RENT THE RUNWAY, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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 endedJanuary 31, 2022 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 year endedJanuary 31, 2022 (the "2021 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".
Insight
We give customers ongoing access to our "unlimited closet" - with over 20,000 styles by over 800 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. 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 over 2.5 million lifetime customers across all of our offerings and we had 177,213 ending total subscribers1 (active and paused) as ofApril 30, 2022 . The majority of our revenue is highly recurring and is generated by our subscribers. For the three months endedApril 30, 2022 and 2021, respectively, 86% and 87% 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, accessories and home goods, directly from designer brands. Prior to 2018, we purchased nearly all of our products from our brand partners typically at a discount to wholesale cost, which we refer to as "Wholesale" items. In late 2018, we began to procure products through Share by RTR and Exclusive Designs. See "-Our Product Acquisition Strategy" below for a description of the three ways in which we procure products. 1 Ending total subscribers represents the number of subscribers with an active or paused membership as of the last day of the period and excludes subscribers who had an active or paused subscription during the period, but ended their subscription prior to the last day of the fiscal period. 27
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Recent Business Developments
Initial Public Offering. OnOctober 29, 2021 , we closed our initial public offering (the "IPO"), in which we issued and sold 17,000,000 shares at the 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. Debt Paydown and Amendment. Concurrent with our IPO, we paid down our senior secured term loan withAres Corporate Opportunities Fund V, L.P. (the "Ares Facility") of$80.7 million in full and$60.0 million of our subordinated, junior lien term loan withDouble Helix Pte Ltd. as administrative agent forTemasek Holdings (the "Temasek Facility"), resulting in a total debt repayment of$140.7 million . We also refinanced the remaining Temasek Facility (the "Amended Temasek Facility").
Main operational and financial results. We achieved the following operational and financial results for the three months ended
• Turnover was
•134,998 and 74,018 end active subscribers2 (excluding paused subscribers), respectively, representing 82% year-over-year growth and our highest number of active subscribers at the end of the quarter since the launch of the subscription;
• 177,213 and 104,138 total subscribers at the end (including paused subscribers), respectively, representing a 70% year-over-year growth;
• Gross profit was
• The net loss was
• Adjusted EBITDA was
• Cash and cash equivalents was
First Quarter Business Highlights
• We continued to drive subscriber engagement, with 28% of subscribers adding one or more additional paid items to their subscription program;
•Continued growth of Exclusive Designs and launch of six new Exclusive Designs collections;
• Expansion of door-to-door collection to more than 20 markets; and
•Continued to expand automation and productivity initiatives in our distribution centers, leveraging RFID technology to increase the efficiency of our quality control process and generate data to improve garment longevity.
2 Active subscribers are defined as the total number of end subscribers at the end of the period, excluding subscribers on pause.
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.
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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 upfront spend and de-risks our investment since we pay brands primarily based on item performance. Our Share by RTR arrangements with brands target delivering 85% 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 afterSeptember 2020 include a cap on total potential payments to the brand partner. In fiscal year 2021, 45% of new items were acquired through Wholesale, 33% through Share by RTR and 22% through Exclusive Designs, compared to 46% Wholesale, 36% Share by RTR and 18% Exclusive Designs in fiscal year 2020. In total, approximately 55% of new items were acquired through the more capital-efficient channels in fiscal year 2021, approximately 54% in fiscal year 2020 and approximately 26% in fiscal year 2019. Both our purchasing power and the diversification into Share by RTR and Exclusive Designs have led to a decrease in average upfront cost per item over time. We are executing on our strategy to further decrease the percentage of units acquired through Wholesale and increase the percentage of units acquired through our more capital-efficient channels, Exclusive Designs and Share by RTR, in fiscal year 2022.
For more details on our business model and product acquisition strategy, see our 2021 Annual Report on Form 10-K.
Key factors affecting our performance
We believe that our performance and future success depends on a variety of factors that present significant opportunities for our business, but also present risks and challenges that could negatively impact our growth and profitability.
