The RealReal(REAL) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's discussion and analysis for Q1 2024 Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed financial statements and detailed notes for Q1 2024 and 2023 Condensed Balance Sheets The condensed balance sheets detail the company's financial position, including assets, liabilities, and stockholders' deficit | Metric | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $165,996 | $175,709 | | Total assets | $431,579 | $446,923 | | Convertible senior notes, net | $302,324 | $452,421 | | Non-convertible notes, net | $131,199 | — | | Warrant liability | $26,000 | — | | Total liabilities | $758,632 | $750,222 | | Total stockholders' deficit | $(327,053) | $(303,299) | Condensed Statements of Operations These statements present the company's financial performance, including revenue and net loss, for Q1 2024 and 2023 | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (YoY) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Total revenue | $143,800 | $141,904 | +1.3% | | Gross profit | $107,279 | $89,983 | +19.2% | | Loss from operations | $(17,942) | $(81,800) | -78.1% | | Change in fair value of warrant liability | $(15,583) | — | N/A | | Gain on extinguishment of debt | $4,177 | — | N/A | | Net loss attributable to common stockholders | $(31,101) | $(82,500) | -62.4% | | Net loss per share, basic and diluted | $(0.30) | $(0.83) | -63.9% | Condensed Statements of Stockholders' Equity (Deficit) This section details changes in the company's equity or deficit, including additional paid-in capital and accumulated deficit | Metric | As of March 31, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :-------------------------------- | :---------------------------------- | :----------------------------------- | | Additional Paid-in Capital | $823,672 | $816,325 | | Accumulated Deficit | $(1,150,726) | $(1,119,625) | | Total Stockholders' Deficit | $(327,053) | $(303,299) | - Net loss for the three months ended March 31, 2024, was $(31.1) million, contributing to the accumulated deficit[21] - Stock-based compensation expense for the three months ended March 31, 2024, was $7.3 million[21] Condensed Statements of Cash Flows These statements summarize cash flows from operating, investing, and financing activities for Q1 2024 and 2023 | Cash Flow Activity | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (YoY) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net cash used in operating activities | $(3,467) | $(30,433) | -88.6% | | Net cash used in investing activities | $(5,321) | $(15,920) | -66.6% | | Net cash used in financing activities | $(929) | $(295) | +215% | | Net decrease in cash, cash equivalents and restricted cash | $(9,717) | $(46,648) | -79.1% | Notes to Unaudited Condensed Financial Statements These notes provide essential details and explanations regarding accounting policies and financial statement items Note 1. Description of Business and Basis of Presentation This note describes The RealReal, Inc.'s business and the basis for its financial statement presentation - The RealReal, Inc. operates as an online marketplace for authenticated, consigned luxury goods, including women's fashion, men's fashion, and jewelry and watches[32] - The unaudited condensed financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting requirements, and should be read in conjunction with the 2023 Annual Report on Form 10-K[33][35] Note 2. Summary of Significant Accounting Policies This note outlines key accounting principles applied, covering revenue, stock-based compensation, and inventory - Revenue is generated from consignment sales (net basis, agent), direct sales of company-owned inventory (gross basis, principal), and shipping services (recognized over time)[41][42][46][48] - Stock-based compensation expense is measured based on the grant-date fair value of awards (stock options, RSUs, PSUs, ESPP purchase rights) and recognized over the vesting period[52] - Inventory is valued at the lower of cost and net realizable value using the specific identification method, with provisions for write-downs and shrinkage[58] - Capped call transactions are classified in stockholders' equity as a reduction to additional paid-in capital and are not subsequently remeasured[67] Note 3. Cash and Cash Equivalents This note provides a breakdown of the company's cash and cash equivalents as of March 31, 2024 | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------- | :----------------------------- | :----------------------------- | | Cash | $23,029 | $50,947 | | Money market funds | $142,967 | $124,762 | | Total cash and cash equivalents | $165,996 | $175,709 | Note 4. Fair Value Measurement This note details fair value measurements of financial instruments, including warrants and convertible notes - Money market funds are classified as Level 1 financial assets, totaling $143.0 million as of March 31, 2024[77] - Warrants are accounted for as Level 3 liabilities, with an aggregate fair value of $26.0 million as of March 31, 2024, and a $15.6 million change in fair value recognized in Q1 2024[77][80][82] - The fair value of the 2025 Convertible Senior Notes was $20.1 million (carrying amount $26.5 million) and 2028 Convertible Senior Notes was $123.3 million (carrying amount $275.8 million) as of March 31, 2024[78] Note 5. Condensed Balance Sheet Components This note provides further detail on specific balance sheet items like