THE REALREAL, INC. The following discussion of our financial condition and results of operations should be read together with our condensed financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes and our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onMarch 1, 2021 . The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. See the discussion under "Note Regarding Forward-Looking Statements" elsewhere in this Quarterly Report on Form 10-Q for more information. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and particularly in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full calendar year or any other period. Overview We are the world's largest online marketplace for authenticated, consigned luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply from consignors and creates a trusted, curated online marketplace for buyers globally. Since our inception in 2011, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people. We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers. We offer products across multiple categories including women's, men's, kids', jewelry and watches, and home and art. We have built a vibrant online marketplace that we believe expands the overall luxury market, promotes the recirculation of luxury goods and contributes to a more sustainable world. We have transformed the luxury consignment experience by removing the friction and pain points inherent in the traditional consignment model. For consignors, we offer concierge in-home consultation and pickup, subject to safety requirements related to the COVID pandemic, and meetings with consignors via online face-to-face platforms, or Virtual Consultations. Consignors may also drop off items at our luxury consignment offices. Our flagship and neighborhood stores, retail stores with smaller square footage, provide an alternative location to drop off consigned items and an opportunity to interact with our experts. Consignors may also utilize our complimentary shipping directly to our authentication centers. We leverage our proprietary transactional database and market insights from approximately 21.3 million item sales since inception to deliver optimal pricing and rapid sell-through. For buyers, we offer highly coveted and exclusive authenticated pre-owned luxury goods at attractive values, as well as a high-quality experience befitting the products we offer. Our online marketplace is powered by our proprietary technology platform, including consumer facing applications and purpose-built software that supports our complex, single-SKU inventory management system. The substantial majority of our revenue is generated by consignment sales. We also generate revenue from other services and direct sales. •Consignment and service revenue. When we sell goods through our online marketplace or retail stores on behalf of our consignors, we retain a percentage of the proceeds, which we refer to as our take rate. Take rates vary depending on the total value of goods sold through our online marketplace on behalf of a particular consignor as well as the category and price point of the items. In the three months endedSeptember 30, 2021 and 2020, our overall take rate on consigned goods was 34.9% and 35.4%, respectively. The decrease in our take rate is due to higher contribution from lower take rate products. Additionally, we earn revenue from shipping fees and from our subscription program, First Look, in which we offer buyers early access to the items we sell in exchange for a monthly fee. •Direct revenue. In certain cases, such as when we accept out of policy returns from buyers, or when we make direct purchases from businesses and consignors, we take ownership of goods and retain 100% of the proceeds when the goods subsequently sell through our online marketplace or retail stores. We generate revenue from orders processed through our website, mobile app and retail stores located inNew York City ,Los Angeles ,Chicago ,Palo Alto ,Newport Beach ,Greenwich ,Dallas ,Austin ,Atlanta ,Palm Beach ,Marin County ,Manhasset andSan Francisco . Our omni-channel experience enables buyers to purchase anytime and anywhere. We have a global base of more than 24.7 million members as ofSeptember 30, 2021 . We count as a member any user who has registered an email address on our website or downloaded our mobile app, thereby agreeing to our terms of service. ThroughSeptember 30, 2021 , we have cumulatively paid more than$2.3 billion in commissions to our consignors. Our GMV increased by 50% to$367.9 million from$245.4 million in the three months endedSeptember 30, 2021 and 2020, 26 -------------------------------------------------------------------------------- Table of Contents respectively. Our GMV increased by 52% to$1,045.3 million from$685.7 million in the nine months endedSeptember 30, 2021 and 2020, respectively. Additionally, NMV increased by 45% to$273.4 million from$189.1 million in the three months endedSeptember 30, 2021 and 2020 due to the magnitude of GMV growth, partially offset by an increase in returns year over year. Our NMV increased by 51% to$774.1 million from$513.5 million in the nine months endedSeptember 30, 2021 and 2020, respectively. Our total revenue increased by 53% to$118.8 million from$77.8 million in the three months endedSeptember 30, 2021 and 2020, respectively. Our total revenue increased by 51% to$322.6 million from$213.1 million in the nine months endedSeptember 30, 2021 and 2020, respectively. In the three months endedSeptember 30, 2021 and 2020, our gross profit was$71.1 million and$49.5 million , respectively, representing an increase of 44%. In the nine months endedSeptember 30, 2021 and 2020, our gross profit was$192.9 million and$134.2 million , respectively. See "-Impact of COVID-19 on our Business" below. Impact of COVID-19 on Our Business In the year endedDecember 31, 2020 , the COVID-19 pandemic adversely impacted our business operations