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 April 30, 2023
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
____________________________
____________________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||
(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 | ||||||
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 ☐
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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, 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.
| Large 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 64,236,581 shares of Class A common stock and 3,085,148 shares of Class B common stock as of June 2, 2023.
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Table of Contents
| Page | ||||||||
| Part I | ||||||||
| Part II | ||||||||
Unless the context otherwise requires, we use the terms the “Company,” “RTR,” “Rent the Runway,” “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.
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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 global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.
•We rely on consumer discretionary spending and have been, and may in the future be, adversely affected by economic downturns and other macroeconomic conditions or trends.
•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.
•We face risks arising from the restructuring of our operations, which could adversely affect our financial condition, results of operations, cash flows, or business reputation.
•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.
•The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business. Other future pandemics or public health crises may have a similar adverse impact on our business.
•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 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, anti-corruption 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.
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•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.
•We face risks associated with our indebtedness and potential need for additional capital, including that financing or refinancing may not be available on acceptable terms or at all.
•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 the 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.
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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 “aims,” “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, share-based compensation, business strategy and initiatives, the design and expected timing of the launch of an AI-driven search beta, sustainability initiatives, business plans, impact from our September 2022 restructuring plan and other cost savings initiatives, product acquisition expectations, our proposed option exchange, impacts from our five-item base subscription offering, 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 April 30, 2023. 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.
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Part I - Financial Information
Item 1. Financial Statements
| Page | |||||
| Notes to Condensed Consolidated Financial Statements | |||||
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RENT THE RUNWAY, INC. Condensed Consolidated Balance Sheets | ||
| April 30, | January 31, | ||||||||||
| 2023 | 2023 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash, current | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
Restricted cash | |||||||||||
Rental product, net | |||||||||||
Fixed assets, net | |||||||||||
Intangible assets, net | |||||||||||
Operating lease right-of-use assets | |||||||||||
Other assets | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities and Stockholders’ Equity (Deficit) | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses and other current liabilities | |||||||||||
Deferred revenue | |||||||||||
Customer credit liabilities | |||||||||||
Operating lease liabilities | |||||||||||
Total current liabilities | |||||||||||
Long-term debt, net | |||||||||||
Operating lease liabilities | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and Contingencies (Note 13) | |||||||||||
Stockholders’ equity (deficit) | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
Preferred stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ( | |||||||||
Total stockholders’ equity (deficit) | ( | ( | |||||||||
Total liabilities and stockholders’ equity (deficit) | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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RENT THE RUNWAY, INC. Condensed Consolidated Statements of Operations | ||
(In millions, except share and per share amounts, unaudited)
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
Revenue: | |||||||||||
Subscription and Reserve rental revenue | $ | $ | |||||||||
Other revenue | |||||||||||
Total revenue, net | |||||||||||
Costs and expenses: | |||||||||||
Fulfillment | |||||||||||
Technology | |||||||||||
Marketing | |||||||||||
General and administrative | |||||||||||
Rental product depreciation and revenue share | |||||||||||
Other depreciation and amortization | |||||||||||
Total costs and expenses | |||||||||||
Operating loss | ( | ( | |||||||||
Interest income / (expense), net | ( | ( | |||||||||
Net loss before income tax benefit / (expense) | ( | ( | |||||||||
Income tax benefit / (expense) | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | $ | ( | |||||||
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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RENT THE RUNWAY, INC. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | ||
(In millions, except share amounts, unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balances as of January 31, 2023 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Stock issued under stock incentive plan | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balances as of April 30, 2023 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Balances as of January 31, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Stock issued under stock incentive plan | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balances as of April 30, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows | ||
(In millions, unaudited)
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
OPERATING ACTIVITIES | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
Rental product depreciation and write-offs | |||||||||||
Write-off of rental product sold | |||||||||||
Other depreciation and amortization | |||||||||||
| (Gain) / loss from lease termination and write-off of fixed and intangible assets | |||||||||||
Proceeds from rental product sold | ( | ( | |||||||||
(Gain) / loss from liquidation of rental product | ( | ||||||||||
Accrual of paid-in-kind interest | |||||||||||
Amortization of debt discount | |||||||||||
Share-based compensation expense | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Operating lease right-of-use assets | |||||||||||
Other assets | |||||||||||
Accounts payable, accrued expenses and other current liabilities | ( | ( | |||||||||
Deferred revenue and customer credit liabilities | |||||||||||
Operating lease liabilities | ( | ( | |||||||||
Other liabilities | ( | ||||||||||
Net cash (used in) provided by operating activities | ( | ( | |||||||||
INVESTING ACTIVITIES | |||||||||||
Purchases of rental product | ( | ( | |||||||||
Proceeds from liquidation of rental product | |||||||||||
Proceeds from sale of rental product | |||||||||||
Purchases of fixed and intangible assets | ( | ( | |||||||||
Net cash (used in) provided by investing activities | ( | ( | |||||||||
FINANCING ACTIVITIES | |||||||||||
| Other financing payments | ( | ( | |||||||||
Net cash (used in) provided by financing activities | ( | ( | |||||||||
Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ( | |||||||||
Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows | ||
(In millions, unaudited)
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Cash and Cash Equivalents and Restricted Cash to the Condensed Consolidated Balance Sheets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash, current | |||||||||||
Restricted cash, noncurrent | |||||||||||
Total cash and cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental Cash Flow Information: | |||||||||||
Cash payments (receipts) for: | |||||||||||
| Fixed operating lease payments (reimbursements), net | $ | $ | |||||||||
| Fixed assets and intangibles received in the prior period | |||||||||||
| Rental product received in the prior period | |||||||||||
| Non-cash financing and investing activities: | |||||||||||
| Financing lease right-of-use asset amortization | $ | $ | |||||||||
| ROU assets obtained in exchange for lease liabilities | |||||||||||
| Purchases of fixed assets and intangibles not yet settled | |||||||||||
| Purchases of rental product not yet settled | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 thousands of styles by hundreds of brand partners. The Company gives customers access to its “unlimited closet” through its subscription offering (“Subscription”) 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, 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 accompanying unaudited 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 ended April 30, 2023 are not necessarily indicative of the operating results expected for the year ending January 31, 2024 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, 2023, which can be found in the Company’s Annual Report on Form 10-K filed with the SEC on April 13, 2023.
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
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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 April 30, 2023, the effects of the macroeconomic environment 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.
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 months ended April 30, 2023 and 2022.
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.
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. 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.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of accounts receivable, net, interest receivable, prepaid insurance, prepaid technology expenses and prepaid taxes.
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 | % | ||||||||||
Accessories | % | ||||||||||
In accordance with its policy, the Company reviews the estimated useful lives and salvage values of rental product on an ongoing basis.
The Company offers its customers an opportunity to purchase items prior to the end of their useful life. In such instances, the Company considers the disposal of 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 within rental product depreciation and revenue share. Write-offs for losses on lost, damaged, and unreturned apparel and accessories are also recorded within rental product depreciation and revenue share.
Once it is no longer considered rentable, rental product in a sellable condition is classified as held for sale and written down to salvage value. The value of rental product held for sale as of April 30, 2023 and January 31, 2023 was $3.0 million and $3.0 million, respectively. The accelerated depreciation related to rental product held for sale was $0.9 million and $1.4 million for the three months ended April 30, 2023 and 2022, respectively. The accelerated depreciation is presented on the condensed consolidated statements of operations within rental product depreciation and revenue share.
When rental product is liquidated, the Company records the gain or loss calculated as proceeds, net of the remaining salvage value and costs to sell, within general and administrative expenses on the condensed consolidated statement of operations. The gain or loss from the liquidation of rental product is included as an adjustment to reconcile net loss to net cash used by operating activities in the condensed consolidated statements of cash flows.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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 10 % and 8 % of total revenue for the three months ended April 30, 2023 and 2022, respectively.
Revenue is presented net of promotional discounts, customer credits and refunds. 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.
The Company recognizes a liability 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 April 30, 2023, $0.7 million of credits included in the customer credit liability as of January 31, 2023 were redeemed. Customer credits and gift cards do not have expiration dates. Over time, a portion of these instruments is not redeemed. The Company recognizes breakage income related to these instruments based on the redemption pattern method. 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.
Subscription and Reserve Rental Revenue
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 or paused 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 four 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 - or -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 April 30, 2023 and January 31, 2023.
13
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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 when a customer purchases 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 assets or liabilities with respect to other revenue as of April 30, 2023 and January 31, 2023.
From time to time, Other revenue may include revenue generated from pilots and other growth initiatives which may cause quarterly fluctuations in the Other revenue line.
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 is based on the closing price of the common stock on the date of grant as reported on the Nasdaq Stock Market. Upon grant of awards, the Company also estimates an amount of forfeitures that will occur prior to vesting.
Recently Issued and Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU 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 adopted this standard on February 1, 2023, and the adoption of this standard did not have a material impact on the condensed consolidated financial statements.
14
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
Recently Issued Accounting Pronouncements
Debt - Debt with Conversion and Other Options and Derivatives and Hedging
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The new guidance reduces complexity and improves comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. This standard is effective for annual reporting periods beginning after December 15, 2023, and interim periods within those years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the condensed consolidated financial statements.
3.Liquidity
The Company has incurred a net loss from operations since inception and has historically relied upon debt and equity financing to fund its operations. The Company experienced year-over-year revenue and subscriber growth in fiscal year 2022 and in the three months ended April 30, 2023. However, the Company believes that macroeconomic factors, including sensitivity to increased pricing, impacted active subscriber levels in fiscal year 2022. The Company believes that these factors did not have a material impact during the first quarter of fiscal year 2023.
In September 2022, the Company announced a restructuring plan that is expected to generate annual operating expense savings of approximately $25 million (relative to the second quarter of fiscal year 2022 run rate) in fiscal year 2023. Actual savings may differ from these estimates.
