards pursuant to the terms of the transition and separation agreement the Company entered into with its founder, Julie Wainwright, in connection with her resignation as Chief Executive Officer on June 6, 2022.

During the year ended December 31, 2022 and 2021, the Company capitalized $ 1.6 million and $ 1.4 million of stock-based compensation expense to proprietary software, respectively.

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 .

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The Company incurred $ 5.6 million and $ 5.3 million of variable lease costs for the years ended December 31, 2022 and 2021, 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):

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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

Year Ended Year ended December 31,

2022 2021 2020

Operating cash flows used for operating leases $ 27,097 $ 25,386 $ 21,381

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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.

The finance lease right-of-use asset and finance lease liabilities for these vehicle and equipment leases are immaterial as of December 31, 2022 and 2021.

Commitments and Contingencies

Noncancelable Purchase Commitments

Our contractual commitments primarily consist of software and other services in the ordinary course of business that are noncancellable with varying expiration dates through 2027.

As of December 31, 2022, the future minimum payments under the Company’s noncancelable purchase commitments were as follows (in thousands):

Year Ending December 31, Purchase

2023 $ 11,240

Total future minimum payments $ 24,386

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

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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.

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

Chanel then sought a partial stay of discovery on the Company's counterclaims and unclean hands defense while Chanel's motion to dismiss and strike those claims are pending, and on March 10, 2022, the Court granted Chanel's request.

The parties continue to engage in fact discovery regarding Chanel's counterfeiting and false advertising claims against the Company.

Fact discovery is currently scheduled to be completed by August 15, 2023, and all depositions of fact witnesses will be completed by no later than July 15, 2023.

The final outcome of this litigation, including our liability, if any, with respect to Chanel’s claims, is uncertain.

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

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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.

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.

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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.

On March 24, 2022, the court entered an order preliminarily approving the settlement.

On July 28, 2022, the court entered an order finally approving the settlement and dismissing the case.

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.

The Company paid the settlement amount on March 29, 2022 with available resources and recorded approximately $ 11.0 million for the year ended December 31, 2021 under our Operating expenses as a Legal settlement.

One of the plaintiffs in the state court action opted out of the settlement.

The stay of the state court case has been lifted, and the opt out plaintiff filed an amended complaint on October 31, 2022 alleging putative class claims under the Securities Act on behalf of the two shareholders who opted out of the settlement and those who purchased stock from November 21, 2019 through March 9, 2020.

On December 22, 2022, the Company filed a motion to dismiss and a motion to strike class allegations.

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.

26 unchanged sentences

524 3,661 402

Tax credits ( 563 ) — —

Convertible Notes — 16,782 —

Adoption of ASU 2020-06 ( 28,045 ) — —

Valuation allowance

7 unchanged sentences

Fixed assets and intangibles

Capitalized research and development (1)

Accruals and reserves

3 unchanged sentences

Capped calls 15,082 15,095

Convertible debt 1,675 —

Tax credits 1,416 —

Gross deferred tax assets 302,332 253,122

9 unchanged sentences

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

(1) Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S.

tax purposes effective January 1, 2022.

The mandatory capitalization requirement increases our gross deferred tax assets, which are fully offset by the valuation allowance.

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.

9 unchanged sentences

However, $ 659.4 million of the federal net operating losses will not expire.

As of December 31, 2022 and 2021, the Company has a credit carryforward of $ 2.0 million and $0.9 million for federal tax purposes, respectively, and $ 1.0 million and $1.0 million for state tax purposes, respectively.

If not utilized, these credits will expire beginning in 2041 for federal tax purposes and do not expire for state tax purposes.

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.

4 unchanged sentences

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.

December 31, 2022 and 2021, 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.

As of December 31, 2022, the Company has unrecognized tax benefits of $ 1.5 million.

The unrecognized tax benefits relate to federal and state research and development credits.

The Company's policy is to include interest and penalties as a component to the statement of operations, however there were no associated interest and penalties.

There were no unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate as of December 31, 2022.

The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months.

Net Loss Per Share Attributable to Common Stockholders

16 unchanged sentences

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.

The impact of the assumed conversion to diluted net loss per share is computed on an as-converted basis.

Retirement Plan

3 unchanged sentences

The Company’s contributions to the 401(k) plan were $ 1.6 million, $ 1.1 million, and $ 0.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.

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.

Subsequent Events

Chief Executive Officer

On January 24, 2023, the Company entered into an offer letter with John E.

Koryl, and he was appointed as Chief Executive Officer and as a member of its Board of Directors, effective February 6, 2023.

Pursuant to the offer letter, Mr.

Koryl’s annual base salary was set at $ 700,000 , with a sign on bonus of $ 300,000 and target annual bonus opportunity of 100 % of base salary.

The Company will recommend that the Board grant Mr.

Koryl 1,250,000 time-based RSUs, which will vest 25 % on the first anniversary of the vesting commencement date and in quarterly installments thereafter and 1,500,000 PSUs, which will be eligible to vest over a five-year performance period based on continuous employment with the Company during the applicable service period and the Company’s stock price achievement.

Restructuring

In February 2023, the Company announced a reduction of its workforce.

The Company expects to incur employee severance and related charges of $ 1.7 million to $ 2.2 million, the majority of which will be recognized in the first quarter of 2023.

In addition, the Company is taking actions to optimize its retail and office space, and is currently in the process of evaluating an estimate for impairment of certain right-of-use assets and related leasehold improvements that have a total carrying value of $ 41.6 million as of December 31, 2022.

As a result, the Company expects to incur exit costs relating to the workspace reductions.

The Company may incur additional charges in the future as it further evaluates its real estate needs.

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

What changed 10-K

Item 9A. Controls and Procedures