property and equipment | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Property and equipment, net | $101,327 | $104,087 | | Other accrued and current liabilities | $82,528 | $82,685 | - Depreciation and amortization expense on property and equipment was $8.2 million for Q1 2024, up from $7.5 million in Q1 2023[83] Note 6. Non-convertible Notes, Net This note describes the company's non-convertible senior secured notes and the Note Exchange transaction - On February 29, 2024, the company completed a Note Exchange, exchanging $145.8 million of 2025 Notes and $6.5 million of 2028 Notes for $135.0 million of 4.25%/8.75% PIK/Cash Senior Secured Notes due 2029 (2029 Notes)[86][87] - The Note Exchange resulted in a $4.2 million gain on extinguishment of debt[88] - The 2029 Notes bear interest at 13.00% per annum (8.75% cash, 4.25% PIK) and mature on March 1, 2029, or earlier under certain conditions[87] | Fiscal Year | 2029 Notes (in thousands) | | :---------------- | :------------------------ | | 2024 through 2028 | — | | 2029 | $166,592 | | Total expected payments at maturity | $166,592 | | Less unamortized debt issuance costs and debt premium, net | $(3,801) | | Less amounts related to PIK interest | $(31,592) | | Net carrying amount | $131,199 | Note 7. Convertible Senior Notes, Net This note provides information on the company's outstanding convertible senior notes due 2025 and 2028 - The company has $26.7 million principal of 3.00% Convertible Senior Notes due 2025 and $281.0 million principal of 1.00% Convertible Senior Notes due 2028 outstanding as of March 31, 2024[106] - The 2025 Notes have an initial conversion rate of 56.2635 shares per $1,000 principal, and the 2028 Notes have an initial conversion rate of 31.4465 shares per $1,000 principal[100] - Capped call transactions, classified in stockholders' equity, are in place to reduce potential dilution from the Convertible Senior Notes[112] | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | 2025 Notes Total interest and amortization expense | $1,158 | $1,602 | | 2028 Notes Total interest and amortization expense | $1,040 | $1,044 | Note 8. Share-based Compensation Plans This note details the company's equity incentive plan and related compensation expense - The 2019 Equity Incentive Plan allows for grants of stock options, RSUs, PSUs, and performance awards, with 5,233,525 new shares authorized on February 20, 2024[114][115] - Total unrecognized compensation expense for RSUs and PSUs was approximately $49.0 million as of March 31, 2024, with a weighted-average vesting period of 2.4 years[119] | Function | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Marketing | $410 | $450 | | Operations and technology | $2,304 | $3,691 | | Selling, general and administrative | $4,406 | $4,850 | | Total stock-based compensation expense | $7,120 | $8,991 | Note 9. Leases This note outlines the company's lease costs and operating lease liabilities | Lease Cost Type | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :---------------------- | :--------------------------------------------- | :--------------------------------------------- | | Operating lease costs | $5,100 | $7,100 | | Variable lease costs | $1,500 | $1,300 | - In Q1 2023, the company recorded $25.7 million in impairment charges related to right-of-use assets due to office and store closures[127] - The present value of operating lease liabilities was $122.0 million as of March 31, 2024, with a weighted average remaining lease term of 5.3 years and a weighted average discount rate of 6.1%[129] Note 10. Restructuring This note describes the company's 2023 savings plan and associated restructuring charges - In February 2023, the company initiated a savings plan involving workforce reduction and real estate presence reduction[130] - Restructuring charges for Q1 2023 totaled $36.4 million, including $25.7 million for right-of-use asset impairment and $7.2 million for leasehold improvements impairment; charges for Q1 2024 were immaterial[131] Note 11. Commitments and Contingencies This note discloses the company's involvement in ongoing legal proceedings - The company is involved in ongoing litigation with Chanel, Inc. regarding trademark infringement, unfair competition, and false advertising, with mediation efforts continuing[134] - A shareholder class action lawsuit was settled for $11.0 million in March 2022, but an opt-out plaintiff is pursuing claims in state court, with a motion for class certification set for July 30, 2024[135] Note 12. Income Taxes This note discusses the company's income tax provision and deferred tax asset valuation allowance - The provision for income taxes was immaterial for both the three months ended March 31, 2024, and 2023[137] - The company maintains a full valuation allowance of $292.3 million against its gross deferred tax assets of $319.4 million as of March 31, 2024, primarily due to net operating loss carryforwards[137] Note 13. Net Loss Per Share Attributable to Common Stockholders This note presents the calculation of basic and diluted net loss per share | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss attributable to common stockholders (in thousands) | $(31,101) | $(82,500) | | Weighted-average common shares outstanding (basic and diluted) | 105,212,053 | 99,608,071 | | Net loss per share (basic and diluted) | $(0.30) | $(0.83) | - Potentially dilutive securities, including options, RSUs, ESPP shares, Convertible