Brands and products
Ability to Acquire 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. Due to our deep partnerships with brands, we can acquire products directly from them in multiple ways, and due to our expertise in reverse logistics and garment restoration we can 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 2021, approximately 55% of new items were acquired through our more capital efficient non-Wholesale channels, compared to 54% in fiscal year 2020 and 26% in fiscal year 2019. We are executing on our strategy to further increase the percentage of units acquired through Exclusive Designs and Share by RTR in fiscal year 2022. We continuously evaluate our product acquisition mix to maximize our strategic priorities. Upfront cost per item is defined as total upfront spend for items acquired in a period divided by the number of items acquired. We define total upfront spend as the total costs of products acquired in a period excluding performance based revenue share payments which are paid out over time. Total upfront spend includes the total acquisition cost for Wholesale items, upfront payments to brand partners for Share by RTR and Exclusive Designs items, third party manufacturing or other similar acquisition costs for Exclusive Designs items, and other ancillary upfront costs such as freight, where applicable. For fiscal year 2021 our average upfront cost per item was$95 , representing a 14% decrease from an average upfront cost of$111 in fiscal year 2019. Due to seasonality factors, we track our progress on average upfront cost on a full year basis, as quarterly costs are not necessarily reflective of full year trends. Our diversification into non-Wholesale channels has meaningfully reduced our upfront spend. Ability to Achieve Leverage in our Cost Structure. Improving operational efficiency of our platform is imperative to maintaining or increasing profitability. We expect our operating costs to increase as we make investments to grow subscribers and revenue and to enhance the customer experience. Though we anticipate quarterly fluctuations in operating leverage, we do not expect these costs to generally grow at the same pace as our total revenue on an annual basis. 29 -------------------------------------------------------------------------------- Table of Contents 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 and are focused on driving additional efficiencies in our 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.
Seasonality
We experience seasonality in our business, which has been impacted and may in the future change due to the effects of the COVID-19 pandemic. 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. We historically had typically realized a higher portion of revenue from Reserve rentals during our third and fourth fiscal quarters as a result of increased wedding and holiday events. The third and fourth fiscal quarters of 2021 and the first quarter of 2022 demonstrated subscriber seasonality patterns that are generally consistent with our historical trends, although our fourth quarter of 2021 saw a higher rate of pause activity due to the Omicron variant impact. In addition, our seasonality trends are seeing effects from COVID-19 generally, as Reserve orders and revenue are impacted by fewer large-scale holiday and special events compared to pre-COVID-19, especially those typically occurring in the third and fourth quarters. Subscriber acquisition was also impacted by COVID-19 in the fourth quarter of 2021 due to fewer large-scale holiday and special events. We also experience seasonality in the timing of expenses and capital outlays. Transportation expense, and therefore fulfillment cost, is typically highest in the fiscal fourth quarter, given higher service levels, such as more costly expedited shipping, and competition during holidays. Our most significant product capital expenditures typically occur in the first fiscal quarter and the third fiscal quarter, when we acquire product for the upcoming fall and spring seasons, though impact on cash is dependent on timing of receipt of product.
For more details on the key factors affecting our performance, see our 2021 Annual Report on Form 10-K.
Impact of COVID-19 on our business
The COVID-19 pandemic materially adversely affected our fiscal year 2020 operating and financial results. InMarch 2020 , we instituted numerous health and safety measures and took immediate financial actions to withstand COVID-19 including pausing of paid advertising and marketing activities and other cost-saving measures to reduce operating and capital expenditures in the short term, including salary reductions, closing of brick and mortar stores and right sizing of labor in our fulfillment centers. These actions significantly reduced these costs as a percentage of revenue throughout fiscal year 2020. Rental product depreciation and revenue share as a percentage of revenue increased throughout fiscal year 2020 due to the levels of rental product on hand relative to the reduced subscriber levels. In fiscal year 2021, our financial results continued to be impacted by the COVID-19 pandemic. In particular, in the first quarter of fiscal year 2021 subscriber acquisition and engagement increased as shelter-at-home restrictions were lifted. In the fourth quarter of fiscal year 2021 the Omicron variant negatively impacted us in three key ways: 1) significantly decreased revenue from our Reserve business as most holiday events were canceled; 2) reduced subscriber acquisition in the second half of quarter; and 3) drove a higher rate of subscriber pause. In fiscal year 2021, financial results also continued to be impacted by consumers working primarily from home and by special events and occasions not being back to pre-pandemic levels. 