While the Company experienced revenue growth in fiscal year 2022 and the three months ended April 30, 2023, to the extent that the Company is further impacted by macroeconomic trends, the Company has established plans to preserve existing cash liquidity, which includes additional reductions to labor, operating expenses, and/or capital expenditures.
As of April 30, 2023 and January 31, 2023, the Company held cash and cash equivalents of $141.4 million and $154.5 million, respectively. The Company believes that it will have sufficient liquidity from cash on-hand and future operations to sustain its business operations, to satisfy its debt service obligations and to comply with its debt covenants for at least the next twelve months from the date these financial statements are issued. Refer to Note 6 - Long-Term Debt for details of the amendment to refinance the Temasek debt facility in January 2023.
4.Leases - Lessee Accounting
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
The following table summarizes the Company’s minimum fixed lease obligations under existing agreements as a lessee, excluding variable payments and short-term lease payments, as of April 30, 2023:
| Operating | Financing | ||||||||||
| Fiscal year: | |||||||||||
| 2023 | $ | $ | |||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total minimum lease payments | |||||||||||
| Imputed interest | ( | ( | |||||||||
| Lease liabilities as of April 30, 2023 | $ | $ | |||||||||
5.Rental Product, Net
Rental product, net consisted of the following:
| April 30, | January 31, | ||||||||||
| 2023 | 2023 | ||||||||||
Apparel | $ | $ | |||||||||
Accessories | |||||||||||
Less: accumulated depreciation | ( | ( | |||||||||
Rental product, net | $ | $ | |||||||||
Depreciation and write-offs related to rental product, including write-offs of rental products sold, was $12.1 million and $13.6 million for the three months ended April 30, 2023 and 2022, respectively.
16
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
6.Long-Term Debt
Summary
The following table summarizes the Company’s line of credit and long-term debt outstanding as of April 30, 2023 and January 31, 2023:
| April 30, | January 31, | ||||||||||
| 2023 | 2023 | ||||||||||
Temasek Facility principal outstanding | $ | $ | |||||||||
Add: payment-in-kind interest | |||||||||||
Less: unamortized debt discount | ( | ( | |||||||||
Temasek Facility, net | |||||||||||
Less: current portion of long-term debt | |||||||||||
| Total noncurrent line of credit and long-term debt | $ | $ | |||||||||
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.
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 Company’s senior secured term loan with Ares Corporate Opportunities Fund V, L.P. 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 “2021 Temasek Facility Amendment”). The Temasek Facility as amended by the 2021 Temasek Facility Amendment is referred to as the “2021 Amended Temasek Facility”. This transaction was accounted for as a debt modification. The terms of the 2021 Temasek Facility Amendment provide for, among other things, (i) an extension of the maturity to October 2024, (ii) an outstanding principal under the 2021 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) an amended interest rate of 12 % with up to 5 % payable in kind. On the effective date of the 2021 Temasek Facility Amendment, the Company paid down an additional $30.0 million of the outstanding principal of the 2021 Amended Temasek Facility, for a total of $60.0 million principal paydown on the Temasek Facility and 2021 Amended Temasek Facility.
The effective interest rate for the Temasek Facility for the period from the date of issuance through the date of the 2021 Temasek Facility Amendment was 15.95 %. The debt discount associated with the Initial Temasek Commitments was fully accreted when the Company entered into the 2021 Temasek Facility Amendment.
17
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
In October 2021, in connection with the 2021 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 2021 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 2021 Amended Temasek Facility. These amounts are being accreted to the principal amount of the 2021 Amended Temasek Facility through the recognition of noncash interest expense.
In January 2023, the Company entered into an amendment to the 2021 Amended Temasek Facility (“2022 Temasek Facility Amendment”). The 2021 Amended Temasek Facility as further amended by the 2022 Temasek Facility Amendment is referred to as the “2022 Amended Temasek Facility”. This transaction was accounted for as a debt modification. The terms of the amendment provide for, (i) an extension of the maturity to October 2026, (ii) a reduction of the cash portion of the interest rate to 2 % per year through July 2024, increasing to 5 % thereafter for the duration of the 2022 Amended Temasek Facility, and (iii) a 1 % increase in the total interest rate in February 2024 from 12 % to 13 % and annual rate increases of 1 % thereafter for the duration of the 2022 Amended Temasek Facility. In connection with the 2022 Temasek Facility Amendment, the Company granted a warrant to purchase up to 2 million shares of the Company’s Class A common stock at an exercise price of $5.00 per share. The warrant will expire on January 31, 2030. The effective interest rate for the 2021 Amended Temasek Facility for the period from the date of issuance through the date of the 2022 Amended Temasek Facility was 14.29 %. The effective interest rate for the 2022 Amended Temasek Facility as of January 31, 2023 was 15.15 %.
In January 2023, in connection with the 2022 Amended Temasek Facility, the Company recorded a debt discount of $6.9 million related to the allocation of proceeds to warrants issued. These amounts are being accreted to the principal amount of the 2022 Amended Temasek Facility through the recognition of noncash interest expense.
The 2022 Amended Temasek Facility did not change the covenants under the 2021 Amended Temasek Facility, which require 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 2022 Amended Temasek Facility includes a minimum liquidity maintenance covenant of $50.0 million. The 2022 Amended Temasek Facility also contains various events of default, the occurrence of which could result in the acceleration of obligations for the Company.
The Company determined that all of the embedded features of the Temasek Facility, 2021 Amended Temasek Facility, and 2022 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.
Covenants
The Company was in compliance with all applicable financial and nonfinancial covenants as of April 30, 2023.
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RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
7.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 April 30, 2023 and January 31, 2023 was $0.9 million and $0.9 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.
8.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| April 30, | January 31, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Accrued operating and general expenses | $ | $ | ||||||||||||
| Revenue share payable | ||||||||||||||
| Accrued payroll related expenses | ||||||||||||||
| Sales and other taxes | ||||||||||||||
| Accrued interest | ||||||||||||||
| Gift card liability | ||||||||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||||||||
9.Fair Value Measurements
As of April 30, 2023 and January 31, 2023, the carrying amounts of the Company’s cash and cash equivalents, current and noncurrent restricted cash, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximated their estimated fair value due to their relatively short maturities.
The Company’s long-term debt is reported at carrying value on the Company’s condensed consolidated balance sheet. Refer to Note 6 — Long-Term Debt. The Company estimates the fair value of its long-term debt based on recently reported market transactions for similar financial instruments by companies with similar credit ratings and, as such, are classified as Level 2 within the fair value hierarchy. As of April 30, 2023, the estimated fair value of the Company’s long-term debt was $276.7 million.
19
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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
Warrants
As of April 30, 2023 and January 31, 2023, the Company had the following outstanding warrants:
April 30, 2023 | |||||||||||||||||||||||||||||
| Outstanding Warrants | Date Issued | Number of Shares | Class of Shares | Exercise Price | Fair Value at Issuance | ||||||||||||||||||||||||
Equity classified: | |||||||||||||||||||||||||||||
| TriplePoint | Nov-16 | Common | $ | $ | |||||||||||||||||||||||||
| TriplePoint | Jun-17 | Common | |||||||||||||||||||||||||||
| TriplePoint | Sep-17 | Common | |||||||||||||||||||||||||||
| TriplePoint | Jan-18 | Common | |||||||||||||||||||||||||||
| TriplePoint | Apr-18 | Common | |||||||||||||||||||||||||||
| TriplePoint | Nov-15 | Common | |||||||||||||||||||||||||||
| TriplePoint | Jun-16 | Common | |||||||||||||||||||||||||||
| TriplePoint | Sep-16 | Common | |||||||||||||||||||||||||||
| Double Helix (Temasek) | Oct-21 | Common | |||||||||||||||||||||||||||
| Double Helix (Temasek) | Jan-23 | Common | |||||||||||||||||||||||||||
| $ | |||||||||||||||||||||||||||||
The warrant for 730,000 shares of common stock issued to Double Helix (Temasek) in July 2018 with an exercise price of $27.40 per share expired unexercised during the three months ended April 30, 2022. See Note 6 - Long-Term Debt for details of the warrants issued to Temasek in January 2023.
20
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
| January 31, 2023 | |||||||||||||||||||||||||||||
| Outstanding Warrants | Date Issued | Number of Shares | Class of Shares | Exercise Price | Fair Value at Issuance | ||||||||||||||||||||||||
Equity classified: | |||||||||||||||||||||||||||||
TriplePoint | Nov-16 | Common | $ | $ | |||||||||||||||||||||||||
TriplePoint | Jun-17 | Common | |||||||||||||||||||||||||||
TriplePoint | Sep-17 | Common | |||||||||||||||||||||||||||
TriplePoint | Jan-18 | Common | |||||||||||||||||||||||||||
TriplePoint | Apr-18 | Common | |||||||||||||||||||||||||||
TriplePoint | Nov-15 | Common | |||||||||||||||||||||||||||
TriplePoint | Jun-16 | Common | |||||||||||||||||||||||||||
TriplePoint | Sep-16 | Common | |||||||||||||||||||||||||||
Double Helix (Temasek) | Oct-21 | Common | |||||||||||||||||||||||||||
Double Helix (Temasek) | Jan-23 | Common | |||||||||||||||||||||||||||
| $ | |||||||||||||||||||||||||||||
As of April 30, 2023 and January 31, 2023, all outstanding warrants were equity-classified and recorded as additional paid-in capital. Equity-classified contracts are not subsequently remeasured unless reclassification is required from equity to liability classification.
The fair value was estimated using the Black-Scholes option pricing model. The fair value is subjective and is affected by changes in inputs to the valuation model including the fair value per share of the underlying stock, the expected term of each warrant, volatility of the Company’s stock and peer company stock, and risk-free rates based on the U.S. Treasury yield curves.