and results. Operations in the Company's fulfillment facilitates were initially limited in accordance with shelter-in-place orders resulting in operations below full capacity. In-person concierge consignment appointments were temporarily suspended and our retail stores and luxury consignment offices were temporarily closed. GMV decreased in 2020 due to the adverse impacts of the COVID-19 pandemic on our business. During the second half of 2020, operations capacity was no longer limited by restrictions related to COVID-19 and all luxury consignment offices and retail stores were open. In-person concierge consignment appointments were available as an option for our consignor base and were augmented with virtual appointments. InMarch 2021 , the Company resumed in-person concierge consignment appointments. GMV trends have improved significantly as GMV increased approximately 50% in the three months endedSeptember 30, 2021 compared to the same period last year and approximately 52% in the nine months endedSeptember 30, 2021 compared to the same period last year. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers. We have enforced social distancing in our authentication centers, enabled virtual consignment appointments, implemented curbside pick-up of products from our consignors, and enabled our corporate employees to work remotely. The impact of these actions on our workforce are difficult to assess. However, we do not believe that these remote work arrangements have adversely affected our ability to maintain our financial reporting systems, internal control over financial reporting and disclosure controls and procedures. In addition, we do not expect to encounter any significant challenges to our ability to maintain these systems and controls. We also do not expect the pandemic to affect the assets on our condensed balance sheets and our ability to timely account for those assets. We evaluate our estimates and assumptions used in preparing our financial statements on an ongoing basis. We do not anticipate any material impairments with respect to inventory, long-lived assets, right-of-use assets, or changes in accounting judgments that would have a material impact on our financial statements. Other Factors Affecting Our Performance Other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, impact our business. To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we focus on the factors described below. While each of these factors presents significant opportunity for our business, collectively, they also pose important challenges that we must successfully address in order to sustain our growth, improve our operating results and achieve and maintain our profitability. Consignor growth and retention. We grow our sales by increasing the supply of luxury goods offered through our consignment online marketplace. We grow our supply both by attracting new consignors and by creating lasting engagement with existing consignors. We generate leads for new consignors principally through our advertising activity. We convert those leads into active consignors through the activities of our sales professionals, who are trained and incentivized to identify and source high-quality, coveted luxury goods from consignors. Our sales professionals form a consultative relationship with consignors and deliver a high-quality, rapid consigning experience. Our existing relationships with consignors allow us to unlock valuable supply across multiple categories within the home, including women's, men's, kids', jewelry and watches, and home and art. We leverage our proprietary transactional database and market insights based on more than 21.3 million item sales since inception to deliver consignors optimal pricing and rapid sell-through. Our growth has been driven in significant part by repeat sales by existing consignors concurrent with growth of our consignor base. The percentage of GMV from repeat consignors in the three and nine months endedSeptember 30, 2021 was 84% as compared to 83% for both the three and nine months endedSeptember 30, 2020 . 27 -------------------------------------------------------------------------------- Table of Contents Buyer growth and retention. We grow our business by attracting and retaining buyers. We attract and retain buyers by offering highly coveted, authenticated, pre-owned luxury goods at attractive values and delivering a high-quality, luxury experience. We measure our success in attracting and retaining buyers by tracking buyer satisfaction and purchasing activity over time. We have experienced high buyer satisfaction, as evidenced by our buyer net promoter score of 71 in 2020. We believe there is substantial opportunity to grow our business by having buyers also become consignors and vice versa. As ofSeptember 30, 2021 , 13% of our buyers had become consignors and 57% of our consignors had become buyers. If we fail to continue to attract and retain our buyer base to our online marketplace, our operating results would be adversely affected. Scaling operations and technology. To support the future growth of our business, we are expanding our capacity through investments in physical infrastructure, talent and technology. In the three months endedSeptember 30, 2021 , we principally conducted our intake, authentication, merchandising and fulfillment operations in our four leased authentication centers located inArizona andNew Jersey comprising an aggregate of approximately 1.4 million square feet of space. We secured leases on more than half of this space in 2018. InOctober 2020 , we secured a lease inArizona for an additional authentication center and commenced operations inJune 2021 . We ceased operations in ourCalifornia authentication center inJuly 2021 and the lease for this center expired inAugust 2021 . The market for real estate to support operations centers such as ours is competitive, and we plan to continue to