30 -------------------------------------------------------------------------------- Table of Contents We expect the effects of the COVID-19 pandemic and related macro-economic trends, including the spread of potential new variants, to have a continued impact on our business, results of operations, growth rates, and financial condition into fiscal year 2022, though we currently expect an environment that is improved from fiscal year 2021. We believe that the backlog of special events and leisure travel that have been pushed to 2022 and 2023 will contribute to additional COVID-19 recovery in those periods. We continue to take actions to adjust to the changing COVID-19 business environment and related inflationary pressure. For example, we increased wage rates throughout fiscal year 2021 to attract and retain talent at our fulfillment centers and we expect to continue to be impacted by rising labor costs in fiscal year 2022. We also expect transportation costs to continue to increase in fiscal year 2022, and we are focused on diversifying our transportation network to mitigate these rising costs and service delays. Examples of these mitigation efforts include increasing volumes with regional and last-mile carriers and consolidating shipments, such as through the launch of an at-home pickup service in certain markets. Although we continue to face a challenging environment due to the COVID-19 pandemic, rising wages, a decreased level of workforce participation and nationwide shipping carrier delays, we have been able to and plan to continue hiring and are diversifying our transportation network in order to support increasing and/or fluctuating demand for our offerings. The full extent to which the COVID-19 pandemic, including the spread of any new variants, 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 the uncertainty, we cannot estimate the financial impact of the pandemic on our future results of operations, cash flows, or financial condition. For additional details, see Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q.
Main commercial and financial parameters
In addition to the measures presented in our condensed consolidated financial
statements, we use the following key business and financial metrics to help us
evaluate our business, identify trends affecting our business, formulate
business plans, and make strategic decisions. The calculation of the key
business and financial metrics discussed below may differ from similarly titled
metrics used by other companies, securities analysts or investors, limiting the
usefulness of those measures for comparative purposes. These key business and
financial metrics are not meant to be considered as indicators of our financial
performance in isolation from or as a substitute for our financial information
prepared in accordance with GAAP and should be considered in conjunction with
other metrics and components of our results of operations, such as each of the
other key business and financial metrics, and our revenue and net loss.
Three Months Ended April 30,
2022 2021
($ in millions)
Active Subscribers 134,998 74,018
Gross Profit $ 22.5 $ 8.1
Adjusted EBITDA (1) $ (8.8) $ (6.2)
__________
(1)Adjusted EBITDA is a non-GAAP financial measure; for a reconciliation to the
most directly comparable GAAP financial measure, net loss, and why we consider
Adjusted EBITDA to be a useful metric, see "-Non-GAAP Financial Metrics" below.
Active Subscribers: Active Subscribers represents the number of subscribers with
an active membership as of the last day of any given period and excludes paused
subscribers. As of April 30, 2022 , we had 134,998 Active Subscribers, up 82%
year-over-year as the equivalent quarter of fiscal year 2021 was more heavily
impacted by the COVID-19 pandemic, and we saw recovery post-Omicron during the
first quarter of fiscal year 2022.
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Gross Profit and Gross Margin: We define Gross Profit as total revenue less
fulfillment expense, rental product depreciation and revenue share. 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 $22.5 million
for the three months ended April 30, 2022 compared to $8.1 million in the three
months ended April 30, 2021 representing Gross Margins of 33.5% and 24.2%,
respectively. The significant increase in Gross Profit and Gross Margin for the
three months ended April 30, 2022 was driven by lower rental product
depreciation and revenue share as a percentage of total revenue than in the
prior period which offset higher fulfillment costs driven by increases in
fulfillment related transportation costs. Rental product depreciation decreased
as a percentage of revenue as costs were absorbed over a larger revenue base,
while revenue share increased slightly as a percentage of revenue due to a
higher proportion of Share by RTR items relative to prior year. We have improved
and expect to have the opportunity to further improve Gross Profit and Gross
Margin over time by driving growth in total revenue and revenue per subscriber,
fulfillment and operational efficiency gains, and strategically evolving our mix
of product acquisition.
