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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2021
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ________
Commission file number 001-40958
____________________________
RENT THE RUNWAY, INC.
____________________________
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 80-0376379 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
10 Jay Street Brooklyn, New York 11201 | 11201 |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 524-6860
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A common stock | RENT | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had outstanding 60,096,327 shares of Class A common stock and 2,939,928 shares of Class B common stock as of December 7, 2021.
Table of Contents
Unless the context otherwise requires, we use the terms the “Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q, or Quarterly Report, to refer to Rent the Runway, Inc. and, where appropriate, our consolidated subsidiaries.
Risk Factor Summary
Investing in our Class A common stock involves numerous risks, including the risks described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks before making an investment. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects.
•We have grown rapidly in recent years and have limited experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.
•The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.
•The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.
•Our continued growth depends on our ability to attract new, and retain existing, customers, which may require significant investment in paid marketing channels. If we are unable to cost-effectively grow our customer base, our business, financial condition and results of operations would be harmed.
•If we fail to retain customers, our business, financial condition, and results of operations would be harmed.
•If we are unable to accurately forecast customer demand, manage our products effectively and plan for future expenses, our operating results could be adversely affected.
•Shipping and logistics are a critical part of our business and our supply chain and any changes or interruptions in shipping or logistics operations could adversely affect our operating results.
•We rely heavily on the effective operation of our proprietary technology systems and software, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information.
•We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses in a timely manner, identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our condensed consolidated financial statements or cause us to fail to meet our periodic reporting obligations, our ability to comply with applicable laws and regulations and our access to the capital markets to be impaired.
•Our business is subject to a large number of U.S. and non-U.S. laws and regulations, many of which are evolving.
•We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets, and we could face criminal liability and other serious consequences for violations, which could harm our business.
•Failure to adequately maintain and protect our intellectual property and proprietary rights could harm our brand, devalue our proprietary content, and adversely affect our ability to compete effectively.
•We are subject to rapidly changing and increasingly stringent laws and industry standards relating to data privacy, data security, data protection, and consumer protection. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.
•We face risks associated with brand partners from whom our products are sourced or co-manufactured.
•We rely on third parties for elements of the payment processing infrastructure underlying our business. If these third-party elements become unavailable or unavailable on favorable terms, our business could be adversely affected.
•We depend on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources to attract consumers to and promote our website and our mobile application, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.
•Any failure by us, our brand partners, or our third-party manufacturers to comply with our vendor code of conduct, product safety, labor, or other laws, or to provide safe factory conditions for their workers, may damage our reputation and brand, and harm our business.
•The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on Nasdaq, including our Co-Founders, and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change of control.
•Our share price may be volatile, and investors may be unable to sell their shares at or above the price they purchased them.
If we are unable to adequately address these and other risks we face, our business may be harmed.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part II, Item 1A, “Risk Factors” in this Quarterly Report for the quarter ended October 31, 2021. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report and have filed as exhibits to this Quarterly Report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of any new information, future events or otherwise.
Part I- Financial Information
Item 1. Financial Statements
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Balance Sheets |
(In millions, except share and per share amounts, unaudited) | | | | | | | | | | | |
| October 31, | | January 31, |
| 2021 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 278.7 | | | $ | 95.3 | |
Restricted cash, current | 5.6 | | | 3.4 | |
Prepaid expenses and other current assets | 5.4 | | | 4.7 | |
Total current assets | 289.7 | | | 103.4 | |
Restricted cash | 7.7 | | | 10.5 | |
Rental product, net | 79.9 | | | 97.6 | |
Fixed assets, net | 57.5 | | | 64.7 | |
Intangible assets, net | 6.8 | | | 7.8 | |
Operating lease right-of-use assets | 32.4 | | | 34.9 | |
Other assets | 4.4 | | | 1.8 | |
Total assets | $ | 478.4 | | | $ | 320.7 | |
Liabilities, Redeemable Preferred Stock and Stockholders’ Equity (Deficit) | | | |
Current liabilities: | | | |
Accounts payable | $ | 22.0 | | | $ | 7.2 | |
Accrued expenses and other current liabilities | 23.7 | | | 14.1 | |
Deferred revenue | 11.0 | | | 5.6 | |
Customer credit liabilities | 6.7 | | | 7.0 | |
Operating lease liabilities | 6.0 | | | 6.7 | |
Total current liabilities | 69.4 | | | 40.6 | |
Long-term debt, net | 256.4 | | | 355.1 | |
Operating lease liabilities | 47.3 | | | 51.5 | |
