The RealReal(REAL) - 2022 Q3 - Quarterly Report

markdown [Part I](index=5&type=section&id=Part%20I) [Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Presents unaudited condensed consolidated financial statements for The RealReal, Inc., including Balance Sheets, Statements of Operations, and Cash Flows, for periods ending September 30, 2022 and 2021 Condensed Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $142,703 | $118,838 | $443,838 | $322,567 | | **Gross Profit** | $85,777 | $71,099 | $252,081 | $192,850 | | **Loss from Operations** | $(45,528) | $(51,156) | $(151,218) | $(168,726) | | **Net Loss** | $(47,258) | $(57,196) | $(157,835) | $(183,912) | | **Net Loss Per Share** | $(0.49) | $(0.62) | $(1.66) | $(2.02) | Condensed Balance Sheet Highlights (in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $300,439 | $418,171 | | **Total Assets** | $634,416 | $754,944 | | **Total Liabilities** | $775,671 | $681,816 | | **Total stockholders' equity (deficit)** | $(141,255) | $73,128 | Condensed Statements of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | **Net cash used in operating activities** | $(95,255) | $(123,387) | | **Net cash used in investing activities** | $(26,255) | $(33,758) | | **Net cash provided by financing activities** | $3,778 | $251,108 | - The company changed its accounting method for shipping and handling, now recognizing it as a separate performance obligation, which had an immaterial impact on loss from operations[65](index=65&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 2022 financial performance, noting a **20% increase** in GMV and total revenue, improved operational leverage, continued net loss, and sufficient liquidity for the next 12 months - The company is the world's largest online marketplace for authenticated, consigned luxury goods, operating through its website, mobile app, and **19** retail locations, with over **30.2 million** members as of September 30, 2022[141](index=141&type=chunk)[144](index=144&type=chunk) Key Financial and Operating Metrics (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | **GMV** | $440.7M | $367.9M | +20% | | **Total Revenue** | $142.7M | $118.8M | +20% | | **Number of Orders (thousands)** | 952 | 757 | +26% | | **AOV** | $463 | $486 | -5% | | **Active Buyers (thousands)** | 950 | 772 | +23% | | **Take Rate** | 36.0% | 34.9% | +1.1 p.p. | - The company's growth is impacted by macroeconomic factors, including labor shortages in authentication centers due to COVID-19, and potential lower consumer demand and increased costs from inflation and geopolitical instability[146](index=146&type=chunk) Adjusted EBITDA Reconciliation (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | **Net loss** | $(47,258) | $(57,196) | | **Adjusted EBITDA** | $(28,151) | $(31,474) | [Results of Operations](index=39&type=section&id=Results%20of%20Operations) Q3 2022 total revenue increased **20%** to **$142.7 million**, gross profit grew **21%** to **$85.8 million**, and net loss narrowed to **$47.3 million** due to decreased operating expenses Revenue Breakdown (Q3 2022 vs Q3 2021, in thousands) | Revenue Type | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Consignment Revenue | $93,874 | $78,373 | +20% | | Direct Revenue | $34,005 | $29,387 | +16% | | Shipping Services Revenue | $14,824 | $11,078 | +34% | | **Total Revenue** | **$142,703** | **$118,838** | **+20%** | - The increase in consignment revenue was driven by a **20% increase** in GMV and an improved take rate (**36.0% vs 34.9%**), attributed to a higher mix of products like women's apparel[189](index=189&type=chunk)[190](index=190&type=chunk) Operating Expenses (Q3 2022 vs Q3 2021, in thousands) | Expense Category | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Marketing | $13,511 | $15,708 | -14% | | Operations and Technology | $70,782 | $61,135 | +16% | | Selling, General and Administrative | $46,860 | $44,912 | +4% | - Marketing expense **decreased 14%** due to improved efficiency in buyer acquisition costs[201](index=201&type=chunk) - Operations and Technology expense **increased 16%** due to higher headcount and inbound shipping costs[203](index=203&type=chunk) - Selling, General and Administrative expense **rose 4%** from increased headcount and software fees[205](index=205&type=chunk) [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) The company held **$300.4 million** in cash as of September 30, 2022, deemed sufficient for the next 12 months, with net cash used in operating activities improving to **$95.3 million** for the nine months ended September 30, 2022 - The company holds **$300.4 million** in cash and cash equivalents as of September 30, 2022, and believes this is sufficient for working capital and capital expenditures for at least the next **12 months**[236](index=236&type=chunk)[237](index=237&type=chunk) Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in Operating Activities | $(95,255) | $(123,387) | | Net cash used in Investing Activities | $(26,255) | $(33,758) | | Net cash provided by Financing Activities | $3,778 | $251,108 | - The significant decrease in cash from financing activities in **2022** compared to **2021** is due to the **2021** period including **$278.2 million** in net proceeds from the issuance of convertible senior notes[246](index=246&type=chunk)[247](index=247&type=chunk) - The company has two outstanding convertible senior notes: **$172.5 million** of **3.00%** notes due **2025** and **$287.5 million** of **1.00%** notes due **2028**[248](index=248&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There have been no material changes to the company's market risk disclosures since its Annual Report on Form 10-K for the year ended December 31, 2021 - There have been no material changes to the company's quantitative and qualitative disclosures about market risk since the Annual Report on Form 10-K for the year ended December 31, 2021[258](index=258&type=chunk) [Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting identified - Based on an evaluation as of the end of the period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[260](index=260&type=chunk) - No changes in internal control over financial reporting were identified during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[261](index=261&type=chunk) [Part II](index=55&type=section&id=Part%20II) [Legal Proceedings](index=55&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ongoing litigation, notably a trademark infringement lawsuit by Chanel, Inc., and a shareholder class action related to its IPO, settled for **$11.0 million** with one opted-out plaintiff - Chanel, Inc. sued the company for trademark infringement, false advertising, and unfair competition, with the case ongoing and fact discovery scheduled to be completed by February 15, 2023, with an uncertain final outcome[265](index=265&type=chunk) - A shareholder class action lawsuit related to the IPO was settled for **$11.0 million**, which the company paid on March 29, 2022, though one plaintiff opted out and has filed an amended complaint[266](index=266&type=chunk) - A shareholder derivative action was settled, involving corporate governance reforms and a payment of **$0.5 million** for plaintiffs' attorneys' fees, which was paid on January 7, 2022[267](index=267&type=chunk)[268](index=268&type=chunk) [Risk Factors](index=57&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including a history of net losses, reliance on discretionary consumer spending, intense competition, supply chain challenges, operational scaling, and legal and brand risks - **Financial Risks:** The company has a history of net losses (**$157.8 million** for the nine months ended Sep 30, 2022) and may not achieve or maintain profitability, with its business depending on discretionary spending vulnerable to economic downturns, inflation, and geopolitical instability[274](index=274&type=chunk)[293](index=293&type=chunk) - **Supply & Authentication Risks:** The business depends on obtaining a sufficient supply of authentic pre-owned luxury goods, and the sale of any counterfeit goods could damage the company's reputation and ability to attract consignors, buyers, and brand partners[284](index=284&type=chunk)[295](index=295&type=chunk) - **Operational & Strategic Risks:** Challenges include scaling operations, managing retail store expansion, attracting and retaining specialized personnel (e.g., authenticators, sales professionals), and potential labor shortages[282](index=282&type=chunk)[301](index=301&type=chunk) - **Legal & Debt Risks:** The company faces litigation risks, such as the ongoing lawsuit with Chanel, and has significant debt from convertible senior notes, whose conversion could dilute shareholder ownership[317](index=317&type=chunk)[343](index=343&type=chunk)[344](index=344&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports no unregistered sales of equity securities during the period, and information regarding IPO proceeds is omitted as it remains unchanged - There were no unregistered sales of equity securities in the period covered by the report[349](index=349&type=chunk) [Defaults Upon Senior Securities](index=73&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reporting period - Not applicable[351](index=351&type=chunk) [Mine Safety Disclosures](index=73&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reporting period - Not applicable[352](index=352&type=chunk) [Other Information](index=73&type=section&id=Item%205.%20Other%20Information) This item is not applicable to the company for the reporting period - Not applicable[353](index=353&type=chunk) [Exhibits](index=74&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including officer certifications and Inline XBRL data files - The exhibits filed with this report include Certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sections **302** and **906** of the Sarbanes-Oxley Act) and Inline XBRL documents[356](index=356&type=chunk)