Adjusted EBITDA and Adjusted EBITDA Margin: We define Adjusted EBITDA as net
loss, adjusted to exclude interest expense, rental product depreciation, other
depreciation and amortization, share-based compensation expense, write-off of
liquidated rental product assets, certain non-recurring or one-time costs (see
below footnotes to the reconciliation table), income taxes, warrant liability
revaluation gains / losses, debt extinguishment gains / losses, 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
$(8.8) million for the three months ended April 30, 2022 compared to $(6.2)
million for the three months ended April 30, 2021 , representing margins of
(13.1)% and (18.5)%, respectively. Adjusted EBITDA Margin has improved for the
three months ended April 30, 2022 due to reasons consistent with the improvement
in Gross Profit and Gross Margin and improved operating leverage across
technology and general and administrative expenses even with additional
strategic investments, offset by higher marketing expenditure. We have the
opportunity to improve Adjusted EBITDA as we increase revenue and drive higher
revenue per subscriber, fulfillment and operational efficiency gains, and
operating expense leverage.
Components of operating results
Total income, 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. 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 inApril 2022 for our subscription plans, which we expect will generally increase revenue per subscriber by program over time. We recognize Reserve fees over the rental period, which starts on the date of delivery of the product to the customer. Reserve orders can be placed up to four months prior to the rental start date and the customer's payment form is charged upon order confirmation. We defer recognizing the rental fees and any related promotions for Reserve rentals until the date of delivery, and then recognize those fees evenly over the four- or eight-day rental period. Other Revenue. We generate Other revenue primarily from the sale of products while they are in rental condition. We offer the ability for subscribers and customers to purchase products at a discount to retail price. Payment for the sale of products occurs upon order confirmation while the associated revenue is recognized either at the time the sold product is delivered to the customer or when purchased, if the item is already at home with the customer. 32
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Costs and expenses
Fulfillment. Fulfillment expenses consist of all costs to receive, process and
fulfill customer orders. This primarily includes shipping costs to/from
customers and personnel and related costs, which include salaries and bonuses,
and employee benefit costs. Personnel and related costs are related to
processing inbound and outbound customer orders, cleaning, restoring and
repairing items received from customers, tracking and managing items within our
fulfillment center network and ingesting new items received from brands.
Fulfillment expenses also include costs of packing materials, cleaning supplies,
and other fulfillment-related expenses. We expect fulfillment costs to increase
in the future as order volume increases and as costs to ship orders increase due
to increasing prices in the transportation market which we started to see in the
second half of fiscal year 2021 and continued to see impact results in the first
quarter of fiscal year 2022. We also expect fulfillment expense to 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 2021 and
believe we will continue to be impacted by rising wage rates. We expect to
continue to invest in automation and other process improvements to support and
drive efficiencies in our operations. To the extent we are successful in
becoming more efficient in fulfilling orders, and at a magnitude that is able to
offset increasing shipping costs, wage rates and cleaning/packing supply price
increases, we would expect these expenses to decrease as a percentage of total
revenue over the longer term.
Technology. Technology expenses consist of personnel and related costs for
employees engaged in software development and engineering, quality assurance,
product, customer experience, data science, analytics and information
technology-related efforts, net of personnel costs associated with capitalized
software. Technology expenses also include professional services, third-party
hosting expenses, website monitoring costs, and software and license fees. We
expect to increase technology expenses 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 and distribution network, including
prioritizing cloud capabilities. While these expenses may vary from period to
period as a percentage of total revenue, we expect them to decrease as a
percentage of total revenue over the longer term.
Marketing. Marketing expenses include online and mobile marketing, search
engine optimization and email costs, marketing personnel and related costs,
agency fees, brand marketing, printed collateral, consumer research, and other
related costs. We expect marketing expenses to increase as we intend to increase
marketing spend to drive the growth of our business and increase our brand
awareness. The trend and timing of our marketing expenses will depend in part on
the timing of marketing campaigns.
General and Administrative. General and administrative 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. We expect
general and administrative expenses to increase as we grow our infrastructure to
support operating as a public company and the overall growth of the business. We
also expect rent expense and other facilities-related costs to increase in the
future as we expand our distribution network to support overall business growth
and fulfillment cost-reduction initiatives. 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 we acquire items
as well as the mix of our rental product base.
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Other depreciation and amortization. Other depreciation and amortization includes amounts for the amortization of fixed assets, intangible fixed assets, including capitalized software, and rights of use financing.