Warrant liability | — | | | 11.8 | |
Other liabilities | 0.4 | | | 0.3 | |
Total liabilities | 373.5 | | | 459.3 | |
Commitments and Contingencies (Note 13) | | | |
Redeemable preferred stock, $0.001 par value; 0 and 35,236,646 shares authorized as of October 31, 2021 and January 31, 2021, respectively; 0 and 31,137,921 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively; liquidation preference of $0.0 million and $393.7 million as of October 31, 2021 and January 31, 2021, respectively | — | | | 388.1 | |
Stockholders’ equity (deficit) | | | |
Common stock, $0.001 par value; 0 and 60,000,000 shares authorized as of October 31, 2021 and January 31, 2021, respectively; 0 and 10,456,521 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | — | | | — | |
Class A common stock, $0.001 par value; 300,000,000 and 0 shares authorized as of October 31, 2021 and January 31, 2021, respectively; 60,049,399 and 0 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | 0.1 | | | — | |
Class B common stock, $0.001 par value; 50,000,000 and 0 shares authorized as of October 31, 2021 and January 31, 2021, respectively; 2,939,928 and 0 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | — | | | — | |
Preferred stock, $0.001 par value; 10,000,000 and 0 shares authorized as of October 31, 2021 and January 31, 2021, respectively; 0 and 0 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | — | | | — | |
Additional paid-in capital | 866.7 | | | 62.7 | |
Accumulated deficit | (761.9) | | | (589.4) | |
Total stockholders’ equity (deficit) | 104.9 | | | (526.7) | |
Total liabilities, redeemable preferred stock and stockholders’ equity (deficit) | $ | 478.4 | | | $ | 320.7 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Operations |
(In millions, except share and per share amounts, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | Nine Months Ended October 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue: | | | | | | | |
Subscription and Reserve rental revenue | $ | 54.3 | | | $ | 30.5 | | | $ | 127.0 | | | $ | 106.8 | |
Other revenue | 4.7 | | | 5.0 | | | 12.2 | | | 17.2 | |
Total revenue, net | 59.0 | | | 35.5 | | | 139.2 | | | 124.0 | |
Costs and expenses: | | | | | | | |
Fulfillment | 19.2 | | | 11.0 | | | 41.5 | | | 43.8 | |
Technology | 12.8 | | | 9.4 | | | 33.0 | | | 28.0 | |
Marketing | 10.8 | | | 1.4 | | | 18.2 | | | 6.5 | |
General and administrative | 35.8 | | | 17.9 | | | 76.4 | | | 59.9 | |
Rental product depreciation and revenue share | 19.9 | | | 22.1 | | | 51.5 | | | 69.1 | |
Other depreciation and amortization | 4.7 | | | 5.7 | | | 14.6 | | | 17.4 | |
Total costs and expenses | 103.2 | | | 67.5 | | | 235.2 | | | 224.7 | |
Operating loss | (44.2) | | | (32.0) | | | (96.0) | | | (100.7) | |
Interest income / (expense), net | (14.3) | | | (11.8) | | | (43.7) | | | (32.2) | |
Gain / (loss) on warrant liability revaluation, net | (17.4) | | | — | | | (24.9) | | | — | |
Gain / (loss) on debt extinguishment, net | (12.2) | | | (0.6) | | | (12.2) | | | (0.6) | |
Other income / (expense), net | — | | | 0.1 | | | 3.9 | | | 1.2 | |
Net loss before benefit from income taxes | (88.1) | | | (44.3) | | | (172.9) | | | (132.3) | |
Income tax benefit / (expense) | 0.3 | | | — | | | 0.4 | | | — | |
Net loss | $ | (87.8) | | | $ | (44.3) | | | $ | (172.5) | | | $ | (132.3) | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (6.72) | | | $ | (3.98) | | | $ | (14.35) | | | $ | (11.89) | |
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 13,063,034 | | | 11,115,005 | | | 12,018,879 | | | 11,130,102 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ Equity (Deficit) |
(In millions, except share amounts, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred Stock | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | Shares | | Amount | | | |
Balances as of July 31, 2021 | 32,575,462 | | | 409.3 | | | | 10,791,253 | | | — | | | 68.9 | | | (674.1) | | | (605.2) | |
Conversion of redeemable preferred stock | (32,575,462) | | | (409.3) | | | | 32,575,462 | | | 0.1 | | | 409.3 | | | — | | | 409.4 | |
Stock issued under stock incentive plan | — | | | — | | | | 201,237 | | | — | | | 1.2 | | | — | | | 1.2 | |
Stock issued as part of IPO, net of offering costs | — | | | — | | | | 17,000,000 | | | — | | | 327.1 | | | — | | | 327.1 | |
Issuance of warrants | — | | | — | | | | — | | | — | | | 6.4 | | | — | | | 6.4 | |
Exercise of warrants | — | | | — | | | | 2,421,375 | | | — | | | 35.5 | | | — | | | 35.5 | |
Reclassification of warrants | — | | | — | | | | — | | | — | | | 1.2 | | | — | | | 1.2 | |
Share-based compensation expense | — | | | — | | | | — | | | — | | | 17.1 | | | — | | | 17.1 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | (87.8) | | | (87.8) | |
Balances as of October 31, 2021 | — | | | $ | — | | | | 62,989,327 | | | $ | 0.1 | | | $ | 866.7 | | | $ | (761.9) | | | $ | 104.9 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of July 31, 2020 | 29,387,695 | | | 365.8 | | | | 10,407,911 | | | — | | | 58.1 | | | (506.3) | | | (448.2) | |
Issuance of redeemable preferred stock | 1,750,226 | | | 22.3 | | | | — | | | — | | | — | | | — | | | — | |
Stock issued under stock incentive plan | — | | | — | | | | 14,282 | | | — | | | 0.1 | | | — | | | 0.1 | |
Share-based compensation expense | — | | | — | | | | — | | | — | | | 2.5 | | | — | | | 2.5 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | (44.3) | | | (44.3) | |
Balances as of October 31, 2020 | 31,137,921 | | | $ | 388.1 | | | | 10,422,193 | | | $ | — | | | $ | 60.7 | | | $ | (550.6) | | | $ | (489.9) | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ Equity (Deficit) |
(In millions, except share amounts, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred Stock | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | Shares | | Amount | | | |
Balances as of January 31, 2021 | 31,137,921 | | | 388.1 | | | | 10,456,521 | | | — | | | 62.7 | | | (589.4) | | | (526.7) | |
Issuance of redeemable preferred stock | 1,437,541 | | | 21.2 | | | | — | | | — | | | — | | | — | | | — | |
Conversion of redeemable preferred stock | (32,575,462) | | | (409.3) | | | | 32,575,462 | | | 0.1 | | | 409.3 | | | — | | | 409.4 | |
Stock issued under stock incentive plan | — | | | — | | | | 535,969 | | | — | | | 3.1 | | | — | | | 3.1 | |
