The RealReal(REAL) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents The RealReal, Inc.'s unaudited condensed financial statements for Q2 2019 and year-to-date, covering balance sheets, operations, comprehensive loss, equity changes, cash flows, and notes on IPO, debt, and legal matters Condensed Financial Statements The financial statements reveal strong revenue growth alongside widening net losses, with Q2 2019 revenue up 51% to $71.0 million and net loss expanding to $26.9 million Balance Sheet Highlights | Financial Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $99.4M | $89.1M | | Total Assets | $158.1M | $135.4M | | Total Liabilities | $96.9M | $98.9M | | Total Stockholders' Deficit | ($306.1M) | ($257.7M) | Key Financial Performance (Three Months Ended June 30) | Metric (Three Months Ended June 30) | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenue | $71.0M | $47.0M | | Gross Profit | $46.1M | $30.8M | | Loss from Operations | ($25.3M) | ($15.9M) | | Net Loss | ($26.9M) | ($17.6M) | | Net Loss Per Share | ($2.83) | ($2.28) | Cash Flow Summary (Six Months Ended June 30) | Cash Flow (Six Months Ended June 30) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($46.2M) | ($28.7M) | | Net cash (used in) provided by investing activities | ($0.2M) | $6.0M | | Net cash provided by financing activities | $65.7M | $98.9M | Notes to Unaudited Condensed Financial Statements The notes detail significant accounting policies, the post-period IPO raising $320.9 million, debt repayment, lease commitments totaling $128.8 million, and a material legal contingency with Chanel, Inc - The company completed its IPO on July 2, 2019, after the quarter end, selling 17,250,000 shares of common stock and receiving aggregate net proceeds of $320.9 million[37][39] - Consignment revenue is reported on a net basis, representing the company's percentage of proceeds ('take rate'), as it acts as an agent. Direct revenue from company-owned inventory is reported on a gross basis[48][53] - On July 26, 2019, following the IPO, the company fully repaid the outstanding principal of its Term Loans, amounting to $6.5 million[93][119] - Chanel, Inc. filed a lawsuit in November 2018 alleging that the company sold counterfeit goods and made false representations about its authentication process. The company intends to defend itself vigorously, but the outcome is uncertain[114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q2 2019 financial performance, highlighting 51% revenue growth driven by 40% GMV increase, alongside widening operating losses due to scaling investments Key Financial and Operating Metrics Q2 2019 saw strong growth in key metrics, with GMV up 40% to $228.5 million, active buyers increasing 40% to 492,000, and an improved take rate of 36.6% Key Operating Metrics (Three Months Ended June 30) | Metric (Three Months Ended June 30) | 2019 | 2018 | | :--- | :--- | :--- | | GMV | $228.5M | $163.0M | | Number of Orders (in thousands) | 505 | 359 | | Take Rate | 36.6% | 35.5% | | Active Buyers (in thousands) | 492 | 352 | | AOV | $453 | $453 | - Growth is supported by strong repeat business, with 81% of GMV from repeat consignors and 83% from repeat buyers in Q2 2019[130][131] - Adjusted EBITDA, a non-GAAP measure, was a loss of $20.9 million for Q2 2019, compared to a loss of $13.1 million in Q2 2018[144] Results of Operations Q2 2019 total revenue grew 51% to $71.0 million, but operating expenses increased 53% to $71.4 million, resulting in a wider operating loss of $25.3 million - Consignment and service revenue increased by 44% in Q2 2019, driven by GMV growth and an improved take rate[154] - Direct revenue grew 114% in Q2 2019 due to a higher volume of returns received after consignor payment, which are then sold as company-owned inventory[155] - Marketing expense increased 26% but decreased as a percentage of revenue from 20% to 17%, showing improved efficiency[158] - SG&A expense increased 76% due to higher headcount in sales and administrative functions, increased stock compensation, and higher legal and consulting fees in preparation for being a public company[161] Liquidity and Capital Resources As of June 30, 2019, the company had $66.7 million in cash, significantly bolstered by $320.9 million IPO proceeds, which will fund operations despite historical negative cash flows - The company received net proceeds of $320.9 million from its IPO on July 2, 2019, significantly strengthening its balance sheet[167] - Net cash used in operating activities was $46.2 million for the six months ended June 30, 2019, an increase from $28.7 million in the prior year period, reflecting investments in growth[172] - The company fully repaid its outstanding Term Loans of $6.5 million on July 26, 2019[181] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $66.7 million cash and investments, with a 10% rate change not expected to materially impact financial results - The main market risk is interest rate risk on the company's $66.7 million portfolio of cash, cash equivalents, and short-term investments[195] - A hypothetical 10% change in interest rates is not expected to materially impact financial results[195] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting identified - Management concluded that disclosure controls and procedures were effective as of the end of the reporting period[197] - No material changes to internal control over financial reporting were identified during the quarter[198] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a lawsuit filed by Chanel, Inc. in November 2018, alleging trademark and advertising issues related to counterfeit goods and authentication claims - Chanel, Inc. filed a lawsuit against the company in November 2018, alleging trademark and advertising-related claims[202] - The core allegations from Chanel are that the company misrepresented counterfeit products as authentic and that only Chanel can properly authenticate its secondhand goods[202] Item 1A. Risk Factors This section outlines key risks including the need to attract consignors, the critical authentication process, historical net losses, intense competition, operational scaling challenges, potential litigation, and data security vulnerabilities Business and Operational Risks Operational success depends on securing luxury goods supply and accurate authentication, with risks including historical net losses, reliance on discretionary spending, competition, and scaling complex logistics - The business's success is contingent on its ability to attract and retain consignors to provide a sufficient supply of pre-owned luxury goods[205] - The company has a history of net losses, including $50.1 million in the first six months of 2019, and may not achieve or maintain profitability in the future[209] - Failure to accurately authenticate items and prevent the sale of counterfeit goods could severely damage the company's reputation and lead to liability[217] Legal, Regulatory, and Financial Risks The company faces significant legal risks from the Chanel lawsuit, complex regulations for secondhand goods and data privacy, and financial risks from tax law changes and NOL carryforward limitations - The company is party to a lawsuit with Chanel, which alleges trademark infringement and misrepresentation regarding the company's authentication process[221] - The business is subject to numerous laws governing the sale of secondhand goods and data privacy (e.g., CCPA, GDPR), and failure to comply could result in fines and penalties[238][247] - The Supreme Court's Wayfair decision may require the company to collect sales tax in more jurisdictions, creating administrative burdens and potential liabilities for past and future sales[264] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered equity sales, including 10.18 million Series H preferred shares for $70.0 million, and the use of $320.9 million IPO net proceeds for debt repayment and general corporate purposes - In March 2019, the company sold an aggregate of 10,182,111 shares of its Series H preferred stock for an aggregate purchase price of $70.0 million[289] - The company's IPO on July 2, 2019 raised approximately $320.9 million in net proceeds after underwriting discounts and commissions[292] - A portion of the IPO proceeds was used to repay $6.5 million in debt, with the remainder allocated to general corporate purposes, working capital, and funding The RealReal Foundation[293]