UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 31, 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 | ||||||
The | ||||||||
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 ☐
1
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 67,223,096 shares of Class A common stock and 3,098,580 shares of Class B common stock as of November 30, 2023.
2
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.
1
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.
•COVID-19 has, and future COVID-19 outbreaks may in the future 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.
1
•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 restructuring or refinancing may not be available on acceptable terms or at all and that our operations may be adversely impacted by the covenants in our current debt agreement or future financing agreements.
•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.
2
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, including rental product depth strategy, promotional and marketing strategy and onboarding initiatives, sustainability initiatives, business plans, impact from our September 2022 restructuring plan and other cost savings initiatives, anticipated cost savings from our 2023 transportation deal with a major national carrier, anticipated future expenditures, product acquisition expectations, 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 October 31, 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.
3
Part I - Financial Information
Item 1. Financial Statements
| Page | |||||
| Notes to Condensed Consolidated Financial Statements | |||||
4
RENT THE RUNWAY, INC. Condensed Consolidated Balance Sheets | ||
| October 31, | 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 14) | |||||||||||
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.
5
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Operations | ||
(In millions, except share and per share amounts, unaudited)
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2023 | 2022 | 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 | |||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||
| Loss on asset impairment related to restructuring | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
Operating loss | ( | ( | ( | ( | |||||||||||||||||||
Interest income / (expense), net | ( | ( | ( | ( | |||||||||||||||||||
| Other 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.
6
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 July 31, 2023 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Stock issued under stock incentive plan | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balances as of October 31, 2023 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Balances as of July 31, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Stock issued under stock incentive plan | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balances as of October 31, 2022 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
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 October 31, 2023 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Balances as of January 31, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Stock issued under stock incentive plan | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balances as of October 31, 2022 | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows | ||
(In millions, unaudited)
| Nine Months Ended October 31, | |||||||||||
| 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 write-off of fixed assets | |||||||||||
| Loss on asset impairment related to restructuring | |||||||||||
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.
9
RENT THE RUNWAY, INC. Condensed Consolidated Statements of Cash Flows | ||
(In millions, unaudited)
| Nine Months Ended October 31, | |||||||||||
| 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, 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 | |||||||||||
| Adjustments to ROU assets or lease liabilities due to modification or other reassessment events to operating and finance leases | ( | ||||||||||
| Purchases of fixed assets and intangibles not yet settled | |||||||||||
| Purchases of rental product not yet settled | |||||||||||
| Reconciliation of loss on asset impairment: | |||||||||||
| Accrued expense related to the loss on asset impairment | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
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”).
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 and nine months ended October 31, 2023 are not necessarily indicative of the operating results expected for the year ending January 31, 2024 or any future period. The condensed consolidated balance sheet as of January 31, 2023 is derived from the audited consolidated financial statements. 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.
Fiscal Year
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
11
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, valuation of share-based compensation and warrants, and recoverability of long-lived assets.
As of October 31, 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 or nine months ended October 31, 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.
12
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 October 31, 2023 and January 31, 2023 was $3.4 million and $3.0 million, respectively. The accelerated depreciation related to rental product held for sale was $1.5 million and $2.6 million for the three months ended October 31, 2023 and 2022, respectively, and $3.5 million and $6.1 million, for the nine months ended October 31, 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.
13
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 11 % and 11 % of total revenue for the three months ended October 31, 2023 and 2022, respectively, and 10 % and 9 % of total revenue for the nine months ended October 31, 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 October 31, 2023 and 2022, $0.5 million and $0.7 million of credits included in the customer credit liability as of July 31, 2023 and 2022, respectively, were redeemed. During the nine months ended October 31, 2023 and 2022, $1.3 million and $1.7 million of credits included in the customer credit liability as of January 31, 2023 and 2022, respectively, were redeemed. Customer credits and gift cards do not have expiration dates. Over time, a portion of these instruments is not redeemed. The Company 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 (reduced to two months prior to the rental start date in October 2023) 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 eight-day rental period.
14
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 October 31, 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.
Interim Impairment Evaluation
During the three months ended October 31, 2023, the Company evaluated whether events or circumstances had changed such that it would indicate it is more likely than not that the carrying value of its long-lived assets may not be recoverable (triggering event). Given the Company’s stock price decline during the third quarter, the Company concluded a triggering event had occurred and performed an impairment analysis of its long-lived assets group (which constitutes the Company’s sole reporting unit) as of October 31, 2023. The Company performed a quantitative assessment using the undiscounted future cash flows expected to be generated by the use and eventual disposition of the Company’s long-lived assets group. The assessment included consideration of key factors including projected enterprise cash flows, market capitalization and the fair value of the Temasek debt. Based on the quantitative assessment, undiscounted cash flows expected to be generated by the use and eventual disposition of the Company’s long-lived assets exceeded their carrying values and therefore no impairment was recognized for the three months ended October 31, 2023.
15
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
Recently Issued and Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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.
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. While the Company experienced year-over-year revenue growth in fiscal year 2022 and in the nine months ended October 31, 2023, revenue decreased year-over-year in the three months ended October 31, 2023. To the extent the Company is impacted by macroeconomic trends, or other factors, including, but not limited to, demand for our business, the Company plans to reduce fixed and variable costs accordingly and has established plans to preserve existing cash liquidity, which includes additional reductions to labor, operating expenses, and/or capital expenditures. The Company anticipates adjusting rental product spend and other investments to align with the overall growth of the business.
In September 2022, the Company announced a restructuring plan that generated annual operating expense savings of approximately $27 million (relative to the second quarter of fiscal year 2022 run rate) in the last four quarters.
16
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
On December 1, 2023, the Company entered into a Tenth Amendment to Credit Agreement (the “Credit Facility Amendment”) to the 2022 Amended Temasek Facility (as amended by the 2023 Amendment, the “2023 Amended Temasek Facility”). The Credit Facility Amendment, among other things, (i) eliminates all interest (both payment-in-kind and cash interest) for a period of six full fiscal quarters beginning with the fourth quarter of fiscal year 2023; (ii) reduces the minimum liquidity maintenance covenant under the 2023 Amended Temasek Facility from $50 million to $30 million; and (iii) provides that the Company may not exceed mutually agreed upon quarterly and annual spend levels for inventory capital expenditures, fixed operating expenditures and marketing expenditures during fiscal year 2024 and to-be-agreed levels for fiscal years 2025 and 2026, subject to Double Helix Pte Ltd.’s consent (as administrative agent for Temasek Holdings) and certain exceptions.
As of October 31, 2023 and January 31, 2023, the Company held cash and cash equivalents of $105.9 million and $154.5 million, respectively, and long-term debt of $300.2 million and $272.5 million, respectively, with a maturity date of October 2026. In the event that the Company fails to comply with the covenants specified in the 2023 Amended Temasek Facility, the lender has the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. The Company believes that it will have sufficient liquidity from cash on-hand and future operations to sustain its business operations, satisfy the $30 million minimum liquidity maintenance covenant and comply with the maximum expenditure covenants for at least the next twelve months from the date these financial statements are issued.