Stock issued as part of IPO, net of offering costs | — | | | — | | | | 17,000,000 | | | — | | | 327.1 | | | — | | | 327.1 | |
Issuance of warrants | — | | | — | | | | — | | | — | | | 6.4 | | | — | | | 6.4 | |
Exercise of warrants | — | | | — | | | | 2,421,375 | | | — | | | 35.5 | | | — | | | 35.5 | |
Reclassification of warrants | — | | | — | | | | — | | | — | | | 1.2 | | | — | | | 1.2 | |
Share-based compensation expense | — | | | — | | | | — | | | — | | | 21.4 | | | — | | | 21.4 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | (172.5) | | | (172.5) | |
Balances as of October 31, 2021 | — | | | $ | — | | | | 62,989,327 | | | $ | 0.1 | | | $ | 866.7 | | | $ | (761.9) | | | $ | 104.9 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of January 31, 2020 | 26,992,271 | | | 330.5 | | | | 10,371,636 | | | — | | | 54.0 | | | (418.3) | | | (364.3) | |
Issuance of redeemable preferred stock | 4,145,650 | | | 57.6 | | | | — | | | — | | | — | | | — | | | — | |
Stock issued under stock incentive plan | — | | | — | | | | 50,557 | | | — | | | 0.4 | | | — | | | 0.4 | |
Share-based compensation expense | — | | | — | | | | — | | | — | | | 6.3 | | | — | | | 6.3 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | (132.3) | | | (132.3) | |
Balances as of October 31, 2020 | 31,137,921 | | | $ | 388.1 | | | | 10,422,193 | | | $ | — | | | $ | 60.7 | | | $ | (550.6) | | | $ | (489.9) | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows |
(In millions, unaudited)
| | | | | | | | | | | |
| Nine Months Ended October 31, |
| 2021 | | 2020 |
OPERATING ACTIVITIES | | | |
Net loss | $ | (172.5) | | | $ | (132.3) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | |
Rental product depreciation and write-offs | 33.9 | | | 43.0 | |
Write-off of rental product sold | 3.7 | | | 11.8 | |
Other depreciation and amortization | 14.6 | | | 18.0 | |
Proceeds from rental product sold | (9.0) | | | (14.4) | |
(Gain) / loss from liquidation of rental product | (0.8) | | | 0.6 | |
Accrual of paid-in-kind interest | 35.4 | | | 25.7 | |
Settlement of paid-in-kind interest | (6.3) | | | — | |
Amortization of debt discount | 4.9 | | | 3.0 | |
Loss on debt extinguishment | 12.2 | | | 0.6 | |
Share-based compensation expense | 21.4 | | | 6.3 | |
Remeasurement of warrant liability | 24.9 | | | — | |
Changes in operating assets and liabilities: | | | |
Prepaid expenses and other current assets | (0.7) | | | (0.8) | |
Operating lease right-of-use assets | 2.5 | | | (2.1) | |
Other assets | (2.6) | | | 1.6 | |
Accounts payable, accrued expenses and other current liabilities | 13.9 | | | 0.3 | |
Deferred revenue and customer credit liabilities | 5.1 | | | (6.3) | |
Operating lease liabilities | (4.9) | | | 11.5 | |
Other liabilities | 0.8 | | | (0.4) | |
Net cash (used in) provided by operating activities | (23.5) | | | (33.9) | |
INVESTING ACTIVITIES | | | |
Purchases of rental product | (17.0) | | | (48.7) | |
Proceeds from liquidation of rental product | 4.8 | | | 0.9 | |
Proceeds from sale of rental product | 9.0 | | | 14.4 | |
Purchases of fixed and intangible assets | (6.2) | | | (19.9) | |
Net cash (used in) provided by investing activities | (9.4) | | | (53.3) | |
FINANCING ACTIVITIES | | | |
Proceeds from issuance of common stock upon IPO, net of offering costs | 331.5 | | | — | |
Proceeds from issuance of redeemable preferred stock | 21.2 | | | 60.4 | |
Proceeds from exercise of stock options under stock incentive plan | 3.1 | | | 0.4 | |
Proceeds from line of credit | — | | | 15.0 | |
Principal repayments on line of credit | — | | | (59.0) | |
Proceeds from long-term debt | — | | | 155.0 | |
Principal repayments on long-term debt | (135.0) | | | — | |
Deferred financing costs paid | (0.2) | | | (3.4) | |
Debt extinguishment costs | (4.7) | | | — | |
Principal payments on financing lease obligations | (0.2) | | | (0.1) | |
Net cash (used in) provided by financing activities | 215.7 | | | 168.3 | |
| | | |
Net increase in cash and cash equivalents and restricted cash | 182.8 | | | 81.1 | |
Cash and cash equivalents and restricted cash at beginning of period | 109.2 | | | 41.9 | |
Cash and cash equivalents and restricted cash at end of period | $ | 292.0 | | | $ | 123.0 | |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONDENSED CONSOLIDATED BALANCE SHEETS | | | |
Cash and cash equivalents | $ | 278.7 | | | $ | 109.0 | |
Restricted cash, current | 5.6 | | | 3.5 | |
Restricted cash, noncurrent | 7.7 | | | 10.5 | |
Total cash and cash equivalents and restricted cash | $ | 292.0 | | | $ | 123.0 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | |
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows |
Supplemental Cash Flow Information
(In millions, unaudited)
| | | | | | | | | | | |
| Nine Months Ended October 31, |
| 2021 | | 2020 |
Cash payments (receipts) for: | | | |
Fixed operating leases payments (reimbursements), net | $ | 12.0 | | | $ | (0.7) | |
Fixed assets received in the prior period | 0.5 | | | 2.1 | |
Rental product received in the prior period | 3.6 | | | 3.7 | |
Non-cash financing and investing activities: | | | |
Financing leases right-of-use asset amortization | $ | 0.2 | | | $ | 0.1 | |
ROU assets obtained in exchange for lease liabilities | 0.7 | | | — | |
Adjustments to ROU assets or lease liabilities due to modification or other reassessment events | 0.1 | | | 5.2 | |
Purchases of fixed assets not yet settled | 0.7 | | | 0.5 | |
Purchases of rental product not yet settled | 10.4 | | | 6.8 | |
IPO offering costs not yet settled | 4.4 | | | — | |
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
1.Business
Description of Business
Rent the Runway, Inc.’s (the “Company”) mission is to power women to feel their best every day. Launched in November 2009, the Company has built the world’s first and largest shared designer closet with approximately 19,000 styles by over 780 brand partners. The Company gives customers access to its “unlimited closet” through its subscription offering or the ability to rent a-la-carte through its reserve offering (“Reserve”). The Company’s corporate headquarters is located in Brooklyn, New York and the operational facilities are located in Secaucus, New Jersey, and Arlington, Texas. Its wholly-owned subsidiary, Rent the Runway Limited (the “Subsidiary”), is located in Galway, Ireland, and is focused on software development and support activities.