secure and efficiently bring online additional capacity to support future growth. We operate flagship retail stores inNew York ,Los Angeles ,San Francisco , andChicago . We operate neighborhood stores inNew York ,Palo Alto ,Newport Beach ,Greenwich ,Dallas ,Austin , andAtlanta . Additionally, we opened three neighborhood stores inMarin County ,Manhasset , andPalm Beach during the three months endedSeptember 30, 2021 . We intend to open one additional retail store in the fourth quarter of 2021. In addition to scaling our physical infrastructure, growing our single-SKU business operations and developing our SKU-depth capabilities require that we attract, train and retain highly-skilled personnel for purposes of authentication, copywriting, merchandising, pricing and fulfilling orders. We have invested substantially in technology to automate our operations and support growth. We continue to strategically invest in technology, as innovation positions us to scale and support growth into the future. Seasonality. Historically, we have observed trends in seasonality of supply and demand in our business. Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter. As a result of this seasonality, we typically see stronger AOV and more rapid sell-through in the fourth quarter. We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes. Key Financial and Operating Metrics The key operating and financial metrics that we use to assess the performance of our business are set forth below for the three and nine months endedSeptember 30, 2021 and 2020. Three Months Ended Nine Months Ended September 30, September 30, September 30, 2021 2020 September 30, 2021 2020 (In thousands, except AOV and percentages) GMV$ 367,925 $ 245,355 $ 1,045,253 $ 685,732 NMV$ 273,417 $ 189,059 $ 774,088$ 513,481 Number of Orders 757 550 2,119 1,562 Take Rate 34.9 % 35.4 % 34.6 % 35.9 % Active Buyers 772 617 772 617 AOV$ 486 $ 446 $ 494$ 439 GMV GMV, or gross merchandise value, represents the total amount paid for goods across our online marketplace in a given period. We do not reduce GMV to reflect product returns or order cancellations. GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of buyer incentives, shipping fees and sales tax. Platform-wide discounts are made available to all buyers on the online marketplace, and impact commissions paid to consignors. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on our platform. We believe this is the primary measure of the scale and growth of our online marketplace and 28 -------------------------------------------------------------------------------- Table of Contents the key indicator of the health of our consignor ecosystem. We monitor trends in GMV to inform budgeting and operational decisions to support and promote growth in our business and to monitor our success in adapting our business to meet the needs of our consignors and buyers. While GMV is the primary driver of our revenue, it is not a proxy for revenue or revenue growth. See Note 2 - Summary of Significant Accounting Policies -Revenue Recognition - Consignment and Service Revenue. NMV NMV, or net merchandise value, represents the value of sales from both consigned goods and our inventory net of platform-wide discounts less product returns and order cancellations and excludes the effect of buyer incentives, shipping fees and sales tax. We believe NMV is a supplemental measure of the scale and growth of our online marketplace. Like GMV, NMV is not a proxy for revenue or revenue growth. Number of Orders Number of orders means the total number of orders placed across our online marketplace and retail stores in a given period. We do not reduce number of orders to reflect product returns or order cancellations. Take Rate Take rate is a key driver of our revenue and provides comparability to other marketplaces. The numerator used to calculate our take rate is equal to net consignment sales and the denominator is equal to the numerator plus consignor commissions. Net consignment sales represent the value of sales from consigned goods net of platform-wide discounts less consignor commission, product returns and order cancellations. We exclude direct revenue from our calculation of take rate because direct revenue represents the sale of inventory owned by us, which costs are included in cost of direct revenue. Our take rate reflects the high level of service that we provide to our consignors across multiple touch points and the consistently high velocity of sales for their goods. Our take rate structure is a tiered commission structure for consignors, where the more they sell the higher percent commission they earn. Consignors start at a 55% commission (which equals a 45% take rate for us) and can earn up to a 70% commission. This tiered structure applies unless it is overridden by a commission exception. Commission exceptions from the tiered commission structure optimize supply and drive take rate changes. Examples of current commission exceptions include a flat 40% commission on all items under$145 , and an 85% commission on watches over$2,495 . Management assesses changes in take rates by monitoring the volume of GMV and take rate across each discrete commission grouping, encompassing commission tiers and exceptions. Active Buyers Active buyers include buyers who purchased goods through our online marketplace during the 12 months ended on the last day of the period presented, irrespective of returns or cancellations. We believe this metric reflects scale, brand awareness, buyer acquisition and engagement. Average Order Value ("AOV") Average order value ("AOV") means the average value of all orders placed across our online marketplace and retail stores, excluding shipping fees and sales taxes. Our focus on luxury goods across multiple categories drives a consistently high AOV. Our AOV reflects both the average price of items sold as well as the number of items per order. Our high AOV is a key driver of our operating leverage. Adjusted EBITDA Adjusted EBITDA means net loss before interest income, interest expense, other (income) expense net, provision for income taxes, and depreciation and amortization, further adjusted to exclude stock-based compensation, employer payroll tax on employee stock transactions, and certain one-time expenses. The employer payroll tax expense related to employee stock transactions are tied to the vesting or exercise of underlying equity awards and the price of our common stock at the time of vesting, which may vary from period to period independent of the operating performance of our business. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we 29 -------------------------------------------------------------------------------- Table of Contents do not believe are indicative of our core operating performance. Adjusted EBITDA is a non-GAAP measure. The following table provides a reconciliation of net loss to Adjusted EBITDA (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Adjusted EBITDA Reconciliation: Net loss$ (57,196) $
(43,560)
6,034 4,917 17,840 13,673
Stock-based compensation 12,592 7,372 36,324 16,911
Payroll taxes expense on employee stock
transactions (1) 245 - 967 -
Legal fees reimbursement benefit (2) (500) - (500) -
Legal settlement (3) 500 - 11,788 1,110
Restructuring charges (4) 811 72 2,314 514
Interest income (55) (448) (249) (2,350)
Interest expense 6,072 2,406 15,374 2,810
Other (income) expense, net (5) - (22) 89
Provision for income taxes 28 (17) 83 38
Adjusted EBITDA $ (31,474) $ (29,258) $ (99,993) $ (92,258)
(1) We exclude employer payroll tax expense related to employee stock-based
transactions because we believe that excluding this item provides meaningful
supplemental information regarding our operating results. In particular, this
expense is dependent on the price of our common stock at the time of vesting or
exercise, which may vary from period to period, and other factors that are
beyond our control and do not correlate to the operation of the business. When
evaluating the performance of our business and making operating plans, we do not
consider these items. Similar charges were not adjusted in prior periods as they
were not material.
(2) During the nine months ended 9/30/21, we received insurance reimbursement of
$3.2 million related to legal fees for a certain matter, of which $2.7 million
have been applied to the current year's legal expenses.
(3) On November 5, 2021 , a stipulation of settlement was filed with the federal
court to settle the putative shareholder class action filed against us, our
officers and directors, and the underwriters for the Company's initial public
offering. The stipulation of settlement is subject to preliminary and final
approval by the court. The financial terms of the settlement stipulation provide
that the Company will pay $11.0 million within thirty (30) days of the later of
preliminary approval of the settlement or plaintiff's counsel providing payment
instructions. Also on November 5, 2021 , a stipulation of settlement was filed in
the derivative case filed against us as a nominal defendant and our officers and
directors as defendants. The stipulation of settlement is subject to preliminary
and final approval by the court. The financial terms of the settlement
stipulation provide that the Company will pay $0.5 million within thirty (30)
days of the later of preliminary approval of the settlement or plaintiff's
counsel providing payment instructions.
(4) The restructuring charges for the three and nine months ended September 30,
2021 comprise of the costs to transition operations from the Brisbane warehouse
to our new Phoenix warehouse. The restructuring charges for the three and nine
months ended September 30, 2020 consist of COVID-19 related costs including
employee severance.
Components of our Operating Results
Revenue
Our revenue is comprised of consignment and service revenue and direct revenue.
•Consignment and service revenue. We generate the substantial majority of our
revenue from the sale of pre-owned luxury goods through our online marketplace
and retail stores on behalf of consignors. For consignment sales, we retain a
percentage of the proceeds received, which we refer to as our take rate. We
recognize consignment revenue, net of allowances for product returns, order
cancellations, buyer incentives and adjustments. Additionally, we generate
revenue from shipping fees we charge to buyers. We also generate service revenue
from subscription fees paid by buyers for early access to products, but to date
our subscription revenue has not been material.
•Direct revenue. We generate direct revenue from the sale of items that we own,
which we refer to as our inventory. We generally acquire inventory when we
accept out of policy returns from buyers. Additionally, we make direct purchases
from businesses and consignors. We recognize direct revenue upon shipment based
on the gross purchase price paid by buyers, net of allowances for product
returns, buyer incentives and adjustments.
Cost of Revenue
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Cost of consignment and services revenue consists of shipping costs, credit card
fees, packaging, customer service personnel-related costs, website hosting
services, and consignor inventory adjustments related to lost or damaged
products. Cost of direct revenue consists of the cost of goods sold, credit card
fees, packaging, customer service personnel-related costs, website hosting
services, and inventory adjustments.
Marketing
Marketing expense comprises the cost of acquiring and retaining consignors and
buyers, including the cost of television, digital and direct mail advertising.
Marketing expense also includes personnel-related costs for employees engaged in
these activities. We expect these expenses to decrease as a percentage of
revenue over the longer term.
