S-1/A 1 d194411ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on October 18, 2021.

Registration No. 333-260027

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

RENT THE RUNWAY, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7389   80-0376379

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

10 Jay Street

Brooklyn, New York 11201

(212) 524-6860

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Jennifer Y. Hyman, Co-Founder, Chief Executive Officer and Chair

Rent the Runway, Inc.

10 Jay Street

Brooklyn, New York 11201

(212) 524-6860

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Marc D. Jaffe

Emily E. Taylor

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

(212) 906-1200

 

Scarlett O’Sullivan

Cara Schembri

Rent the Runway, Inc.

10 Jay Street

Brooklyn, New York 11201

(212) 524-6860

 

Nicole Brookshire

Christina T. Roupas

Cooley LLP

500 Boylston Street

Boston, Massachusetts 02116

(617) 937-2300

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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      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 7(a)(2)(B) of the Securities Act.  

 

 

 

 

Title of Each Class of Securities To Be Registered   Shares to be
  Registered(1)  
  Proposed maximum
  aggregate offering price  
per share(2)
  Proposed
  Maximum Aggregate  
Offering Price(1)(2)
  Amount of
  Registration Fee(3)

Class A common stock, $0.001 par value per share

  17,250,000   $21.00   $362,250,000   $33,581

 

 

(1)

Includes 2,250,000 shares of Class A common stock that may be sold if the option to purchase additional shares of Class A common stock granted by the Registrant to the underwriters is exercised. See “Underwriting.”

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

The Registrant previously paid $9,270 of this amount in connection with a prior filing of the registration statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated October 18, 2021.

15,000,000 Shares

 

 

LOGO

Rent the Runway, Inc.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Rent the Runway, Inc. We are selling 15,000,000 shares of Class A common stock.

 

 

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible into one share of Class A common stock at any time. Jennifer Y. Hyman, our Co-Founder, Chief Executive Officer and the Chair of our board of directors, and Jennifer Fleiss, our Co-Founder and a member of our board of directors, together, the Co-Founders, and their affiliates, will together hold all of the outstanding shares of Class B common stock. Holders of shares of our Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders except as otherwise provided in our amended and restated certificate of incorporation or as required by applicable law. After giving effect to the sale of the shares of Class A common stock offered hereby, shares of Class A common stock will collectively represent approximately 95.2% of our total issued and outstanding shares and 49.6% of the voting power attached to all of our issued and outstanding shares (or 95.3% and 50.6%, respectively, if the underwriters’ exercise in full their option to purchase additional shares), and shares of Class B common stock will collectively represent approximately 4.8% of our total issued and outstanding shares and 50.4% of the voting power attached to all of our issued and outstanding shares (or 4.7% and 49.4%, respectively, if the underwriters’ exercise in full their option to purchase additional shares).

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $18.00 and $21.00. We have applied to list our Class A common stock on The Nasdaq Global Select Market, or Nasdaq, under the symbol “RENT.”

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and will be subject to reduced public company reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company. See the section titled “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

See “Risk Factors” beginning on page 26 to read about factors you should consider before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds to us, before expenses

   $        $    

 

(1)

See “Underwriting” for additional information regarding underwriter compensation.

At our request, the underwriters have reserved for sale at the initial public offering price per share up to 5.0% of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. See the section titled “Underwriting—Directed Share Program.”

One or more funds affiliated with Franklin Templeton have indicated an interest in purchasing up to $75.0 million of our Class A common stock offered in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, these funds may determine to purchase more, fewer or no shares in this offering, or the underwriters may determine to sell more, fewer or no shares to such funds. The underwriters will receive the same discount from any of our shares of Class A common stock purchased by these funds as they will from any other shares of Class A common stock sold to the public in this offering.

To the extent the underwriters sell more than 15,000,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 2,250,000 shares of Class A common stock from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of Class A common stock against payment in New York, New York on                , 2021.

 

 

 

Goldman Sachs & Co. LLC  

Morgan Stanley   

  Barclays
Credit Suisse   Piper Sandler   Wells Fargo Securities   JMP Securities  

KeyBanc Capital Markets

  Telsey Advisory Group  

 

 

Prospectus dated                , 2021.


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LOGO

"I have nothing everything to wear." RENT THE RUNWAY


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LOGO

OUR MISSION To power women to feel their best every day.