All revenue is currently generated in the United States. Substantially all revenue is derived from rental subscription fees and a-la-carte rental fees, with a portion derived from the sale of apparel and accessories and other fees.
2.Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its Subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Certain amounts in the financial statements have been reclassified to conform to the current presentation.
The unaudited interim condensed consolidated financial statements and related disclosures have been prepared by management on a basis consistent with the annual consolidated financial statements and, in the opinion of management, include all adjustments necessary for a fair statement of the results for the interim periods presented.
The results for the three months and nine months ended October 31, 2021 are not necessarily indicative of the operating results expected for the year ended January 31, 2022 or any future period. Certain information and notes normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted under the Securities and Exchange Commission’s (the “SEC”) rules and regulations. Accordingly, the unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended January 31, 2021, which can be found in the Company’s final prospectus dated October 27, 2021 filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”).
Fiscal Year
The Company operates on a fiscal calendar ending January 31. All references to fiscal year 2020 reflect the results of the 12-month period ending January 31, 2021. All references to fiscal year 2021 reflect the results of the 12-month period ending January 31, 2022.
Segment Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer is the Company’s CODM. The Company has one operating and reportable segment as the CODM reviews financial information on a consolidated basis for purposes of making operating decisions, allocating
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
resources, and evaluating financial performance. All revenue is attributed to customers based in the United States and substantially all the Company’s long-lived assets are located in the United States.
Initial Public Offering
On October 27, 2021, the Company completed its initial public offering (“IPO”) and the Company’s Class A common stock began public trading on the Nasdaq Stock Market LLC under the symbol “RENT”. In connection with the IPO, the Company issued and sold 17,000,000 shares of its Class A common stock at a public offering price of $21.00 per share. The Company received proceeds of $327.1 million from the IPO which are net of underwriting discounts of $24.1 million and offering costs payable by the Company of $5.8 million (of which $1.4 million were paid as of October 31, 2021). Offering costs, including legal, accounting, printing and other costs directly related to the IPO have been recorded in Additional paid-in capital against the proceeds from the IPO on the Company’s condensed consolidated balance sheet.
At the closing of the IPO, the Company’s then outstanding redeemable preferred stock converted into 32,575,462 shares of the Company’s Class A common stock. The carrying value of the redeemable preferred stock of $409.3 million was reclassified to common stock and additional paid-in-capital.
In connection with the effectiveness of the Company’s IPO registration statement on Form S-1 (the “registration statement”), the Company recognized $14.4 million in stock-based compensation expense for (i) certain RSUs that contain both service-based and liquidity based vesting conditions satisfied upon the effectiveness of the registration statement and (ii) the fully vested portion of certain RSU awards that were granted upon the effectiveness of the IPO.
In connection with the IPO, the Company adopted an amended charter and adopted amended bylaws. The amended charter authorized capital stock consisting of:
•300,000,000 shares of Class A common stock, par value $0.001 per share;
•50,000,000 shares of Class B common stock, par value $0.001 per share; and
•10,000,000 shares of preferred stock, par value $0.001 per share.
Holders of the Class A are entitled to one vote per share, and the holders of Class B common stock are entitled to twenty votes per share. Immediately after the effectiveness of the amended charter, 2,939,928 shares of Class A common stock held by the Company’s co-founders were exchanged for an equivalent number of shares of Class B common stock. In addition, the terms of certain outstanding equity awards held by the Company’s cofounders were modified to provide that such awards are exercisable or settle into shares of Class B common stock.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience, market conditions, and on various other assumptions that are believed to be reasonable. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful life and salvage value of rental product, incremental borrowing rate to determine lease liabilities, and the valuation of share-based compensation and warrants.
As of October 31, 2021, the effects of the ongoing COVID-19 pandemic on the Company’s business, results of operations, and financial condition continue to evolve. As a result, many of the Company’s estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may change materially in future periods.
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
Concentrations of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash investments with high credit quality financial institutions. The Company believes no significant credit risk exists with respect to these financial instruments.
No single customer accounted for more than 5% of the Company’s revenue during the three or nine months ended October 31, 2021 and 2020.
Fair Value Measurements and Financial Instruments
Fair value accounting is applied for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis, at least annually. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity, associated with the inputs to the valuation of these assets or liabilities, are as follows:
Level 1: Observable inputs, such as quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3: Unobservable inputs, in which there is little or no market data which require the Company to develop its own assumptions.
The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The carrying amounts of financial instruments, including cash, cash equivalents and restricted cash approximate fair value as of October 31, 2021 and January 31, 2021, due to the relatively short duration of these instruments. The carrying value of the Company’s long-term debt instruments approximate their fair values as of October 31, 2021 and January 31, 2021.
Rental Product, Net
The Company considers rental product to be a long-term productive asset and, as such, classifies it as a noncurrent asset on the condensed consolidated balance sheets.
Rental product is stated at cost, less accumulated depreciation. The Company depreciates rental product, less an estimated salvage value, over the estimated useful lives of the assets using the straight-line method. The useful life is determined based on historical trends and an assessment of any future changes. The salvage value considers the historical trends and projected liquidation proceeds for the assets. The estimated useful lives and salvage values are described below:
| | | | | | | | | | | |
| Useful Life | | Salvage Value |
Apparel | 3 years | | 20 | % |
Accessories | 2 years | | 30 | % |
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
In accordance with its policy, the Company reviews the estimated useful lives and salvage values of rental product on an ongoing basis.
Rental product is classified as held for sale and written down to salvage value at the time it is no longer considered rentable. The value of rental product held for sale as of October 31, 2021 and January 31, 2021 was $2.7 million and $6.4 million, net, respectively. The accelerated depreciation related to rental product held for sale was $0.9 million and $1.6 million for the three months ended October 31, 2021 and October 31, 2020, respectively, and $3.2 million and $6.6 million, for the nine months ended October 31, 2021 and October 31, 2020, respectively. The accelerated depreciation is presented on the condensed consolidated statements of operations within rental product depreciation and revenue share.
The Company records write-offs for the remaining net book value of rental product sold, and separately records write-offs for losses on lost, damaged, and unreturned apparel and accessories. These write-offs are presented on the condensed consolidated statements of operations within rental product depreciation and revenue share.
