TheRealReal, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (“CEO”) and interim Chief Financial Officer, who acts as our principal financial officer (“Interim 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, 2023. Based on this evaluation, our CEO and Interim CFO concluded that, as of December 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting Management, including our CEO and Interim CFO, who acts as our principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. GAAP. Under the supervisi on and with the participation of our management, including our CEO and Interim CFO, 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, 2023 . 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, 2023, as stated in their report which is included in Part IV —Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 49 Table of C ontents Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and our Interim Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by the collusion of two or more people or by management override of controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information. Rule 10b5-1 Trading Plans On November 27, 2023 , James Miller , a member of the Company’s Board of Directors , adopted a new trading plan for the sale of securities that is intended to satisfy the affirmative defense conditions of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Miller Plan”). The Miller Plan provides for the sale of up to a maximum of 74,586 shares of the Company’s common stock that he has received or will receive following the vesting of restricted stock units. The first possible trade date under the Miller Plan is March 5, 2024, and the end date of the Miller Plan is November 27, 2024, subject to certain conditions. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 50 Table of C ontents PART III Item 10. Directors, Executive Officers and Corporate Governance. Information required by this Item is incorporated herein by reference to our fiscal year 2024 proxy statement to be filed with the SEC within 120 days of the fiscal year ended December 31, 2023 (the “Proxy Statement”). Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference to our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item is incorporated herein by reference to our Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item is incorporated herein by reference to our Proxy Statement. Item 14. Principal Accounting Fees and Services. Our independent registered public accounting firm is KPMG LLP , San Francisco, CA , Auditor ID: 185 . The information required by this Item is incorporated herein by reference to our Proxy Statement. 51 Table of C ontents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Please refer to the Financial Statements, Notes to Financial Statements and the Exhibit Index in this Form 10-K which is incorporated herein by reference. (b) Please refer to the Exhibit Index in this Form 10-K which is incorporated herein by reference. Item 16. Form 10-K Summary None. 52 Table of C ontents Exhibit Index Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 3.1 Form of Amended and Restated Certificate of Incorporation of The RealReal, Inc., as currently in effect. S-1 333-231891 3.2 June 17, 2019 3.2 Form of Amended and Restated Bylaws of The RealReal, Inc. as currently in effect. S-1 333-231891 3.4 June 6, 2019 4.1 Form of Common Stock Certificate. S-1 333-231891 4.1 June 17, 2019 4.2 Seventh Amended and Restated Investor Rights Agreement, dated March 22, 2019 among The RealReal, Inc. and certain holders of its capital stock. S-1 333-231891 4.7 May 31, 2019 4.3 Indenture dated June 15, 2020, between The RealReal, Inc. and U.S. Bank National Association as Trustee, including form of 3.00% Convertible Senior Note due 2025. 8-K 001-38953 4.1 June 16, 2020 4.4 Description of Securities. 10-Q 001-38953 4.2 August 7, 2020 4.5 Indenture dated March 8, 2021, between The RealReal, Inc. and U.S. Bank National Association as Trustee, including form of 1.00% Convertible Senior Note due 2028. 8-K 001-38953 4.1 March 8, 2021 4.6 Form of 1.00% Convertible Senior Note due 2028 (included in Exhibit 4.1). 8-K 001-38953 4.1 March 8, 2021 10.1+ The RealReal, Inc. 2011 Equity Incentive Plan and related form agreements. S-1 333-231891 10.1 May 31, 2019 10.2# Loan and Security Agreement dated as of September 19, 2013 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.3 May 31, 2019 10.3# First Amendment to Loan and Security Agreement dated as of March 13, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.4 May 31, 2019 10.4# Second Amendment to Loan and Security Agreement dated as of August 5, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.5 May 31, 2019 10.5# Third Amendment to Loan and Security Agreement dated as of September 25, 2014 by and between The RealReal, Inc. and Square 1 Bank. S-1 333-231891 10.6 May 31, 2019 10.6# Fourth Amendment to Loan and Security Agreement dated as of December 28, 2015 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.7 May 31, 2019 53 Table of C ontents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.7# Fifth Amendment to Loan and Security Agreement dated as of July 18, 2016 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.8 May 31, 2019 10.8# Sixth Amendment to Loan and Security Agreement dated as of September 16, 2016 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.9 May 31, 2019 10.9# Seventh Amendment to Loan and Security Agreement dated as of March 28, 2017 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.10 May 31, 2019 10.10# Eighth Amendment to Loan and Security Agreement dated as of July 27, 2017 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.11 May 31, 2019 10.11# Ninth Amendment to Loan and Security Agreement dated as of March 5, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.12 May 31, 2019 10.12# Tenth Amendment to Loan and Security Agreement dated as of July 25, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.13 May 31, 2019 10.13# Eleventh Amendment to Loan and Security Agreement dated as of August 9, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.14 May 31, 2019 10.14# Twelfth Amendment to Loan and Security Agreement dated as of December 19, 2018 by and between The RealReal, Inc. and Pacific Western Bank. S-1 333-231891 10.15 May 31, 2019 10.15# Lease Agreement dated as of March 18, 2014 by and between The RealReal, Inc. and 35 Enterprise Avenue, L.L.C. S-1 333-231891 10.16 May 31, 2019 10.16# Lease Modification Agreement dated as of March 8, 2018 by and between The RealReal, Inc. and 35 Enterprise Avenue, L.L.C. S-1 333-231891 10.17 May 31, 2019 10.17# Lease Agreement dated as of June 5, 2018 by and between The RealReal, Inc. and Hartz Enterprise LLC. S-1 333-231891 10.19 May 31, 2019 10.18# Lease Agreement dated as of September 14, 2018 by and between The RealReal, Inc. and Prologis Perth Amboy Associates, LLC. S-1 333-231891 10.20 May 31, 2019 10.19+ The RealReal, Inc. 2019 Equity Incentive Plan. S-1 333-231891 10.21 June 17, 2019 54 Table of C ontents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.20+ The RealReal, Inc. Employee Stock Purchase Plan. S-1 333-231891 10.22 June 17, 2019 10.21+ The RealReal, Inc. 2019 Equity Incentive Plan Stock Option Agreement and related form agreements. 10-Q 001-38953 10.1 August 14, 2019 10.22+ The RealReal, Inc. Employee Stock Purchase Plan, as amended and restated on February 19, 2020. 10-K 001-38953 10.25 March 11, 2020 10.23+ T he RealReal , Inc. 2019 Equity Incentive Plan for Non-Employee Director Deferred Restricted Stock Unit Award Agreement and Deferral Election Form 10-Q 011-38953 10.1 November 7, 2023 10.24 Form of Base Capped Call Confirmation, dated June 10, 2020 between The RealReal, Inc. and each of the Counterparties. 8-K 001-38953 10.1 June 16, 2020 10.25 Form of Additional Capped Call Confirmation, dated June 18, 2020 between The RealReal, Inc. and each of the Capped Call Counterparties. 8-K 001-38953 10.1 June 23, 2020 10.26# Lease Agreement dated as of November 2, 2020 by and between The RealReal, Inc. and Liberty Property Limited Partnership. 10-Q 001-38953 10.1 November 10, 2020 10.27 Form of Base Capped Call Confirmation, dated March 8, 2021 between The RealReal, Inc. and each of the Counterparties. 8-K 001-38953 10.1 March 8, 2021 10.28 Form of Additional Capped Call Confirmation, dated March 12, 2021 between The RealReal, Inc. and each of the Capped Call Counterparties. 8-K 001-38953 10.1 March 16, 2021 10.29+ Form of Severance and Change in Control Agreement approved by the Company’s board of directors on May 5, 2021. 10-Q 001-38953 10.1 May 10, 2021 10.30+ T ransition and Separation Agreement by and between The RealReal, Inc. and Robert Julian dated September 28, 2 023. 8-K 001-38953 10.1 September 29, 2023 10.31+ C onsulting Services Agreement by and between The RealReal, Inc. and Robert Julian dated September 28, 2023 8-K 001-38953 10.20 September 29, 2023 10.32+ The RealReal, Inc. 2019 Equity Incentive Plan Performance-Based Restricted Stock Unit Award Agreement 10-K 001-38953 10.34 February 28, 2022 10.33+ The RealReal, Inc. 2019 Equity Incentive Plan Restricted Stock Unit Award 10-Q 001-38953 10.1 August 9, 2022 55 Table of C ontents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 10.34+ Offer Letter dated January 24, 2023 between the Company and John E. Koryl 8-K 001-38953 10.1 January 25, 2023 10.35+ Form of Indemnification Agreement entered into by and between The RealReal, Inc. and its directors and executive officers. 10-K 100-38953 10.35 February 28, 2023 10.37+ F orm of Stand -Alone Performance -Based Restr icted Stock Unit Award Agreement, by and between the C o mpany and John Koryl. S-8 333-270281 99.1 March 3, 2023 10.38+ Form of Stand-Alone Restricted Stock Unit Award Agreement, by and between the Company and John Koryl . S-8 333-270281 99.2 March 3, 2023 10.39+ Form of Stand-Alone Restricted Stock Unit Award Agreement, by and between the Company a nd Luke Friang. S-8 333-270281 99.3 March 3, 2023 10.40+ Offer Letter by and between The RealReal, Inc. and Ajay Gopal dated February 19, 2024 . 