4.Restructuring and Related Charges
On September 12, 2022, the Company announced a restructuring plan to reduce costs, streamline its organizational structure and drive operational efficiencies. The plan primarily includes 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 $2.0
The Company recorded an asset impairment charge of $3.8 3.4 0.4 million related to accrued expenses, during the three and nine months ended October 31, 2022, related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan. The charge is reflected in Loss on asset impairment related to restructuring on the Company’s Unaudited Condensed Consolidated Statements of Operations. The Company may incur additional restructuring charges in the future.
5.Leases - Lessee Accounting
During the three months ended October 31, 2023, the Company issued a letter of intent to exercise the renewal option on the operating lease for its fulfillment center at 100 Metro Way in Secaucus, NJ, the terms of which extended the lease for an additional five years to August 31, 2029. The Company treated the extension of the lease as a lease modification as of the effective date of the letter of intent which resulted in an adjustment of $10.2 million and $10.2 million to the related lease liabilities and right-of-use assets, respectively. The Company has subsequently continued to negotiate the terms of the renewal option with the landlord. The Company did not exercise its renewal option with respect to its lease for 55 Metro Way in Secaucus, NJ, which is anticipated to expire in accordance with its terms on August 31, 2024.
17
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
During the nine months ended October 31, 2022, the Company amended the operating lease for its corporate headquarters in Brooklyn, NY, the terms of which terminated one floor of the leased space. The partial lease termination of the corporate headquarters leased space resulted in a reduction of $10.6 million in the Company’s future minimum fixed lease obligations as of the lease modification date. The Company treated the partial lease termination amendment as a lease modification as of the effective date which resulted in an adjustment of $3.7 million and $1.4 million to the related lease liabilities and right-of-use assets, respectively. The Company recorded a gain on the partial termination of $1.8 million and a loss on surrender of the related fixed assets, primarily leasehold improvements, of $1.9 million, both of which are recorded on the condensed consolidated statements of operations within general and administrative expenses in the nine months ended October 31, 2022.
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 October 31, 2023:
| Operating | Financing | ||||||||||
| Fiscal year: | |||||||||||
| 2023 | $ | $ | |||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total minimum lease payments | |||||||||||
| Imputed interest | ( | ( | |||||||||
Lease liabilities as of October 31, 2023 | $ | $ | |||||||||
6.Rental Product, Net
Rental product, net consisted of the following:
| October 31, | 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 $15.5 million and $13.9 million for the three months ended October 31, 2023 and 2022, respectively, and $40.4 million and $41.0 million for the nine months ended October 31, 2023 and 2022, respectively.
18
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
7.Long-Term Debt
Summary
The following table summarizes the Company’s long-term debt outstanding as of October 31, 2023 and January 31, 2023:
| October 31, | 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 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.
19
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 included a minimum liquidity maintenance covenant of $50 million. The 2022 Amended Temasek Facility also contains various events of default, including failure to comply with the minimum liquidity maintenance covenant, the occurrence of which could result in the acceleration of obligations for the Company. Refer to Note 15 - Subsequent Events for details of the Credit Facility Amendment in December 2023.
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 October 31, 2023.
20
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
8.Income Taxes
The Company’s provision or benefit from income taxes in interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The estimate of the annual effective income tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year.
The Company continues to maintain a full valuation allowance on all United States net deferred tax assets for all periods presented.
The amount of unrecognized tax benefits as of October 31, 2023 and January 31, 2023 was $1.0 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.
9.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| October 31, | 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 | $ | $ | |||||||||
10.Fair Value Measurements
As of October 31, 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 7 — 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 October 31, 2023, the estimated fair value of the Company’s long-term debt was $293.7 million.
21
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
11.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 October 31, 2023 and January 31, 2023, the Company had the following outstanding warrants:
October 31, 2023 | |||||||||||||||||||||||||||||
| Outstanding Warrants | Date Issued | Number of Shares | Class of Shares | Exercise Price (Per Warrant) | 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 nine months ended October 31, 2022. See Note 7 - Long-Term Debt for details of the warrants issued to Temasek in January 2023.
22
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 (Per Warrant) | 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 October 31, 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.
12.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.
23
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 nine months ended October 31, 2023 have a shorter vesting period of to two years 6,151,568 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. There were no stock options granted during the year ended January 31, 2023 or the nine months ended October 31, 2023.
24
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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 October 31, 2023 | $ | $ | |||||||||||||||||||||
Exercisable as of October 31, 2023 | $ | $ | |||||||||||||||||||||
As of October 31, 2023, there was $0.5 million of unrecognized compensation cost related to stock options granted that is expected to be recognized over a weighted average period of 1.6 years.
During the nine months ended October 31, 2023, the Company completed an option exchange designed to incentivize and retain employees, directors and other service providers by providing the ability to exchange outstanding stock options for RSUs representing the right to receive Class A common stock. Stock options relating to 6,627,411 shares of Class A and Class B common stock were forfeited in exchange for 2,650,930 RSUs which generally vest over years. The Company will recognize $0.8 million of incremental stock compensation expense from the RSUs granted as a result of the option exchange which will be recognized over the two years vesting period. The Company currently uses authorized and unissued shares to satisfy the exercise of stock option awards.
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 October 31, 2023 | $ | ||||||||||
As of October 31, 2023, there was $16.8 million of unrecognized compensation cost related to RSUs granted that is expected to be recognized over a weighted average period of 1.6 years. Of the total unrecognized compensation cost, $2.9 million related to RSUs granted as a result of the option exchange.
25
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
Share-Based Compensation Summary
The classification of share-based compensation for the three and nine months ended October 31, 2023 and 2022, respectively, presented within each line item of the condensed consolidated statements of operations is as follows:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Technology | $ | $ | $ | $ | |||||||||||||||||||
| Marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total share-based compensation | $ | $ | $ | $ | |||||||||||||||||||
The Company recognized $2.4 million of incremental share-based compensation expense in General and administrative expenses during the nine months ended October 31, 2023 due to equity award modifications related to the transition of the Chief Financial Officer role. There was no expense recognized during the three months ended October 31, 2023.
The Company recognized $0.4 million and $0.5 million of incremental share-based compensation expense during the three and nine months ended October 31, 2023, respectively, as a result of the option exchange discussed above.
13.Net Loss per Share Attributable to Common Stockholders
The Company computes net loss per share attributable to common stockholders under the two-class method required for multiple classes of common stock and participating securities. The rights of the Class A common stock and Class B common stock are substantially identical, other than voting rights. Accordingly, the net loss per share attributable to common stockholders will be the same for Class A and Class B common stock on an individual or combined basis.
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
2023 | 2022 | 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 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
26
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
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:
Nine Months Ended October 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Stock options | |||||||||||
Common stock warrants | |||||||||||
| RSUs | |||||||||||
Total | |||||||||||
14.Commitments and Contingencies
The Company had restricted cash balances for cash collateralized standby letters of credit as of October 31, 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.