Operations and Technology
Operations and technology expense principally includes personnel-related costs
for employees involved with the authentication, merchandising and fulfillment of
goods sold through our online marketplace and retail stores, as well as our
general information technology expense. Operations and technology expense also
includes allocated facility and overhead costs, costs related to our retail
stores, facility supplies and depreciation of hardware and equipment, as well as
research and development expense for technology associated with managing and
improving our operations. We capitalize a portion of our proprietary software
and technology development costs. As such, operations and technology expense
also includes amortization of capitalized technology development costs. We
expect operations and technology expense to increase in future periods to
support our growth, including continuing to invest in automation and other
technology improvements to support and drive efficiency in our operations. These
expenses may vary from year to year as a percentage of revenue, depending
primarily upon when we choose to make more significant investments. We expect
these expenses to decrease as a percentage of revenue over the longer term.
Selling, General and Administrative
Selling, general and administrative expense is principally comprised of
personnel-related costs for our sales professionals and employees involved in
finance and administration. Selling, general and administrative expense also
includes allocated facilities and overhead costs and professional services,
including accounting and legal advisors. While these expenses may vary from year
to year as a percentage of revenue, we expect these expenses to decrease as a
percentage of revenue over the longer term.
Legal Settlement
Legal settlement expense primarily includes actual or estimated losses related
to legal settlements when they become probable and estimable.
Provision for Income Taxes
Our provision for income taxes consists primarily of state minimum taxes in the
United States . We have a full valuation allowance for our net deferred tax
assets primarily consisting of net operating loss carryforwards, accruals and
reserves, stock-based compensation, fixed assets, and other book-to-tax timing
differences. We expect to maintain this full valuation allowance for the
foreseeable future.
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Results of Operations
The following tables set forth our results of operations (in thousands) and such
data as a percentage of revenue for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenue:
Consignment and service revenue $ 89,451 $ 64,152 $ 246,985 $ 176,006
Direct revenue 29,387 13,645 75,582 37,111
Total revenue 118,838 77,797 322,567 213,117
Cost of revenue:
Cost of consignment and service revenue 22,714 16,304 64,352 47,253
Cost of direct revenue 25,025 11,964 65,365 31,678
Total cost of revenue 47,739 28,268 129,717 78,931
Gross profit 71,099 49,529 192,850 134,186
Operating expenses:
Marketing 15,708 15,186 44,378 37,747
Operations and technology 61,135 40,578 172,906 117,858
Selling, general and administrative 44,912 35,384 132,504 101,937
Legal settlement 500 - 11,788 1,110
Total operating expenses 122,255 91,148 361,576 258,652
Loss from operations (51,156) (41,619) (168,726) (124,466)
Interest income 55 448 249 2,350
Interest expense (6,072) (2,406) (15,374) (2,810)
Other income (expense), net 5 - 22 (89)
Loss before provision for income taxes (57,168) (43,577) (183,829) (125,015)
Provision (benefit) for income taxes 28 (17) 83 38
Net loss $ (57,196) $ (43,560) $ (183,912) $ (125,053)
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenue:
Consignment and service revenue 75.3 % 82.5 % 76.6 % 82.6 %
Direct revenue 24.7 17.5 23.4 17.4
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of consignment and service revenue 19.1 21.0 19.9 22.2
Cost of direct revenue 21.1 15.3 20.3 14.8
Total cost of revenue 40.2 36.3 40.2 37.0
Gross profit 59.8 63.7 59.8 63.0
Operating expenses:
Marketing 13.2 19.5 13.8 17.7
Operations and technology 51.4 52.2 53.5 55.4
Selling, general and administrative 37.9 45.5 41.1 47.8
Legal settlement 0.4 - 3.7 0.5
Total operating expenses 102.9 117.2 112.1 121.4
Loss from operations (43.1) (53.5) (52.3) (58.4)
Interest income - 0.6 0.1 1.1
Interest expense (5.1) (3.1) (4.8) (1.3)
Other income (expense), net - - - -
Loss before provision for income taxes (48.2) (56.0) (57.0) (58.6)
Provision (benefit) for income taxes - - - -
Net loss (48.2) % (56.0) % (57.0) % (58.6) %
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Consignment and Service Revenue
Consignment and service revenue increased by $25.3 million , or 39%, in the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 and increased by $71.0 million , or 40%, in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . The
increase in revenue was driven primarily by a 50% and 52% increase in GMV during
the three and nine months ended September 30, 2021 , respectively, partially
offset by an increase in returns and cancellations year over year. GMV growth
during the three months ended September 30, 2021 was driven by a 38% increase in
orders and a 9% increase in AOV. GMV growth during the nine months ended
September 30, 2021 was driven by a 36% increase in orders and a 13% increase in
AOV. Returns and cancellations as a percentage of GMV for the three months and
nine months ended September 30, 2021 was 25.7% and 25.9%, respectively, compared
to 22.9% and 25.1% for the three and nine months ended September 30, 2020 ,
respectively. These increases were primarily due to a lower mix of
non-returnable items during the three and nine months September 30, 2021 . Our
take rate decreased to 34.9% from 35.4% during the three months ended
September 30, 2021 compared to the same period last year due to higher
contribution from lower take rate products. Our take rate decreased to 34.6%
from 35.9% in the nine months ended September 30, 2021 compared to the same
period last year due to the higher sales mix of lower take rate categories such
as watches, handbags, fine jewelry, and sneakers.
