The RealReal, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars.
Business context
The RealReal operates an online and retail marketplace for authenticated, primarily pre-owned luxury goods. Most revenue comes from consignment services, with the company retaining a commission; it also sells company-owned inventory. The filing describes significant COVID-19 disruption in 2020, followed by a recovery in marketplace activity through year-end.
Financial and operating results
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $299.9 million | $316.4 million |
| Gross profit / gross margin | $187.6 million / 63% | $201.5 million / 64% |
| Operating loss | $172.8 million | $100.1 million |
| Net loss | $175.8 million | $98.4 million |
| Adjusted EBITDA (non-GAAP) | $(128.0) million | $(74.7) million |
| Net cash used in operating activities | $(134.4) million | $(54.5) million |
| GMV | $987.0 million | $1,008.3 million |
| NMV | $736.9 million | $731.4 million |
| Active buyers | 649,000 | 582,000 |
| Take rate | 35.7% | 36.3% |
- Revenue declined 5% year over year; consignment and service revenue fell 7%, while direct revenue grew 4%. Management attributed the decline primarily to COVID-related supply disruption, lower take rate and increased buyer incentives.
- GMV fell 2%, while NMV rose slightly as returns declined. Returns and cancellations were 25.3% of GMV, compared with 27.5% in 2019.
- Operating expenses rose 19% to $360.4 million. Marketing increased 15%; operations and technology increased 14%; and selling, general and administrative expense increased 28%. Stock-based compensation was $24.3 million, up from $7.7 million.
- Fourth-quarter revenue was $86.8 million versus $92.6 million in fourth-quarter 2019. Fourth-quarter net loss was $50.8 million versus $22.5 million; Adjusted EBITDA was $(35.8) million versus $(13.9) million. Fourth-quarter GMV was $301.2 million, down about 1% year over year.
Liquidity, debt and cash flow
- At year-end, cash and cash equivalents were $350.8 million and short-term investments were $4.0 million, totaling $354.9 million. Current assets were $421.5 million and current liabilities were $148.3 million.
- The company issued $172.5 million of 3.00% convertible senior notes due 2025 in June 2020. Their year-end carrying value, net of discount and issuance costs, was $149.2 million. The notes are convertible subject to specified conditions; the company said it intended to settle conversions using cash for principal and shares for conversion value above principal.
- Operating cash outflow increased to $134.4 million. Investing activities provided $178.0 million, largely reflecting maturities of short-term investments; financing activities provided $152.8 million, primarily from the notes issuance.
- Operating lease liabilities totaled $130.1 million on the balance sheet. Contractual obligations also include $203.5 million of operating lease payments and $195.8 million of note payments including interest, as presented in the filing’s obligations table.
Changes, outlook and material matters
- GMV fell sharply early in the pandemic: about 45% year over year from March through mid-April. The year-over-year declines narrowed to 20% in the second quarter, 3% in the third quarter and 1% in the fourth quarter.
- Management expected COVID-19 to continue to adversely affect operations and financial results, while stating that supply growth could accelerate in 2021. It expected operating losses and negative operating cash flow could continue in the foreseeable future. No specific 2021 revenue, earnings or cash-flow guidance is provided.
- Management said year-end cash and short-term investments were sufficient for working capital and capital expenditure needs for at least 12 months, but noted that future capital needs depend on growth and expansion plans and additional financing might be required.
- Material risks include continued pandemic disruption, persistent losses and cash burn, dependence on consignor supply and buyer demand, competition, authentication and counterfeit exposure, a single shipping provider, data security, and execution of retail and operations expansion.
- Chanel litigation concerning authentication, trademark and advertising claims remained in discovery; the company’s counterclaims were permitted in February 2021. IPO-related securities class actions and derivative suits were also ongoing. The company said it could not estimate possible losses for these matters.
- The company disclosed an immaterial prior-period error involving consignment revenue and inventory, revised comparative periods in this filing, and stated that no restatement of previously filed reports was required. It also identified an interim-period material weakness in certain IT controls, which management said was remediated by year-end; management and the auditor reported effective internal control as of December 31, 2020.
Important facts for investors to verify
- Whether the recovery in GMV and supply continued after year-end, and whether growth translates into higher GAAP revenue and improved margins.
- Whether take rate, buyer incentives, returns and the mix of company-owned inventory support sustainable gross profit and cash generation.
- The pace of operating cash burn and the adequacy of liquidity relative to planned facility, retail and technology investment.
- The potential dilution, cash-settlement requirements and accounting effects of the $172.5 million convertible notes.
- Developments in the Chanel and IPO-related litigation, and ongoing evidence that remediated IT controls remain effective.