The Company offers its customers an opportunity to purchase items prior to the end of their estimated useful life. In such instances, the Company considers the disposal of such rental product to be a sale and, as such, records the proceeds as other revenue and the net book value of the items at the time of sale as rental product depreciation in the condensed consolidated statements of operations. The cash proceeds and the cost of rental product are classified as cash flows from investing activities on the condensed consolidated statements of cash flows, because the predominant activity of the rental product purchased is to generate subscription and a-la-carte rental revenue. The cash proceeds associated with these sales were $9.0 million and $14.4 million for the nine months ended October 31, 2021 and 2020, respectively.
Revenue Recognition
Subscription and a-la-carte rental fees (“Subscription and Reserve rental revenue”) are recognized in accordance with Accounting Standard Update (“ASU”) 2016-02, Leases, Topic 842 (“ASC 842”). Other revenue, primarily related to the sale of rental product, is recognized under ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASC 606”) at the date of delivery of the product to the customer. Other revenue represented 8.0% and 14.1% of total revenue for the three months ended October 31, 2021 and 2020, respectively, and 8.8% and 13.9% of total revenue for the nine months ended October 31, 2021 and 2020, respectively.
Revenue is presented net of promotional discounts. Promotional discounts are recognized in accordance with either ASC 842 or ASC 606, based on the guidance applied to the rental fees or product sales to which the promotional discounts are related. Revenue is presented net of taxes that are collected from customers and remitted to governmental authorities.
Revenue is also presented net of customer credits and refunds. A liability is recognized at the time a customer credit or a gift card is issued, and revenue is recognized upon redemption of the credit or gift card. The Company’s customer credit liability is presented on the condensed consolidated balance sheets. During the three months ended October 31, 2021 and October 31, 2020, $0.7 million and $0.8 million of credits included in the customer credit liability as of July 31, 2021 and July 31, 2020, respectively, were redeemed. During the nine months ended October 31, 2021 and October 31, 2020, $1.6 million and $1.0 million of credits included in the customer credit liability as of January 31, 2021 and January 31, 2020, respectively, were redeemed. Customer credits and gift cards do not have expiration dates. Over time, a portion of these instruments is not redeemed. The Company continues to maintain the full liability for the unredeemed portion of the credits and gift cards when the Company has any legal obligation to remit such credits to government authorities in relevant jurisdictions.
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
Subscription and Reserve Rental Revenue
The Company recognizes rental revenue from subscription and a-la-carte rental fees in accordance with ASC 842. Subscription fees are recognized ratably over the subscription period, commencing on the date the subscriber enrolls in the rental program. The fees are collected upon enrollment. The subscription automatically renews on a monthly basis until cancelled by the customer. Subscribers can pause or cancel their subscriptions at any time.
The Company recognizes fees for a-la-carte rentals ratably over the rental period, which starts with the date of delivery of rental product to the customer. A-la-carte rental orders can be placed up to 4 months prior to the rental start date and the customer’s payment form is charged upon order confirmation. The Company defers recognizing the fees and any related promotions for a-la-carte rentals until the date of delivery, and then recognizes those fees ratably over the 4-or 8-day rental period.
The Company accrues for credits and refunds issued subsequent to the balance sheet date that relate to rentals prior to the balance sheet date. These amounts were not material as of October 31, 2021 and January 31, 2021.
Other Revenue
Other revenue consists primarily of revenue from the sale of rental product. The Company recognizes revenue from the sale of rental product in accordance with ASC 606. Sale of rental product occurs in two forms: (i) liquidation at the end of the useful life and; (ii) customer purchase of rental product at a discounted price, calculated as a percentage of retail value. Payment is due upon order confirmation and there is no financing component. The single performance obligation associated with rental product sales is generally satisfied upon delivery of the rental product to the customer. The Company does not have any material contractual receivables, assets, or liabilities with respect to other revenue as of October 31, 2021 and January 31, 2021.
Share-Based Compensation
The Company recognizes all employee share-based compensation as an expense in the condensed consolidated financial statements. Equity classified awards are measured at the grant date fair value of the award. The Company estimates grant date fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options is recognized as compensation expense on a straight-line basis over the requisite service period of the award. Determining the fair value of options at the grant date requires judgment, including the expected term that stock options will be outstanding prior to exercise, the associated volatility, and the expected dividend yield. The fair value of common stock post-IPO is based on the closing price of the common stock on the date of grant as reported on the Nasdaq Global Select Market. Upon grant of awards, the Company also estimates an amount of forfeitures that will occur prior to vesting.
The Company has granted restricted stock units (“RSUs”) which vest only upon satisfaction of both time-based service and liquidity-based conditions. The liquidity-based vesting condition was satisfied upon the effectiveness of the Company’s IPO. Share-based compensation related to any remaining time-based service after the qualifying event is recorded over the remaining requisite service period. The Company records share-based compensation expense for RSUs on an accelerated attribution method over the requisite service period, which is generally 4 years, and only if liquidity-based conditions are considered probable to be satisfied. See Note 11 for a description of the accounting for share-based awards.
Insurance Proceeds
During the nine months ended October 31, 2021, the Company recorded an insurance recovery of $4.0 million, related to a network issue during the year ended January 31, 2020. This amount is recorded in other income / (expense), net in the condensed consolidated statements of operations.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
Recently Issued and Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement. The ASU also requires amortization expense be recognized in the same line item as the related fees associated with the arrangement and related capitalized implementation costs be presented in the same line as the prepayment for the hosting fee. This standard is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those years, and early adoption is permitted. The Company adopted this standard on February 1, 2021, and the adoption of this standard did not have a material impact on the unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also improves the consistency in application of other areas by clarifying and amending existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2021, and interim periods within those years, and early adoption is permitted. Certain amendments of this standard may be adopted on a retrospective basis, modified retrospective basis or prospective basis. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU No 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. This standard is effective for annual reporting periods beginning after December 15, 2022, and interim periods within those years, and early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
3.Liquidity and Impact of COVID-19 Pandemic
The Company has incurred a net loss from operations since inception and has historically relied upon debt and equity financing to fund its operations. In addition, the COVID-19 pandemic has had a significant adverse impact on the Company’s business. As a result, the Company experienced a significant decline in active subscribers, subscription revenue and a-la-carte rental revenue and a significant increase in net loss in fiscal year 2020. While the Company has experienced active subscriber revenue growth during the nine months ended October 31, 2021, it is uncertain when subscription revenue and a-la-carte rental revenue will return to pre-COVID-19 levels. To the extent that the strength or pace of the Company’s COVID-19 recovery lags from what is currently anticipated, the Company has established plans to preserve existing cash liquidity, which could include reducing labor, operating expenses and/or capital expenditures.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
In April and May 2021, the Company sold additional shares of Series G redeemable preferred stock in exchange for $20.1 million.