On November 14, 2022, a purported stockholder of the Company filed a putative class action lawsuit in the Eastern District of New York against the Company, certain of its officers and directors, and the underwriters of its IPO, entitled Rajat Sharma v. Rent the Runway, Inc., et al. 22-cv-6935. The complaint alleges that the defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), by making allegedly materially misleading statements, and by omitting material facts necessary to make the statements made therein not misleading concerning, inter alia, the Company’s growth at the time of the IPO. The lawsuit seeks, among other things, compensatory damages, an award of attorneys’ fees and costs and such other relief as deemed just and proper by the court. On June 8, 2023, the court appointed Delaware Public Employees’ Retirement System and Denver Employees Retirement Plan as lead plaintiffs. On August 21, 2023, lead plaintiffs filed an amended complaint against the Company, certain of its officers and directors, and the underwriters of its IPO. The amended complaint alleges that defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act by allegedly making certain false and misleading statements, and by omitting material facts necessary to make the statements made therein not misleading, concerning, among other things, the Company’s growth prospects and fulfillment costs at the time of the IPO. The lawsuit seeks an award of damages, attorney’s fees and costs, and such other relief as the court deems just and proper. The Company intends to vigorously defend itself against these claims. The Company believes it has meritorious defenses to the claims asserted in the amended complaint and any liability for such claims is not currently probable and the potential loss or range of loss is not reasonably estimable.
27
RENT THE RUNWAY, INC. Notes to Condensed Consolidated Financial Statements | ||
(Dollars in millions, except share and per share amounts)
15.Subsequent Events
On December 1, 2023, the Company entered into the Credit Agreement Amendment. The Credit Facility Amendment, among other things, (i) eliminates all interest (both payment-in-kind and cash interest) for a period of six full fiscal quarters beginning with the fourth quarter of fiscal year 2023; (ii) reduces the minimum liquidity maintenance covenant under the 2023 Amended Temasek Facility from $50 million to $30 million; and (iii) provides that the Company may not exceed mutually agreed upon quarterly and annual spend levels for inventory capital expenditures, fixed operating expenditures and marketing expenditures during fiscal year 2024 and to-be-agreed levels for fiscal years 2025 and 2026, subject to Double Helix Pte Ltd.’s consent (as administrative agent for Temasek Holdings) and certain exceptions.
28
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 175,901 ending total subscribers1 (active and paused) as of October 31, 2023. The majority of our revenue is highly recurring and is generated by our subscribers. For the nine months ended October 31, 2023 and 2022, respectively, 88% and 84% 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, or in partnership with, 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.
29
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.
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 7, “Long-Term Debt” in the Notes to the Condensed Consolidated Financial Statements for more details.
On December 1, 2023, we entered into an amendment to our 2022 Amended Temasek Agreement (as amended by the 2023 Amendment, the “2023 Amended Temasek Agreement”). The 2023 Amended Temasek Agreement, among other things, (i) eliminates all interest (both payment-in-kind and cash interest) for a period of six full fiscal quarters beginning with the fourth quarter of fiscal year 2023; (ii) reduces the minimum liquidity maintenance covenant under the 2023 Amended Temasek Agreement from $50 million to $30 million; and (iii) provides that we may not exceed mutually agreed upon quarterly and annual spend levels for inventory capital expenditures, fixed operating expenditures and marketing expenditures during fiscal year 2024 and to-be-agreed levels for fiscal years 2025 and 2026, subject to Double Helix Pte Ltd.’s consent (as administrative agent for Temasek Holdings) and certain exceptions. The maximum expenditure amounts are consistent with our current profitability goals and anticipated spend for fiscal year 2024 and reflect lower amounts relative to fiscal year 2023 for inventory capital expenditures and fixed operating expenditures and roughly flat amounts for marketing expenditures.
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 $2.0 million for severance and related costs were recognized during the three and nine months ended October 31, 2022 and are reflected in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations. We recorded an asset impairment charge of $3.8 million during the three and nine months ended October 31, 2022 related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan, of which $3.4 million related to the write-off of fixed assets and $0.4 million related to accrued expenses. The charge is reflected in Loss on asset impairment related to restructuring on our Unaudited Condensed Consolidated Statements of Operations. There were no restructuring charges or asset impairment charges recognized during the nine months ended October 31, 2023. We may incur additional restructuring charges in the future.
The September 2022 restructuring plan has generated total annual operating expense savings of approximately $27 million (relative to the second quarter of fiscal year 2022 run rate) in the last four quarters. Approximately $16 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 approximately $11 million of total annualized savings reflect the portion related to technology and general and administrative expenses.
See Note 4, “Restructuring and Related Charges” in the Notes to the Condensed Consolidated Financial Statements for more details on these charges.
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 was completed during the second quarter of fiscal year 2023. The option exchange resulted in minimal incremental share-based compensation expense over the life of the replacement RSUs, in addition to certain administrative expenses in fiscal year 2023.
30
Additional Key Fiscal Third Quarter and Recent Business Highlights:
•Made Significant Progress on Customer Inventory Experience: Over-delivered against plans to increase inventory availability for our customers, driven by the depth strategy we announced in prior quarter. Third quarter in-stock rate was 1400bps higher than the first half of fiscal year 2023 and 1200bps higher than the third quarter of fiscal year 2022, which has contributed to the highest NPS scores we have seen since pre-COVID. Retention has grown month-over-month since August.
•Launched Luxury Evening Wear: As one of many steps intended to reinvigorate our special-event rental business, today we unveiled “The Vault,” a new category of luxury evening wear styles from 20+ of the top designer brands in fashion, featuring new-to-site designers including Etro, Oscar de la Renta, Brandon Maxwell, Anna October, Giambattista Valli, Rachel Gilbert, Paris Georgia, Mara Hoffman, Zac Posen and Roland Mouret, exclusively for 4- or 8-day rentals.
•Further Improved Operating Efficiencies: Further internationalized our technology team by relocating roles from NYC to Galway, Ireland, which is expected to result in lower technology costs for the remainder of fiscal year 2023 and for fiscal year 2024. RTR is leveraging our existing strong presence and technical leadership at our Galway, Ireland EU software development hub, which was established in 2019.
•Grew Resale Business: Purchase rate, which we believe represents a significant sales and loyalty lever for customers, was up 50% in the third quarter in units sold versus prior year. Subscribers are increasingly using Rent the Runway as a “try before you buy” sales channel, where she can understand how the product fits into her life by first wearing it through her subscription.
•Drove Record Adoption of RTR Concierge Service: Our SMS-based luxury styling and support service, RTR Concierge, has reached an all-time high adoption rate with over 30% of new subscribers opting in as of the end of the third quarter. We have seen sustained retention improvements for people that use concierge across all terms of membership.
31
Key Operating and Financial Results. We have achieved the following operating and financial results for the three months ended October 31, 2023 and 2022, respectively:
•Revenue was $72.5 million and $77.4 million, respectively, representing a change of (6.3)% year-over-year;
•131,725 and 134,240 ending Active Subscribers2 (excluding paused subscribers), respectively, representing a change of (2)% year-over-year;
•134,646 and 129,186 Average Active Subscribers3, respectively, representing 4% growth year-over-year;
•175,901 and 176,167 ending Total Subscribers (including paused subscribers), respectively, roughly flat year-over-year;
•Gross Profit was $25.2 million and $31.8 million, respectively, representing a gross margin of 34.8% and 41.1%, respectively;
•Net Loss was $(31.5) million and $(36.1) million, respectively. Net Loss as a percentage of revenue was (43.4)% and (46.6)%, respectively. In the three months ended October 31, 2022, Net Loss included $5.8 million of restructuring and related charges; and
•Adjusted EBITDA was $3.5 million and $6.6 million, respectively, representing an Adjusted EBITDA margin of 4.8% and 8.5%, respectively.