11.Share-based Compensation Plans
2009 Stock Incentive Plan and 2019 Stock Incentive Plan
In 2009, the Company adopted its stock incentive plan (the “2009 Plan”) to grant equity to employees and service providers. In 2019, the Company adopted a new stock incentive plan (the “2019 Plan”) which replaced the 2009 Plan. The Company has granted RSUs and stock options, each of which is settleable in shares. Options are generally granted for a 10 -year term, and generally vest and become fully exercisable over four years of service. RSU awards have both service-based and liquidity-based vesting conditions. The liquidity-based vesting condition was satisfied in connection with the effectiveness of the Company’s IPO. The service-based requirement of RSUs was typically satisfied over four years . While no shares are available for future issuance under the 2009 Plan or the 2019 Plan, they continue to govern outstanding equity awards granted thereunder. Outstanding awards granted under the 2009 Plan and 2019 Plan are exercisable for or settled in shares of Class A common stock, or, if approved by the board of directors, shares of Class B common stock.
21
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
Amended and Restated 2021 Incentive Award Plan
The Company's Amended and Restated 2021 Incentive Award Plan (the "2021 Plan") was adopted by its board of directors and approved by stockholders in October 2021 and became effective upon the effective date of the IPO. The 2021 Plan replaced the 2019 Plan, and no further grants will be made under the 2019 Plan. The terms of equity awards granted under the 2021 Plan in the year ended January 31, 2022 were generally consistent with those granted under the 2019 Plan, as described above. RSUs granted under the 2021 Plan in the year ended January 31, 2022 generally vest over four years and do not have liquidity-based vesting conditions. RSUs granted under the 2021 Plan during the year ended January 31, 2023 and three months ended April 30, 2023 have a shorter vesting period of to two years . As of April 30, 2023, there were 1,997,050 shares of Class A common stock available for issuance under the 2021 Plan. There will not be any further equity grants of Class B common stock.
The grant date fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The option pricing model considers several variables and assumptions in estimating the fair value of share-based awards. Because the Company’s shares are only recently publicly traded and there is a lack of historical company-specific data available, expected term is estimated under the simplified method using the vesting and contractual terms, and expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.
Stock Options
Stock option activity during the period indicated is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
Balances as of January 31, 2023 | $ | $ | |||||||||||||||||||||
Granted | |||||||||||||||||||||||
Exercised | |||||||||||||||||||||||
Forfeited | ( | ||||||||||||||||||||||
Balances as of April 30, 2023 | $ | $ | |||||||||||||||||||||
Exercisable as of April 30, 2023 | $ | $ | |||||||||||||||||||||
As of April 30, 2023, there was $7.1 million of unrecognized compensation cost related to stock options granted that is expected to be recognized over a weighted average period of 2.0 years.
The Company currently uses authorized and unissued shares to satisfy the exercise of stock option awards.
22
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
RSUs
RSUs activity during the period indicated is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value per Share | ||||||||||
Unvested and outstanding as of January 31, 2023 | $ | ||||||||||
Granted | |||||||||||
| Vested/Released | ( | ||||||||||
Forfeited | ( | ||||||||||
Unvested and outstanding as of April 30, 2023 | $ | ||||||||||
As of April 30, 2023, there was $23.2 million of unrecognized compensation cost related to RSUs granted that is expected to be recognized over a weighted average period of 1.8 years.
Share-Based Compensation Summary
The classification of share-based compensation for the three months ended April 30, 2023 and 2022, respectively, presented within each line item of the condensed consolidated statements of operations is as follows:
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Technology | $ | $ | |||||||||
| Marketing | |||||||||||
| General and administrative | |||||||||||
| Total share-based compensation | $ | $ | |||||||||
The Company recognized $1.9 million of incremental share-based compensation expense in General and administrative expenses during the three months ended April 30, 2023 due to equity award modifications related to the transition of the Chief Financial Officer role.
12.Net Loss per Share Attributable to Common Stockholders
23
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:
Three Months Ended April 30, | |||||||||||
2023 | 2022 | ||||||||||
Numerator: | |||||||||||
Net loss attributable to common stockholders | $ | ( | $ | ( | |||||||
Denominator: | |||||||||||
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | |||||||||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | $ | ( | |||||||
The following potentially dilutive outstanding securities based on amounts outstanding at each period end were excluded from the computation of diluted loss per share attributable to common stockholders because including them would have been anti-dilutive:
Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
Stock options | |||||||||||
Common stock warrants | |||||||||||
| RSUs | |||||||||||
Total | |||||||||||
13.Commitments and Contingencies
The Company had restricted cash balances for cash collateralized standby letters of credit as of April 30, 2023 and January 31, 2023 of $10.0 million and $9.1 million, respectively, primarily to satisfy security deposit requirements on its leases.
Legal Proceedings
From time to time in the normal course of business, various claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation could have an adverse effect on the Company’s results of operations, cash flows, or business and financial condition in the period the claims or litigation are resolved. Accruals for loss contingencies are recorded when a loss is probable, and the amount of such loss can be reasonably estimated.
24
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended January 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2022 Annual Report on Form 10-K”).
In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those described in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors”.
Overview
We give customers ongoing access to our “unlimited closet” — with thousands of styles by hundreds of designer brands — through our Subscription offering or the ability to rent a-la-carte through our Reserve offering. We also give our subscribers and customers the ability to buy our products through our Resale offering, which offers customers pre-loved styles from our closet at a discount to retail price, up to 90% off of designer retail value. These offerings allow us to engage and serve our subscribers and customers across diverse use cases from everyday life to special occasions. We have served approximately 3 million lifetime customers across all of our offerings and we had 185,720 ending total subscribers1 (active and paused) as of April 30, 2023. The majority of our revenue is highly recurring and is generated by our subscribers. For the three months ended April 30, 2023 and 2022, respectively, 87% and 86% of our total revenue (including Reserve and Resale revenue) was generated by subscribers while they were active or paused.
The variety, breadth and quantity of products we carry is important to our business, and we strategically manage the capital efficient acquisition of a high volume of items every year. We have successfully disproved the myth that fashion apparel items and accessories only last one season as we are able to rent or “turn” our products multiple times over many years. We price our items at a fraction of their retail or comparable value, creating an attractive price and value proposition for our subscribers and customers.
We source virtually all of our products, which includes apparel and accessories, directly from designer brands. Prior to 2018, we purchased nearly all of our products from our brand partners typically at a discount to wholesale cost, which we refer to as “Wholesale” items. In late 2018, we began to procure products through Share by RTR and Exclusive Designs. See “—Our Product Acquisition Strategy” below for a description of the three ways in which we procure products.
1 Ending total subscribers represents the number of subscribers with an active or paused membership as of the last day of the period and excludes subscribers who had an active or paused subscription during the period, but ended their subscription prior to the last day of the fiscal period.
26
Recent Developments
5 Item Plan. Beginning in March 2023, we permanently added an extra item to every shipment of our rental subscription programs to deliver greater value to subscribers. We expect this program change to improve retention and acquisition rates and increase fulfillment and product depreciation and revenue share expenses with minimal impact on gross margin in fiscal year 2023.
Debt Restructuring. On January 31, 2023, we completed an amendment to our Temasek Facility (“2022 Amended Temasek Facility”). The 2022 Amended Temasek Facility extended the maturity date of our credit facility from October 2024 to October 2026, reduced cash interest payments by over $20 million in the next two fiscal years while the total interest rate remains unchanged during this period, with subsequent increases thereafter. In connection with the 2022 Amended Temasek Facility, we also granted warrants to Temasek to purchase two million shares of Class A Common Stock at an exercise price of $5.00 per share and made other clarifications and updates. See Note 6, “Long-Term Debt” in the Notes to the Condensed Consolidated Financial Statements for more details.
Corporate Restructuring Plan. On September 12, 2022, we announced a restructuring plan to reduce costs, streamline our organizational structure and drive operational efficiencies. The plan primarily included total workforce reductions of approximately 24% of corporate employees (primarily a reduction in force, with some open role closures/reduced backfills), reorganizing certain functions and reallocating resources to continue to focus on customer experience and growth initiatives.
Restructuring charges of $2.4 million for severance and related costs were recognized during the year ended January 31, 2023 and were reflected in Restructuring charges on our Condensed Consolidated Statements of Operations. We recorded asset impairment charges of $5.3 million during the year ended January 31, 2023 related to discontinuing two warehouse operations projects during the third and fourth quarters of fiscal year 2022 in connection with the restructuring plan. The charges were reflected in Loss on asset impairment related to restructuring on our Condensed Consolidated Statements of Operations. There were no restructuring charges or asset impairment charges recognized during the three months ended April 30, 2023. We may incur additional restructuring charges in the future.
We expect the restructuring plan to generate total annual operating expense savings of approximately $25 million (relative to the second quarter of fiscal year 2022 run rate) in fiscal year 2023. Approximately $17 million of the total annualized savings reflect the portion related to personnel expenses, which was substantially completed by the end of the fourth quarter of fiscal year 2022, and we expect approximately $8 million of technology and general and administrative expense savings to be realized in fiscal year 2023.
Option Exchange. In April 2023, we announced a proposed option exchange designed to incentivize and retain employees, directors and other service providers by providing the ability to exchange outstanding stock options for RSUs. This option exchange was approved by shareholders on June 7, 2023 and is expected to be completed during the second quarter of fiscal year 2023. Assuming that it is completed as planned, the option exchange is expected to result in minimal incremental share-based compensation expense over the anticipated life of the replacement RSUs (if any), in addition to certain administrative expenses in fiscal year 2023.
Additional Key Fiscal First Quarter and Recent Business Highlights:
•Introduced text-based concierge service: In early May, launched RTR CONCIERGE, a luxury-style service that offers complimentary 1:1 communication via text with our customer service team to help subscribers early in their tenure. Concierge is focused on onboarding new subscribers to ensure they get the most out of their membership.
•Improved product discovery features: In early April, launched Rent the Look to enable customers to rent a complete outfit or a similar option based on our recommendations. This feature has led to a 34% increase in engagement with substitute items.