Interest Income / (Expense). Interest income / (expense) consists primarily of accrued paid-in-kind interest, cash interest and debt issuance cost amortization associated with our Amended Temasek Facility going forward. Gain / (Loss) on Warrant Liability Revaluation, Net. Gain / (loss) on warrant liability revaluation is associated with revaluing liability classified warrants to the respective fair value at period end or prior to conversion. As ofApril 30, 2022 , all outstanding warrants are equity classified and therefore do not require remeasurement going forward. Income Tax Benefit / (Expense). Income taxes consist primarily of state minimum taxes and Irish refundable tax credits. We have established a valuation allowance for ourU.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 inthe United States .
Operating results
The results of operations presented below should be reviewed in conjunction with
the condensed consolidated financial statements and notes included elsewhere in
this Quarterly Report on Form 10-Q. The following tables set forth our results
of operations for the periods presented:
Three Months Ended April 30,
2022 2021
Revenue:
Subscription and Reserve rental revenue $ 61.4 $ 29.8
Other revenue 5.7 3.7
Total revenue, net 67.1 33.5
Costs and expenses:
Fulfillment 22.9 8.8
Technology 13.6 9.7
Marketing 8.7 2.6
General and administrative 29.2 19.0
Rental product depreciation and revenue share 21.7 16.6
Other depreciation and amortization 4.2 5.1
Total costs and expenses 100.3 61.8
Operating loss (33.2) (28.3)
Interest income / (expense), net (9.3) (14.5)
Gain / (loss) on warrant liability revaluation, net - 0.5
Net loss before income tax benefit / (expense) (42.5) (42.3)
Income tax benefit / (expense) - -
Net loss $ (42.5) $ (42.3)
Comparison of the three months ended
Total Revenue, Net. Total revenue, net was$67.1 million for the three months endedApril 30, 2022 , an increase of$33.6 million , or 100.3%, compared to$33.5 million for the three months endedApril 30, 2021 . This increase was primarily driven by the increase in overall demand, including subscriber count, directly attributable to the COVID-19 recovery compared to last year. 34
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Subscription and Reserve Rental Revenue. Subscription and Reserve rental revenue was$61.4 million for the three months endedApril 30, 2022 , an increase of$31.6 million , or 106.0%, compared to$29.8 million for the three months endedApril 30, 2021 . This increase was primarily driven by the 82% year-over-year increase in Active Subscriber count and the increase in Reserve rental revenue as a result of the COVID-19 pandemic recovery compared to last year. In addition, in the first quarter of fiscal year 2022, we experienced a recovery from the impact of the Omicron variant which impacted the fourth quarter of fiscal year 2021. Our active subscriber count increased 17% from the end of fiscal year 2021 and the rate of subscriber pause decreased from 28% to 24% of total subscribers. InApril 2022 , we announced a price increase for our subscription plans which went into effect for new subscribers at the end of the quarter, and which went into effect for existing subscribers in the second quarter of fiscal year 2022. We expect the price increase will generally increase revenue per subscriber by program over time. Other Revenue. Other revenue was$5.7 million for the three months endedApril 30, 2022 , an increase of$2.0 million , or 54.1%, compared to$3.7 million for the three months endedApril 30, 2021 . This increase was primarily driven by an increase in Active Subscribers which resulted in increased purchases of resale items. Other revenue represented 8.5% of total revenue, down from 11.0% in the same period of fiscal year 2021 as we shifted away from the strategy to increase resale revenue through promotional activities during COVID-19. Costs and Expenses. Total costs and expenses were$100.3 million for the three months endedApril 30, 2022 , an increase of$38.5 million , or 62.3%, compared to$61.8 million for the three months endedApril 30, 2021 . This increase was primarily driven by an increase in fulfillment, paid marketing, technology, and G&A expenses and hiring to support our increased growth and public company costs. Fulfillment. Fulfillment expenses were$22.9 million for the three months endedApril 30, 2022 , an increase of$14.1 million , or 160.2%, representing 34.1% of revenue, compared to$8.8 million for the three months endedApril 30, 2021 , representing 26.3% of revenue. The increase in fulfillment dollars was primarily driven by an increase in demand-related growth and an increase in transportation costs and wage rates which are expected to continue for the remainder of fiscal year 2022, partially offset by fulfillment process improvements. Technology. Technology expenses were$13.6 million for the three months endedApril 30, 2022 , an increase of$3.9 million , or 40.2%, compared to$9.7 million for the three months endedApril 30, 2021 . This increase was primarily driven by an increase in strategic investments and personnel costs to support future growth initiatives, including back end infrastructure and cloud investments that provide scaling and efficiency benefits