TheRealReal, Inc.REAL
TheRealReal, Inc. Fair Value Disclosure
Fair Value Measurement
Assets and liabilities recorded at fair value on a recurring basis on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth the Company's financial instruments on the balance sheet that were measured at fair value on a recurring basis for the period indicated by level within the fair value hierarchy (in thousands):
| December 31, 2025 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||
Money market funds | $ | 125,548 | $ | — | $ | — | $ | 125,548 | |||||||||||||||
Total | $ | 125,548 | $ | — | $ | — | $ | 125,548 | |||||||||||||||
Financial liabilities: | |||||||||||||||||||||||
Warrants | $ | — | $ | — | $ | 114,353 | $ | 114,353 | |||||||||||||||
Total | $ | — | $ | — | $ | 114,353 | $ | 114,353 | |||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||
Money market funds | $ | 147,342 | $ | — | $ | — | $ | 147,342 | |||||||||||||||
Total | $ | 147,342 | $ | — | $ | — | $ | 147,342 | |||||||||||||||
Financial liabilities: | |||||||||||||||||||||||
Warrants | $ | — | $ | — | $ | 78,584 | $ | 78,584 | |||||||||||||||
Total | $ | — | $ | — | $ | 78,584 | $ | 78,584 | |||||||||||||||
Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of the financial instruments that are not recorded at fair value on the balance sheets (in thousands):
| December 31, 2025 | December 31, 2024 | ||||||||||||||||||||||
| Net Carrying Amount | Estimated Fair Value | Net Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| 2025 Notes | $ | — | $ | — | $ | 26,653 | $ | 26,493 | |||||||||||||||
| 2028 Notes | $ | 47,703 | $ | 45,152 | $ | 276,807 | $ | 216,291 | |||||||||||||||
| 2029 Notes | $ | 140,980 | $ | 153,712 | $ | 134,470 | $ | 140,889 | |||||||||||||||
| 2031 Notes | $ | 183,130 | $ | 280,269 | $ | — | $ | — | |||||||||||||||
During the period ended June 30, 2025, the Company repaid the outstanding principal amount of the 3.00% Convertible Senior Notes due 2025 (the "2025 Notes") at maturity. The outstanding principal amounts of the 1.00% Convertible Senior Notes due 2028 (the "2028 Notes"), 4.25%/8.75% PIK/cash senior secured notes due 2029 (the “2029 Notes”) and 4.00% Convertible Senior Notes due 2031 (the “2031 Notes” and, together with the 2028 Notes, and the 2029 Notes, the "Notes") are $48.2 million, $143.8 million and $190.1 million, respectively. The difference between the principal amounts of such notes and their respective net carrying amounts are the unamortized debt issuance costs and debt premiums.
For the periods presented, the fair value of the 2025 Notes, the 2028 Notes, the 2029 Notes and the 2031 Notes, which differs from their carrying value, is determined based on the quoted bid prices of such notes in an over-the counter market using the latest trading information of the reporting period.
Fair Value Measurement of Warrants
In connection with the 2024 Note Exchange (defined in Note 6 – Non-convertible Notes, Net), the Company issued warrants (the "Warrants") to the participants in the 2024 Note Exchange to acquire an aggregate of up to 7,894,737 shares (subject to adjustment in accordance with the terms of the Warrants) of the Company’s common stock to the holders of the Exchanged Notes at an exercise price of $1.71, subject to certain cashless exercise provisions and adjustment in accordance with the terms of the Warrants. The Warrants are exercisable from the date of issuance until they expire on March 1, 2029. The Warrants are accounted for as liabilities under ASC 480 since the Warrants may be required to be settled in cash in case of a fundamental change, which could occur outside of the Company’s control. Changes in fair value are recognized within change in fair value of warrant liability on the Company’s statements of operations. Issuance costs allocated to the Warrants are included in selling, general and administrative on the Company’s statements of operations.
The aggregate fair value of the Warrants for the periods presented was determined using a Black-Scholes Model with the following inputs:
| December 31, 2025 | December 31, 2024 | ||||||||||
| Stock price | $15.78 | $10.93 | |||||||||
| Exercise price | $1.71 | $1.71 | |||||||||
Expected life in years | 3.17 | 4.17 | |||||||||
Expected volatility | 93.51 | % | 96.75 | % | |||||||
Expected dividends | — | % | — | % | |||||||
Discount rate | 3.55 | % | 4.38 | % | |||||||
The following table presents the activity related to the Warrants for each of the years presented:
| December 31, 2025 | December 31, 2024 | ||||||||||
| Beginning balance | $ | 78,584 | $ | — | |||||||
| Issuance of warrants | — | 10,417 | |||||||||
| Change in fair value | 35,769 | 68,167 | |||||||||
| Ending balance | $ | 114,353 | $ | 78,584 | |||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.