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LOGO

The closet was dead. For millions of women, the closet had become a museum of the past, full of clothes they didn't want to wear anymore. We realized, long before the sharing economy became what it is today, that women didn't want to own more clothing.


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LOGO

They wanted unlimited access to that feeling of confidence and power that comes from an amazing outfit.


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LOGO

SO WE BUILT The Closet In The Cloud


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LOGO

POWERED BY our proprietary operating system for the sharing economy of physical goods


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LOGO

Where we are today 18,000+ styles 750+ designer brands ~88% of customers acquired organically ~80% of revenue from subscribers 40m+ items shipped $16B GMV shipped1 Note: All metrics as of July 31, 2021. 1 GMV is calculated using original retail and/or comparable value prices.


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LOGO

2.5M+ lifetime customers and we're just getting started...


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Prospectus

 

     Page  

ABOUT THIS PROSPECTUS

     ii  

A LETTER FROM OUR CO-FOUNDER

     1  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     26  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     73  

MARKET, INDUSTRY AND OTHER DATA

     75  

USE OF PROCEEDS

     77  

DIVIDEND POLICY

     78  

CAPITALIZATION

     79  

DILUTION

     82  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     85  

BUSINESS

     124  

MANAGEMENT

     191  

EXECUTIVE COMPENSATION

     200  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     219  

PRINCIPAL STOCKHOLDERS

     223  

DESCRIPTION OF CAPITAL STOCK

     227  

SHARES ELIGIBLE FOR FUTURE SALE

     236  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK

     239  

UNDERWRITING

     243  

LEGAL MATTERS

     250  

EXPERTS

     250  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     251  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free

writing prospectuses we have prepared. Neither we nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of Class A common stock offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any free writing prospectus is current only as of its date regardless of the time of delivery of this prospectus or any sale of shares of Class A common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

For investors outside the United States: we have not, and the underwriters have not, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

 

 

 

 

 

 

 


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ABOUT THIS PROSPECTUS

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

Our fiscal year begins on February 1 and ends on January 31 of the following year. All references to (i) fiscal 2019 or fiscal year 2019 relate to the year ended January 31, 2020, (ii) fiscal 2020 or fiscal year 2020 relate to the year ended January 31, 2021 and (iii) fiscal 2021 or fiscal year 2021 relate to the year ending January 31, 2022.

 

ii


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LOGO

A LETTER FROM OUR CO-FOUNDER JENNIFER Y. HYMAN It started with a dress. It was 2008 and I stood in the bedroom of my sister Beckys crammed New York City apartment, watching her spin around in a new very expensive dress. Behind her was a closet full of ignored clothing. I was in full-on big sister mode, begging her to return the new dress that would send her into credit card debt. My closet is dead to me, Becky explained. By Beckys estimation, the exorbitant price of a new dress was worth it for the experience of showing up to the wedding feeling like her most confident self. As I watched Becky model the dress she couldnt afford, I realized that the traditional closet is indeed dead. Its a museum of the past filled with relics that we no longer wear, that no longer fit us, that cost us a lot of money, and that no longer bring us joy. I asked myself: What if the closet were alive? What if it could adapt and change with us as our size, mood, style and life stage changed? Shouldnt our clothes express how we feel and who we are today? And what if we just didnt need so much stuff? And so the idea for Rent the Runway was born. This vision evolved from a single dress for a single situation to our Closet in the Cloud the worlds first and largest shared designer closet that has transformed the way women get dressed by letting them wear whatever they want, without having to own it. With Rent the Runway, closets would no longer be limited by ones income, body shape, closet size, location, or rationality (does it ever make sense to buy the hot pink top instead of the black one?!). Rent the Runways closet is Unlimited - unlimited options, unlimited self-expression, and unlimited opportunities to show up with confidence. I am obsessed with female self-confidence. Thats why I founded and have spent the last thirteen years building this business. I believe that when women have confidence in themselves, they can change the outcomes of their lives, and they can change the world. Like it or not, how we dress has a powerful effect on how we see ourselves and how others see and treat us. This is especially true for women and the opportunities they receive, both in the workplace and in society at large. For women, clothing isnt merely about style its about power. When she gets dressed, she is making a decision about how she wants to show up in the world that day and Rent the Runway has the honor to be part of those intimate moments and transform them. Prior to Rent the Runway, wearing beautiful designer fashion wasnt a realistic option for most people. We have democratized high-end fashion for women everywhere, offering them access to that power the Cinderella moment that Becky was chasing.