We have achieved the following operating and financial results for the nine months ended October 31, 2023 and 2022, respectively:
•Revenue was $222.4 million and $221.0 million, respectively, representing 0.6% growth year-over-year;
•Gross Profit was $89.8 million and $86.7 million, respectively, representing a gross margin of 40.4% and 39.2%, respectively;
•Net Loss was $(88.4) million and $(112.5) million, respectively. Net Loss as a percentage of revenue was (39.7)% and (50.9)%, respectively. In the nine months ended October 31, 2022, Net Loss included $5.8 million of restructuring and related charges;
•Adjusted EBITDA was $15.7 million and $(0.4) million, respectively, representing an Adjusted EBITDA margin of 7.1% and (0.2)%, respectively;
•Net cash used in operating activities plus net cash used in investing activities was $(47.3) million and $(69.9) million, respectively;
•Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (21.3)% and (31.6)%, respectively; and
•Cash and Cash Equivalents was $105.9 million and $176.0 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.
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.
32
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.
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 Share by RTR and Exclusive Designs, our 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 over time. We expect to incur considerably lower Purchases of Rental Product in fiscal year 2024 relative to fiscal year 2023 due to fiscal year 2023 being impacted by the need to make inventory depth adjustments.
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 that 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, including improving rental product in-stock levels, which we believe impacted subscriber growth in the second and third quarters of fiscal year 2023. Our data indicate that newer subscribers were most negatively impacted by lower rental product in-stock levels. We have begun to implement plans designed to address these lower in-stock levels through higher levels of rental product depth per style in future rental product purchases. We have seen an improvement to retention in the third quarter of fiscal year 2023 and expect these changes to have an even greater positive impact during fiscal year 2024. 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, in the second quarter of fiscal year 2023, we experimented with changes to our initial promotion prices for Subscription, which impacted subscriber acquisition. We further reduced promotions in the third quarter of fiscal year 2023, as we believe that being less promotional going forward will have improved effects on retention and the overall health of the business over the longer-term and enable us to invest these resources into the customer experience. We expect our promotional activities to be below historical averages in the near to medium term, which is anticipated to reduce subscriber acquisition in the near term; however, depending on market conditions and other factors, we will likely conduct additional experiments and may make changes to our promotions strategy in the future, which could impact subscriber acquisition.
33
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. Additionally, during the third quarter of fiscal year 2022, we launched a pilot to sell our brand new Exclusive Design products wholesale to a third party retailer, which we believe highlights the potential of the RTR platform and our data and consumer appeal. 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.
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 in fiscal year 2023 compared with fiscal year 2022 due to lower sales projections, the reallocation of marketing dollars to rental product purchases and 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 reduced operating expenses by approximately $27 million in the last four quarters 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 and continuous improvements to our cost structure, 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.
34
Seasonality
We experience seasonality in our business, which has been impacted and may in the future change due to the effects of COVID-19, the macro environment, and business decisions. 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, we believe that a price increase of our Subscription programs in April 2022 affected traditional seasonal patterns. In fiscal year 2023, changes in rental product in-stock levels and changes to promotional prices also disrupted typical seasonality. Given continued business changes, our future seasonality may not resemble historical trends.
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 typical timing of carrier rate increases, higher service levels, such as more costly and expedited shipping, and competition during holidays. However we expect transportation expenses per shipment in the fourth quarter of fiscal year 2023 to be roughly flat with the third quarter of fiscal year 2023 due to more favorable contract terms. 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 historically 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 several factors, including inflationary pressures, higher interest rates, potential risk of recession, ongoing industry-wide supply chain issues, instability in the financial system, the wars in Ukraine and the Middle East and COVID-19. 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 review and learn how changes in customer behavior post the 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, 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 fiscal year 2023 to attract and retain talent at our fulfillment centers and we expect to continue to be impacted by rising labor costs in the future. We also expect transportation costs to decrease in fiscal year 2023 due to transportation efficiencies and the impact of our new transportation contract with a major national carrier, effective in September 2023. While we expect to be able to reduce transportation costs in fiscal year 2023, we plan to continue to mitigate longer-term rising costs by seeking to optimize shipping methods and improve contractual and pricing terms. Although we continue to face a challenging environment, we plan to invest in our customers, manage our staffing and further leverage our transportation partners to help 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.
35
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 generally accepted accounting principles in the United States (“U.S. 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 October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||
| Active Subscribers | 131,725 | 134,240 | 131,725 | 134,240 | |||||||||||||||||||
| Average Active Subscribers | 134,646 | 129,186 | 134,646 | 129,186 | |||||||||||||||||||
| Gross Profit | $ | 25.2 | $ | 31.8 | $ | 89.8 | $ | 86.7 | |||||||||||||||
| Adjusted EBITDA (1) | $ | 3.5 | $ | 6.6 | $ | 15.7 | $ | (0.4) | |||||||||||||||
__________
(1)Adjusted EBITDA is a non-GAAP financial measure; for a reconciliation to the most directly comparable U.S. 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 October 31, 2023, we had 131,725 Active Subscribers, a change of (2)% year-over-year. Our Active Subscribers decreased year-over-year, primarily due to the impact of lower rental product in-stock levels, changes in our promotional strategy and lower marketing spend.
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 October 31, 2023, we had 134,646 Average Active Subscribers, up from 129,186 as of October 31, 2022, or a 4% increase year-over-year.
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 $25.2 million for the three months ended October 31, 2023 compared to $31.8 million for the three months ended October 31, 2022 representing Gross Margins of 34.8% and 41.1%, respectively. Gross Profit was $89.8 million for the nine months ended October 31, 2023 compared to $86.7 million for the nine months ended October 31, 2022 representing Gross Margins of 40.4% and 39.2%, respectively. The decrease in Gross Profit and Gross Margin for the three months ended October 31, 2023 was driven by higher rental product depreciation and revenue share costs as a percentage of sales. Fulfillment costs as a percentage of revenue remained consistent compared to the prior year.
36
Gross Profit for the nine months ended October 31, 2023 increased due to the impact of the April 2022 price increase and efficiencies in fulfillment costs. Gross Margin increased for the nine months ended October 31, 2023 due to lower fulfillment costs as a percentage of sales, partially offset by higher rental product depreciation and revenue share costs as a percentage of sales. We expect Gross Margin to be lower in fiscal year 2023 compared to fiscal year 2022 due to higher rental product depreciation and revenue share costs as a percentage of sales. We will seek to continue to drive fulfillment and operational efficiency gains over time and strategically evolve our mix of revenue and product acquisition to offset cost increases and/or higher units processed per shipment.