Senior Notes, and Warrants, were excluded from diluted EPS calculation as their effect would be anti-dilutive due to net losses[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for Q1 2024 Overview This overview introduces The RealReal's business model and highlights key financial performance - The RealReal is the world's largest online marketplace for authenticated resale luxury goods, offering an end-to-end service for consignors and a trusted, curated marketplace for buyers[142] - The company's revenue is primarily generated from consignment sales, supplemented by direct sales and shipping services[144][145] - As of March 31, 2024, the company had over 36.2 million members[145] - Gross Merchandise Value (GMV) increased by 2% to $451.9 million, and gross profit increased by 19% to $107.3 million for the three months ended March 31, 2024, compared to the prior year[146] Factors Affecting Our Performance This section discusses critical elements influencing the company's performance - Consignor growth and retention are key, with 85% of GMV from repeat consignors in Q1 2024, up from 82% in Q1 2023[148][149] - The company invests in physical infrastructure (authentication centers), talent, and proprietary technology, including machine learning, to automate operations and support growth[152] - The business experiences seasonality, with supply and demand typically increasing in the third and fourth quarters, leading to stronger Average Order Value (AOV) and faster sell-through in Q4[153] Key Financial and Operating Metrics This section presents essential financial and operational data, including GMV, revenue, and take rate | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | GMV (in thousands) | $451,941 | $444,366 | +1.7% | | NMV (in thousands) | $334,815 | $327,805 | +2.1% | | Consignment revenue (in thousands) | $115,648 | $102,643 | +12.7% | | Direct revenue (in thousands) | $12,709 | $24,953 | -49.1% | | Shipping services revenue (in thousands) | $15,443 | $14,308 | +7.9% | | Number of orders (in thousands) | 840 | 891 | -5.7% | | Take rate | 38.4% | 37.4% | +1.0 pp | | Active buyers (in thousands) | 922 | 1,014 | -9.1% | | AOV | $538 | $499 | +7.8% | - The take rate increased to 38.4% from 37.4% due to an updated consignor commission structure implemented in November 2022, aimed at optimizing take rate and increasing supply of higher value items[163][164] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, specifically Adjusted EBITDA - Adjusted EBITDA is a key non-GAAP measure used by management to assess operating performance and for business planning, excluding items not indicative of core operating performance[167][168] | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net loss | $(31,101) | $(82,500) | | EBITDA | $(21,039) | $(73,979) | | Adjusted EBITDA | $(2,261) | $(27,297) | - Adjusted EBITDA for Q1 2024 significantly improved to $(2.3) million from $(27.3) million in Q1 2023, reflecting reduced net loss and lower restructuring charges[171] Components of our Operating Results This section details the various revenue streams, cost of revenue, and operating expenses - Revenue is categorized into consignment (majority), direct (company-owned inventory), and shipping services[175][179] - Cost of revenue includes credit card fees, packaging, customer service, website hosting, and inventory adjustments for both consignment and direct sales, plus shipping costs[176] - Operating expenses comprise marketing, operations and technology (including authentication, merchandising, fulfillment, and R&D), selling, general and administrative, and restructuring charges[177][178][179][180] - The provision for income taxes is immaterial, and the company maintains a full valuation allowance against its net deferred tax assets[181] Results of Operations This section provides a detailed comparison of the company's financial performance for Q1 2024 Comparison of the Three Months Ended March 31, 2024 and 2023 This subsection offers a comprehensive line-by-line analysis of revenue, costs, and expenses | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | Change (k) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Consignment revenue | $115,648 | $102,643 | $13,005 | 13% | | Direct revenue | $12,709 | $24,953 | $(12,244) | -49% | | Shipping services revenue | $15,443 | $14,308 | $1,135 | 8% | | Cost of consignment revenue | $13,280 | $15,529 | $(2,249) | -14% | | Cost of direct revenue | $12,285 | $25,030 | $(12,745) | -51% | | Cost of shipping services revenue | $10,956 | $11,362 | $(406) | -4% | | Marketing | $15,283 | $17,518 | $(2,235) | -13% | | Operations and technology | $62,972 | $68,032 | $(5,060) | -7% | | Selling, general and administrative | $46,770 | $49,845 | $(3,075) | -6% | | Restructuring charges | $196 | $36,388 | $(36,192) | -99% | | Change in fair value of warrant liability | $(15,583) | — | $(15,583) | 100% | | Gain on extinguishment of debt | $4,177 | — | $4,177 | 100% | | Interest income | $2,069 | $2,053 | $16 | 1% | | Interest expense | $(3,751) | $(2,667) | $(1,084) | 41% | - Total gross margin increased by 1,119 basis points due to increased consignment revenue, decreased direct revenue as a percentage of total revenue, and an improved take rate[197] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations Cash Flows This subsection analyzes the changes in cash from operating, investing, and financing activities - Net cash used in operating activities