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LOGO

Along the way, weve also unlocked the ability for brands to reach new customers. Designer brands have been facing structural shifts in the industry that make it harder than ever for them to succeed. We have always viewed our brands as partners, and we are committed to helping them compete against low-quality, copycat fashion. Weve built a two-sided discovery engine that empowers brands with access to the new customers they need to grow their businesses, while enabling our community to discover new brands they love. In the decade since I co-founded Rent the Runway, we have seen a monumental shift away from ownership business models and into access and sharing business models. This transition happened quickly and across industries. Access models now represent the vast majority of the market in industries like entertainment and music. Rent the Runway has proven that the fashion industry is inevitably ripe for that same disruption, pioneering the access model for retail. And I like to bet on the inevitable. Its inevitable that women will be entering the workforce at record rates as theyre already outpacing men with college degrees. Its inevitable that these financially empowered women will want and need more choices in their clothing, from styles to sizes, at lower prices. Theyre going to want these choices to be sustainable and theyre not going to want to own them. As a result, the opportunity in front of us is immense. Rent the Runway is part of an industry that is in dire and immediate need of change. Fashion is one of the most pollutive industries on earth, and 70% of its negative impact comes from the production of new clothing. Fast fashion business models only work on high volume, and use psychological tactics to convince consumers to buy more than they would ever need. By creating the worlds largest shared closet, weve built a more sustainable solution that helps consumers buy less and wear more effectively transforming a broken system and turning the fashion industry on its head. Using the data from our life cycle analysis, we estimate that our rental model has displaced production of 1.3 million new garments since 2010. We are the rare company whose financial and sustainability goals are perfectly aligned. In other words, increasing the number of times our garments are worn improves our positive environmental impact and our financial outcomes. Im proud that our value proposition is a win-win-win for customers, brands and the environment, and we will continue to innovate on behalf of these stakeholders. We entered 2020 with momentum behind us, poised for continued growth. We couldnt have foreseen the global pandemic and the resulting fight for our survival. Today, Rent the Runway has emerged stronger: a testament to the resilience, passion and continuous innovation of our people. Its one thing to have a vision

    


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LOGO

and its a very different thing to see thousands of teammates take on that vision as their own and treat Rent the Runway with the love and ownership of a founder. I am deeply humbled by our team past and present. Thank you from the bottom of my heart to our leaders, employees, investors, brand partners, and Board members who have brought us to this moment. I owe my biggest thanks to our community. Our customers have always been our north star. Youve made our subscription a beloved everyday ritual in your lives, enthusiastically shared RTR with everyone you know, and transformed rental from a novelty into a celebrated lifestyle. I spent the early days of Rent the Runway answering customer service calls, reading (and responding) to nearly every customer feedback email, and travelling around the country for focus groups and events. Many of our most successful product launches including gowns in prealtered lengths, photo reviews, and even our monthly subscriptions were born out of your feedback. Thank you for helping us build the Closet in the Cloud, but more, thank you for being a true community of women supporting other women. Your detailed photo reviews on how to style a floral skirt, dress up a baby bump, or lounge at home in sweats enhance the Rent the Runway experience for millions of other women. In the years to come, we look forward to bringing the magic of Rent the Runway to more customers, and to any thing we dont need or want to own forever. Our flexible platform has the potential to power not just the Closet in the Cloud but our lives in the cloud. This means more money saved and a more sustainable future for us all. I am incredibly honored to lead our community into our next chapter as a public company, as we drive value for shareholders and continue to build a better future for fashion. While Rent the Runway has always been a disruptive force, our IPO will also trailblaze in the universe of public companies. We will become the first-ever IPO with a female CEO, CFO and COO a distinction I am immensely proud of. On behalf of our entire team, we are excited to have you on this journey! We are all like Becky to some degree. We all want the power to express ourselves through what we wear today, but we also want the flexibility to decide who we want to be tomorrow. Welcome to Rent the Runway, where women can live life unlimited. With gratitude, Jennifer Y. Hyman Co-Founder, CEO and Chair

    


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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” “our company,” “Rent the Runway” and “RTR” refer to Rent the Runway, Inc. and its consolidated subsidiary.

Our Mission

Our mission is to power women to feel their best every day.