•Further elevated delivery and returns experience: Launched a new convenience feature in At-Home Pickup, leading to an increase in in-market adoption of the service by nearly four percentage points from the end of Q4 of 2022 to the end of Q1 of 2023, and launched Saturday delivery to more than half of our subscribers.
•Achieved faster site speed: Made improvements to load times across the site experience, driving a 48% improvement in average load times on a key entry point into our conversion funnel, which resulted in an 89% lift in conversion on that page.
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•Made foundational investments in AI: Took a first and important step in leveraging AI models to improve the RTR search & discovery experience by developing an AI-driven search beta. Expected to launch in the coming weeks, the feature will allow customers to leverage RTR's existing search tools and product catalog using common phrases or fashion terms, which is intended to make the process of discovering products more intuitive and natural.
Key Operating and Financial Results. We have achieved the following operating and financial results for the three months ended April 30, 2023 and 2022, respectively:
•Revenue was $74.2 million and $67.1 million, respectively, representing 10.6% growth year-over-year;
•145,220 and 134,998 ending Active Subscribers2 (excluding paused subscribers), respectively, representing 7.6% growth year-over-year and our highest end-of-quarter Active Subscriber count since launch of subscription;
•135,966 and 125,119 Average Active Subscribers3, respectively, representing 8.7% growth year-over-year;
•185,720 and 177,213 ending Total Subscribers (including paused subscribers), respectively, representing 4.8% growth year-over-year;
•Gross Profit was $31.4 million and $22.5 million, respectively, representing a gross margin of 42.3% and 33.5%, respectively;
•Net Loss was $(30.1) million and $(42.5) million, respectively. Net Loss as a percentage of revenue was (40.6)% and (63.3)%, respectively;
•Adjusted EBITDA was $4.5 million and $(8.8) million, respectively, representing an Adjusted EBITDA margin of 6.1% and (13.1)%, respectively;
•Net cash used in operating activities plus net cash used in investing activities was $(12.1) million and $(28.2) million, respectively;
•Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (16.3)% and (42.0)%, respectively; and
•Cash and Cash Equivalents was $141.4 million and $219.0 million, respectively.
Our Product Acquisition Strategy
We acquire and monetize products in three ways: Wholesale, Share by RTR and Exclusive Designs. Wholesale items are acquired directly from brand partners, typically at a discount to Wholesale price. Share by RTR items are acquired directly from brand partners on consignment, at zero to low upfront cost with performance-based revenue share payments to our brand partners over time. Exclusive Designs items are designed using our data in collaboration with our brand partners. These units are manufactured through third-party partners with a low upfront fee and minimal revenue share payments to our brand partners over time.
Our three product acquisition methods are strategic levers to manage our capital efficiency, profitability and product risk. Our Exclusive Designs channel uses data insights to acquire items at a lower cost, which are designed to generate higher profitability over time. Share by RTR meaningfully reduces our purchases of rental product and de-risks our investment since we pay brands primarily based on item performance. Our Share by RTR arrangements with brands target delivering 75% to 100% of comparable Wholesale cost to the brand in the first year; however there is no minimum commitment other than the upfront payment if applicable. Nearly all Share by RTR deals consummated after September 2020 include a cap on total potential payments to the brand partner.
2 Active Subscribers is defined as ending total subscribers as of period end, excluding paused subscribers.
3 Average Active Subscribers represents the mean of the beginning of quarter and end of quarter Active Subscribers for a quarterly period; and for other periods, represents the mean of the Average Active Subscribers of every quarter within that period.
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In fiscal year 2022, 42% of new items were acquired through Wholesale, 27% through Share by RTR and 31% through Exclusive Designs, compared to 45% Wholesale, 33% Share by RTR and 22% Exclusive Designs in fiscal year 2021. In total, approximately 58% of new items were acquired through the more capital-efficient channels in fiscal year 2022 and approximately 55% in fiscal year 2021. Both our purchasing power and the diversification into Share by RTR and Exclusive Designs have led to a decrease in rental product capital expenditures (or Purchases of Rental Product as presented in the Condensed Consolidated Statement of Cash Flows) as a percentage of revenue over time. We plan to further decrease the percentage of units acquired through Wholesale and increase the percentage of units acquired through our more capital-efficient channels, Exclusive Designs and Share by RTR over time.
For additional details about our business model and our product acquisition strategy, see our 2022 Annual Report on Form 10-K.
Key Factors Affecting Our Performance
We believe that our performance and future success depend on a variety of factors that present significant opportunities for our business, but also present risks and challenges that could adversely impact our growth and profitability.
Subscribers and Customers
Ability to Attract and Retain Subscribers and Customers. We believe that we have a significant market opportunity to increase our base of subscribers and customers, and our long-term growth depends in large part on our continued ability to acquire and retain subscribers and customers. We provide a flexible offering that allows our subscribers to customize their subscription as their everyday life changes, choosing to pause and reactivate their membership as needed. We have also historically seen that many subscribers who cancel their subscription will return and resubscribe when membership again makes sense for their everyday life. Our strategies in fiscal year 2023 are focused on investing in and improving the customer experience to drive growth. In particular, we believe that improving retention in the first 90 days of a subscription, which is when the majority of subscriber churn typically occurs, can increase loyalty and subscriber growth. Further, we are experimenting with changes to our initial promotion prices. We expect that these tests may reduce initial acquisitions in the short term, especially in our lower priced programs; however, we believe they will have improved effects on retention and overall health of the business over the longer-term and enable us to invest these resources into the customer experience.
Brands and Products
Ability to Acquire, Manage and Monetize Products Efficiently. Our ability to deliver an elevated experience for our subscribers and customers that keeps them loyal to RTR depends on us having the right assortment. For example, in fiscal year 2023 we are focused on enhancing the availability of the items on our site and increasing the depth of our buys (i.e., purchasing more units of particular styles). Due to our deep partnerships with brands, flexibility in our buying timelines and ability to react to advantageous retail purchasing environments, we can acquire products directly from brands in multiple cost effective ways. Our expertise in reverse logistics and garment restoration also provides us with the ability to monetize our products effectively over their useful life. Diversifying our product acquisition away from 100% Wholesale has driven higher overall product return on investment and reduced the capital needs of the business. In fiscal year 2022, approximately 58% of new items were acquired through our more capital efficient non-Wholesale channels, compared to 55% in fiscal year 2021. We plan to further increase the percentage of units acquired through Exclusive Designs and Share by RTR in fiscal year 2023. We continuously evaluate our product acquisition mix to maximize our strategic priorities.
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Purchases of rental product includes the cost of wholesale products acquired in the period and other ancillary costs such as freight, where applicable. Many factors impact the purchases of rental product including our acquisition mix strategy, the proportion of subscribers to total customers, timing of when those subscribers are acquired, the formality of styles, brand assortment, opportunities in the market and timing of when the rental product is received and paid for. Purchases of rental product as a percentage of revenue in fiscal year 2022 was 21% as compared to 15% in fiscal year 2021. We anticipate this percentage to increase slightly in fiscal year 2023 compared with fiscal year 2022 due to opportunistic purchases of attractively priced product beginning in the first quarter of fiscal year 2023. Due to seasonality factors, we track our progress on purchases of rental product as a percentage of revenue on a full year basis, as quarterly expenditures are not necessarily reflective of full year trends.
Ability to Achieve Leverage in our Cost Structure. Improving operational efficiency of our platform is imperative to increasing profitability. We expect certain of our operating costs to increase as order volume increases and as we make investments to grow subscribers and revenue and to enhance the customer experience. In September 2022, we announced a restructuring plan that we expect to reduce operating expenses by approximately $25 million in fiscal year 2023 compared to the annualized run rate for the second quarter of fiscal year 2022. Though we anticipate quarterly fluctuations in operating leverage, with these reductions we expect our fixed costs to decrease as a percentage of total revenue in fiscal year 2023, and over time we anticipate that our operating costs will grow more slowly than our total revenue on an annual basis.
We use technology and customer data to drive efficiency across products, fulfillment expenses and operating costs. Our data has allowed us to build a differentiated and proprietary rental reverse logistics platform with a vertically integrated cleaning and restoration process. We have invested in technology and automation in order to drive operating leverage and higher margins as we grow and scale our business.
Over time, we have improved our margins, profitability and cash flow, and we believe we will continue to benefit from economies of scale. We are focused on driving additional efficiencies in our operating expenses and growing profitability to also cover rental product depreciation, in addition to fulfillment, revenue share and operating expenses.
We use Adjusted EBITDA to assess our operating performance and the operating leverage of our business prior to capital expenditures. We also measure the cash consumption of the business including capital expenditures by assessing net cash used in operating activities and net cash used in investing activities on a combined basis. The 2022 Amended Temasek Facility reduces our cash interest payments during fiscal years 2023 and 2024 relative to the original agreement, which we expect to improve our overall liquidity.
Seasonality
We experience seasonality in our business, which has been impacted and may in the future change due to the effects of the COVID-19 pandemic and the macro environment. For our Subscription rentals, we typically acquire the highest number of subscribers in March through May and September through November, as these are the times customers naturally think about changing over their wardrobes. We generally see a higher rate of subscribers pause in the summer, and in mid-December through the end of January. In the third and fourth fiscal quarters, our Reserve business historically (prior to COVID-19) benefited from increased wedding and holiday events but this seasonality has varied since the onset of COVID-19. In fiscal year 2022, our active subscriber count increased sequentially in the first and third quarters and decreased sequentially in the second and fourth quarters. The third quarter increase and the fourth quarter decrease are generally consistent with more recent historical seasonality. Our second quarter historically has seen a moderate increase in active subscriber count compared to the first quarter (except in fiscal year 2021 which saw a significant increase post-Omicron variant), however the second quarter active subscriber count of fiscal year 2022 was further impacted by the price increase of our Subscription programs in April 2022.
Our seasonality trends have seen effects from COVID-19, the macro environment, and business decisions such as pricing changes and may continue to do so in the future. As a result, our seasonality may not resemble historical trends.