8-K 100-38953 10.1 February 21, 2024 10.41* Form of Exchange Agreement by and between The RealReal Inc. and the Noteholder, as defined therein, dated February 29, 2024. X 10.42 Indenture by and between The RealReal, Inc., the Guarantors party thereto and Glas Trust Company LLC dated February 29, 2024. X 10.43 Warrant Agency Agreement by and between The RealReal, Inc., Computershare, In., and Computershare Trust Company, N.A. dated February 29, 2024. X 23.1 Consent of KPMG LLP, Independent Registered Public Accounting Firm X 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 97 T he RealReal, Inc. Clawback Policy X 56 Table of C ontents Incorporated by Reference Exhibit Number Description Form File No. Exhibit Filing Date Filed Herewith 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE). ___________________________________________ + Indicates management contract or compensatory plan. # Certain information contained in this agreement has been omitted because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed. * Certain schedules and exhibits omitted pursuant to Item 601(a)(5) of Regulation S-K promulgated by the SEC. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. 57 Table of C ontents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . The RealReal, Inc. Date: March 1, 2024 By: /s/ Todd Suko Todd Suko Interim Chief Financial Officer, Chief Legal Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ John Koryl Chief Executive Officer and Director March 1, 2024 John Koryl (Principal Executive Officer) /s/ Todd Suko Interim Chief Financial Officer, Chief Legal Officer and Secretary March 1, 2024 Todd Suko (Principal Financial Officer) /s/ Steve Lo Senior Vice President, Chief Accounting Officer March 1, 2024 Steve Lo (Principal Accounting Officer) /s/ Chip Baird Director March 1, 2024 Chip Baird /s/ Caretha Coleman Director March 1, 2024 Caretha Coleman /s/ Karen Katz Director March 1, 2024 Karen Katz /s/ Rob Krolik Director March 1, 2024 Rob Krolik /s/ Niki Leondakis Director March 1, 2024 Niki Leondakis /s/ Carol Melton Director March 1, 2024 Carol Melton /s/ James Miller Director March 1, 2024 James Miller 58 Table of C ontents INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm 60 Balance Sheets as of December 31, 202 3 and 202 2 63 Statements of Operations for the Years ended December 31, 202 3 , 202 2 , and 202 1 64 Statements of Comprehensive Loss for the Years ended December 31, 202 3 , 202 2 , and 202 1 65 Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 202 3 , 202 2 , and 202 1 66 Statements of Cash Flows for the Years ended December 31, 202 3 , 202 2 , and 202 1 67 Notes to Financial Statements 68 59 Table of C ontents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors The RealReal, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of The RealReal, Inc. (the Company) as of December 31, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing 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 $549 million in total revenue for the year ended December 31, 2023. 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. 60 Table of C ontents The following are the primary procedures we performed to address this critical audit matter. 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. /s/ KPMG LLP We have served as the Company’s auditor since 2013. San Francisco, California March 1, 2024 61 Table of C ontents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors The RealReal, Inc.: Opinion on Internal Control Over Financial Reporting We have audited The RealReal, Inc.'s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, 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, 2023 and 2022, 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, 2023, and the related notes (collectively, the financial statements), and our report dated March 1, 2024 expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP San Francisco, California March 1, 2024 62 Table of C ontents THE REALREAL, INC. Balance Sheets (In thousands, except share and per share data) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 175,709 $ 293,793 Accounts receivable 17,226 12,207 Inventory, net 22,246 42,967 Prepaid expenses and other current assets 20,766 23,291 Total current assets 235,947 372,258 Property and equipment, net 104,087 112,679 Operating lease right-of-use assets 86,348 127,955 Restricted cash 14,914 — Other assets 5,627 2,749 Total assets $ 446,923 $ 615,641 Liabilities and Stockholders’ Deficit Current liabilities Accounts payable $ 8,961 $ 11,902 Accrued consignor payable 77,122 81,543 Operating lease liabilities, current portion 20,094 20,776 Other accrued and current liabilities 82,685 93,292 Total current liabilities 188,862 207,513 Operating lease liabilities, net of current portion 104,856 125,118 Convertible senior notes, net 452,421 449,848 Other noncurrent liabilities 4,083 3,254 Total liabilities 750,222 785,733 Commitments and contingencies (Note 12) Stockholders’ deficit: Common stock, $ 0.00001 par value; 500,000,000 shares authorized as of December 31, 2023 and December 31, 2022; 104,670,500 and 99,088,172 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively 1 1 Additional paid-in capital 816,325 781,060 Accumulated deficit ( 1,119,625 ) ( 951,153 ) Total stockholders’ deficit ( 303,299 ) ( 170,092 ) Total liabilities and stockholders’ deficit $ 446,923 $ 615,641 The accompanying notes are an integral part of these financial statements. 63 Table of C ontents THE REALREAL, INC. Statements of Operations (In thousands, except share and per share data) Years Ended December 31, 2023 2022 2021 Revenue: Consignment revenue $ 415,572 $ 384,979 $ 302,221 Direct revenue 79,160 158,726 120,844 Shipping services revenue 54,572 59,788 44,627 Total revenue 549,304 603,493 467,692 Cost of revenue: Cost of consignment revenue 58,120 56,963 44,985 Cost of direct revenue 74,343 141,661 101,427 Cost of shipping services revenue 40,563 56,178 47,803 Total cost of revenue 173,026 254,802 194,215 Gross profit 376,278 348,691 273,477 Operating expenses: Marketing 58,275 62,988 62,749 Operations and technology 257,041 278,628 233,687 Selling, general and administrative 182,453 194,886 176,246 Restructuring 43,462 896 2,314 Legal settlements 1,340 456 13,389 Total operating expenses 542,571 537,854 488,385 Loss from operations ( 166,293 ) ( 189,163 ) ( 214,908 ) Interest income 8,805 3,191 365 Interest expense ( 10,701 ) ( 10,472 ) ( 21,531 ) Other income, net — 171 23 Loss before provision for income taxes ( 168,189 ) ( 196,273 ) ( 236,051 ) Provision for income taxes 283 172 56 Net loss attributable to common stockholders $ ( 168,472 ) $ ( 196,445 ) $ ( 236,107 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.65 ) $ ( 2.05 ) $ ( 2.58 ) Shares used to compute net loss per share attributable to common stockholders, basic and diluted 101,806,000 95,921,246 91,409,624 The accompanying notes are an integral part of these financial statements. 64 Table of C ontents THE REALREAL, INC. Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2023 2022 2021 Net loss $ ( 168,472 ) $ ( 196,445 ) $ ( 236,107 ) Other comprehensive loss, net of tax: Unrealized loss on investments — — ( 11 ) Comprehensive loss $ ( 168,472 ) $ ( 196,445 ) $ ( 236,118 ) The accompanying notes are an integral part of these financial statements. 65 Table of C ontents THE REALREAL, INC. Statements of Stockholders’ Equity (Deficit) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Balance as of December 31, 2020 89,301,664 $ 1 $ 723,302 $ 11 $ ( 532,021 ) $ 191,293 Purchase of capped calls — — ( 33,666 ) — — ( 33,666 ) Equity component of convertible senior notes, net of issuance costs of $ 3,131 — — 93,031 — — 93,031 Issuance of common stock upon exercise of options 1,221,365 — 6,009 — — 6,009 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes 2,237,748 — ( 8 ) — — ( 8 ) Issuance of common stock for exercises under ESPP 199,289 — 2,341 — — 2,341 Stock-based compensation expense — — 50,246 — — 50,246 Other comprehensive loss — — — ( 11 ) — ( 11 ) Net loss — — — — ( 236,107 ) ( 236,107 ) Balance as of December 31, 2021 92,960,066 $ 1 $ 841,255 $ — $ ( 768,128 ) $ 73,128 Cumulative effect adjustment due to adoption of ASU 2020-06 — — ( 112,052 ) — 13,420 ( 98,632 ) Issuance of common stock upon exercise of options 1,929,265 — 2,906 — — 2,906 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes 3,587,964 — ( 216 ) — — ( 216 ) Issuance of common stock for exercises under ESPP 610,877 — 1,400 — — 1,400 Stock-based compensation expense — — 47,767 — — 47,767 Net loss — — — — ( 196,445 ) ( 196,445 ) Balance as of December 31, 2022 99,088,172 $ 1 $ 781,060 $ — $ ( 951,153 ) $ ( 170,092 ) Issuance of common stock upon exercise of options 8,511 — 19 — — 19 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes 4,708,141 — ( 690 ) — — ( 690 ) Issuance of common stock for exercises under ESPP 865,676 — 886 — — 886 Stock-based compensation expense — — 35,050 — — 35,050 Net loss — — — — ( 168,472 ) ( 168,472 ) Balance as of December 31, 2023 104,670,500 $ 1 $ 816,325 $ — $ ( 1,119,625 ) $ ( 303,299 ) The accompanying notes are an integral part of these financial statements. 66 Table of C ontents THE REALREAL, INC. Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 168,472 ) $ ( 196,445 ) $ ( 236,107 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 31,695 27,669 23,531 Stock-based compensation expense 34,273 46,138 48,802 Reduction of operating lease right-of-use assets 16,746 19,602 19,439 Bad debt expense 1,962 1,680 1,034 Accrued interest on convertible notes — — 950 Loss on disposal of property and equipment and impairment of capitalized proprietary software 223 702 546 Accretion of debt discounts and issuance costs 2,573 2,368 13,989 Property, plant, equipment, and right-of-use asset impairments 39,739 — — Provision for inventory write-downs and shrinkage 9,783 4,077 510 Gain on lease termination ( 738 ) — — Other adjustments — — 10 Changes in operating assets and liabilities: Accounts receivable ( 6,981 ) ( 6,120 ) ( 1,588 ) Inventory, net 10,938 23,971 ( 29,204 ) Prepaid expenses and other current assets 2,001 ( 2,952 ) ( 4,009 ) Other assets ( 3,050 ) ( 409 ) ( 638 ) Operating lease liability ( 26,478 ) ( 17,764 ) ( 15,285 ) Accounts payable ( 425 ) 4,947 ( 9,989 ) Accrued consignor payable ( 4,421 ) 10,501 13,989 Other accrued and current liabilities ( 464 ) ( 9,823 ) 30,922 Other noncurrent liabilities ( 172 ) 301 947 Net cash used in operating activities ( 61,268 ) ( 91,557 ) ( 142,151 ) Cash flow from investing activities: Proceeds from maturities of short-term investments — — 4,000 Capitalized proprietary software development costs ( 12,951 ) ( 14,061 ) ( 9,967 ) Purchases of property and equipment ( 29,177 ) ( 22,861 ) ( 37,470 ) Net cash used in investing activities ( 42,128 ) ( 36,922 ) ( 43,437 ) Cash flow from financing activities: Proceeds from issuance of 2028 convertible notes, net of issuance costs — — 278,234 Purchase of capped calls in conjunction with the issuance of the 2028 convertible senior notes — — ( 33,666 ) Proceeds from exercise of stock options 19 2,906 6,009 Proceeds from issuance of stock in connection with the Employee Stock Purchase Program 886 1,400 2,341 Taxes paid related to restricted stock vesting ( 679 ) ( 205 ) ( 5 ) Net cash provided by financing activities 226 4,101 252,913 Net increase (decrease) in cash, cash equivalents, and restricted cash ( 103,170 ) ( 124,378 ) 67,325 Cash, cash equivalents, and restricted cash Beginning of period 293,793 418,171 350,846 End of period $ 190,623 $ 293,793 $ 418,171 Supplemental disclosures of cash flow information Cash paid for interest $ 8,127 $ 8,104 $ 6,584 Cash paid for income taxes 227 256 94 Supplemental disclosures of non-cash investing and financing activities Purchases of property and equipment included in accounts payable and other accrued and current liabilities 1,757 13,860 1,922 Purchases of capitalized proprietary software development costs included in accounts payable and other accrued and current liabilities 1,122 1,590 1,647 Stock-based compensation capitalized to proprietary software development costs 777 1,629 1,444 Tax withholding liability for restricted stock 11 11 3 The accompanying notes are an integral part of these financial statements. 67 Table of C ontents THE REALREAL, INC. Notes to Financial Statements Note 1. Description of Business and Basis of Presentation Organization and Description of Business The RealReal, Inc. (the “Company”) is an online marketplace for authenticated, consigned luxury goods across multiple categories, including women’s 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. 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, stockholders’ equity (deficit), and cash flows for the periods presented. The Company’s functional and reporting currency is the U.S. dollar. The Company has made a presentation change to reclassify provision for inventory write-downs and shrinkage from inventory, net within operating cash flows in the statements of cash flows. Additionally, the Company has made a presentation change to the Company's statements of operations to reclassify its restructuring expenses from marketing, operations and technology, and sales, general and administrative operating expenses. Changes to reclassify amounts in the prior periods have been made to conform to the current period presentation. Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to revenue recognition, including the returns reserve, standalone selling price related to consignment revenue 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. Actual results could differ from those estimates. Net Loss per Share Attributable to Common Stockholders The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method determines net loss per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available or attributable to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible senior notes are participating securities as they give the holders the right to receive dividends if dividends or distributions declared to the common stockholders is equal to or greater than the last reported sale price of the Company’s common stock on the trading day immediately preceding the ex-dividend date for such dividend or distribution as if the instruments had been converted into shares of common stock. No undistributed earnings were allocated to the participating securities as the contingent event is not satisfied as of the reporting date. For periods in which the Company reports net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because potentially dilutive common shares and assumed conversion of the convertible senior notes are not assumed to have been issued within the calculation, if their effect is anti-dilutive. 68 Table of C ontents Segments The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. All long-lived assets are located in the United States and substantially all revenue is attributed to consignors and buyers based in the United States. Revenue Recognition The Company generates revenue from the sale of pre-owned luxury goods through its online marketplace and retail stores. 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. Title to the consigned goods remains with the consignor until transferred to the buyer upon purchase of the consigned goods and expiration of the allotted return period. The Company does not take title of consigned goods at any time except in certain cases where returned goods become Company-owned inventory. The Company recognizes consignment revenue upon purchase of the consigned good by the buyer as its performance obligation of providing consignment services to the consignor is satisfied at that point. Consignment revenue is recognized net of estimated returns, cancellations, buyer incentives and adjustments. The Company recognizes a returns reserve based on historical experience, which is recorded in other accrued and current liabilities on the balance sheets (see Note 5). Sales tax assessed by governmental authorities is excluded from revenue. Certain transactions provide consignors with a material right resulting from the tiered consignor commission plan. Under this plan, the amount an individual consignor receives for future sales of consigned goods may be dependent on previous consignment sales for that consignor within his/her consignment period. Accordingly, in certain consignment transactions, a small portion of the Company’s consignment revenue is allocated to such material right using the portfolio method and recorded as deferred revenue, which is recorded in other accrued and current liabilities on the balance sheets. The impact of the deferral has not been material to the financial statements. The Company also generates subscription revenue from monthly memberships allowing buyers early access to shop for luxury goods. The buyers receive the early access and other benefits over the term of the subscription period, which represents a single stand-ready performance obligation. Therefore, the subscription fees paid by the buyer are recognized over the monthly subscription period. Subscription revenue was not material in 2023, 2022, and 2021. Direct Revenue The Company generates direct revenue from the sale of Company-owned inventory. The Company recognizes direct revenue on a gross basis upon shipment of the purchased good to the buyer as the Company acts as the principal in the transaction. 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. Sales tax assessed by governmental authorities is excluded from revenue. Cost of direct revenue is also recognized upon shipment to the buyer in an amount equal to that paid to the consignor from the original consignment sale, an amount equal to that paid as a direct purchase from a third party, or the lower of cost of the inventory purchased and its net realizable value. 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 69 Table of C ontents 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 Incentives, which include platform-wide discounts and buyer incentives, may periodically be offered to buyers. Platform-wide discounts are made available to all buyers on the online marketplace. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on the Company’s platform, and do not impact the commissions paid to consignors. These are treated as a reduction of consignment 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 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 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. Contract liabilities are recorded in other accrued and current liabilities on the balance sheets and are generally expected to be recognized within one year. Contract liabilities were immaterial as of December 31, 2023 and December 31, 2022. Cost of Revenue 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 Marketing expense is comprised of the cost of acquiring new consignors and buyers for our online platform and physical stores, including the cost of television, digital and direct mail advertising. Marketing expense also includes personnel-related costs, including stock-based compensation, of employees engaged in these activities. Advertising costs are expensed as incurred and were $ 48.4 million, $ 49.0 million, and $ 46.2 million in 2023, 2022, and 2021, respectively. Operations and Technology Operations and technology expense is comprised of costs associated with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as general information technology expense. The principal component of operations and technology expense is personnel-related costs, including stock-based compensation, of employees engaged in these activities. Operations and technology expense also includes allocated facility and overhead costs, costs related to our retail stores, facility supplies, 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 2023, 2022, and 2021, the Company capitalized proprietary software developments costs of $ 13.3 million, $ 15.6 million, and $ 12.7 million, respectively. As such, operations and technology expense also includes amortization of capitalized technology development costs, which is taken on straight-line basis over three years once the technology is ready for its intended use. Selling, General and Administrative Selling, general and administrative expense is principally comprised of the personnel-related costs for employees involved in sales, finance and administration, and includes stock-based compensation expense. Selling, general and 70 Table of C ontents 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”) subject to performance or market conditions, 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. 