Direct Revenue
Direct revenue increased by $15.7 million , or 115%, in the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 , and
increased by $38.5 million , or 104%, in the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . The increase was primarily
driven by the higher sales mix of company-owned inventory due to direct
purchases from businesses and consignors, along with higher sales of aged
inventory primarily resulting from out of policy returns. We recognize direct
revenue on a gross basis upon shipment of the purchased good to the buyer.
Direct revenue has been increasing as a percentage of total revenue in recent
quarters as a result of a higher sales mix of company-owned inventory due to
direct purchases from businesses and consignors, and may continue to in the near
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term. However, direct revenue as a percentage of total revenue may vary from
period to period primarily based on the growth of consignment and service
revenue, as well as the amount of company-owned inventory we purchase.
Cost of Consignment and Service Revenue
Cost of consignment and service revenue increased by $6.4 million , or 39%, in
the three months ended September 30, 2021 compared to the three months ended
September 30, 2020 , and increased by $17.1 million , or 36%, in the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 .
The increase was primarily attributable to increases in shipping costs driven by
fulfillment of a larger number of orders and credit card fees driven by growth
in our business. Gross margin remained flat in the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 , and
increased by 1 percentage point in the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . This increase was
primarily attributable to consignment and service revenue growth outpacing
corresponding shipping costs increases.
Cost of Direct Revenue
Cost of direct revenue increased by $13.1 million , or 109%, in the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 ,
and increased by $33.7 million , or 106%, in the nine months ended September 30,
2021 compared to the nine months ended September 30, 2020 . Gross margin
increased by 3 percentage points for the three months ended September 30, 2021
driven by a higher sales mix of higher margin company-owned inventory.
Gross margin decreased by 1 percentage point for the nine months ended
September 30, 2021 compared to the same period last year, primarily due to a
higher sales mix of aged inventory. As we continue to make direct purchases from
vendors, gross margin may vary from period to period.
Marketing
Marketing expense increased by $0.5 million , or 3%, in the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 , and
increased by $6.6 million , or 18%, in the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . The increase in the three
and nine months ended September 30, 2021 compared to the three and nine months
ended September 30, 2020 was primarily due to increases in advertising costs and
marketing program expenses as we seek to optimize the digital experience on our
online marketplace and grow the number of buyers and consignors.
As a percent of revenue, marketing expense decreased to 13.2% from 19.5% in the
three months ended September 30, 2021 and 2020, respectively, and decreased to
13.8% from 17.7% in the nine months ended September 30, 2021 compared to the
nine months ended September 30, 2020 , respectively. These expenses may vary from
period to period as a percentage of revenue, depending primarily upon our
marketing investments. We expect these expenses to decrease as a percentage of
revenue over the longer term.
Operations and Technology
Operations and technology expense increased by $20.6 million , or 51%, in the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020 , and increased by $55.0 million , or 47%, in the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 .
The increase was primarily due to higher employee compensation related expenses,
including stock-based compensation expense due to an increase in headcount, and
higher occupancy costs due to our additional retail stores and authentication
center in Arizona . The increase was also driven by an increase in travel
expense, as well as restructuring costs associated with the transition of
operations from our Brisbane authentication center to our Arizona authentication
center during the three and nine months ended September 30, 2021 .
As a percent of revenue, operations and technology expense decreased to 51.4%
from 52.2% in the three months ended September 30, 2021 and 2020, respectively,
and decreased to 53.6% from 55.3% in the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . These expenses may vary
from period to period as a percentage of revenue, depending primarily upon when
we choose to make more significant investments. We expect these expenses to
decrease as a percentage of revenue over the longer term.
Selling, General and Administrative
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Selling, general and administrative expense increased by $9.5 million , or 27%,
in the three months ended September 30, 2021 compared to the three months ended
September 30, 2020 , and increased by $30.6 million , or 30% in the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 .
The increase was primarily due to higher employee compensation expenses,
including stock-based compensation expense due to an increased headcount, an
increase in software fees, partially offset by an insurance reimbursement for
legal expenses.