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We also experience seasonality in the timing of expenses and capital outlays. Transportation expense, and therefore fulfillment cost, is typically highest in the fourth fiscal quarter, given higher service levels, such as more costly and expedited shipping, and competition during holidays. Our most significant product capital expenditures typically occur in the first fiscal quarter and the third fiscal quarter, when we acquire product for the upcoming fall and spring seasons. However, the impact on cash is typically dependent on timing of receipt of product.
Impact of Macro and Consumer Environment on Our Business
There remains significant uncertainty in the current macroeconomic and consumer environment, driven by inflationary pressures, potential risk of recession, ongoing industry-wide supply chain issues, instability in the financial system, the war in Ukraine and the COVID-19 pandemic. These factors have impacted, and are expected to continue to impact, consumer discretionary spending and purchasing behavior, price sensitivity, wage rates, transportation costs, and other costs associated with our business.
We continue to learn how changes in customer behavior post COVID-19 pandemic may impact our business and demand, particularly in a challenging macro environment. We believe that Active Subscriber levels have been impacted by seasonal changes in consumer behavior and macro factors, such as higher levels of remote work and evolving demand for work wear, inflationary pressures and sensitivity to increased pricing, or other factors, particularly in the second quarter of fiscal year 2022, and may continue to be impacted by these factors in the future.
We continue to take actions to adjust to the changing business environment and related inflationary pressure. For example, in light of potential pricing sensitivity in the current macro-economic environment, we are focused on investing in our customer and delivering even more value to her and emphasizing the value proposition of our offering in our marketing materials. In addition, we increased wage rates throughout fiscal year 2022 and during the first quarter of 2023 to attract and retain talent at our fulfillment centers and we expect to continue to be impacted by rising labor costs in fiscal year 2023. We also expect transportation costs to continue to increase in fiscal year 2023, and therefore are focused on continuing to diversify our transportation network to mitigate these rising costs and service delays. Examples of these mitigation efforts include optimizing carrier mix such as through increasing volumes with regional and last-mile carriers and consolidating shipments through our at-home pickup service in certain markets and improving contractual terms. Although we continue to face a challenging environment, we plan to invest in our customers, manage our staffing and further diversify our transportation network in order to drive growth and efficiencies in our business.
The full extent to which the macro environment will directly or indirectly impact our business, results of operations, growth rates, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given this uncertainty, we cannot estimate the financial impact of the macro environment on our future results of operations, cash flows, or financial condition.
For additional details about key factors affecting our performance, see our 2022 Annual Report on Form 10-K and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.
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Key Business and Financial Metrics
In addition to the measures presented in our condensed consolidated financial statements, we use the following key business and financial metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. The calculation of the key business and financial metrics discussed below may differ from similarly titled metrics used by other companies, securities analysts or investors, limiting the usefulness of those measures for comparative purposes. These key business and financial metrics are not meant to be considered as indicators of our financial performance in isolation from or as a substitute for our financial information prepared in accordance with GAAP and should be considered in conjunction with other metrics and components of our results of operations, such as each of the other key business and financial metrics, and our revenue and net loss.
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in millions) | |||||||||||
| Active Subscribers | 145,220 | 134,998 | |||||||||
| Average Active Subscribers | 135,966 | 125,119 | |||||||||
| Gross Profit | $ | 31.4 | $ | 22.5 | |||||||
| Adjusted EBITDA (1) | $ | 4.5 | $ | (8.8) | |||||||
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(1)Adjusted EBITDA is a non-GAAP financial measure; for a reconciliation to the most directly comparable GAAP financial measure, net loss, and why we consider Adjusted EBITDA to be a useful metric, see “—Non-GAAP Financial Metrics” below.
Active Subscribers: Active Subscribers represents the number of subscribers with an active membership as of the last day of any given period and excludes paused subscribers. As of April 30, 2023, we had 145,220 Active Subscribers, up 7.6% year-over-year and 14.6% quarter-over-quarter. Our Active Subscribers increased primarily due to the launch of the 5 Item Plan and seasonality as compared to the prior quarter.
Average Active Subscribers: Average Active Subscribers represents the mean of the beginning of quarter and end of quarter Active Subscribers for a quarterly period; and for other periods, represents the mean of the Average Active Subscribers of every quarter within that period. As of April 30, 2023, we had 135,966 Average Active Subscribers, up from 125,119 as of April 30, 2022, or a 8.7% increase year-over-year. Average Active Subscribers align to revenue levels in the period, while Active Subscribers are measured as of a specific day.
Gross Profit and Gross Margin: We define Gross Profit as total revenue less costs related to activities to fulfill customer orders and rental product acquisition costs, presented as fulfillment and rental product depreciation and revenue share, respectively, on the condensed consolidated statement of operations. We depreciate owned apparel assets over three years and owned accessory assets over two years net of 20% and 30% salvage values, respectively, and recognize the depreciation on a straight-line basis and remaining cost of items when sold or retired on our condensed consolidated statement of operations. Rental product depreciation expense is time-based and reflects all rental product items we own. We use Gross Profit and Gross Profit as a percentage of revenue, or Gross Margin, to measure the continued efficiency of our business after the cost of our products and fulfillment costs are included. Gross Profit was $31.4 million for the three months ended April 30, 2023 compared to $22.5 million for the three months ended April 30, 2022 representing Gross Margins of 42.3% and 33.5%, respectively. The significant increase in Gross Profit and Gross Margin for the three months ended April 30, 2023 was driven by the impact of our April 2022 price increase, efficiencies in fulfillment costs and lower rental product depreciation costs. Rental product depreciation decreased due to the lower proportion of Wholesale items relative to prior year. We anticipate that our Gross Margin may be lower in fiscal year 2023 compared to fiscal year 2022 due to the March 2023 launch of extra items in our subscription plans and due to the anticipated decrease in our Reserve business. We will seek to continue to drive fulfillment and operational efficiency gains over time and strategically evolve our mix of product acquisition to offset cost increases and/or higher units processed per shipment.
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Adjusted EBITDA and Adjusted EBITDA Margin: We define Adjusted EBITDA as net loss, adjusted to exclude interest expense, rental product depreciation, other depreciation and amortization, share-based compensation expense, write-off of liquidated rental product assets, certain non-recurring or one-time costs (see below footnotes to the reconciliation table), income taxes, other income and expense, and other gains / losses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenue, net for a period. Adjusted EBITDA was $4.5 million for the three months ended April 30, 2023 compared to $(8.8) million for the three months ended April 30, 2022, representing margins of 6.1% and (13.1)%, respectively. Adjusted EBITDA Margin significantly improved for the three months ended April 30, 2023 due to the improvement in Gross Profit and Gross Margin, impact of the restructuring plan, and improved operating leverage across technology, marketing and general and administrative expenses even with additional strategic investments.
We have the opportunity to improve Adjusted EBITDA and offset cost increases and/or higher units processed per shipment as we increase revenue and drive fulfillment and operational efficiency gains and operating expense leverage. In particular, we continue to expect our restructuring plan to significantly reduce fixed costs and improve operating expense leverage in fiscal year 2023 compared to fiscal year 2022.
Components of Results of Operations
Total Revenue, Net
Our total revenue, net consists of Subscription and Reserve rental revenue and Other revenue. Total revenue is presented net of promotional discounts, credits and refunds and taxes. In fiscal year 2022, our revenue growth rate benefited from COVID recovery and the April 2022 price increase compared to fiscal year 2021. While we anticipate our total revenue to increase and our Active Subscriber growth rate to increase in fiscal year 2023, we anticipate our total revenue growth rate to decelerate due to an anticipated lower growth rate of Average Active Subscribers in fiscal year 2023 relative to fiscal year 2022 and in part due to an anticipated decrease in Reserve revenue.
Subscription and Reserve Rental Revenue. We generate Subscription and Reserve rental revenue from subscription and Reserve rental fees. We recognize subscription fees ratably over the subscription period, commencing on the date the subscriber enrolls in a subscription program. These fees are collected upon enrollment and any revenue from an unrecognized portion of the subscription period is deferred to the following fiscal period. We announced a price increase in April 2022 for our subscription plans, which has since increased revenue per subscriber. We recognize Reserve fees over the rental period, which starts on the date of delivery of the product to the customer. Reserve orders can be placed up to four months prior to the rental start date and the customer’s payment form is charged upon order confirmation. We defer recognizing the rental fees and any related promotions for Reserve rentals until the date of delivery, and then recognize those fees evenly over the four- or eight-day rental period.
Other Revenue. We generate Other revenue primarily from the sale of products while they are in rental condition. We offer the ability for subscribers and customers to purchase products at a discount to retail price. Payment for the sale of products occurs upon order confirmation while the associated revenue is recognized either at the time the sold product is delivered or when purchased, if the item is already at home with the customer. From time to time, Other revenue may include revenue generated from pilots and other growth initiatives which may cause quarterly fluctuations in the Other revenue line.
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Costs and Expenses
Fulfillment. Fulfillment expenses consist of all costs to receive, process and fulfill customer orders. This primarily includes shipping costs to/from customers and personnel and related costs, which include salaries and bonuses, and employee benefit costs. Personnel and related costs are related to processing inbound and outbound customer orders, cleaning, restoring and repairing items received from customers, tracking and managing items within our fulfillment center network and ingesting new items received from brands. Fulfillment expenses also include costs of packing materials, cleaning supplies, and other fulfillment-related expenses. We expect fulfillment costs to increase as order volume increases. In fiscal year 2022 costs to ship orders increased due to increasing prices in the transportation market. Fulfillment expense may fluctuate due to various factors including commercial terms and market trends. Fulfillment expense may also increase due to competitive pressures in the labor market which could lead to continued higher wage rates. We increased warehouse wage rates during fiscal year 2022 and expect to continue to be impacted by rising wage rates in the future. During the first quarter of fiscal year 2023, we realized efficiencies that offset fulfillment cost increases. For fiscal year 2023, fulfillment expense may increase as a percentage of revenue compared to fiscal year 2022. We expect to continue to invest in automation and other process improvements to support and drive efficiencies in our operations. To the extent we are successful in becoming more efficient in fulfilling orders, and at a magnitude that is able to offset increasing shipping costs, wage rates and cleaning/packing supply price increases, we would expect these expenses to decrease as a percentage of total revenue over the longer term.