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. 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 for awards with only a service condition. To determine the grant-date fair value of the Company's stock-based payment awards for PSUs subject to performance conditions, the quoted stock price on the date of grant is used. The stock-based compensation expense for PSUs with performance conditions 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. For PSUs subject to market conditions, the grant-date fair value is determined using the Monte Carlo simulation model which utilizes multiple input variables to estimate the probability that market conditions will be achieved. These variables include the Company's expected stock price volatility over the expected term of the award, the risk-free interest rate for the expected term of the award, and expected dividends. For PSUs with market conditions, the stock-based compensation expense is recognized on a tranche by tranche basis over the requisite service period using the fair value derived from the Monte Carlo simulation model. The compensation expense will be recognized regardless of whether the market condition is ever satisfied, provided the requisite service period is satisfied. For all awards, the Company accounts for forfeitures as they occur. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents primarily consist of investments in short-term money market funds. Restricted cash consists of cash deposited with a financial institution as collateral for the Company’s letters of credit for its facility leases and the Company’s credit cards. The Company had $ 14.9 million and $ 0 in restricted cash as of December 31, 2023 and 2022, respectively. The following table provides a reconciliation of cash, cash equivalents and restricted cash for the year ended December 31, 2023 that sum to the total of the same amounts shown in the statements of cash flows (in thousands): December 31, 2023 December 31, 2022 December 31, 2021 Cash and cash equivalents $ 175,709 $ 293,793 $ 418,171 Restricted cash 14,914 — — Total cash, cash equivalents and restricted cash $ 190,623 $ 293,793 $ 418,171 Accounts Receivable Accounts receivables are recorded at the amounts billed to buyers and do not bear interest. Accounts receivables result from credit card transactions, the majority of which are settled within two business days. Inventory, Net Inventory consists of finished goods arising from goods returned after the title has transferred from the buyer to the Company as well as finished goods from direct purchases from vendors and consignors. The cost of inventory is an amount equal to that paid to the consignor or vendors. Inventory is valued at the lower of cost and net realizable value using the specific identification method and the Company records provisions, as appropriate, to write down obsolete and excess inventory to estimated net realizable value. After the inventory value is reduced, adjustments are not made to increase it from the estimated net realizable value. Additionally, inventory is recorded net of an allowance for shrinkage which represents the risk of physical loss of inventory. Provisions for inventory shrinkage are estimated based on historical 71 Table of C ontents experience and are adjusted based upon physical inventory counts. Provisions to write down inventory to net realizable value and provisions for inventory shrinkage were $ 9.8 million and $ 4.1 million during the year end December 31, 2023 and 2022, 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 as of December 31, 2023 and 2022. Included in inventory on the Company’s balance sheets are assets totaling $ 5.2 million and $ 6.1 million as of December 31, 2023 and 2022, respectively, for the rights to recover products from customers associated with its liabilities for return reserves. Property and Equipment, Net Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Repair and maintenance costs are expensed as incurred. The estimated useful lives of our assets are as follows: Proprietary software 3 years Furniture and equipment 3 - 5 years Vehicles 5 years Leasehold improvements Shorter of lease term or estimated useful life Software Development Costs Proprietary software includes the costs of developing the Company’s internal proprietary business platform and automation projects. The Company capitalizes qualifying proprietary software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (1) the preliminary project stage is completed and (2) it is probable that the software will be completed and used for its intended function. Such costs are capitalized in the period incurred. Capitalization ceases and amortization begins when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. Impairment of Long-lived Assets The carrying amounts of long-lived assets, including right-of-use assets, property and equipment, net and capitalized proprietary software, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of assets to future undiscounted net cash flows the assets are expected to generate over their remaining life. If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the revised shorter useful life. Leases Contracts that have been determined to convey the right to use an identified asset are evaluated for classification as an operating or finance lease. For the Company’s operating leases, the Company records a lease liability based on the present value of the lease payments at lease inception, using the applicable incremental borrowing rate. The Company estimates the incremental borrowing rate by developing its own synthetic credit rating, corresponding yield curve, and the terms of each lease at the lease commencement date. The corresponding right-of-use asset is recorded based on the corresponding lease liability at lease inception, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred and any tenant incentives allowed for under the lease. The Company does not include optional renewal terms or early termination provisions unless the Company is reasonably certain such options would be 72 Table of C ontents exercised at the inception of the lease. Operating lease right-of-use assets, current portion of operating lease liabilities, and operating lease liabilities, net of current portion are included on the Company’s balance sheet. The Company has elected the practical expedients that allows for the combination of lease components and non-lease components and to record short-term leases as lease expense on a straight-line basis on the statements of operations. Variable lease payments are recorded as expense as they are incurred. The Company has finance leases for vehicles and equipment, and the amounts of finance lease right-of-use assets and finance lease liabilities have been immaterial to date. Convertible Senior Notes, Net 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 3.00 % Convertible Senior Notes due 2025 (the “2025 Notes”) and the 1.00 % Convertible Senior Notes due 2028 (the “2028 Notes” and, together with the 2025 Notes, 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 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. The Company monitors the conditions for equity classification, which continue to be met as of December 31, 2023. Debt Issuance Costs Debt issuance costs, which consist of direct incremental legal, consulting, banking and accounting fees related 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 series of 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 Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in loss in the period of enactment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. 73 Table of C ontents Concentrations of Credit Risks Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash and accounts receivable. At times, such amount may exceed federally-insured limits. The Company is monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally. The Company reduces credit risk by placing its cash, cash equivalents, restricted cash and investments with major financial institutions with high credit ratings within the United States. The Company has not experienced any realized losses on cash, cash equivalents and restricted cash to date; however, no assurances can be provided. As of December 31, 2023 and December 31, 2022, 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, 2023, 2022, and 2021. Recently Issued Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures. This new guidance is designed to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. Additionally, public entities with a single reportable segment must provide all the disclosures required by ASU 2023-07, as well as all existing segment disclosures in accordance with Accounting Standards Codification 280. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company expects the adoption of the standard to result in additional segment footnote disclosures. The Company does not expect the adoption of this guidance to have a material impact on our financial statements. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. This new guidance is designed to enhance the transparency and decision usefulness of income tax disclosures. The amendments of this update are related to the rate reconciliation and income taxes paid, requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its financial statements. Note 3. Cash and Cash Equivalents The following tables summarize the estimated value of the Company’s cash and cash equivalents (in thousands) and do not include restricted cash. There are no unrealized gains or losses related to the restricted cash balance. December 31, 2023 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 50,947 $ — $ — $ 50,947 Money market funds 124,762 — — 124,762 Total cash and cash equivalents $ 175,709 $ — $ — $ 175,709 December 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 275,742 $ — $ — $ 275,742 Money market funds 18,051 — — 18,051 Total cash and cash equivalents $ 293,793 $ — $ — $ 293,793 74 Table of C ontents Note 4. Fair Value Measurement Assets and liabilities recorded at fair value on a recurring basis on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented. Assets and Liabilities Measured at Fair Value on a Recurring Basis As of December 31, 2023 and December 31, 2022, the Company’s cash equivalents solely consisted of money market funds, which amounted to $ 124.8 million and $ 18.1 million, respectively. Money market funds are measured at net asset value per share. Fair Value Measurements of Other Financial Instruments The following table presents the carrying amounts and estimated fair values of the financial instruments that are not recorded at fair value on the balance sheets (in millions): December 31, 2023 Net Carrying Amount Estimated Fair Value 2025 Convertible senior notes $ 170.6 $ 128.2 2028 Convertible senior notes $ 281.9 $ 100.0 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. As of December 31, 2023, the fair value of the 2025 Notes and 2028 Notes, which differs from their carrying value is determined based on the quoted bid prices of the Notes in an over-the counter market using the latest trading information of the reporting period. 75 Table of C ontents Note 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Property and equipment, net consists of the following (in thousands): December 31, 2023 December 31, 2022 Proprietary software $ 44,964 $ 39,017 Furniture and equipment 47,389 47,692 Automobiles 2,069 2,119 Leasehold improvements 84,138 86,986 Property and equipment, gross 178,560 175,814 Less: accumulated depreciation and amortization ( 74,473 ) ( 63,135 ) Property and equipment, net $ 104,087 $ 112,679 Depreciation and amortization expense on property and equipment was $ 31.0 million, $ 26.9 million, and $ 23.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, the Company recorded $ 8.6 million of impairment of leasehold improvements and disposal of fixed assets related to the closures of several of its office and retail locations as part of the savings plan the Company implemented. The impairment charges are included in restructuring in the statements of operations. Other Accrued and Current Liabilities Other accrued and current liabilities consist of the following (in thousands): December 31, 2023 December 31, 2022 Returns reserve $ 22,204 $ 22,233 Accrued compensation 20,086 15,111 Accrued legal 614 484 Accrued sales tax and other taxes 8,118 8,531 Site credit and gift card liability 14,058 13,223 Accrued marketing and outside services 5,012 8,729 Accrued shipping 4,244 5,715 Accrued interest 1,166 1,166 Deferred revenue 2,214 3,549 Accrued property and equipment 1,066 11,417 Other 3,903 3,134 Other accrued and current liabilities $ 82,685 $ 93,292 Note 6. Debt Revolving Credit Agreement In April 2021, the Company entered into a loan and security agreement ("Revolving Credit Agreement") with a lender, to provide a revolving line of credit of up to $ 50 million. Advances on the line of credit bear interest payable monthly at a variable annual rate equal to the greater of the prime rate plus 0.50 % or 4.25 %. The credit facility was set to expire in April 2023. In April 2023 the Company signed an amendment with the lender to extend the credit facility through June 2023. As of June 30, 2023, $ 0 had been drawn on the Revolving Credit Agreement, and the credit facility has expired and was not renewed. 76 Table of C ontents Note 7. Convertible Senior Notes, Net In June 2020, the Company issued an aggregate principal of $ 172.5 million of its 2025 Notes, 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. The Company received net proceeds from the 2025 Notes offering of approximately $ 165.8 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $ 22.5 million of the net proceeds from the 2025 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes. In March 2021, the Company issued an aggregate principal of $ 287.5 million of its 2028 Notes, pursuant to an indenture between the Company and U.S. Bank National Association, as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2028 Notes include $ 37.5 million in aggregate principal amount of the 2028 Notes sold to the initial purchasers resulting from the exercise in full of their option to purchase additional Notes. The 2028 Notes will mature on March 1, 2028, unless earlier redeemed or repurchased by the Company or converted. The Company received net proceeds from the 2028 Notes offering of approximately $ 278.1 million, after deducting the initial purchasers’ discount and commission and offering expenses. The Company used approximately $ 33.7 million of the net proceeds from the 2028 Notes offering to fund the net cost of entering into the capped call transactions described below. The Company intends to use the remainder of the net proceeds for general corporate purposes. The 2025 Notes accrue interest at a rate of 3.00 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The initial conversion rate applicable to the 2025 Notes is 56.2635 shares of common stock per $1,000 principal amount of 2025 Notes (which is equivalent to an initial conversion price of approximately $ 17.77 per share of the Company’s common stock). The 2028 Notes accrue interest at a rate of 1.00 % per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021. The initial conversion rate applicable to the 2028 Notes is 31.4465 shares of common stock per $1,000 principal amount of 2028 Notes (which is equivalent to an initial conversion price of approximately $ 31.80 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a corporate event, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 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, and the 2028 Notes will be redeemable, in whole or in part, at the Company's option at any time, and from time to time, on or after March 5, 2025, in each case if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. Prior to March 15, 2025, in the case of the 2025 Notes, and December 1, 2027, in the case of the 2028 Notes, the applicable Notes will be convertible only under the following circumstances: • During any calendar quarter (and only during such calendar quarter), if, the last reported sale price per share of the Company’s common stock exceeds 130 % of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter; • During the five business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less 77 Table of C ontents than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; • Upon the occurrence of specified corporate transactions; or • If the Company calls any notes for redemption. On and after March 15, 2025, in the case of the 2025 Notes, and December 1, 2027, in the case of the 2028 Notes, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their Notes, in multiples of $1,000 principal amount, at any time, regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. It is the Company’s current intent to settle conversions of the 2025 Notes and the 2028 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. The conditions allowing holders of either the 2025 Notes or the 2028 Notes to convert were not met as of December 31, 2023 . The Notes are unsecured and unsubordinated obligations of the Company and will rank senior in right of payment to any of future indebtedness of the Company that is expressly subordinated in right of payment to the Notes; rank equal in right of payment to any existing and future unsecured indebtedness of the Company that is not so subordinated; be effectively subordinated in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all existing and future indebtedness and other liabilities and obligations incurred by future subsidiaries of the Company. If bankruptcy, insolvency, or reorganization occurs with respect to the Company (and not solely with respect to a significant subsidiary of the Company), then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If an event of default (other than bankruptcy, insolvency, or reorganization with respect to the Company and not solely with respect to a significant subsidiary of 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 2025 Notes or 2028 Notes, as applicable, 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 or 2028 Notes, as applicable, the 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 and the 2028 Notes, the Company separately accounted for the liability and equity components of the Notes. 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 and 2028 Notes, the Company incurred approximately $ 6.7 million and $ 9.4 million of debt issuance costs, respectively, 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 was recorded as a reduction to additional paid-in capital. The portion of these costs initially allocated to the liability component 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 Notes. On January 1, 2022, the Company adopted ASU 2020-06 based on a modified retrospective transition method. 