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), non-ordinary course legal expenses, restructuring charges, loss on asset impairment related to restructuring, income tax (benefit) expense, 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 $3.5 million for the three months ended October 31, 2023 compared to $6.6 million for the three months ended October 31, 2022, representing margins of 4.8% and 8.5%, respectively. Adjusted EBITDA decreased for the three months ended October 31, 2023 as the prior year benefited from a $4.6 million contribution to Adjusted EBITDA from sales of Exclusive Designs inventory to a third party retailer as part of a pilot program and from the launch of a new liquidation partnership. These declines were partly offset by the impact of the September 2022 restructuring plan. Adjusted EBITDA was $15.7 million for the nine months ended October 31, 2023 compared to $(0.4) million for the nine months ended October 31, 2022, representing margins of 7.1% and (0.2)%, respectively. Adjusted EBITDA Margin significantly improved for the nine months ended October 31, 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 believe 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 September 2022 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. We anticipate our total revenue growth rate to be roughly flat year-over-year 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 in fiscal year 2023 compared to fiscal year 2022.
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 two months prior to the rental start date (reduced from four months prior to the rental start date beginning in October 2023) 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.
37
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.
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 during the first quarter of fiscal year 2023 and expect to continue to be impacted by rising wage rates in the future. During the first three quarters of fiscal year 2023, we realized efficiencies that offset fulfillment cost increases. For fiscal year 2023, we expect to offset fulfillment expense increases with transportation efficiencies and the impact of our new transportation contract. We expect to continue to invest in automation, other process improvements to support and drive efficiencies in our operations and negotiate better pricing where possible. To the extent we are successful in becoming more efficient in fulfilling orders, and at a magnitude that is able to offset long-term increases in 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 in fiscal year 2023 compared to fiscal year 2022 as a result of our September 2022 restructuring plan and our continued focus on managing costs. . In addition, we expect to incur lower fixed cost operating expenses in fiscal year 2024 relative to fiscal year 2023; however, over the 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. Marketing expenses unrelated to personnel costs may increase if we increase marketing spend to drive the growth of our business and increase our brand awareness. Marketing expenses in the third quarter of fiscal year 2023 decreased as compared to the prior year, which we expect to continue into the fourth quarter of fiscal year 2023 as we reallocate a portion of our budgeted marketing expenses to rental product purchases, which is anticipated to continue to reduce subscriber acquisition in the near term. We expect our marketing spend to be roughly flat in fiscal year 2024 as compared to fiscal year 2023. The trend and timing of our marketing expenses will depend in part on the timing of marketing campaigns.
38
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 fiscal year 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 September 2022 restructuring plan. In addition, we expect to incur lower fixed cost operating expenses in fiscal year 2024 relative to fiscal year 2023; however, over the longer 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.
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.
Restructuring Charges. Restructuring charges consist of severance and related costs associated with the September 2022 restructuring plan.
Loss on Asset Impairment Related to Restructuring. Loss on asset impairment related to restructuring consists of an asset impairment charge related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan.
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 2023 Amended Temasek Facility going forward. The 2023 Amended Temasek Facility eliminates all interest (both payment-in-kind and cash interest) for a period of six full fiscal quarters beginning with the fourth quarter of fiscal year 2023.
Other Income / (Expense). Other income / (expense) consists primarily of proceeds from monetizing tax credits associated with growth.
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.
39
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 October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription and Reserve rental revenue | $ | 64.7 | $ | 68.8 | $ | 199.5 | $ | 200.2 | |||||||||||||||
| Other revenue | 7.8 | 8.6 | 22.9 | 20.8 | |||||||||||||||||||
| Total revenue, net | 72.5 | 77.4 | 222.4 | 221.0 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Fulfillment | 21.5 | 23.2 | 65.9 | 69.5 | |||||||||||||||||||
| Technology | 12.1 | 14.1 | 38.1 | 42.6 | |||||||||||||||||||
| Marketing | 7.1 | 9.7 | 24.6 | 27.4 | |||||||||||||||||||
| General and administrative | 24.4 | 25.3 | 76.8 | 84.1 | |||||||||||||||||||
| Rental product depreciation and revenue share | 25.8 | 22.4 | 66.7 | 64.8 | |||||||||||||||||||
| Other depreciation and amortization | 3.5 | 3.9 | 11.0 | 12.6 | |||||||||||||||||||
| Restructuring charges | — | 2.0 | — | 2.0 | |||||||||||||||||||
| Loss on asset impairment related to restructuring | — | 3.8 | — | 3.8 | |||||||||||||||||||
| Total costs and expenses | 94.4 | 104.4 | 283.1 | 306.8 | |||||||||||||||||||
| Operating loss | (21.9) | (27.0) | (60.7) | (85.8) | |||||||||||||||||||
| Interest income / (expense), net | (10.0) | (9.3) | (28.3) | (28.2) | |||||||||||||||||||
| Other income / (expense), net | 0.2 | 0.1 | 0.3 | 1.4 | |||||||||||||||||||
| Net loss before income tax benefit / (expense) | (31.7) | (36.2) | (88.7) | (112.6) | |||||||||||||||||||
| Income tax benefit / (expense) | 0.2 | 0.1 | 0.3 | 0.1 | |||||||||||||||||||
| Net loss | $ | (31.5) | $ | (36.1) | $ | (88.4) | $ | (112.5) | |||||||||||||||
Comparison of the three months ended October 31, 2023 and 2022
Total Revenue, Net. Total revenue, net was $72.5 million for the three months ended October 31, 2023, a decrease of $(4.9) million, or (6.3)%, compared to $77.4 million for the three months ended October 31, 2022. This decrease was primarily driven by lower revenue per subscriber, lower reserve revenue and lower other revenue which was offset by higher Average Active Subscribers and an increase in units purchased per subscriber.
Subscription and Reserve Rental Revenue. Subscription and Reserve rental revenue was $64.7 million for the three months ended October 31, 2023, a decrease of $(4.1) million, or (6.0)%, compared to $68.8 million for the three months ended October 31, 2022. This decrease was driven by lower revenue per subscriber which was driven by changes in subscription program mix and lower add-on rates. The decrease was also driven by lower reserve revenue and was partially offset by higher Average Active Subscribers.
Other Revenue. Other revenue was $7.8 million for the three months ended October 31, 2023, a decrease of $(0.8) million, or (9.3)%, compared to $8.6 million for the three months ended October 31, 2022. The prior year period benefited from $1.6 million of other revenue related to our pilot to sell brand new Exclusive Design products wholesale to a third party retailer. This decrease was offset 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 10.8% of total revenue, down from 11.1% in the same period last year.
40
Costs and Expenses. Total costs and expenses were $94.4 million for the three months ended October 31, 2023, a decrease of $(10.0) million, or (9.6)%, compared to $104.4 million for the three months ended October 31, 2022. This decrease was primarily driven by cost savings from the September 2022 restructuring plan which reduced costs compared to the same period last year.