Technology. Technology expenses consist of personnel and related costs for employees engaged in software development and engineering, quality assurance, product, customer experience, data science, analytics and information technology-related efforts, net of personnel costs associated with capitalized software. Technology expenses also include professional services, third-party hosting expenses, website monitoring costs, and software and license fees. We expect these expenses to decrease in dollars and as a percentage of total revenue compared to fiscal year 2022 as a result of our restructuring plan. Over the medium to long term, these expenses may increase as we continue to improve the customer and subscriber experience and invest in our technology stack and infrastructure to support overall growth in our business. While these expenses may vary from period to period as a percentage of total revenue, we expect them to decrease as a percentage of total revenue over the longer term.
Marketing. Marketing expenses include online and mobile marketing, search engine optimization and email costs, marketing personnel and related costs, agency fees, brand marketing, printed collateral, consumer research, and other related costs. We expect marketing expenses unrelated to personnel costs to increase as we intend to increase marketing spend to drive the growth of our business and increase our brand awareness. The trend and timing of our marketing expenses will depend in part on the timing of marketing campaigns.
General and Administrative. General and administrative (“G&A”) expenses consist of all other personnel and related costs for customer service, finance, tax, legal, human resources, fashion and photography and fixed operations costs. General and administrative expenses also includes occupancy costs (including warehouse-related), professional services, credit card fees, general corporate and warehouse expenses, other administrative costs, and gains and losses associated with asset disposals and operating lease terminations. In 2023, we expect these expenses to decrease significantly in dollars and as a percentage of total revenue compared to fiscal year 2022 as a result of our restructuring plan while over the medium to long term, we expect these expenses to increase as we grow our infrastructure to support the overall growth of the business. Rent expense and other facilities-related costs may increase in the future due to inflation or to support overall business growth and fulfillment efficiencies. While these expenses may vary from period to period as a percentage of total revenue, we expect them to decrease as a percentage of total revenue over the longer term.
Rental Product Depreciation and Revenue Share. Rental product depreciation and revenue share expenses consist of depreciation and write-offs of rental products, and payments under revenue share arrangements with brand partners. We depreciate the cost, less an estimated salvage value, of our owned products (Wholesale and Exclusive Designs items), over the estimated useful lives of these items and, if applicable, accelerate depreciation of the items when they are no longer in rental condition. We recognize the cost of items acquired under Share by RTR, as incurred, through upfront payments and performance-based revenue share payments. We expect rental product depreciation and revenue share expenses to increase in absolute dollars as we continue to support subscriber and customer growth. The amount and proportion of rental product depreciation and revenue share will vary from period to period based on how and when we acquire items as well as the mix of our rental product base.
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Other Depreciation and Amortization. Other depreciation and amortization expenses consist of depreciation and amortization amounts for fixed assets, intangible assets including capitalized software, and financing right-of-use assets.
Interest Income / (Expense). Interest income / (expense) consists primarily of accrued paid-in-kind interest, cash and cash equivalents interest and debt issuance cost amortization associated with our 2022 Amended Temasek Facility going forward.
Income Tax Benefit / (Expense). Income taxes consist primarily of state minimum taxes and Irish refundable tax credits. We have established a valuation allowance for our U.S. federal and state deferred tax assets, including net operating losses. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.
Results of Operations
The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. The following tables set forth our results of operations for the periods presented:
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Revenue: | |||||||||||
| Subscription and Reserve rental revenue | $ | 66.8 | $ | 61.4 | |||||||
| Other revenue | 7.4 | 5.7 | |||||||||
| Total revenue, net | 74.2 | 67.1 | |||||||||
| Costs and expenses: | |||||||||||
| Fulfillment | 21.9 | 22.9 | |||||||||
| Technology | 13.1 | 13.6 | |||||||||
| Marketing | 9.3 | 8.7 | |||||||||
| General and administrative | 26.5 | 29.2 | |||||||||
| Rental product depreciation and revenue share | 20.9 | 21.7 | |||||||||
| Other depreciation and amortization | 3.8 | 4.2 | |||||||||
| Total costs and expenses | 95.5 | 100.3 | |||||||||
| Operating loss | (21.3) | (33.2) | |||||||||
| Interest income / (expense), net | (8.8) | (9.3) | |||||||||
| Net loss before income tax benefit / (expense) | (30.1) | (42.5) | |||||||||
| Income tax benefit / (expense) | — | — | |||||||||
| Net loss | $ | (30.1) | $ | (42.5) | |||||||
Comparison of the three months ended April 30, 2023 and 2022
Total Revenue, Net. Total revenue, net was $74.2 million for the three months ended April 30, 2023, an increase of $7.1 million, or 10.6%, compared to $67.1 million for the three months ended April 30, 2022. This increase was primarily driven by the increase in Average Active Subscribers and an increase in revenue per subscriber, primarily due to the April 2022 subscription price increase.
Subscription and Reserve Rental Revenue. Subscription and Reserve rental revenue was $66.8 million for the three months ended April 30, 2023, an increase of $5.4 million, or 8.8%, compared to $61.4 million for the three months ended April 30, 2022. This increase was driven by an increase in Average Active Subscribers year-over-year and an increase in revenue per subscriber, primarily due to the price increase announced in April 2022, partially offset by changes in subscriber program mix, lower add-on rates, and flat Reserve revenue compared to the same period in fiscal year 2022.
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Other Revenue. Other revenue was $7.4 million for the three months ended April 30, 2023, an increase of $1.7 million, or 29.8%, compared to $5.7 million for the three months ended April 30, 2022. This increase was primarily driven by an increase in total items sold as well as an increase in Average Active Subscribers and the items purchased per subscriber. Other revenue represented 10.0% of total revenue, up from 8.5% in the same period of fiscal year 2022.
Costs and Expenses. Total costs and expenses were $95.5 million for the three months ended April 30, 2023, a decrease of $(4.8) million, or (4.8)%, compared to $100.3 million for the three months ended April 30, 2022. This decrease was driven by cost savings from the September 2022 restructuring plan which reduced costs compared to the same quarter last year.
Fulfillment. Fulfillment expenses were $21.9 million for the three months ended April 30, 2023, a decrease of $(1.0) million, or (4.4)%, representing 29.5% of revenue, compared to $22.9 million for the three months ended April 30, 2022, representing 34.1% of revenue. The decrease in fulfillment dollars and as a percentage of revenue was primarily driven by higher revenue per shipment and fulfillment process and transportation network improvements which offset an increase in units per shipment due to the 5 Item plan and higher transportation pricing and wage rates.
Technology. Technology expenses were $13.1 million for the three months ended April 30, 2023, a decrease of $(0.5) million, or (3.7)%, compared to $13.6 million for the three months ended April 30, 2022. This decrease was driven by cost savings from the September 2022 restructuring plan. We were able to realize these benefits while supporting growth initiatives including enhanced search, fit and discovery experience for the consumer. Technology expenses were 17.7% of revenue for the three months ended April 30, 2023 compared to 20.3% last year as we saw increased operating leverage with higher revenue. Technology related share-based compensation expense was $1.9 million for the three months ended April 30, 2023 and was $1.2 million for the same period last year.
Marketing. Marketing expenses were $9.3 million for the three months ended April 30, 2023, an increase of $0.6 million, or 6.9%, compared to $8.7 million for the three months ended April 30, 2022. This increase was driven by increased marketing spend to support customer initiatives. Marketing expenses unrelated to personnel costs were $8.5 million in the three months ended April 30, 2023 and 11.5% of revenue, compared to $7.4 million last year and 11.0% of total revenue.
General and Administrative. General and administrative (“G&A”) expenses were $26.5 million for the three months ended April 30, 2023, a decrease of $(2.7) million, or (9.2)%, compared to $29.2 million for the three months ended April 30, 2022. This decrease was driven by cost savings from the September 2022 restructuring plan. G&A expenses as a percentage of revenue were 35.7% compared to 43.5% last year as we saw increased operating leverage with higher revenue and a lower cost base post-restructuring. G&A related share-based compensation expense was $6.8 million for the three months ended April 30, 2023 and was $4.1 million for the three months ended April 30, 2022. The increase was primarily due to incremental share-based compensation expense due to equity award modifications related to the transition of the Chief Financial Officer role. We generally expect G&A expenses to decrease in fiscal year 2023, compared with fiscal year 2022, as a result of the aforementioned restructuring; however, share-based compensation expense is expected to increase in fiscal year 2023.
Rental Product Depreciation and Revenue Share. Rental product depreciation and revenue share was $20.9 million for the three months ended April 30, 2023, a decrease of $(0.8) million, or (3.7)%, compared to $21.7 million for the three months ended April 30, 2022. The decrease was driven by a decrease in rental product depreciation, offset by an increase in revenue share. Rental product depreciation and revenue share was 28.2% of revenue in the three months ended April 30, 2023, down from 32.3% in the same period last year primarily due to both the impact of the April 2022 price increase as well as the shift towards more cost efficient product acquisition channels.
Other Depreciation and Amortization. Other depreciation and amortization was $3.8 million for the three months ended April 30, 2023, a decrease of $(0.4) million, or (9.5)%, compared to $4.2 million for the three months ended April 30, 2022. This decrease was primarily driven by lower depreciation associated with computers and equipment.