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. 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 $ 170.6 million as of December 31, 2023, with principal of $ 172.5 million, net of unamortized issuance costs of $ 1.9 million. The 2025 Notes were classified as long term liabilities as of December 31, 2023. 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 %. 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 $ 281.9 million as of December 31, 2023, with principal of $ 287.5 million, net of unamortized issuance costs of 78 Table of C ontents $ 5.6 million. The 2028 Notes were classified as long term liabilities as of December 31, 2023. 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 following tables present the outstanding principal amount, unamortized debt issuance costs, and net carrying amount of the 2025 Notes and the 2028 Notes as of the dates indicated (in thousands): 2025 Notes December 31, 2023 December 31, 2022 Principal $ 172,500 $ 172,500 Unamortized debt issuance costs ( 1,936 ) ( 3,204 ) Net carrying amount $ 170,564 $ 169,296 2028 Notes December 31, 2023 December 31, 2022 Principal $ 287,500 $ 287,500 Unamortized debt issuance costs ( 5,643 ) ( 6,948 ) Net carrying amount $ 281,857 $ 280,552 The following tables set forth the amounts recorded in interest expense related to the 2025 Notes as of the dates indicated (in thousands): Year Ended December 31, 2023 2022 2021 Contractual interest expense $ 5,175 $ 5,175 $ 5,175 Amortization of debt discount — — 3,594 Amortization of debt issuance costs 1,268 1,080 1,082 Total interest and amortization expense $ 6,443 $ 6,255 $ 9,851 The following tables set forth the amounts recorded in interest expense related to the 2028 Notes as of the dates indicated (in thousands): Year Ended December 31, 2023 2022 2021 Contractual interest expense $ 2,875 $ 2,875 $ 2,332 Amortization of debt discount — — 8,759 Amortization of debt issuance costs 1,305 1,288 554 Total interest and amortization expense $ 4,180 $ 4,163 $ 11,645 Future minimum payments under the 2025 Notes and the 2028 Notes as of December 31, 2023, are as follows (in thousands): Amount Fiscal Year 2025 Notes 2028 Notes 2024 5,175 2,875 2025 175,088 2,875 2026 — 2,875 2027 — 2,875 2028 — 288,937 Total future payments 180,263 300,437 Less amounts representing interest ( 7,763 ) ( 12,937 ) Total principal amount $ 172,500 $ 287,500 79 Table of C ontents Capped Call Transactions with Respect to the 2025 Notes and 2028 Notes In connection with the issuance of the 2025 Notes and 2028 Notes, including the initial purchasers’ exercise of the option to purchase additional Notes, the Company entered into capped call transactions with respect to its common stock with certain financial institutions (collectively, the “Counterparties”). The Company paid an aggregate amount of approximately $ 22.5 million to the Counterparties in connection with the 2025 capped call transactions (the “2025 Capped Calls”) and $ 33.7 million to the Counterparties in connection with the 2028 capped call transactions and (the “2028 Capped Calls” and, together with the 2025 Capped Calls, the “Capped Calls”). The 2025 Capped Calls and 2028 Capped Calls cover approximately 9,705,454 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. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offer and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. The 2025 Capped Calls settle in components commencing on April 16, 2025 with the last component scheduled to expire on June 12, 2025. The 2028 Capped Calls settle in components commencing on December 31, 2027 with the last component scheduled to expire on February 28, 2028. The cap price of the 2025 Capped Call is initially $ 27.88 per share, which represents a premium of 100.0 % over the closing price of the Company’s common stock of $ 13.94 per share on June 10, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The cap price of the 2028 Capped Call is initially $ 48.00 per share, which represents a premium of 100.0 % over the closing price of the Company’s common stock of $ 24.00 per share on March 3, 2021, and is subject to certain adjustments under the terms of the capped call transactions. The Company expects to receive from the Counterparties a number of shares of the Company’s common stock or, at the Company’s election (subject to certain conditions), cash, with an aggregate market value (or, in the case of cash settlement, in an amount) approximately equal to the product of such excess times the number of shares of the Company’s common stock relating to the 2025 Capped Call and 2028 Capped Call 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 Call and 2028 Capped Call transactions. Note 8. Common Stock The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows: December 31, 2023 December 31, 2022 Options issued and outstanding 1,119,676 1,754,776 Outstanding restricted stock units 12,695,176 11,369,021 Shares available for grant under the 2019 equity incentive plan 7,654,656 5,035,545 Shares available for issuance under 2019 ESPP 3,654,915 3,529,709 Total 25,124,423 21,689,051 Note 9. Share-based Compensation Plans 2019 Equity Incentive Plan In connection with the Company’s initial public offering, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to participants. Subject to the terms and conditions of the 2019 Plan, the initial number of shares authorized for grants under the 2019 Plan is 8,000,000 . These available shares increase annually by 80 Table of C ontents an amount equal to the lesser of 8,000,000 shares, 5 % of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. The Company’s board of directors approved an increase of shares available for grant under the 2019 Plan by 4,465,083 shares on May 5, 2021, by 4,648,003 shares on February 23, 2022, and by 4,954,409 shares on February 13, 2023. Activity under the Company’s stock option plan is set forth below: Number of Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Balances at December 31, 2022 1,754,776 8.21 4.0 $ 1 Options granted — — Options exercised ( 8,511 ) 2.28 Options cancelled ( 626,589 ) 9.04 Balances at December 31, 2023 1,119,676 7.79 4.2 15 Options vested and exercisable— December 31, 2023 1,119,676 7.79 4.2 15 There were no stock options granted in 2023 and in 2022. There was no aggregate intrinsic value of options exercised for the year ended December 31, 2023. The aggregate intrinsic value of options exercised for the years ended December 31, 2022 and 2021 was $ 5.3 million and $ 20.5 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, 2023, the Company has not recognized stock-based compensation expense as attainment of financial performance targets is not considered probable. In March 2023, the Company granted PSUs under the 2019 Plan subject to the achievement of both market and service conditions to certain employees of the Company . The number of units vested will depend on the achievement of approved market conditions and continuous service with the Company. The PSUs are eligible to vest in three tranches over a five-year performance period. The PSUs are measured using the Monte Carlo simulation to obtain the fair value at the date of grant based on the probability that the market conditions will be met. The compensation expense associated with the PSUs is based on the fair value and is recognized over the requisite service period. The compensation expense will be recognized regardless of whether the market condition is ever satisfied, provided the requisite service period is satisfied. Inducement Grants In March 2023, the Company granted stock-based awards outside of the 2019 Plan to the Company’s new Chief Executive Officer and the Chief Technology and Product Officer. These awards were granted as inducements material to their commencement of employment and entry into offer letters with the Company, in accordance with Nasdaq Listing Rule 5635(c)(4). The inducement pool consisted of a total of 3,075,000 shares of the Company's common stock, which includes (a) 1,500,000 shares of PSUs granted to the Chief Executive Officer that are eligible to vest based on market and service conditions in four tranches over a five-year performance period and (b) 1,575,000 shares of RSUs ( 1,250,000 RSUs to the Chief Executive Officer and 325,000 RSUs to the Chief Technology and Product Officer) generally subject to the same terms and conditions as grants that are made under the 2019 Plan. As of December 31, 2023, the unrecognized expense for the PSUs is $ 1.3 million and the unrecognized expense for RSUs is $ 2.0 million. 