In October 2021, the Company completed its IPO and issued 17,000,000 shares of its Class A common stock at $21.00 per share. The Company received proceeds of $327.1 million which are net of the underwriting discounts of $24.1 million and direct offering costs payable by the Company of $5.8 million.
As of October 31, 2021 and January 31, 2021, the Company held cash and cash equivalents of $278.7 million and $95.3 million, respectively. The Company believes that its existing cash resources will be sufficient to meet the costs of the business, debt service obligations, and working capital requirements for the twelve months from the issuance date of these condensed consolidated financial statements. As such, the Company believes that it will have sufficient liquidity from cash on-hand and future operations to satisfy its obligations and to comply with its amended debt covenants for at least the next twelve months from the date these financial statements are available to be issued.
4.Rental Product, Net
Rental product consisted of the following:
| | | | | | | | | | | |
| October 31, | | January 31, |
| 2021 | | 2021 |
| | | |
Apparel | $ | 166.1 | | | $ | 183.8 | |
Accessories | 7.3 | | | 8.9 | |
| 173.4 | | | 192.7 | |
Less accumulated depreciation | (93.5) | | | (95.1) | |
Rental product, net | $ | 79.9 | | | $ | 97.6 | |
Depreciation and write-offs related to rental product, including write-offs of rental products sold, was $13.7 million and $16.8 million for the three months ended October 31, 2021 and 2020, respectively, and $37.6 million and $54.8 million for the nine months ended October 31, 2021 and 2020, respectively.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
5.Long-Term Debt
Summary
The following table summarizes the Company’s line of credit and long-term debt outstanding as of October 31, 2021 and January 31, 2021:
| | | | | | | | | | | |
| October 31, | | January 31, |
| 2021 | | 2021 |
| | | |
Bank of America Line of Credit | $ | — | | | $ | — | |
Temasek Facility principal outstanding | 271.6 | | | 230.0 | |
Add: payment-in-kind interest | 0.1 | | | 62.2 | |
Less: unamortized debt discount | (15.3) | | | (1.9) | |
Temasek Facility, net | 256.4 | | | 290.3 | |
| | | |
Ares Facility principal outstanding | — | | | 75.0 | |
Add: payment-in-kind interest | — | | | 1.6 | |
Less: unamortized debt discount | — | | | (10.9) | |
Ares Facility, net | — | | | 65.7 | |
Total net carrying value | 256.4 | | | 356.0 | |
Less: current portion of long-term debt | — | | | (0.9) | |
Total noncurrent line of credit and long-term debt | $ | 256.4 | | | $ | 355.1 | |
Bank of America Line of Credit
In April 2019, the Company entered into a Credit Agreement with Bank of America and an asset-backed revolving credit facility (the “Line of Credit”) was put in place with Bank of America as agent and a lender, and Barclays Bank PLC and Goldman Sachs Bank USA as additional lenders. The Line of Credit provided for revolving advances up to an aggregate amount of $100.0 million, with an incremental uncommitted accordion of $50.0 million.
The Line of Credit contained various events of default, the occurrence of which could have resulted in termination of the lenders’ commitments to lend and the acceleration of all obligations under the Line of Credit. In October 2020, the Company entered into a new secured term loan senior credit agreement with Ares Corporate Opportunities Fund V, L.P. (the “Ares Facility” described below) and repaid all outstanding principal on the Line of Credit, and terminated the credit commitments. During the three months ended October 31, 2020, the Company recognized a $0.6 million loss on debt extinguishment related to this transaction.
Temasek Facility
In July 2018, the Company entered into a subordinated, junior lien term loan agreement with Double Helix Pte Ltd. as administrative agent for Temasek Holdings (the “Temasek Facility”). The Company drew $100.0 million under the Temasek Facility at closing with the ability to draw an additional $100.0 million in multiple drawings at any time prior to July 23, 2020 (the “Initial Temasek Commitments”) based on meeting certain performance and financial tests at each draw.
In November 2019, the Company drew an additional $50.0 million of the Initial Temasek Commitments and amended the Temasek Facility to include an additional $30.0 million of committed availability (the “Subsequent Temasek Commitments”). In March 2020, the Company drew the remaining $50.0 million of the Initial Temasek Commitments and the $30.0 million of the Subsequent Temasek Commitments.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
Prior to the termination of the Ares Facility, Temasek Facility was both lien-subordinated and payment-subordinated to the Ares Facility (described below) pursuant to a Subordination Agreement entered into in October 2020 that functions as both a secured lender intercreditor agreement and a subordination agreement (for payment subordination); the Ares Facility was senior debt, and the Temasek facility was subordinated debt with respect to the Ares Facility.
The Initial Temasek Commitments had an interest rate of 15% per annum that accrued as noncash interest. The Subsequent Temasek Commitments had a cash interest rate of 13% per annum, payable quarterly. The Temasek Facility required mandatory prepayment upon certain defined triggering events as well as optional prepayments, but such mandatory prepayments were not required to be made while the Ares Facility was outstanding.
In October 2021, the Company used proceeds from the IPO to pay down the Subsequent Temasek Commitments of $30.0 million outstanding principal and interest in full. Concurrently, the Company entered into an amendment to the Temasek Facility (the “Temasek Facility Amendment”). The Temasek Facility as amended by the Temasek Facility Amendment is referred to as the “Amended Temasek Facility”. This transaction was accounted for as a debt modification. The terms of the Temasek Facility Amendment provides for, among other things, (i) an extension of the maturity to October 2024, (ii) an outstanding principal under the Amended Temasek Facility of $271.6 million (with no additional debt proceeds having been funded and after giving effect to the repayment described below), and (iii) amended interest rate of 12% with up to 5% payable in kind. On the effective date of the Temasek Facility Amendment, the Company paid down an additional $30.0 million of the outstanding principal of the Amended Temasek Facility, for a total of $60.0 million principal paydown on the Temasek Facility and Amended Temasek Facility.