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Interest Income / (Expense), Net. Interest expense, net was $8.8 million for the three months ended April 30, 2023, a decrease in expense of $(0.5) million, or (5.4%), compared to $9.3 million for the three months ended April 30, 2022. This decrease was driven by lower cash interest as a result of the 2022 Amended Temasek Facility and higher cash interest earned partially offset by higher paid-in-kind (“PIK”) interest from the 2022 Amended Temasek Facility. Of the $8.8 million total interest expense in the three months ended April 30, 2023, $7.1 million was the accrual of PIK interest, $0.1 million was the net of cash interest, interest earned and financing lease interest and other interest and $1.6 million was debt discount amortization, compared to $3.4 million of PIK interest, $4.9 million of cash interest, financing lease interest and other interest and $1.0 million of debt discount amortization in the three months ended April 30, 2022.
Non-GAAP Financial Metrics
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial metrics are useful in evaluating our performance. These non-GAAP financial metrics are not meant to be considered as indicators of our financial performance in isolation from, or as a substitute, for our financial information prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. There are limitations to the use of the non-GAAP financial metrics presented in this Quarterly Report. For example, our non-GAAP financial metrics may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial metrics differently than we do, limiting the usefulness of those measures for comparative purposes.
The reconciliation of the below non-GAAP financial metrics to the most directly comparable GAAP financial measure is presented below. We encourage reviewing the reconciliation in conjunction with the presentation of the non-GAAP financial metrics for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items, and may include other expenses, costs and non-recurring items.
Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are key performance measures used by management to assess our operating performance and the operating leverage of our business prior to capital expenditures. Our Adjusted EBITDA margins have improved from (13.1)% in the three months ended April 30, 2022 to 6.1% in the three months ended April 30, 2023.
The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods presented:
| Three Months Ended April 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Net loss | $ | (30.1) | $ | (42.5) | |||||||
| Interest (income) / expense, net (1) | 8.8 | 9.3 | |||||||||
| Rental product depreciation | 12.1 | 13.6 | |||||||||
| Other depreciation and amortization (2) | 3.8 | 4.2 | |||||||||
| Share-based compensation (3) | 8.8 | 5.5 | |||||||||
| Write-off of liquidated assets (4) | 1.0 | 0.6 | |||||||||
| Non-recurring adjustments (5) | — | 0.3 | |||||||||
| Other (gains) / losses (6) | 0.1 | 0.2 | |||||||||
| Adjusted EBITDA | $ | 4.5 | $ | (8.8) | |||||||
| Adjusted EBITDA Margin (7) | 6.1 | % | (13.1) | % | |||||||
__________
(1)Includes debt discount amortization of $1.6 million in the three months ended April 30, 2023 and $1.0 million in the three months ended April 30, 2022.
(2)Reflects non-rental product depreciation and capitalized software amortization.
(3)Reflects the non-cash expense for share-based compensation.
(4)Reflects the write-off of the remaining book value of liquidated rental product that had previously been held for sale.
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(5)Non-recurring adjustments for the three months ended April 30, 2022 includes $0.3 million of costs related to public company SOX readiness.
(6)Includes gains / losses recognized in relation to foreign exchange, operating lease terminations and the related surrender of fixed assets (see “Note 4 - Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements).
(7)Adjusted EBITDA Margin calculated as Adjusted EBITDA as a percentage of revenue.
Liquidity and Capital Resources
Since our founding, we have financed our operations primarily from net proceeds from the sale of redeemable preferred stock, common stock and debt financings. As of April 30, 2023, we had cash and cash equivalents of $141.4 million and restricted cash of $10.0 million ($4.2 million current and $5.8 million noncurrent), and an accumulated deficit of $(970.0) million.
On October 29, 2021, we closed our IPO, in which we issued and sold 17,000,000 shares at a public offering price of $21.00 per share. We received net proceeds of $327.3 million after deducting underwriting discounts and commissions and offering expenses.
Concurrent with our IPO, we paid down our senior secured term loan of $80.7 million (including accrued interest) with Ares Corporate Opportunities Fund V, L.P. in full and $60.0 million of our Temasek Facility and refinanced the remaining Temasek Facility, resulting in a total debt repayment of $140.7 million. In January 2023, we entered into the 2022 Amended Temasek Facility. The 2022 Amended Temasek Facility extended the maturity date from October 2024 to October 2026, reduced cash interest payments by over $20 million in cash in the next two fiscal years while the total interest rate remains unchanged during this period, with subsequent increases thereafter. In connection with the 2022 Amended Temasek Facility, we also granted warrants to purchase two million shares of Class A Common Stock at an exercise price of $5.00 per share, along with other clarifications and updates. Our total indebtedness as of April 30, 2023 was $281.2 million. For a description of the terms of our current and prior credit agreements, see “Note 6 – Long-Term Debt” in the Notes to the Condensed Consolidated Financial Statements.
We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we continue to acquire products and increase other investments in our business. We believe our existing cash and cash equivalents, and cash generated from our operations, will be sufficient to sustain our business operations, to satisfy our debt service obligations and to comply with our amended debt covenants for at least the next twelve months from the date the accompanying financial statements included elsewhere in this Quarterly Report are issued. In September 2022, we announced a restructuring plan to reduce costs, streamline its organizational structure and drive operational efficiencies, which is expected to generate annual operating expense savings of approximately $25 million (relative to the second quarter of fiscal year 2022 run rate) in fiscal 2023.
Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of customers and Active Subscribers and the timing of investments in technology and personnel to support the overall growth of our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements and service our debt obligations, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital which could negatively affect our liquidity in the future. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.
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Cash Flows
The following table summarizes our cash flows for the periods presented:
| Three Months Ended April 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (in millions) | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (3.3) | $ | (17.4) | ||||||||||
| Net cash (used in) provided by investing activities | (8.8) | (10.8) | ||||||||||||
| Net cash (used in) provided by financing activities | (0.1) | (1.6) | ||||||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (12.2) | (29.8) | ||||||||||||
| Cash and cash equivalents and restricted cash at beginning of year | 163.6 | 259.6 | ||||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 151.4 | $ | 229.8 | ||||||||||
We also measure the cash consumption of the business including capital expenditures, by assessing net cash used in operating activities and net cash used in investing activities on a combined basis, which was $(12.1) million for the three months ended April 30, 2023 and $(28.2) million for the three months ended April 30, 2022. The cash consumption of the business was lower in the first quarter of fiscal year 2023 compared with the same period of fiscal year 2022 primarily due to lower operating costs as a result of the restructuring and lower purchases of property and equipment compared to the prior period. Purchases of rental product were higher than the same period last year to support higher subscribers. We also began to opportunistically purchase additional rental product to take advantage of attractive pricing in the current environment, which partially offset the lower cash consumption in the first quarter of fiscal year 2023 compared to the prior year. The sum of net cash used in operating activities and net cash used in investing activities, as a percentage of revenue, was (16.3)% for the three months ended April 30, 2023 and (42.0)% for the three months ended April 30, 2022.
We anticipate this percentage to increase slightly in fiscal year 2023 compared with fiscal year 2022 due to opportunistic purchases of attractively priced product beginning in the first quarter of fiscal year 2023.
Net cash (used in) provided by operating activities. For the three months ended April 30, 2023, net cash used in operating activities was $(3.3) million, which consisted of a net loss of $(30.1) million, partially offset by non-cash charges of $33.3 million, reclassification of the proceeds from the sale of rental product of $5.4 million and a net change of $(1.1) million in our operating assets and liabilities. The non-cash charges were primarily comprised of $11.9 million of rental product depreciation and write-off expenses, $7.1 million of payment-in-kind interest, $8.8 million of share-based compensation, $1.6 million of debt discount amortization and $3.9 million of other fixed and intangible asset depreciation.
For the three months ended April 30, 2022, net cash used in operating activities was $(17.4) million, which consisted of a net loss of $(42.5) million, partially offset by non-cash charges of $29.6 million, reclassification of the proceeds from the sale of rental product of $4.0 million and a net change of $(0.5) million in our operating assets and liabilities. The non-cash charges were primarily comprised of $13.6 million of rental product depreciation and write-off expenses, $3.4 million of payment-in-kind interest, $5.5 million of share-based compensation, $1.0 million of debt discount amortization and $6.1 million of other fixed and intangible asset depreciation and the loss on the surrender of fixed asset write-offs related to the partial termination of the lease of the corporate headquarters (see “Note 4 - Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements).
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Net cash (used in) provided by investing activities. For the three months ended April 30, 2023, net cash used in investing activities was $(8.8) million, primarily consisting of $(14.6) million of purchases of rental product incurred in the period and $(0.9) million of purchases of fixed and intangible assets. The investment in rental product does not include an additional $13.0 million of cost for units received in the current period but not yet paid for, but does include $(5.4) million of cost for units paid for in the current period but received in the prior period (see the Supplemental Cash Flow Information in Part I, Item 1. Financial Statements). The investment in rental product was to support our growth in customer demand. We also began to opportunistically purchase additional rental product to take advantage of attractive pricing in the current environment. The majority of the investment in fixed and intangible assets was related to investments in capitalized technology labor. The cash used in investing activities was partially offset by $5.4 million of proceeds from the sale of owned rental product and $1.3 million of proceeds from the liquidation of rental product.
For the three months ended April 30, 2022, net cash used in investing activities was $(10.8) million, primarily consisting of $(13.4) million of purchases of rental product and $(2.0) million of purchases of fixed and intangible assets. The investment in rental product did not include the additional $12.7 million of cost for units received in the current period but not yet paid for, but did include $6.5 million of cost for units paid for in the current period but received in the prior period (see Supplemental Cash Flow Information in Part I, Item 1. Financial Statements). The investment in rental product was to support growth in customer demand. The majority of the investment in fixed and intangible assets was related to investments in automation assets, additional processing machinery and equipment for the Secaucus and Arlington warehouses and capitalized technology labor. The cash used in investing activities was partially offset by $4.0 million of proceeds from sales of owned rental products and $0.6 million of proceeds from the liquidation of rental product.
Net cash provided by (used in) financing activities. During the three months ended April 30, 2023, net cash used in financing activities was $(0.1) million, consisting of other financing payments.