Fulfillment. Fulfillment expenses were $21.5 million for the three months ended October 31, 2023, a decrease of $(1.7) million, or (7.3)%, representing 29.7% of revenue, compared to $23.2 million for the three months ended October 31, 2022, representing 30.0% of revenue. The decrease in fulfillment dollars and as a percentage of revenue was primarily driven by transportation and processing cost efficiencies and subscriber program mix that offset an increase in units per shipment due to the 5 item plan.
Technology. Technology expenses were $12.1 million for the three months ended October 31, 2023, a decrease of $(2.0) million, or (14.2)%, compared to $14.1 million for the three months ended October 31, 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 16.7% of revenue for the three months ended October 31, 2023 compared to 18.2% last year as we saw increased operating leverage despite lower revenue. Technology related share-based compensation expense was $0.9 million for the three months ended October 31, 2023 and was $1.5 million for the same period last year.
Marketing. Marketing expenses were $7.1 million for the three months ended October 31, 2023, a decrease of $(2.6) million, or (26.8)%, compared to $9.7 million for the three months ended October 31, 2022. This decrease was driven by timing of marketing spend to support customer initiatives and by the reallocation of our budgeted marketing expenses to rental product purchases in the third quarter of fiscal year 2023. Marketing expenses unrelated to personnel costs were $6.5 million in the three months ended October 31, 2023 and 9.0% of revenue, compared to $8.7 million and 11.2% of total revenue last year.
General and Administrative. General and administrative (“G&A”) expenses were $24.4 million for the three months ended October 31, 2023, a decrease of $(0.9) million, or (3.6)%, compared to $25.3 million for the three months ended October 31, 2022. This decrease was driven by cost savings from the September 2022 restructuring plan. We recognized proceeds from a new liquidation partnership which positively impacted G&A expenses by $2.3 million in the third quarter of fiscal year 2022. G&A expenses as a percentage of revenue were 33.7% compared to 32.7% last year as we had less operating leverage over lower revenue despite a lower cost base post-restructuring. G&A related share-based compensation expense was $4.0 million for the three months ended October 31, 2023 and was $5.0 million for the three months ended October 31, 2022. 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 due to equity award modifications related to the transition of the Chief Financial Officer role.
Rental Product Depreciation and Revenue Share. Rental product depreciation and revenue share was $25.8 million for the three months ended October 31, 2023, an increase of $3.4 million, or 15.2%, compared to $22.4 million for the three months ended October 31, 2022. Rental product depreciation and revenue share was 35.6% of revenue in the three months ended October 31, 2023, up from 28.9% in the same period last year due to higher rental product depreciation and revenue share costs as a percentage of sales.
Other Depreciation and Amortization. Other depreciation and amortization was $3.5 million for the three months ended October 31, 2023, a decrease of $(0.4) million, or (10.3)%, compared to $3.9 million for the three months ended October 31, 2022. This decrease was primarily driven by lower depreciation and amortization associated with capitalized technology labor offset by higher depreciation associated with reusable packaging.
Restructuring Charges. Restructuring charges were $2.0 million for the three months ended October 31, 2022 for severance and related costs in connection with the September 2022 restructuring plan.
Loss on Asset Impairment Related to Restructuring. Loss on asset impairment related to restructuring was $3.8 million for the three months ended October 31, 2022 and consisted of an asset impairment charge related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan.
41
Interest Income / (Expense), Net. Interest expense, net was $(10.0) million for the three months ended October 31, 2023, an increase in expense of $0.7 million, or 7.5%, compared to $(9.3) million for the three months ended October 31, 2022. This increase was driven by higher paid-in-kind (“PIK”) interest from the 2022 Amended Temasek Facility, offset by lower cash interest as a result of the 2022 Amended Temasek Facility and higher cash interest earned. Of the $10.0 million total interest expense in the three months ended October 31, 2023, $7.8 million was the accrual of PIK interest, $0.4 million was the net of cash interest, interest earned and financing lease interest and other interest and $1.8 million was debt discount amortization, compared to $3.6 million of PIK interest, $4.5 million of net cash interest, interest earned and financing lease interest and $1.2 million of debt discount amortization in the three months ended October 31, 2022.
Other Income / (Expense), Net. Other income / (expense) was $0.2 million for the three months ended October 31, 2023, an increase of $0.1 million, compared to $0.1 million for the three months ended October 31, 2022.
Comparison of the nine months ended October 31, 2023 and 2022
Total Revenue, Net. Total revenue, net was $222.4 million for the nine months ended October 31, 2023, an increase of $1.4 million, or 0.6%, compared to $221.0 million for the nine months ended October 31, 2022. This increase was primarily driven by the increase in Average Active Subscribers and units purchased per subscriber.
Subscription and Reserve Rental Revenue. Subscription and Reserve rental revenue was $199.5 million for the nine months ended October 31, 2023, a decrease of $(0.7) million, or (0.3)%, compared to $200.2 million for the nine months ended October 31, 2022. This decrease was driven by lower reserve revenue and lower add-on rates, and was partially offset by an increase in Average Active Subscribers compared to the same period last year.
Other Revenue. Other revenue was $22.9 million for the nine months ended October 31, 2023, a increase of $2.1 million, or 10.1%, compared to $20.8 million for the nine months ended October 31, 2022. This increase was primarily driven by an increase in Average Active Subscribers and the items purchased per subscriber. Other revenue represented 10.3% of total revenue, up from 9.4% in the same period last year. During the nine months ended October 31, 2022 we also recognized $1.6 million of revenue from a pilot to sell our brand new Exclusive Design products wholesale to a third party retailer.
Costs and Expenses. Total costs and expenses were $283.1 million for the nine months ended October 31, 2023, a decrease of $(23.7) million, or (7.7)%, compared to $306.8 million for the nine months ended October 31, 2022. This decrease was primarily driven by cost savings from the September 2022 restructuring plan which reduced costs compared to the same period last year.
Fulfillment. Fulfillment expenses were $65.9 million for the nine months ended October 31, 2023, a decrease of $(3.6) million, or (5.2)%, representing 29.6% of revenue, compared to $69.5 million for the nine months ended October 31, 2022, representing 31.4% of revenue. The decrease in fulfillment dollars and as a percentage of revenue was primarily driven by transportation and processing cost efficiencies and higher revenue per shipment that offset an increase in units per shipment due to the 5 item plan.
Technology. Technology expenses were $38.1 million for the nine months ended October 31, 2023, a decrease of $(4.5) million, or (10.6)%, compared to $42.6 million for the nine months ended October 31, 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 17.1% of revenue for the nine months ended October 31, 2023 compared to 19.3% for the same period last year as we saw increased operating leverage with higher revenue and a lower cost base post-restructuring. Technology related share-based compensation expense was $4.6 million for the nine months ended October 31, 2023 and was $4.3 million for the same period last year.
42
Marketing. Marketing expenses were $24.6 million for the nine months ended October 31, 2023, a decrease of $(2.8) million, or (10.2)%, compared to $27.4 million for the nine months ended October 31, 2022. This decrease was driven by timing of marketing spend to support customer initiatives and by the reallocation of our budgeted marketing expenses to rental product purchases in the third quarter of fiscal year 2023. Marketing expenses unrelated to personnel costs were $22.5 million in the nine months ended October 31, 2023 and 10.1% of revenue, compared to $23.9 million and 10.8% of total revenue for the same period last year.