significantly decreased to $3.5 million in Q1 2024 from $30.4 million in Q1 2023, primarily due to a lower net loss and non-cash charges related to warrant liability[216][217] - Net cash used in investing activities decreased to $5.3 million in Q1 2024 from $15.9 million in Q1 2023, reflecting reduced capital expenditures[218][219] - Net cash used in financing activities increased to $0.9 million in Q1 2024 from $0.3 million in Q1 2023, mainly due to debt issuance costs for the Note Exchange[220] Convertible Senior Notes This subsection provides details on the company's outstanding convertible senior notes - As of March 31, 2024, the company had $26.7 million principal of 2025 Convertible Senior Notes and $281.0 million principal of 2028 Convertible Senior Notes outstanding[221] - Capped call transactions are in place to reduce potential dilution from the conversion of these notes[223] 2029 Notes and Warrants This subsection describes the issuance of 2029 Notes and associated warrants - On February 29, 2024, the company issued $135.0 million in 2029 Notes and warrants to acquire up to 7,894,737 shares of common stock as part of the Note Exchange[225] Contractual Obligations and Commitments This subsection outlines the company's significant contractual obligations - No material changes to contractual obligations from the 2023 10-K, except for the Note Exchange, which decreased 2025 and 2028 Notes commitments and introduced 2029 Notes and Warrants[227][230] Critical Accounting Estimates This subsection identifies key accounting estimates requiring significant management judgment - The fair value of the 2029 Notes and the warrant liability are considered critical accounting estimates, requiring significant judgment in valuation methods and interest rate assessment[229][230][231] Recent Accounting Pronouncements This subsection confirms no new material accounting pronouncements have been adopted since the last annual report - There have been no new developments to recently issued accounting standards from those disclosed in the 2023 Annual Report on Form 10-K[232] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide detailed market risk disclosures - The company is a smaller reporting company and is exempt from providing detailed market risk disclosures[233] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024 - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of March 31, 2024[234] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control during the period[235] - Management acknowledges the inherent limitations of control systems, which can only provide reasonable, not absolute, assurance against errors and fraud[236] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings and risk factors Item 1. Legal Proceedings This section details the company's involvement in ongoing legal proceedings - The company is a defendant in an ongoing lawsuit filed by Chanel, Inc. in November 2018, alleging trademark infringement, unfair competition, and false advertising; mediation efforts are continuing[240] - A shareholder class action lawsuit was settled for $11.0 million in March 2022, but an opt-out plaintiff is pursuing claims in state court, with a motion for class certification set for July 30, 2024[241] Item 1A. Risk Factors This section outlines various risks that could materially affect the company's business and financial condition - The company has a history of net losses and an accumulated deficit, and there is no assurance of achieving or maintaining future profitability[251] - The savings plan implemented in February 2023, including workforce and real estate reductions, may not yield anticipated benefits, could incur higher costs, or disrupt business operations[252][253][254] - Success depends on the ability to obtain sufficient new and recurring supply of pre-owned luxury goods and to accurately authenticate items, as counterfeit goods could damage reputation[267][280] - The company has incurred significant debt, and transactions related to Convertible Senior Notes and Warrants may dilute ownership interests or adversely affect financial condition due to cash settlement requirements or accounting volatility[329][332][333][334] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports the issuance of warrants to purchase common stock in connection with the Note Exchange - Warrants to purchase 7,894,737 shares of common stock were issued on February 29, 2024, as part of the Note Exchange, with an exercise price of $1.71 per share and an expiration date of March 1, 2029[339] - These warrants were issued pursuant to Section 4(a)(2) of the Securities Act of 1933[340] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period Item 5. Other Information This section discloses a Rule 10b5-1 trading plan adopted by a Board member - Rob Krolik, a Board member, adopted a Rule 10b5-1 trading plan on March 7, 2024, for the sale of up to 74,949 shares of common stock[344] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q - Exhibits include the Offer Letter for Ajay Gopal, Form of Exchange Agreement, Indenture for 2029 Notes, Warrant Agency Agreement, Security Agreement, and various certifications (e.g., CEO/CFO certifications under Sarbanes-Oxley Act)[346] Signatures The report is officially signed by the Chief Executive Officer and Chief Financial Officer - The report was signed by John Koryl (Chief Executive Officer) and Ajay Madan Gopal (Chief Financial Officer) on May 7, 2024[351]