As a percent of revenue, selling, general and administrative expense decreased
to 38% from 45.5% in the three months ended September 30, 2021 and 2020,
respectively, and decreased to 41% from 47.8% in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 ,
respectively. These expenses may vary from period to period as a percentage of
revenue.
Legal Settlement
Legal settlement expense increased $0.5 million , or 100%, in the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 ,
and increased by $10.7 million , or over 100%, in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . The
increases were primarily due to the $11.0 million legal settlement for the
shareholder class action filed against us and $0.5 million of attorney's fees to
be paid as part of the settlement for the related derivative case filed against
us, both of which were accrued for in connection with the settlement of both
actions during the nine months ended September 30, 2021 .
Interest Income
Interest income decreased $0.4 million , or 88%, for the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020 , and
decreased $2.1 million , or 89%, for the nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020 , respectively, primarily
due to lower rates and lower average investment balances.
Interest Expense
Interest expense increased $3.7 million , and over 100%, for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 ,
and increased $12.6 million , or over 100%, for the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020 ,
respectively, primarily due to the contractual interest expense and amortization
of the debt discount related to the 3.00% convertible senior notes issued in
June 2020 and the 1.00% convertible senior notes issued in March 2021 .
Other Income (Expense), Net
Other expense decreased by less than $0.1 million in the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020 .
Other expense decreased by $0.1 million in the nine months ended September 30,
2021 as compared to the nine months ended September 30, 2020 .
Liquidity and Capital Resources
As of September 30, 2021 , we had unrestricted cash and cash equivalents of
$444.8 million and an accumulated deficit of $715.9 million . Since inception, we
have generated negative cash flows from operations and have primarily financed
our operations through several rounds of venture capital financing. In July
2019 , we received net proceeds of $315.5 million upon completion of our IPO on
July 2, 2019 . In June 2020 , we received net proceeds of $143.3 million from the
issuance of 3% convertible senior notes due 2025 and the related cap call
transactions. In March 2021 , we received net proceeds of $244.5 million from the
issuance of the 1% convertible senior notes due in 2028 and the related cap call
transactions.
We expect that operating losses and negative cash flows from operations could
continue in the foreseeable future as we navigate the challenges presented by
COVID-19 and invest in expansion activities in the longer term. We believe our
existing cash and cash equivalents as of September 30, 2021 will be sufficient
to meet our working capital and capital expenditures needs for at least the next
12 months.
Our future capital requirements will depend on many factors, including, but not
limited to, our ability to grow our revenues and the timing of investments to
support growth in our business, such as the build-out of new authentication
centers and, to a lesser extent, the opening of new retail stores. We may seek
additional equity or debt financing. In the event that additional financing is
required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are
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unable to raise additional capital when desired, our business, financial
condition and results of operations could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated.
Nine
Months Ended
2021 2020
Net cash provided by (used in):
Operating activities $ (123,387) $ (96,017)
Investing activities (33,758) 134,544
Financing activities 251,108 150,119
Net increase in cash and cash equivalents $
93,963
Net Cash Used in Operating Activities During the nine months endedSeptember 30, 2021 , net cash used in operating activities was$123.4 million , which consisted of a net loss of$183.9 million , adjusted by non-cash charges of$81.4 million and cash outflows due to a net change of$20.8 million in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of cash outflows due to an increase of$21.6 million in inventory driven by an increase in direct purchases of inventory from vendors, a decrease of$12.5 million in operating lease liability, a increase of$5.3 million in prepaid expenses and other current assets, and a$6.2 million decrease in accounts payable, partially offset by a$22.0 million increase in other accrued and current liabilities. We anticipate direct inventory purchases from vendors to continue through the remainder of 2021. During the nine months endedSeptember 30, 2020 , net cash used in operating activities was$96.0 million , which consisted of a net loss of$125.1 million , adjusted by non-cash charges of$45.9 million and cash outflows due to a net change of$16.9 million in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of cash outflows due to decreases of$8.3 million in accrued consignor payable, an increase of$4.6 million in prepaid and other current assets, partially offset by a decrease of$4.9 million in inventory.Net Cash Used in Investing Activities During the nine months endedSeptember 30, 2021 , net cash used in investing activities was$33.8 million , which consisted of$30.3 million for purchases of property and equipment, net, including leasehold improvements and$7.5 million for capitalized proprietary software development costs, partially offset by$4.0 million of proceeds from maturities on short-term investment. During the nine months endedSeptember 30, 2020 , net cash provided by investing activities was$134.5 million , which consisted of$222.2 million proceeds from maturities on short-term investments and$7.9 million in sales of short-term investments, partially offset by$73.3 million for purchases of short-term investments,$15.7 million for purchases of property and equipment, net, including leasehold improvements, and$6.6 million for capitalized proprietary software development costs. Net Cash Provided by Financing Activities During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$251.1 million , which primarily consisted of proceeds of$278.2 million from the issuance of the 1.00% convertible senior notes, net of issuance costs,$5.5 million