General and Administrative. General and administrative (“G&A”) expenses were $76.8 million for the nine months ended October 31, 2023, a decrease of $(7.3) million, or (8.7)%, compared to $84.1 million for the nine months ended October 31, 2022. This decrease was driven by cost savings from the September 2022 restructuring plan. We recognized proceeds from a new liquidation partnership which positively impacted G&A expenses by $2.3 million in the third quarter of fiscal year 2022. G&A expenses as a percentage of revenue were 34.5% compared to 38.1% 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 $16.4 million for the nine months ended October 31, 2023 and was $14.3 million for the nine months ended October 31, 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 due to equity award modifications related to the transition of the Chief Financial Officer role.
Rental Product Depreciation and Revenue Share. Rental product depreciation and revenue share was $66.7 million for the nine months ended October 31, 2023, an increase of $1.9 million, or 2.9%, compared to $64.8 million for the nine months ended October 31, 2022. The increase was primarily driven by an increase in revenue share. Rental product depreciation and revenue share was 30.0% of revenue in the nine months ended October 31, 2023, up from 29.3% in the same period last year primarily due to an increase in revenue share due to more Share by RTR units acquired.
Other Depreciation and Amortization. Other depreciation and amortization was $11.0 million for the nine months ended October 31, 2023, a decrease of $(1.6) million, or (12.7)%, compared to $12.6 million for the nine months ended October 31, 2022. This decrease was primarily driven by lower depreciation and amortization associated with capitalized technology labor, computers, equipment and software.
Restructuring Charges. Restructuring charges was $2.0 million for the nine months ended October 31, 2022 for severance and related costs in connection with the September 2022 restructuring plan.
Loss on Asset Impairment Related to Restructuring. Loss on asset impairment related to restructuring was $3.8 million for the nine months ended October 31, 2022 and consists of an asset impairment charge related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan.
Interest Income / (Expense), Net. Interest expense, net was $(28.3) million for the nine months ended October 31, 2023, an increase in expense of $0.1 million, or 0.4%, compared to $(28.2) million for the nine months ended October 31, 2022. This increase was driven by higher paid-in-kind (“PIK”) and lower cash interest from the 2022 Amended Temasek Facility, partially offset by higher cash interest earned. Of the $28.3 million total interest expense in the nine months ended October 31, 2023, $22.5 million was the accrual of PIK interest, $0.6 million was the net of cash interest, interest earned and financing lease interest and other interest and $5.2 million was debt discount amortization, compared to $10.6 million of PIK interest, $14.4 million of cash interest, financing lease interest and other interest and $3.2 million of debt discount amortization in the nine months ended October 31, 2022.
Other Income / (Expense), Net. Other income / (expense) was $0.3 million for the nine months ended October 31, 2023, a decrease of $(1.1) million, compared to $1.4 million for the nine months ended October 31, 2022. This decrease was primarily driven by $1.4 million of monetization of tax credits during the nine months ended October 31, 2022.
43
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. Adjusted EBITDA was $3.5 million for the three months ended October 31, 2023 compared to $6.6 million for the three months ended October 31, 2022, representing margins of 4.8% and 8.5%, respectively. Adjusted EBITDA decreased for the three months ended October 31, 2023 as the prior year benefited from a $4.6 million contribution to Adjusted EBITDA from sales of Exclusive Designs inventory to a third party retailer as part of a pilot program and from the launch of a new liquidation partnership. These declines were partly offset by the impact of the September 2022 restructuring plan. Adjusted EBITDA was $15.7 million for the nine months ended October 31, 2023 compared to $(0.4) million for the nine months ended October 31, 2022, representing margins of 7.1% and (0.2)%, respectively. Adjusted EBITDA Margin significantly improved for the nine months ended October 31, 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.
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 October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Net loss | $ | (31.5) | $ | (36.1) | $ | (88.4) | $ | (112.5) | |||||||||||||||
| Interest (income) / expense, net (1) | 10.0 | 9.3 | 28.3 | 28.2 | |||||||||||||||||||
| Rental product depreciation | 15.5 | 13.9 | 40.4 | 41.0 | |||||||||||||||||||
| Other depreciation and amortization (2) | 3.5 | 3.9 | 11.0 | 12.6 | |||||||||||||||||||
| Share-based compensation (3) | 4.9 | 6.6 | 21.1 | 19.0 | |||||||||||||||||||
| Write-off of liquidated assets (4) | 0.9 | 2.5 | 2.6 | 4.9 | |||||||||||||||||||
| Non-recurring adjustments (5) | 0.1 | 0.3 | 0.6 | 1.3 | |||||||||||||||||||
| Non-ordinary course legal fees (6) | 0.2 | — | 0.2 | — | |||||||||||||||||||
| Restructuring charges (7) | — | — | 2.0 | — | — | — | 2.0 | ||||||||||||||||
| Loss on asset impairment related to restructuring (8) | — | 3.8 | — | 3.8 | |||||||||||||||||||
| Income tax (benefit) / expense | (0.2) | (0.1) | (0.3) | (0.1) | |||||||||||||||||||
| Other (income) / expense, net (9) | (0.2) | (0.1) | (0.3) | (1.4) | |||||||||||||||||||
| Other (gains) / losses (10) | 0.3 | 0.6 | 0.5 | 0.8 | |||||||||||||||||||
| Adjusted EBITDA | $ | 3.5 | $ | 6.6 | $ | 15.7 | $ | (0.4) | |||||||||||||||
| Adjusted EBITDA Margin (11) | 4.8 | % | 8.5 | % | 7.1 | % | (0.2) | % | |||||||||||||||
44
__________
(1)Includes debt discount amortization of $1.8 million in the three months ended October 31, 2023, $1.2 million in the three months ended October 31, 2022, $5.2 million in the nine months ended October 31, 2023 and $3.2 million in the nine months ended October 31, 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.
(5)Non-recurring adjustments for the three months ended October 31, 2023 includes $0.1 million of costs primarily related to the option exchange and the three months ended October 31, 2022 includes $0.3 million of costs related to public company SOX readiness. Non-recurring adjustments for the nine months ended October 31, 2023 includes $0.6 million of costs primarily related to the option exchange and for the nine months ended October 31, 2022 includes $1.3 million of costs related to public company SOX readiness.
(6)Non-ordinary course legal fees for the three and nine months ended October 31, 2023 includes $0.2 million of costs related to a class action lawsuit.
(7)Reflects restructuring charges primarily related to severance and related costs in connection with the September 2022 restructuring plan.
(8)Reflects the asset impairment charge related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan.
(9)Primarily includes $1.4 million of monetized tax credits for the nine months ended October 31, 2022.
(10)Includes gains / losses recognized in relation to foreign exchange, operating lease terminations and the related surrender of fixed assets (see “Note 5 - Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements).
(11)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 October 31, 2023, we had cash and cash equivalents of $105.9 million and restricted cash of $10.0 million ($4.8 million current and $5.2 million noncurrent), and an accumulated deficit of $(1,028.3) 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 October 31, 2023 was $300.2 million. For a description of the terms of our current and prior credit agreements, see “Note 7 – Long-Term Debt” and “Note 15 – Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements.