The Amended Temasek Facility requires the Company to comply with specified nonfinancial covenants including, but not limited to, restrictions on the incurrence of debt, payment of dividends, making of investments, sale of assets, mergers and acquisitions, modifications of certain agreements and its fiscal year, and granting of liens. Additionally, the Amended Temasek Facility includes a minimum liquidity maintenance covenant of $50.0 million and amends the call protection applicable to the loans outstanding thereunder including the ability to refinance at a lower penalty within 12 months from the date of the amendment. The Amended Temasek Facility contains various events of default, the occurrence of which could result in the acceleration of obligations under each respective facility.
In July 2018, in connection with the Initial Temasek Commitments, the Company recorded a debt discount of $11.7 million, of which $1.4 million related to closing fees paid and $10.3 million related to the allocation of proceeds to the warrants issued. Please refer to Note 10 for the details of the warrants outstanding in relation to the Temasek Facility. These amounts were accreted to the principal amount of the Temasek Facility through the recognition of noncash interest expense. The effective interest rate for the Temasek Facility for the period from the date of issuance through the date of the Temasek Facility Amendment was 15.95%. As of October 31, 2021 the debt discount associated with the Initial Temasek Commitments was fully accreted.
In October 2021, in connection with the Amended Temasek Facility, the Company recorded a debt discount of $15.3 million, of which $0.2 million related to lender fees, $5.3 million related to the allocation of proceeds to warrants issued in relation to the Amended Temasek Facility, $1.0 million related to the extension of the term of warrants issued in relation to the Temasek Facility, and $8.8 million related to fees incurred to amend the Amended Temasek Facility. These amounts are being accreted to the principal amount of the Amended Temasek Facility through the recognition of noncash interest expense. The effective interest rate for the Amended Temasek Facility for the period from the date of issuance through October 31, 2021 was 14.29%.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
The Company determined that all of the embedded features of the Temasek Facility and Amended Temasek Facility were clearly and closely related to the debt host and did not require bifurcation as a derivative liability, or the fair value of the feature was immaterial to the Company’s condensed consolidated financial statements.
Ares Facility
In October 2020, the Company entered into the Ares Facility with Alter Domus (US) LLC as administrative agent for Ares Corporate Opportunities Fund V, L.P. (“Ares”). The Company received gross proceeds equal to $75.0 million (the “Ares Original Principal”). In conjunction with the incurrence of the Ares Facility, the Company received proceeds from Ares of $25.0 million for the issuance of 1,695,955 shares of Series G redeemable preferred stock. The total transaction resulted in the receipt of $100.0 million in exchange for the Ares Facility, Series G redeemable preferred stock and issuance of common stock warrants (the “Ares Financing Transaction”).
The Ares Facility had an interest rate of 8% per annum accrued as noncash interest. The Ares Facility required quarterly principal payments of 0.25% of the original principal amount. The remaining principal balance would have become due in 2023. The Ares Facility required an exit payment of $1.5 million which was to be paid once the Ares Facility matured or the Ares Original Principal was paid in full.
The Ares Facility was secured by a first priority lien over substantially all assets of the Company. The Ares Facility required the Company to comply with substantially the same specified nonfinancial covenants as the Temasek Facility, including but not limited to, restrictions on the incurrence of debt, making of investments, the payment of dividends, sale of assets, mergers and acquisitions, modifications of certain agreements and its fiscal year, and granting of liens. The Ares Facility also required the Company to meet specified financial covenants that are measured based on pre-defined consolidated EBITDA thresholds. The Ares Facility required mandatory prepayment upon defined triggering events as well as permitting optional prepayments and certain of the mandatory prepayment triggering items are subject to a prepayment premium. The Ares Facility contained various events of default, the occurrence of which could result in the acceleration of obligations under the Ares Facility.
The Company allocated the debt discount and debt issuance costs amongst the various instruments issued in the Ares Financing Transaction. The amount allocated as a debt discount was $10.4 million, of which $1.7 million related to fees paid to the lender and $8.7 million related to the allocation of proceeds to the warrants issued. The Company also recorded debt issuance costs of $1.6 million related to other third-party costs incurred in obtaining the Ares Facility. Please refer to Note 10 for the details of the warrants issued in relation to the Ares Financing Transaction. These amounts were being accreted to the principal amount of the Ares Facility through the recognition of noncash interest expense. The effective interest rate for the period from the date of issuance through the date of repayment was 13.35%.
The Company determined that all of the embedded features of the Ares Facility were either clearly and closely related to the debt host and did not require bifurcation as a derivative liability, or the fair value of the feature was immaterial to the Company’s condensed consolidated financial statements.
In October 2021, the Company paid down the Ares Facility outstanding principal and accrued interest in full and terminated the Ares Facility. The Company recognized a $12.2 million loss on debt extinguishment related to this transaction.
Covenants
The Company was in compliance with all applicable financial and nonfinancial covenants as of October 31, 2021.
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
6.Income Taxes
The Company’s provision or benefit from income taxes in interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The estimate of the annual effective income tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year.
The Company continues to maintain a full valuation allowance on all United States net deferred tax assets for all periods presented.
The amount of unrecognized tax benefits as of October 31, 2021 and January 31, 2021 was $0.7 million and $0.6 million, respectively. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized benefits relating to the Company’s tax position is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain and a reasonable estimate of the range of gross unrecognized tax benefits, excluding interest and penalties, that could potentially be reduced during the next 12 months cannot be made at this time.
