The RealReal(REAL) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements for The RealReal, Inc. reflect COVID-19's impact, showing decreased revenue, increased net loss, and a strengthened cash position from convertible notes and ASC 842 adoption Condensed Balance Sheets The balance sheet as of June 30, 2020, shows increased cash and total assets due to convertible notes, a rise in liabilities from new notes and ASC 842, and a decrease in stockholders' equity Condensed Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $304,348 | $154,446 | | Total current assets | $452,249 | $408,439 | | Total assets | $634,060 | $466,930 | | Liabilities & Equity | | | | Total current liabilities | $102,553 | $118,546 | | Convertible senior notes, net | $146,958 | $— | | Total liabilities | $366,159 | $128,002 | | Total stockholders' equity | $267,901 | $338,928 | Condensed Statements of Operations For Q2 and six months ended June 30, 2020, the company reported decreased revenue and widening net losses due to COVID-19, driven by lower gross profit and higher operating expenses Statement of Operations Summary (in thousands) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $57,389 | $72,209 | $135,629 | $142,791 | | Gross profit | $35,769 | $46,050 | $84,966 | $88,432 | | Loss from operations | $(42,972) | $(25,340) | $(82,538) | $(48,555) | | Net loss | $(42,892) | $(26,875) | $(81,184) | $(50,097) | | Net loss per share | $(0.49) | $(2.83) | $(0.94) | $(5.87) | Condensed Statements of Cash Flows For the six months ended June 30, 2020, cash used in operations increased, while investing activities provided cash, and financing activities, primarily from convertible notes, significantly boosted the overall cash position Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(86,581) | $(46,174) | | Net cash provided by (used in) investing activities | $88,882 | $(182) | | Net cash provided by financing activities | $147,601 | $65,743 | | Net increase in cash | $149,902 | $19,387 | Notes to Unaudited Condensed Financial Statements These notes detail the material impact of COVID-19 on revenues, the early adoption of ASC 842, the issuance of $172.5 million in convertible senior notes, and ongoing legal proceedings including the Chanel lawsuit and shareholder class actions - The COVID-19 pandemic materially impacted business, causing net revenues to decrease by 21% for the three months and 5% for the six months ended June 30, 2020, compared to the same periods in 2019[36] - In June 2020, the Company issued $172.5 million of 3.00% Convertible Senior Notes due 2025, receiving net proceeds of approximately $165.8 million after costs[99][100] - The company is involved in a lawsuit with Chanel, Inc. over trademark and advertising claims, and is also defending against shareholder class action complaints filed after its IPO[140][141] - The company early adopted the new lease accounting standard ASC 842 on January 1, 2020, recognizing $110.3 million in right-of-use assets and corresponding lease liabilities[82][83][84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's significant negative impact on H1 2020 financial performance, including a 20% Q2 GMV decrease, noting a recovery trend and strengthened liquidity from a $172.5 million convertible note issuance Overview and COVID-19 Impact The online luxury marketplace experienced significant COVID-19 disruption, with a 20% Q2 2020 GMV decrease, but saw recovery by June, leading to the issuance of $172.5 million in convertible senior notes to bolster finances - GMV was negatively impacted by COVID-19, declining 40%-45% year-over-year in March through mid-April 2020, but trends improved to a decline of approximately 8% year-over-year in June 2020[155] Key Financial and Operating Metrics | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | GMV (in thousands) | $182,771 | $228,487 | | Number of Orders (in thousands) | 438 | 505 | | Active Buyers (in thousands) | 612 | 492 | | AOV | $417 | $453 | - As a preemptive measure to strengthen its balance sheet during the pandemic, the company issued $172.5 million in aggregate principal amount of 3% convertible senior notes due 2025 in June 2020[157] Results of Operations Q2 2020 results show a 22% decrease in consignment and service revenue due to COVID-19, with marketing expenses increasing as a percentage of revenue, and rising operations, technology, and SG&A costs leading to a significant operating loss - Consignment and service revenue decreased by 22% in Q2 2020 compared to Q2 2019, primarily due to a decrease in GMV caused by COVID-19 related operational limitations and store closures[189] - Marketing expense decreased by 18% in Q2 2020 as investments were reduced in response to COVID-19, but it increased as a percentage of revenue from 16.2% to 16.8% due to the significant revenue