and support our work to provide an enhanced search, fit and discovery experience for the consumer. Technology expenses were 20.3% of revenue for the three months endedApril 30, 2022 compared to 29.0% last year as we saw increased operating leverage with higher revenue compared to prior year. Technology related share-based compensation expense was$1.2 million for the three months endedApril 30, 2022 and was$0.4 million for the same period last year. We expect technology expenses to increase in fiscal year 2022, driven by continued strategic investments. Marketing. Marketing expenses were$8.7 million for the three months endedApril 30, 2022 , an increase of$6.1 million , or 234.6%, compared to$2.6 million for the three months endedApril 30, 2021 . This increase was driven by the increased marketing initiatives as compared to the same period last year which had reduced paid and brand marketing spend during the COVID-19 pandemic. Marketing expenses unrelated to personnel costs were$7.4 million in the three months endedApril 30, 2022 and 11.0% of revenue, compared to$1.6 million last year and 4.8% of total revenue. We expect marketing expenses to increase in absolute dollars in fiscal year 2022, in particular in the first half relative to fiscal year 2021, in order to drive subscriber growth and higher recurring revenue earlier in the year. General and Administrative. General and administrative ("G&A") expenses were$29.2 million for the three months endedApril 30, 2022 , an increase of$10.2 million , or 53.7%, compared to$19.0 million for the three months endedApril 30, 2021 . This increase was primarily driven by the increase in costs required to support our growth and public company operations, including increased personnel, insurance and professional service fees, as well as increased credit card fees and customer service costs driven by revenue growth. G&A expenses as a percentage of revenue were 43.5% compared to 56.7% last year as we saw increased operating leverage with higher revenue compared to prior year. G&A related share-based compensation expense was$4.1 million for the three months endedApril 30, 2022 and was$1.4 million for the same period last year. 35
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Rental Product Depreciation and Revenue Share. Rental product depreciation and revenue share was$21.7 million for the three months endedApril 30, 2022 , an increase of$5.1 million , or 30.7%, compared to$16.6 million for the three months endedApril 30, 2021 . The increase is primarily a result of an increase in revenue share payments due to a higher proportion of Share by RTR items rented. Rental product depreciation and revenue share was 32.3% of revenue in the three months endedApril 30, 2022 , down from 49.6% in the prior period primarily due to rental product depreciation decreasing as a percentage of revenue as costs were absorbed over a larger revenue base.
Other depreciation and amortization. The other amortizations were
Interest Income / (Expense), Net. Interest expense, net was$9.3 million for the three months endedApril 30, 2022 , a decrease of$5.2 million , or 35.9%, compared to$14.5 million for the three months endedApril 30, 2021 . This decrease was driven by the accrued payment-in-kind interest related to the additional Ares debt entered inOctober 2020 which impacted the balance as ofApril 30, 2021 and then was paid down in full inOctober 2021 which impacted the balance as ofApril 30, 2022 . Of the$9.3 million total interest expense in the three months endedApril 30, 2022 ,$3.4 million was the accrual of paid-in kind ("PIK") interest,$4.9 million was cash, financing lease interest and other interest and$1.0 million was debt discount amortization, compared to$11.2 million of PIK interest,$1.1 million of cash, financing lease interest and other interest and$2.2 million of debt discount amortization in the three months endedApril 30, 2021 . Gain / (Loss) on Warrant Liability Revaluation, Net. Gain / (loss) on warrant liability revaluation, net was none for the three months endedApril 30, 2022 , a decrease of$0.5 million compared to$0.5 million for the three months endedApril 30, 2021 . This decrease was driven by the exercise and reclassification of liability-classified warrants to equity-classified warrants upon the Company's IPO in the third quarter of fiscal year 2021. As ofApril 30, 2022 , all the Company's outstanding warrants are equity-classified and, as such, did not require fair value remeasurement.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial metrics are useful in evaluating our performance. These non-GAAP financial metrics are not meant to be considered as indicators of our financial performance in isolation from, or as a substitute, for our financial information prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. There are limitations to the use of the non-GAAP financial metrics presented in this Quarterly Report. For example, our non-GAAP financial metrics may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial metrics differently than we do, limiting the usefulness of those measures for comparative purposes. The reconciliation of the below non-GAAP financial metrics to the most directly comparable GAAP financial measure is presented below. We encourage reviewing the reconciliation in conjunction with the presentation of the non-GAAP financial metrics for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items, and may include other expenses, costs and non-recurring items. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are key performance measures used by management to assess our operating performance and the operating leverage of our business prior to capital expenditures. Our Adjusted EBITDA margins have improved from (18.5)% in the three months endedApril 30, 2021 to (13.1)% in the three months endedApril 30, 2022 . 36