During the three months ended April 30, 2022, net cash used in financing activities was $(1.6) million, consisting of other financing payments.
Contractual Obligations and Commitments
In January 2023, we entered into the 2022 Amended Temasek Facility, which extended the maturity date and reduced cash interest payments over the next two years. As of April 30, 2023, we had approximately $281.2 million of total debt outstanding, none of which matures within the next 12 months. See “Note 6 — Long-Term Debt” in the Notes to the Condensed Consolidated Financial Statements for more information.
See “Note 4 — Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements for our minimum fixed lease obligations under existing lease agreements as of April 30, 2023.
Critical Accounting Estimates
Our critical accounting estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates” in our 2022 Annual Report on Form 10-K. In the three months ended April 30, 2023, there were no material changes to our critical accounting estimates from those discussed in our 2022 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See “Note 2 — Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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JOBS Act
We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period. Accordingly, our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our quantitative and qualitative disclosures about market risk are described under the heading “Quantitative and Qualitative Disclosures About Market Risk” in our 2022 Annual Report on Form 10-K. In the three months ended April 30, 2023, there were no material changes to our quantitative and qualitative disclosures about market risk from those discussed in our 2022 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on our evaluation, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as such term is defined in Rule(s) 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of April 30, 2023 because of the material weaknesses in our internal control over financial reporting described below.
Notwithstanding the below identified material weaknesses, management believes the condensed consolidated financial statements as included in Part I, Item 1 of this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company's financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles in the United States.
Material Weaknesses in Internal Control Over Financial Reporting
In connection with the audit of our financial statements as of and for the year ended January 31, 2021, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of April 30, 2023, these material weaknesses are still in the process of being remediated.
We did not maintain sufficient evidence of the operation of controls to achieve complete, accurate and timely financial accounting, reporting and disclosures nor were monitoring controls evidenced at a sufficient level to provide the appropriate level of oversight of activities related to our internal control over financial reporting. This material weakness contributed to the following additional material weaknesses:
We did not design and maintain effective controls to ensure (i) the appropriate segregation of duties in the operation of manual controls and (ii) journal entries were reviewed at the appropriate level of precision.
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We did not design and maintain effective controls over information technology (“IT”) general controls for information systems and applications that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to our financial applications, programs and data to appropriate personnel, (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
These IT control deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected.
These material weaknesses did not result in a misstatement to our annual or interim condensed consolidated financial statements. However, each of these material weaknesses could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to our annual or interim condensed consolidated financial statements that would not be prevented or detected.
Remediation Efforts to Address Material Weaknesses
We continue to implement measures to remediate the identified material weaknesses. The measures include (i) formalizing the Company’s framework and policies with respect to maintaining evidence in the operation of control procedures, (ii) improving our control framework to include the appropriate segregation of duties and controls over the preparation and review of journal entries, and (iii) designing and implementing IT general controls for systems and applications impacting internal control over financial reporting.
We have performed extensive work with personnel responsible for the design and operating effectiveness of internal control over financial reporting in our efforts to ensure that appropriate evidence is maintained. We are continuing to implement comprehensive access control protocols for our enterprise resource planning environment in order to implement restrictions on user and privileged access to certain applications, establishing additional controls over segregation of duties and the preparation and review of journal entries, implementing controls to review the activities for those users who have privileged access and program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately.
The implementation of these remediation efforts is in progress, may require additional expenditures to implement, and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and as a result, the timing of when we will be able to fully remediate the material weaknesses is uncertain. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting, which may necessitate additional implementation and evaluation time. We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended April 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II - Other Information
Item 1. LEGAL PROCEEDINGS
The information contained in “Note 13 — Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements is incorporated by reference into this Item.
Item 1A. RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes appearing elsewhere in this filing, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, or results of operations.
Risks Related to Our Business and Industry
We have grown rapidly in recent years and have limited experience at our current scale of operations and our historical growth rates are not necessarily indicative of our future performance. If we are unable to drive future growth or manage our growth effectively, our brand, company culture, and financial performance may suffer.
We have grown rapidly over the last several years, due in large part to the growth in demand for our Subscription offerings, however, our recent growth rates and financial performance should not necessarily be considered indicative of our future performance. To effectively manage and capitalize on our growth, we must continue to enhance customer experience and attract and retain customers (particularly subscribers), iterate our subscription products, invest in digital consumer innovation, expand our brand awareness and marketing, and upgrade our management information and reverse logistics systems and other processes. Our growth and growth strategies have in the past strained, and could in the future strain, our existing resources, and we could experience ongoing operating difficulties in managing our business across numerous jurisdictions, including difficulties in hiring, training, and managing a diverse and growing employee base. Failure to scale and preserve our company culture as we grow could also harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
Our growth strategy is focused on continuing to grow, engage, and retain our subscriber and customer base, expanding our brand partner relationships and product assortment, increasing our advertising and other marketing spending, and continuing to invest in our offerings and technology. The majority of our revenue is generated by our subscribers. Our base subscription plans range in price and customers can customize their subscription monthly by purchasing additional slots and shipments. Our subscriptions renew automatically on a monthly basis and subscribers may disable automatic renewal by canceling or pausing their subscription prior to the next month’s bill date. As a result, even though a significant number of subscribers have historically renewed their monthly subscription, there can be no assurance that we will be able to retain a significant portion of subscribers beyond the existing monthly subscription periods. In addition, any limitation or restriction imposed on our ability to bill our subscribers on a recurring basis, whether due to new regulations or otherwise, may significantly lower our subscription retention rate. We also offer our customers the option to rent or buy items via our Reserve offering and Resale offering, respectively. Our subscription plans and offerings do not have demonstrably long track records of success and may not grow as much or as fast as we expect. For example, our active subscriber growth rate slowed year over year as of January 31, 2023. In addition, we presently anticipate our revenue growth rate to slow in fiscal year 2023. If our growth rates continue to decelerate, investors’ perception of our business, financial condition and results of operations may be adversely affected.
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The fashion industry is rapidly evolving and our business may not develop as we expect. Overall growth of our revenue will depend on a number of factors, including our ability to:
•change traditional consumer buying habits and normalize clothing subscription, rental and resale;
•price our Subscription, Reserve and Resale offerings so that we are able to attract new customers, and retain and expand our relationships with existing customers;
•ensure that we maintain an adequate depth and breadth of available products to meet customer demand and respond swiftly and appropriately to new and changing styles, trends or desired consumer preferences;
•accurately forecast our revenue and plan our fulfillment, operating expenses and capital expenditures;
•provide customers with a high-quality, seamless user experience and order fulfillment, as well as customer service and support that meets their needs;
•acquire customers into varying levels of subscription programs at different price points;
•improve our website and app performance and successfully identify and acquire, partner or invest in products, technologies, or businesses that we believe could complement or expand our business;
•successfully maintain and grow our relationships with existing and new brand partners, including continuing to maintaining and growing our Share by RTR and Exclusive Design offerings;
•avoid disruptions in acquiring and distributing our products and offerings;
•be efficient in our paid marketing;
•maintain and enhance our reputation and the value of our brand;
•hire, integrate and retain talented personnel across all levels of our organization;
•successfully compete with other companies that are currently in, or may in the future enter, the industry or the markets in which we operate, and respond to developments from these competitors such as pricing changes and the introduction of new offerings;
•comply with existing and new laws and regulations applicable to our business;
•successfully expand into new and penetrate existing geographic markets in the United States;
•successfully develop new offerings and innovate and enhance our existing offerings and their features, including in response to new trends, competitive dynamics or the needs of customers and subscribers;
•effectively manage growth of our business, personnel, and operations, including expanding our shipping and distribution network and fulfillment center operations, as well as our logistics footprint and the number of facilities we operate in the future;
•effectively manage our costs related to our business and operations; and
•avoid or manage interruptions in our business from information technology downtime, cybersecurity incidents and other factors that could affect our physical and digital infrastructure.
Because we have a limited history operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our offerings, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. Failure to manage our future growth effectively could have an adverse effect on our business, financial condition, and results of operations.
We also expect to continue to expend substantial financial and other resources to grow our business, and we may fail to allocate our resources in a manner that results in increased revenue growth in our business. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial condition, and results of operations may be harmed, and we may not achieve or sustain profitability in the future.
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The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.
We compete with other fashion rental companies and also with a range of traditional and online retail and resale fashion companies and we expect competition to continue to increase in the future. To be successful, we need to continue to attract and retain customers and brand partners.
We believe our ability to compete effectively depends on many factors within and beyond our control, including:
•our ability to normalize fashion rental and change traditional retail shopping habits and norms;
•how effectively differentiated our offerings, customer experience and value proposition are from those of our competitors;
•how effectively we market and communicate how to use our Subscription, Reserve and Resale offerings and attract and retain customers;
•our ability to expand and maintain an appealing depth and breadth of our products to meet customer demand;
•the price at which we are able to offer our Subscription, Reserve and Resale offerings;
•the amount, diversity, and quality of brands that we or our competitors offer;
•our ability to acquire products on favorable and efficient terms, including our ability to attract new brand partners and retain existing brand partners in our Share by RTR and Exclusive Design programs;
•the speed and cost at which we can deliver products to our customers and the ease with which they can return our products;
•the effectiveness of our customer service;
•further developing our data science capabilities for brand partners;
•the strength of our brand, including maintaining favorable brand recognition and effectively marketing our services and value proposition to customers;
•the success of our reverse-logistics processes in delivering products in good condition to customers; and
•anticipating and successfully responding to changing apparel trends and consumer shopping preferences.
Many competitors or potential competitors have or may have longer operating histories, greater brand recognition, better user experiences, stronger consumer and supplier relationships, less complicated business models, and significantly greater financial, marketing and other resources. In addition, they may be able to innovate and provide products and services faster and with more selection than we can, including as a result of their vertical integrations that better enables them to acquire market share. Certain fashion rental competitors have lower priced subscription offerings than we do and/or offer more items per shipment. In addition, competitors and potential compe