decline[194][195] - Operations and technology expense increased by 6% in Q2 2020, and Selling, general and administrative expense increased by 28%, both driven by higher headcount, stock compensation, and fixed costs against a lower revenue base[196][198] Liquidity and Capital Resources As of June 30, 2020, the company held $410.3 million in cash and investments, with liquidity significantly enhanced by $143.3 million from convertible notes, which management believes is sufficient for the next 12 months despite ongoing operating losses - As of June 30, 2020, the company had unrestricted cash, cash equivalents, and short-term investments of $410.3 million[204] - In June 2020, the company received net proceeds of $143.3 million from the issuance of convertible senior notes and the related capped call transactions[204] Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating Activities | $(86,581) | $(46,174) | | Investing Activities | $88,882 | $(182) | | Financing Activities | $147,601 | $65,743 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $410.3 million in cash and investments, which management deems immaterial, as fixed-rate convertible notes mitigate direct financial statement risk from interest rate changes - The company is exposed to interest rate risk on its $410.3 million of cash, cash equivalents, and short-term investments, but does not consider the risk to be material[234] - The convertible senior notes bear a fixed interest rate, mitigating direct financial statement risk from interest rate changes[235] Item 4. Controls and Procedures As of June 30, 2020, management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of June 30, 2020, the company's disclosure controls and procedures were effective at a reasonable assurance level[237] - No material changes to the company's internal control over financial reporting were identified during the quarter[238] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in significant legal proceedings, including an ongoing trademark lawsuit with Chanel, Inc. and multiple shareholder class action lawsuits related to its IPO, with uncertain outcomes - The company is in litigation with Chanel, Inc., which filed a lawsuit in November 2018 alleging trademark and advertising-related claims, with the outcome uncertain[243] - Multiple purported shareholder class action complaints have been filed against the company, its officers, directors, and IPO underwriters, alleging federal securities law violations related to the IPO registration statement, which the company is vigorously defending[244] Item 1A. Risk Factors Key risks include the ongoing adverse impacts of the COVID-19 pandemic, dependency on consignor supply, authentication accuracy, intense competition, potential for costly litigation, and challenges in scaling operations and technology - The COVID-19 pandemic has adversely affected and is expected to continue to adversely impact business operations, results of operations, financial condition, and liquidity[255] - The business's success is highly dependent on its ability to attract and retain consignors to generate a sufficient supply of pre-owned luxury goods[249] - Failure to accurately authenticate items and identify counterfeit goods could severely damage the company's reputation and expose it to liability[264] - The company faces significant competition from a wide range of players, including branded luxury stores, department stores, traditional consignment shops, and other online marketplaces[278] - The company is party to lawsuits, including with Chanel and shareholder class actions, which are expensive, time-consuming, and could have a significant negative impact if resolved unfavorably[268][270] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period, and the use of IPO proceeds remains unchanged from previous disclosures - There were no unregistered sales of equity securities in the period[337] - The use of proceeds from the company's IPO, declared effective on June 27, 2019, remains unchanged from previous disclosures[338] Item 3. Defaults Upon Senior Securities This item is not applicable as the company has not defaulted upon any senior securities - Not applicable[339] Item 4. Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[340] Item 5. Other Information This item is not applicable as there is no other information to report - Not applicable[341] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the indenture for the 3.00% Convertible Senior Notes due 2025, related capped call confirmations, and required CEO and CFO certifications - Exhibit 4.1 is the Indenture for the 3.00% Convertible Senior Notes due 2025[343] - Exhibits 10.1 and 10.2 are the confirmations for the Capped Call Transactions related to the convertible notes[343] - Exhibits 31.1, 31.2, 32.1, and 32.2 are the required CEO and CFO certifications[343]