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The following table provides a reconciliation of net loss, the most comparable GAAP financial measure, to adjusted EBITDA for the periods presented:
Three Months Ended April 30,
2022 2021
(in millions)
Net loss $ (42.5) $ (42.3)
Interest (income) / expense, net (1) 9.3 14.5
Rental product depreciation 13.6 12.7
Other depreciation and amortization (2) 4.2 5.1
Share-based compensation (3) 5.5 1.9
Write-off of liquidated assets (4) 0.6 1.4
Non-recurring adjustments (5) 0.3 1.0
(Gain) / loss on warrant liability revaluation, net (6) - (0.5)
Other (gains) / losses (7) 0.2 -
Adjusted EBITDA $ (8.8) $ (6.2)
Adjusted EBITDA Margin (8) (13.1) % (18.5) %
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(1)Includes amortization of debt discounting
(2) Reflects the amortization of non-rental income and the amortization of capitalized software.
(3)Reflects non-cash charge related to stock-based compensation.
(4)Reflects the write-off of the remaining book value of liquidated rental income that was previously held for sale.
(5)Non-recurring adjustments for the three months endedApril 30, 2022 includes$0.3 million of costs related to public company SOX readiness and the three months endedApril 30, 2021 includes$1.0 million of costs primarily associated with public readiness preparation.
(6)Reflects the charge associated with the revaluation of prior lenders’ warrants classified as liabilities to their respective fair values at the end of the period. From
(7)Includes gains / losses recognized in relation to foreign exchange, operating lease terminations and the related surrender of fixed assets (see "Note 4 - Leases - Lessee Accounting" in the Notes to the Condensed Consolidated Financial Statements).
(8) Adjusted EBITDA margin calculated as Adjusted EBITDA as a percentage of sales.
Cash 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 ofApril 30, 2022 , we had cash and cash equivalents of$219.0 million and restricted cash of$10.8 million ($5.0 million current and$5.8 million noncurrent), and an accumulated deficit of$(843.7) million . As disclosed above, onOctober 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) withAres Corporate Opportunities Fund V, L.P. (the "Ares Facility") 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 . Our total indebtedness as ofApril 30, 2022 was$265.2 million . For a description of the terms of our current and prior credit agreements, see "Note 6 - Long-Term Debt" in the Notes to the Condensed Consolidated Financial Statements. 37
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We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we continue to acquire products and increase other investments in our business. We believe our existing cash and cash equivalents, and cash generated from our operations, will be sufficient to sustain our business operations, to satisfy our debt service obligations and to comply with our amended debt covenants for at least the next twelve months from the date of this Quarterly Report. Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of customers and Active Subscribers and the timing of investments in technology and personnel to support the overall growth of our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital which could negatively affect our liquidity in the future. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected. Cash Flows
The following table summarizes our cash flows for the periods presented:
Three Months Ended
April 30,
2022 2021
Net cash (used in) provided by operating activities $ (17.4) $ (9.0)
Net cash (used in) provided by investing activities (10.8) (1.3)
Net cash (used in) provided by financing activities (1.6) 17.9
Net increase in cash and cash equivalents and restricted cash (29.8)
7.6
Cash and cash equivalents and restricted cash at the beginning of the year
259.6 109.2
Cash and cash equivalents and restricted cash at the end of the year
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$(10.3) million for the three months endedApril 30, 2021 and$(28.2) million for the three months endedApril 30, 2022 . The sum of net cash used in operating activities and net cash used in investing activities, as a percentage of revenue, was (30.7)% for the three months endedApril 30, 2021 and (42.0)% for three months endedApril 30, 2022 . Net cash (used in) provided by operating activities. For the three months endedApril 30, 2022 , net cash used in operating activities was$(17.4) million , which consisted of a net loss of$(42.5) million , partially offset by non-cash charges of$29.6 million , reclassification of the proceeds from the sale of rental product of$4.0 million and a net change of$(0.5) million in our operating assets and liabilities. The non-cash charges were primarily comprised of$13.6 million of rental product depreciation and write-off expenses,$3.4 million of payment-in-kind interest,$5.5 million of share-based compensation,$1.0 million of debt discount amortization and$6.1 million of other fixed and intangible asset depreciation and the loss on the surrender of fixed asset write-offs related to the partial termination of the lease of the corporate headquarters (see "Note 4 - Leases - Lessee Accounting" in the Notes to the Condensed Consolidated Financial Statements). 38