Since our founding, we have disrupted the trillion-dollar fashion industry and changed the way women get dressed by creating the world’s first Closet in the Cloud: a dream closet filled with a massive selection of designer styles to rent, wear and return (or keep!).

Overview

We built the world’s first and largest shared designer closet — what we call the Closet in the Cloud — with over 18,000 styles by over 750 designer brands that has transformed the way women get dressed by letting them wear whatever they want, without having to own it. We give customers ongoing access to our “Unlimited Closet” through our Subscription offerings 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. Our Closet in the Cloud offers a wide assortment of items for every occasion, from evening wear and accessories to ready-to-wear, workwear, denim, casual, maternity, outerwear, blouses, knitwear, loungewear, jewelry, handbags, activewear, ski wear, home goods and kidswear. We have served over 2.5 million lifetime customers across all of our offerings and we had 126,841 ending total subscribers1 (active and paused) as of July 31, 2021. In the first six months of fiscal year 2021, 83% of our total revenue was generated by subscribers (including their Reserve and Resale revenue) while they were active or paused.

We have created a two-sided discovery engine: customers are finding new brands they love and brand partners are finding new customers they need. For customers, we unlock freedom of self-expression through access to our “Unlimited Closet” that has a constantly rotating supply of styles for all occasions, seasons, moods and price points. This leads to deep engagement with our platform as customers discover new brands they love. Brand partners are able to tap into our large, engaged community to discover new customers and get unparalleled data insights. All of this helps them grow their businesses and encourages them to partner more closely with us over time.

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” while saving money and time and reducing clothing waste. We deliver significant financial value to customers, with our average subscriber wearing clothes worth more than 20 times what she pays for a monthly RTR subscription on an annualized basis (more than $37,000 in designer retail value annualized

 

1 

Ending total subscribers represent the number of subscribers with an active or paused membership as of the last day of the fiscal period and excludes subscribers who had an active or paused subscription during the fiscal period, but ended their subscription prior to the last day of the fiscal period.


 

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for the first six months of fiscal year 2021).2 We have become an everyday utility; our average subscriber wears Rent the Runway 83 days per year. We believe that the convenience of our service and access to a broad assortment of designer brands, categories and styles helps drive our strong customer engagement.

Our tremendous selection is enabled by our designer brand partnerships. We source our products directly from over 750 brand partners that include many of the most renowned and relevant names in the fashion industry. Our platform continues to be a valued launching pad for new and emerging brands and a business builder for existing brands. The transformative nature of our customer value proposition means our customers are different from other audiences our brands are exposed to. Approximately 91% of our brand partners work with us because we introduce them to new, desirable customers and deepen awareness of their brands. Over the last 12 years, we have fostered strong relationships with our brand partners and we have retained nearly 100% of our brand partners.

Our Closet in the Cloud connects our deeply engaged customers and our differentiated brand partners on a powerful platform built around our brand, data, logistics and technology advantages.

 

   

Brand Partner Advantage. Our assortment contains thousands of new, current season styles procured from our brand partners that luxury competitors simultaneously carry - all available for subscription, a-la-carte rental, and resale at much lower prices. We believe our engaged and loyal customer base paired with the data that we provide to our brand partners makes us an essential destination for many of the world’s most important brands. As we have grown, our commercial relationships with our brand partners have evolved to balance our margins and the capital needs of our business. Today, we acquire our products through three channels: Wholesale, Share by RTR and Exclusive Designs. Through Share by RTR, we acquire items directly from brand partners on consignment, at zero or low upfront cost and revenue share with our brands each time an item is rented. We leverage our data to create highly desirable Exclusive Designs in collaboration with select brand partners that we manufacture through third-party partners to be more durable and at significantly lower cost. The portion of our products sourced through Share by RTR and Exclusive Designs - our more asset-light sources - has grown from approximately 26% in fiscal year 2019 to approximately 54% in fiscal year 2020. We anticipate a similar acquisition mix to fiscal year 2020 for the full year of fiscal year 2021.

 

   

Data Advantage. We capture a vast amount of unique, actionable data on our customers and products. We leverage this data to create benefits for our customers (deep personalization of styles and fit), brand partners (understanding of customer demand patterns and garment lifecycle) and our business (higher subscriber lifetime value and better product return on investment).