from the exercise of stock options partially offset by$33.7 million for the purchase of capped calls related to the Notes issuance. During the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$150.1 million , which primarily consisted of proceeds of$166.3 million from the issuance of the 3.00% convertible senior notes, net of issuance costs,$7.1 million from the exercise of stock options and warrants partially offset by$22.5 million for the purchase of capped calls related to the 2025 Notes issuance. Convertible Senior Notes 36 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2021 , we had 3.00% convertible senior notes due 2025 outstanding in an aggregate principal amount of$172.5 million and 1.00% convertible senior notes due 2028 outstanding in an aggregate principal amount of$287.5 million . A portion of the net proceeds from the sale of these convertible senior notes was used to fund the net cost of entering into the capped call transactions described below. We intend to use the remainder of the net proceeds for general corporate purposes. The 2025 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company's election, at an initial conversion rate of 56.2635 shares of our common stock per$1,000 principal amount of the convertible senior notes, which is equivalent to an initial conversion price of approximately$17.77 per share of our common stock. The initial conversion price of the notes represents a premium of approximately 27.5% over the$13.94 closing price of our common stock onJune 10, 2020 . The 2028 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company's election, at an initial conversion rate of 31.4465 shares of our common stock per$1,000 principal amount of the convertible senior notes, which is equivalent to an initial conversion price of approximately$31.80 per share of our common stock. The initial conversion price of the notes represents a premium of approximately 32.5% over the$24.00 closing price of our common stock onMarch 3, 2021 . In connection with the convertible senior notes, we entered into privately negotiated capped call transactions, with certain of the initial purchasers or their affiliates. The capped call transactions cover, subject to anti-dilution adjustments, the number of shares of common stock underlying the convertible senior notes sold in the offering. The capped call transactions are generally expected to reduce potential dilution to our common stock upon any conversion of the notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the capped call transactions related to the 2025 Notes was initially$27.88 per share, which represents a premium of 100.0% over the closing price of our common stock of$13.94 per share onJune 10, 2020 , and is subject to certain adjustments under the terms of the capped call transactions. The cap price of the capped call transactions related to the 2028 Notes was initially$48.00 per share, which represents a premium of 100.0% over the closing price of our common stock of$24.00 per share onMarch 3, 2021 , and is subject to certain adjustments under the terms of the capped call transactions. For additional details related to our convertible senior notes, please see "Note 7 - Convertible Senior Notes, net" to the condensed financial statements included in this report. Contractual Obligations and Commitments As ofSeptember 30, 2021 , there have been no material changes from the contractual obligations and commitments previously disclosed in our Annual Report on 10-K. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles. The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Revenue Recognition Consignment and Service Revenue 37 -------------------------------------------------------------------------------- Table of Contents We generate the majority of our revenue from consignment services for the sale of pre-owned luxury goods on behalf of consignors through our online consignment marketplace and retail stores. For consignment sales, we retain a portion of the proceeds received, which we refer to as our take rate, and remit the balance to the consignors. We recognize consignment revenue upon purchase of the goods by the buyer based on our take rate, net of allowances for product returns, order cancellations, buyer incentives and adjustments. Direct Revenue We also generate revenue from the sales of company-owned inventory. We recognize direct revenue upon shipment of the goods sold through our online marketplace and retail stores, based on the gross purchase price net of allowances for product returns, buyer incentives and adjustments. Recent Accounting Pronouncements For more information on recently issued accounting pronouncements, see Note 2 to our unaudited condensed financial statements "Summary of Significant Accounting Policies" in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risks in the ordinary course of our business, including fluctuations in interest rates. Such fluctuations to date have not been significant. The COVID-19 pandemic presents new and emerging uncertainty in the financial markets. See further discussion in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors." As ofSeptember 30, 2021 , we had unrestricted cash and cash equivalents of approximately$444.8 million , which carry a degree of interest rate risk. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our investment portfolio. In addition, we have no direct financial statement risk associated with changes in interest rates with respect to our convertible senior notes, which bear interest at fixed rates. However, the fair market value of the convertible senior notes will fluctuate primarily as a result of changes in interest rates or the market price of our stock. We do not believe that inflation has had a material effect on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial condition. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level. Changes in Internal Control There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls and Procedures Our management, including our principal executive officer and principal financial officer, do 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 designed 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 38 -------------------------------------------------------------------------------- Table of Contents 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 collusion of two or more people or by management override of the 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. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 39
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