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For the three months endedApril 30, 2021 , net cash used in operating activities was$(9.0) million , which consisted of a net loss of$(42.3) million , partially offset by non-cash charges of$32.4 million , reclassification of the proceeds from the sale of rental product of$2.8 million and a net change of$3.7 million in our operating assets and liabilities. The non-cash charges were primarily comprised of$12.5 million of rental product depreciation and write-off expenses,$11.2 million of payment-in-kind interest,$1.9 million of share-based compensation,$2.2 million of debt discount amortization and$5.1 million of other fixed and intangible asset depreciation and amortization. Net cash (used in) provided by investing activities. For the three months endedApril 30, 2022 , net cash used in investing activities was$(10.8) million , primarily consisting of$(13.4) million of purchases of rental product incurred in the period and$(2.0) million of purchases of fixed and intangible assets. The investment in rental product does not include an additional$12.7 million of cost for units received in the current period but not yet paid for, but does include$6.5 million of cost for units paid for in the current period but received in the prior period (see the Supplemental Cash Flow Information in Part I, Item 1. Financial Statements). The investment in rental product was to support our growth in customer demand. The majority of the investment in fixed and intangible assets was related to investments in automation assets, additional processing machinery and equipment for our Secaucus and Arlington warehouses and capitalized technology labor. The cash used in investing activities was partially offset by$4.0 million of proceeds from the sale of owned rental product and$0.6 million of proceeds from the liquidation of rental product. For the three months endedApril 30, 2021 , net cash used in investing activities was$(1.3) million , primarily consisting of$(4.4) million of purchases of rental product and$(1.3) million of purchases of fixed and intangible assets. The investment in rental product did not include the additional$3.5 million of cost for units received in the current period but not yet paid for, but did include$3.6 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 planned customer demand prior to the onset of COVID-19. The majority of the investment in fixed and intangible assets was related to the build-out of our new headquarters inBrooklyn, NY , the investment in automation assets and additional processing machinery and equipment for our warehouses in addition to capitalized technology labor. The cash used in investing activities was partially offset by$2.8 million of proceeds from sale of owned rental product and$1.6 million of proceeds from the liquidation of rental product. Net cash provided by (used in) financing activities. During the three months endedApril 30, 2022 , net cash used in financing activities was$(1.6) million , consisting of other financing payments. During the three months endedApril 30, 2021 , net cash provided by financing activities was$17.9 million , consisting primarily of proceeds from the issuance of redeemable preferred stock of$17.1 million .
Contractual obligations and commitments
InOctober 2021 , we paid down outstanding principal and accrued interest of our Ares Facility in full and a portion of our Temasek Facility. Additionally, we entered into the Amended Temasek Facility. As ofApril 30, 2022 , we had approximately$265.2 million of total debt outstanding, none of which is payable within the next 12 months. See "Note 6 - Long-Term Debt" in the Notes to the Condensed Consolidated Financial Statements for more information.
See “Note 4 – Leases – Accounting for tenants” in the Notes to the condensed consolidated financial statements for our minimum fixed lease obligations under existing leases at
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 2021 Annual Report on Form 10-K. In the three months endedApril 30, 2022 , there were no material changes to our critical accounting estimates from those discussed in our 2021 Annual Report on Form 10-K. 39
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Recent accounting pronouncements
See “Note 2 – Summary of Significant Accounting Policies” in the Notes to the Condensed Consolidated Financial Statements for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements that have not yet been 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.
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