81 Table of C ontents RSUs A summary of RSU activity for the year ended December 31, 2023 is as follows: Number of Shares Restricted Stock Units Weighted- Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested December 31, 2022 11,369,021 $ 8.39 $ 14,178 Granted 10,863,664 1.62 Vested ( 5,098,002 ) 7.51 Forfeited ( 4,439,507 ) 5.19 Unvested December 31, 2023 12,695,176 $ 4.07 $ 25,517 Included in the table above for the year ended December 31, 2023 are approximately 1,998,000 PSUs granted and no PSUs forfeited. The weighted average grant date fair value per share of the PSUs granted in the year ended December 31, 2023 was $ 1.63 . The total fair value as of the respective vesting dates of RSUs that vested during the year ended December 31, 2023 was $ 9.5 million . Employee Stock Purchase Plan In connection with the Company’s initial public offering, the Company adopted the Employee Stock Purchase Plan (the “ESPP”). The Employee Stock Purchase Plan permits employees to purchase shares of common stock during six-month offering periods at a purchase price equal to the lesser of (1) 85 % of the fair market value of a share of common stock on the first business day of such offering period and (2) 85 % of the fair market value of a share of common stock on the last business day of such offering period. The initial number of shares of common stock that could be issued under the employee stock purchase plan was 1,750,000 shares. These available shares increase by an amount equal to the lesser of 1,750,000 shares, 1 % of the number of shares of common stock outstanding on the immediately preceding December 31, or the number of shares determined by the Company’s board of directors. The Company's board of directors approved an increase in the shares available for grant under the ESPP by 893,016 shares on May 5, 2021, by 929,601 shares on February 23, 2022, and by 990,882 shares on February 13, 2023. During the years ended December 31, 2023, 2022 and 2021, employees purchased 865,676 , 610,877 , and 199,289 shares, respectively, at an average price of $ 1.02 , $ 2.29 and $ 11.74 , respectively. As of December 31, 2023, the Company had an immaterial amount of unrecognized stock-based compensation cost related to purchase rights under the employee stock purchase plan. Stock-based Compensation In determining the fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Fair Value of Common Stock— The fair value of the shares of common stock has historically been determined by the Company’s board of directors as there was no public market for the common stock. Subsequent to our IPO, the fair value per share of common stock is the closing price of the Company’s common stock as reported on the applicable grant date. Expected Term —The expected term represents the period that the Company’s stock options are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term . Volatility —Because the Company was privately held and did not have an active trading market for its common stock for a sufficient period of time, the expected volatility was estimated based on the average volatility for comparable publicly-traded companies, over a period equal to the expected term of the stock option grants. 82 Table of C ontents Risk-free Rate —The risk-free rate assumption is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Dividends —The Company has never paid dividends on its common stock and does not anticipate paying dividends on common stock. Therefore, the Company uses an expected dividend yield of zero. The following assumptions were used to estimate the fair value of stock options granted in 2019, as there were no stock options granted in 2023, 2022 and 2021: Year Ended December 31, 2019 Expected term (in years) 5.0 – 6.1 Expected volatility 44.2 % – 47.8 % Average risk-free rate 1.9 % – 2.6 % Dividend yield — As of December 31, 2023, the Company had approximately $ 40.3 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 2.1 years. As of December 31, 2023, the Company had no unrecognized stock-based compensation expense related to options. Total stock-based compensation expense by function was as follows (in thousands): Year Ended December 31, 2023 2022 2021 Marketing $ 1,550 $ 2,209 $ 2,557 Operations and technology 12,534 19,822 21,395 Selling, general and administrative 20,189 24,107 24,850 Total $ 34,273 $ 46,138 $ 48,802 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 years ended December 31, 2023, 2022 and 2021, the Company capitalized $ 0.8 million, $ 1.6 million, and $ 1.4 million of stock-based compensation expense to proprietary software, respectively. Note 10. Leases The Company leases its corporate offices, retail spaces and authentication centers under various noncancelable operating leases with terms ranging from one year to fifteen years . The Company recorded operating lease costs of $ 22.8 million and $ 29.0 million for the years ended December 31, 2023 and 2022, respectively. The Company incurred $ 5.2 million and $ 5.6 million of variable lease costs for the years ended December 31, 2023 and 2022, respectively, which is comprised primarily of the Company’s proportionate share of operating expenses, property taxes and insurance. Due to the office and store closures in the year ended December 31, 2023, the Company reviewed its right-of-use assets for impairment. Impairment losses are measured and recorded for the excess of carrying value over its fair value, estimated based on expected future cash flows using discount rate and other quantitative and qualitative factors. As a result, the Company recorded $ 31.1 million related to the impairment of certain office and store right-of-use assets during the year ended December 31, 2023. The impairment charges are included in restructuring in the statements of operations. During the year ended December 31, 2023, the Company entered into agreements to amend certain of its operating leases. The lease for the Company's corporate headquarters in San Francisco, CA was amended to remove one floor of leased space, and the lease for the Company's offices in New York, NY, was amended to remove two floors of leased space. Additionally, the Company terminated the operating leases for retail locations in Austin, TX, Atlanta, GA, and 83 Table of C ontents Miami, FL. The Company treated the lease termination amendments as lease modifications for accounting purposes as of the applicable effective dates of such terminations which resulted in a decrease of $ 7.7 million to the related lease liabilities, and a decrease of $ 1.4 million to the related right-of-use assets for the year ended December 31, 2023. The Company recorded a net gain on the lease terminations of $ 0.7 million during the year ended December 31, 2023. The net gain on lease terminations is included in restructuring in the statement of operations. Maturities of operating lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year Amount 2024 26,964 2025 27,787 2026 27,614 2027 23,608 2028 20,866 Thereafter 19,866 Total future minimum payments $ 146,705 Less: Imputed interest ( 21,755 ) Present value of operating lease liabilities $ 124,950 Supplemental cash flow information related to the Company’s operating leases are as follows (in thousands): Year Ended Year ended December 31, 2023 2022 2021 Operating cash flows used for operating leases $ 34,118 $ 27,097 $ 25,386 Operating lease assets obtained in exchange for operating lease liabilities $ 6,272 $ 2,245 $ 46,614 The weighted average remaining lease term and discount rate for the Company’s operating leases are as follows: As of December 31, 2023 As of December 31, 2022 Weighted average remaining lease term 5.5 years 6.2 years Weighted average discount rate 6.1 % 6.2 % 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 immaterial as of December 31, 2023 and 2022. Note 11. Restructuring In February 2023, the Company announced a savings plan to reduce its real estate presence and operating expenses through closure of certain retail and office locations (referred to as the “Real Estate Reduction Plan”) and workforce reduction. During the year ended December 31, 2023, the Company closed two flagship stores (San Francisco, California and Chicago, Illinois), two neighborhood stores (Atlanta, Georgia and Austin, Texas), and two luxury consignment offices (Miami, Florida and Washington, D.C.), including any co-located logistics hubs, and reduced its office spaces in San Francisco, California. For the year ended December 31, 2023, the Company recognized $ 43.5 million in restructuring which consisted of right-of-use asset impairment charge of $ 31.1 million, leasehold improvements impairment charge of $ 8.6 million, employee severance of $ 3.0 million, and other related charges of $ 1.5 million, partially offset by a $ 0.7 million gain on lease terminations. The restructuring related charges were recorded on a separate line item in the Company's statement of operations. 84 Table of C ontents Note 12. 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, 2023, the future minimum payments under the Company’s noncancelable purchase commitments were as follows (in thousands): Year Ending December 31, Purchase Commitments 2024 $ 7,944 2025 8,344 2026 4,018 2027 1,158 2028 — Total future minimum payments $ 21,464 Contingencies From time to time, the Company is subject to, and it is presently involved in, litigation and other legal proceedings and from time to time, the Company receives inquiries from government agencies. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. The Company records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company discloses material contingencies when a loss is not probable but reasonably possible. On November 14, 2018, Chanel, Inc. sued the Company in the U.S. District Court for the Southern District of New York. The Complaint alleged federal and state law claims of trademark infringement, unfair competition, and false advertising. On February 1, 2019, Chanel, Inc. filed its First Amended Complaint that included substantially similar claims against the Company. On March 4, 2019, the Company filed a Motion to Dismiss the First Amended Complaint, which was granted in part and dismissed in part on March 30, 2020. The surviving claims against the Company include trademark infringement under 15 U.S.C. § 1114, false advertising under 15 U.S.C. § 1125, and unfair competition under New York common law. On May 29, 2020, the Company filed its Answer to the Amended Complaint. On November 3, 2020, the Company sought leave to amend its Answer to assert counterclaims against Chanel, Inc. for violations of the Sherman Act, 15 U.S.C. §§ 1 & 2, the Donnelly Act, N.Y. Gen. Bus. Law. § 340, and New York common law. The motion for leave to amend was granted on February 24, 2021. On February 25, 2021, the Company filed its First Amended Answer, Affirmative Defenses and Counterclaims against Chanel. The Company’s Counterclaims allege violations of the Sherman Act, 15 U.S.C. §§ 1 & 2, the Donnelly Act, N.Y. Gen. Bus. Law. § 340, and New York common law. On March 18, 2021, Chanel moved to dismiss the Company’s Counterclaims and moved to strike the Company’s unclean hands affirmative defense. Decisions on Chanel’s motion to dismiss and motion strike are pending. The parties agreed to a stay in April 2021 to engage in settlement discussions. After several mediation sessions, the parties were unable to reach a resolution, and the stay was lifted in November 2021. 