We expect that operating losses and negative cash flows from operations plus cash flows used in investing could continue in the future as we continue to acquire products and invest in our business initiatives. However, we anticipate making further reductions to our fixed and variable costs to support our profitability goals in fiscal year 2023 and 2024. 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 $30 million minimum liquidity maintenance covenant for at least the next twelve months from the date the accompanying financial statements included elsewhere in this Quarterly Report are issued. As noted above, our 2023 Amended Temasek Facility eliminates all interest (both payment-in-kind and cash interest) for a period of six full fiscal quarters beginning with the fourth quarter of fiscal year 2023. In September 2022, we announced a restructuring plan to reduce costs, streamline our organizational structure and drive operational efficiencies, which generated annual operating expense savings of approximately $27 million (relative to the second quarter of fiscal year 2022 run rate) in the last four quarters.
45
Our future capital requirements will depend on many factors, including, but not limited to, demand for our business, rental product spend 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 or if we fail to comply with the covenants specified in the 2023 Amended Temasek Facility, inclusive of the $30 million minimum liquidity maintenance covenant, we may be required to seek additional capital or restructure or refinance our indebtedness. 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 this occurs, our repayment obligations under the 2023 Amended Temasek Facility may be accelerated and we may be unable to meet such obligations. 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.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| Nine Months Ended October 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Net cash (used in) provided by operating activities | $ | (7.7) | $ | (39.4) | |||||||
| Net cash (used in) provided by investing activities | (39.6) | (30.5) | |||||||||
| Net cash (used in) provided by financing activities | (0.4) | (3.8) | |||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (47.7) | (73.7) | |||||||||
| 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 | $ | 115.9 | $ | 185.9 | |||||||
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 $(47.3) million for the nine months ended October 31, 2023 and $(69.9) million for the nine months ended October 31, 2022. The cash consumption of the business was lower in the first three quarters of fiscal year 2023 compared with the same period of fiscal year 2022 primarily due to lower operating costs as a result of the September 2022 restructuring plan 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 our rental product strategy. We also opportunistically purchased additional rental product to take advantage of attractive pricing in the current environment, which partially offset the lower cash consumption in the first three quarters 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 (21.3)% for the nine months ended October 31, 2023 and (31.6)% for the nine months ended October 31, 2022.
Net cash (used in) provided by operating activities. For the nine months ended October 31, 2023, net cash used in operating activities was $(7.7) million, which consisted of a net loss of $(88.4) million, partially offset by non-cash charges of $99.6 million, reclassification of the proceeds from the sale of rental product of $16.2 million and a net change of $(2.7) million in our operating assets and liabilities. The non-cash charges were primarily comprised of $39.5 million of rental product depreciation and write-off expenses, $22.5 million of payment-in-kind interest, $21.1 million of share-based compensation, $5.2 million of debt discount amortization, and $11.3 million of other fixed and intangible asset depreciation.
46
For the nine months ended October 31, 2022, net cash used in operating activities was $(39.4) million, which consisted of a net loss of $(112.5) million, partially offset by non-cash charges of $89.6 million, reclassification of the proceeds from the sale of rental product of $13.7 million and a net change of $(2.8) million in our operating assets and liabilities. The non-cash charges were primarily comprised of $38.3 million of rental product depreciation and write-off expenses, $10.6 million of payment-in-kind interest, $19.0 million of share-based compensation, $3.2 million of debt discount amortization, $15.1 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 5 - Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements), and $3.8 million consisting of an asset impairment charge related to discontinuing a warehouse operations project in connection with the September 2022 restructuring plan, of which $0.4 million is included in accrued expenses related to the asset impairment (see the Supplemental Cash Flow Information in Part I, Item 1. Financial Statements).
Net cash (used in) provided by investing activities. For the nine months ended October 31, 2023, net cash used in investing activities was $(39.6) million, primarily consisting of $(56.3) million of purchases of rental product incurred in the period and $(3.2) million of purchases of fixed and intangible assets. The investment in rental product does not include an additional $17.3 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 rental product strategy. We also opportunistically purchased additional rental product to take advantage of attractive pricing in the current environment. The majority of the investment in fixed and intangible assets was primarily related to capitalized lease renewals and investments in leasehold improvements. The cash used in investing activities was partially offset by $16.2 million of proceeds from the sale of owned rental product and $3.7 million of proceeds from the liquidation of rental product.
For the nine months ended October 31, 2022, net cash used in investing activities was $(30.5) million, primarily consisting of $(43.6) million of purchases of rental product and $(8.5) million of purchases of fixed and intangible assets. The investment in rental product did not include the additional $14.0 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 $13.7 million of proceeds from sales of owned rental products and $7.9 million of proceeds from the liquidation of rental product.
Net cash provided by (used in) financing activities. During the nine months ended October 31, 2023, net cash used in financing activities was $(0.4) million, consisting of other financing payments.
During the nine months ended October 31, 2022, net cash used in financing activities was $(3.8) 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 October 31, 2023, we had approximately $300.2 million of total debt outstanding, none of which matures within the next 12 months. See “Note 7 — Long-Term Debt” in the Notes to the Condensed Consolidated Financial Statements for more information. See “Note 5 — Leases – Lessee Accounting” in the Notes to the Condensed Consolidated Financial Statements for our minimum fixed lease obligations under existing lease agreements as of October 31, 2023, including the discussion of the recent extension of our Secaucus lease.
47
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 nine months ended October 31, 2023, there were no material changes to our critical accounting estimates from those discussed in our 2022 Annual Report on Form 10-K except as discussed below.
Interim Impairment Evaluation
Long-lived assets, such as rental product, fixed assets, intangible assets, and right-of-use lease assets, are reviewed for impairment triggers when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined using various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as necessary.
Given the Company’s stock price decline during the third quarter, the Company concluded a triggering event had occurred and performed an impairment analysis of its long-lived assets as of October 31, 2023. The Company performed a quantitative assessment using the undiscounted future cash flows expected to be generated by the use and eventual disposition of the Company’s long-lived assets group. The assessment included consideration of key factors including projected enterprise cash flows, market capitalization and the fair value of the Temasek debt. Based on the quantitative assessment, undiscounted cash flows expected to be generated by the use and eventual disposition of the Company’s long-lived assets exceeded their carrying values and therefore no impairment was recognized for the three months ended October 31, 2023.
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.
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 October 31, 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.
48
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 October 31, 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 October 31, 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.
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.
49
Remediation Efforts to Address Material Weaknesses
We continue to implement measures designed 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 controls are in place and 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 October 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
50
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
The information contained in “Note 14 — 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 in the last several years, due in large part to the growth in demand for our Subscription offerings, however, our historical 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 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 and may continue to slow year over year in the future. In addition, we presently anticipate our revenue growth rate to be roughly flat year-over-year in fiscal year 2023. If our growth rates continue to decelerate, the perception of our business, financial condition and results of operations by investors and our third-partner service providers and brand partners may be adversely affected.
51
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 maintain and grow 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;