7.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | | | | |
| October 31, | | January 31, |
| 2021 | | | 2021 |
Revenue share payable | 7.1 | | | | $ | 4.3 | |
Accrued operating and general expenses | 9.5 | | | | 3.8 | |
Accrued payroll related expenses | 4.6 | | | | 3.4 | |
Sales and other taxes | 1.9 | | | | 1.0 | |
Current portion of long-term debt | — | | | | 0.9 | |
Gift card liability | 0.6 | | | | 0.7 | |
Accrued expenses and other current liabilities | $ | 23.7 | | | | $ | 14.1 | |
8.Fair Value Measurements
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are remeasured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
Observable inputs are based on market data obtained from independent sources. Unobservable inputs reflect the Company’s assessment of the assumptions market participants would use to value certain financial instruments. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | October 31, | | January 31, |
Description | | Level | | 2021 | | 2021 |
| | | | | | |
Liabilities: | | | | | | |
Warrant liability – Common stock warrants | | 3 | | $ | — | | | $ | 11.2 | |
Warrant liability – Preferred stock warrants | | 3 | | — | | | 0.6 | |
Total liabilities | | | | $ | — | | | $ | 11.8 | |
The warrant liabilities are valued using a Black-Scholes option pricing model. The assumptions used in preparing the model include estimates such as volatility, contractual terms, dividend yield, expiration dates and risk-free interest rates. Prior to the Company’s IPO, this valuation model used unobservable market share price input on a recurring basis, and therefore was considered a Level 3 liability.
The following table presents a roll forward of the fair value of the level 3 liabilities for the nine months ended October 31, 2021 and October 31, 2020:
| | | | | |
| Warrant Liability |
Balance as of January 31, 2020 | $ | 0.6 | |
Issuance of warrants | $ | 11.6 | |
Balance as of October 31, 2020 | $ | 12.2 | |
| |
Balance as of January 31, 2021 | $ | 11.8 | |
Issuance of warrants | 0.5 | |
Changes in estimated fair value | 24.4 | |
Exercise of warrants | (35.5) | |
Reclassification to equity-classified warrants | (1.2) | |
Balance as of October 31, 2021 | $ | — | |
The Company issued a warrant for 1,651,701 shares of common stock related to the Ares Financing Transaction with a fair value at issuance of $11.6 million and there were no changes in the estimated fair value, exercise or reclassification of the liability-classified warrants during the nine months ended October 31, 2020.
The Company issued a warrant for 40,828 shares of common stock with a fair value at issuance of $0.5 million, included in the loss on warrant liability revaluation, net on the condensed consolidated statement of operations for the nine months ended October 31, 2021.
The warrants for 1,651,701 and 40,828 shares of common stock were automatically exercised and converted to an aggregate of 1,691,723 shares of Class A Common Stock through cashless exercise upon completion of the Company’s IPO. These warrants were adjusted to a fair value of $35.5 million immediately prior to exercise.
The warrants for an aggregate of 88,037 shares of Series D redeemable preferred stock were converted to warrants for shares of Class A common stock as of the IPO date. These warrants were reclassified to stockholders’ equity as of the effective date of the IPO, as the redemption provision from the shares
| | |
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
underlying these warrants was eliminated. These warrants were adjusted to fair value of $1.2 million immediately prior to reclassification.
The following table presents the key assumptions used in the Black-Scholes option pricing model for the valuation of the liability-classified warrants as of January 31, 2021. There were no outstanding liability-classified warrants as of October 31, 2021.
| | | | | | | | |
| | January 31, |
| | 2021 |
Valuation assumptions: | | |
Expected dividend yield | | — | % |
Expected volatility | | 87.68 | % |
Expected term (in years) | | 6.75 |
Risk-free interest rate | | 0.79 | % |
9.Redeemable Preferred Stock
During the nine months ended October 31, 2020, the Company sold 4,145,650 shares of Series G redeemable preferred stock in exchange for $57.6 million. During the nine months ended October 31, 2021, the Company sold an additional 1,437,541 shares of Series G redeemable preferred stock for $21.2 million. Upon consummation of the IPO, the Company accreted the carrying value of $409.3 million of the redeemable preferred stock to the liquidation value of $414.9 million and the Company’s 32,575,462 outstanding shares of redeemable preferred stock were converted into 32,575,462 shares of the Company’s Class A common stock. The accretion to liquidation value did not have a net impact on the Company’s additional paid-in capital.
10.Stockholders’ Equity
Common Stock
Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to twenty votes per share, as well as dividends if and when declared by the Board of Directors and, upon liquidation, dissolution, winding up or other liquidation event of the Company, all assets available for distribution to common stockholders. There are no redemption provisions with respect to common stock.
Preferred Stock
Upon the IPO, the Company authorized 10,000,000 shares of preferred stock, with a par value of $0.001 per share. No shares were issued or outstanding as of October 31, 2021.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements |
(Dollars in millions, except share and per share amounts)
Warrants
As of October 31, 2021 and January 31, 2021, the Company had the following outstanding warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2021 |
Outstanding Warrants | Date Issued | | Number of Shares | | Class of Shares | | Exercise Price ($) | | Fair Value at Issuance |
Equity classified: | | | | | | | | | |
TriplePoint | Nov-16 | | 82,891 | | | Common | | 7.54 | | | $ | 0.3 | |
TriplePoint | Jun-17 | | 18,236 | | | Common | | 7.54 | | | 0.1 | |
TriplePoint | Sep-17 | | 14,920 | | | Common | | 7.54 | | | 0.1 | |
TriplePoint | Jan-18 | | 16,578 | | | Common | | 7.54 | | | 0.1 | |
TriplePoint | Apr-18 | | 16,578 | | | Common | | 7.54 | | | 0.1 | |
TriplePoint | Nov-15 | | 35,215 | | | Common | | 17.04 | | | 0.2 | |
TriplePoint | Jun-16 | | 28,172 | | | Common | | 17.04 | | | 0.2 | |
TriplePoint | Sep-16 | | 24,650 | | | Common | | 17.04 | | | 0.1 | |
Double Helix (Temasek) | Jul-18 | | 730,000 | | | Common | | 27.40 | | | 1.3 | |
Double Helix (Temasek) | Oct-21 | | 394,343 | | | Common | | 21.00 | | | 5.3 | |
| | | 1,361,583 | | | | | | | 7.8 | |
There were no outstanding liability-classified warrants as of October 31, 2021.