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 have continued to engage in fact discovery regarding Chanel's counterfeiting and false advertising claims against the Company. Fact discovery was scheduled to be completed by August 15, 2023. However, on July 19, 2023, the Court ordered a stay of the case at the parties’ request to enable the parties to attempt mediation again. The parties are working to schedule mediation in the first half of 2024. 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. The Company is not able to predict or reasonably estimate the ultimate outcome or possible losses relating to this claim. Beginning on September 10, 2019, purported shareholder class action complaints were filed against the Company, its officers and directors and the underwriters of its IPO in the San Mateo Superior Court, Marin County Superior Court, and the United States District Court for the Northern District of California. On July 27, 2021, the Company reached an agreement in principle to settle the shareholder class action. On November 5, 2021, plaintiff filed the executed stipulation of settlement and motion for preliminary approval of the settlement with the federal court. 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 85 Table of C ontents payment instructions. 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 Marin County case opted out of the federal settlement and is pursuing the claim in Marin County Superior Court. 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 of 1933 (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, based on purported new revelations. The claims are for alleged violations of Sections 11 and 15 of the Securities Act. On February 23, 2024, plaintiff filed a motion for class certification, which has been set for hearing on May 28, 2024. While the Company intends to defend vigorously against this litigation, there can be no assurance that the Company will be successful in its defense. For this reason, the Company cannot currently estimate the loss or range of possible losses it may experience in connection with this litigation. Indemnifications In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company's various services, or its acts or omissions. The Company has not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in its financial statements. Note 13. Income Taxes The components of the Company’s income tax provision consisted of (in thousands): Year Ended December 31, 2023 2022 2021 Current: Federal $ — $ — $ — State 283 172 56 Total current tax expense 283 172 56 Deferred: Federal — — — State — — — Total deferred tax expense — — — Total provision for income taxes $ 283 $ 172 $ 56 The reconciliation of the Federal statutory income tax provision for the Company’s effective income tax provision (in thousands): Year Ended December 31, 2023 2022 2021 Tax at federal statutory rate $ ( 35,290 ) $ ( 41,209 ) $ ( 49,480 ) State taxes, net of federal effect ( 9,554 ) ( 11,257 ) ( 13,704 ) Stock-based compensation 8,956 419 ( 2,698 ) Non-deductible items 504 524 3,661 Tax credits ( 531 ) ( 563 ) — Convertible Notes — — 16,782 Adoption of ASU 2020-06 — ( 28,045 ) — Provision to return adjustments 9,259 — — Valuation allowance 26,501 80,254 42,327 Other 438 49 3,168 Provision for income taxes $ 283 $ 172 $ 56 86 Table of C ontents The Company’s deferred tax assets and liabilities (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 232,259 $ 219,872 Fixed assets and intangibles 6,364 3,904 Capitalized research and development (1) 13,835 7,899 Accruals and reserves 12,477 10,867 Stock options 840 2,474 Operating lease liabilities 33,683 39,143 Capped calls 15,065 15,082 Convertible debt 2,329 1,675 Tax credits 2,569 1,416 Gross deferred tax assets 319,421 302,332 Less: valuation allowance ( 292,297 ) ( 265,796 ) Total deferred tax assets 27,124 36,536 Deferred tax liabilities: Operating lease right-of-use assets ( 24,416 ) ( 34,330 ) Other ( 2,708 ) ( 2,206 ) Gross deferred tax liabilities ( 27,124 ) ( 36,536 ) Net deferred tax assets $ — $ — (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. In assessing the realizability of deferred tax assets, the Company evaluates all available positive and negative evidence by considering whether it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon future taxable income, future reversals of existing taxable temporary difference, taxable income in carryback years and tax-planning strategies. The Company believes it is more likely than not that the deferred tax assets in the U.S. will not be realized; accordingly, a valuation allowance has been established against our U.S. deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2023 and December 31, 2022 was an increase of $ 26.5 million and an increase of $ 80.3 million, respectively. As of December 31, 2023 and 2022, the Company has a net operating loss carryforward of $ 871.3 million and $ 827.6 million for federal tax purposes, respectively, and $ 817.5 million and $ 770.0 million for state tax purposes, respectively. If not utilized, these losses will expire beginning in 2024 for state tax purposes. However, beginning in tax year 2018 and forward, the Federal law has changed such that net operating losses generated after December 31, 2017 may be carried forward indefinitely. Accordingly, $ 168.2 million of the federal net operating losses will begin to expire in 2032. However, $ 703.1 million of the federal net operating losses will not expire. As of December 31, 2023 and 2022, the Company has a credit carryforward of $ 4.3 million and $ 2.0 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. During 2019, the Company analyzed whether any of the reported net operating losses would be limited because of these rules. Based on the analysis the Company believes $ 3.3 million of the Federal and $ 2.1 million of California net operating losses will not be available to offset future taxable income because of the limitation. The reported net operating losses have been adjusted based on this analysis. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local, jurisdictions, where applicable. As of December 31, 2023 and 2022, all years generally remain open to examination. Additionally, net operating loss 87 Table of C ontents carryforwards are subject to examination by the Internal Revenue Service and the California Franchise Tax Board for up to three and four years, respectively, after utilization. Uncertain Income Tax Positions The following table reflects the changes to the Company's unrecognized tax benefits (in thousands): December 31, 2023 2022 Unrecognized tax benefits beginning balance $ 1,525 $ — Increases related to current year tax positions 531 563 Increases related to prior year tax positions 622 962 Unrecognized tax benefits ending balance $ 2,678 $ 1,525 As of December 31, 2023 and 2022, the Company had unrecognized tax benefits of $ 2.7 million and $ 1.5 million, respectively, none of which, if recognized, would favorably impact the Company’s effective tax rate. 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 during the years ended December 31, 2023 and 2022. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months. Note 14. Net Loss Per Share Attributable to Common Stockholders A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share attributable to common stockholders is as follows (in thousands, except share and per share data): Year Ended December 31, 2023 2022 2021 Numerator Net loss attributable to common stockholders $ ( 168,472 ) $ ( 196,445 ) $ ( 236,107 ) Denominator Weighted-average common shares outstanding used to calculate net loss per share attributable to common stockholders, basic and diluted 101,806,000 95,921,246 91,409,624 Net loss per share attributable to common stockholders, basic and diluted $ ( 1.65 ) $ ( 2.05 ) $ ( 2.58 ) The following securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis): December 31, 2023 2022 2021 Options to purchase common stock 1,119,676 1,754,776 4,131,501 Restricted stock units 12,695,176 11,369,021 8,187,586 Estimated shares issuable under the Employee Stock Purchase Plan 367,074 695,782 147,871 Assumed conversion of the Convertible Senior Notes 18,746,323 18,746,323 18,746,323 Total 32,928,249 32,565,902 31,213,281 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 loss per share is computed on an as-converted basis. 88 Table of C ontents Note 15. Retirement Plan The Company has a defined-contribution 401(k) retirement plan covering substantially all of its employees. Eligible employees are permitted to contribute up to an amount not to exceed an annual statutory maximum. The Company matches employee contributions at a rate of 25 % of vested contributions, up to a maximum of $ 1,000 per participant per year. The Company’s contributions to the 401(k) plan were $ 0.8 million, $ 1.6 million, and $ 1.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. 89 Table of C ontents Note 16. Subsequent Events On February 29, 2024, the Company entered into an exchange agreement with certain holders of its Notes to exchange (i) $ 145,751,000 in aggregate principal amount of the 2025 Notes and (ii) $ 6,480,000 in aggregate principal amount of the 2028 Notes (together, the “Exchanged Notes”) for $ 135,000,000 in aggregate principal amount of new senior notes due 2029 (“2029 Notes”), pursuant to an indenture. The exchange was consummated on February 29, 2024. The 2029 Notes bear cash interest (“Cash Interest”) at a rate of 8.75 % per annum payable semi-annually in arrears. In addition, the Notes bear interest at a rate of 4.25 % payable in kind (“PIK Interest”). Additionally, the Company issued warrants to acquire an aggregate of up to 7,894,737 shares of the Company’s common stock to the holders of the Exchanged Notes. 90