 

   

Technology and Logistics Advantage. We have developed a proprietary operating system for the sharing economy of physical goods that pairs proprietary intelligent software with differentiated infrastructure and hardware. Our expertise in vertically integrated just-in-time reverse logistics and garment science allows us to achieve multi-year monetization on our garments. We have also built a custom front-end platform that supports subscription, a-la-carte rental and resale in one easy experience for the customer.

Since our inception, organic growth, or word-of-mouth marketing, has been a key advantage for RTR. Because of the self-confidence they feel when they rent, the majority of our customers publicly share their

 

2 

We calculate designer retail values using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.


 

2


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love of the Rent the Runway experience on social media and in their personal lives, which helps drive brand awareness and new customer acquisition. Our "Unlimited Closet" inspires women to experiment with fashion and rent bold, colorful, dynamic pieces that become natural conversation starters with their friends and family and create strong virality for the platform. As a result, since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic. Approximately 88% of our customers over the last 12 years have been acquired organically. Our brand and deeply engaged community have allowed us to acquire customers efficiently even as we have scaled.

We believe our platform is powering a new frontier for fashion, one in which women buy less and wear more, disrupting a centuries old industry and contributing to a more sustainable future. Using the data from our life cycle analysis, we estimate that our rental model has displaced the production of approximately 1.3 million total new garments since 2010, resulting in the savings of 67.0 million gallons of water, 98.6 million kWh of energy and 44.2 million pounds of CO2 emissions.

We generate revenue from our Subscription, Reserve and Resale offerings. The majority of revenue comes from our Subscription offering, which is highly recurring and drives customer engagement.

We have achieved the following operating and financial results for fiscal year 2019 and 2020, respectively:

 

   

We had 147,866 and 95,245 ending total subscribers, respectively, and 133,572 and 54,797 ending active subscribers3 (excluding paused subscribers), respectively;

 

   

Revenue was $256.9 million and $157.5 million, respectively;

 

   

Gross Profit was $53.6 million and $15.5 million, respectively;

 

   

Gross Profit Excluding Product Depreciation was $129.3 million and $85.4 million, respectively;

 

   

Net Loss was $(153.9) million and $(171.1) million, respectively;

 

   

Adjusted EBITDA was $(18.0) million and $(20.3) million, respectively;

 

   

Adjusted EBITDA as a percentage of revenue was (7.0)% and (12.9)%, respectively;

 

   

Net cash used in operating activities plus net cash used in investing activities was $(176.2) million and $(101.2) million, respectively; and

 

   

Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (68.6)% and (64.3)%, respectively.

We have achieved the following operating and financial results for the six months ended July 31, 2020 and 2021, respectively:

 

   

We had 108,752 and 126,841 ending total subscribers, respectively, and 54,228 and 97,614 ending active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $88.5 million and $80.2 million, respectively;

 

   

Gross Profit was $8.7 million and $26.3 million, respectively;

 

   

Gross Profit Excluding Product Depreciation was $46.8 million and $50.2 million, respectively;

 

   

Net Loss was $(88.0) million and $(84.7) million, respectively;

 

3 

Ending active subscribers is defined as ending total subscribers as of period end, excluding paused subscribers.


 

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Adjusted EBITDA was $(10.6) million and $(8.1) million, respectively;

 

   

Adjusted EBITDA as a percentage of revenue was to (12.0)% and (10.1)%, respectively;

 

   

Net cash used in operating activities plus net cash used in investing activities was $(71.7) million and $(16.1) million, respectively; and

 

   

Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (81.0)% and (20.1)%, respectively.

Trends in Our Favor

We are witnessing trends that are driving consumer and brand behavior in our favor, though the extent to which they may be impacted by the COVID-19 pandemic remains uncertain.

Consumer Trends

Some of the key trends impacting consumers in our industry include:

 

   

Shift from Ownership to Access: In 2020, access models represented 64% of the U.S. recorded music market, 71% of the U.S. home entertainment market and 17% of the U.S. hospitality market.4 Businesses such as Spotify, Netflix and Airbnb have been built in the transition to access and we believe that the apparel industry is ripe for this same disruption.

 

   

Desire for Variety and Newness: Consumers are increasingly seeking variety and newness in their wardrobes. Closets are growing and, according to the Wall Street Journal, the average consumer buys approximately 70 items of clothing per year as compared to 40 items per year in 1990.5

 

   

Growth of Online Shopping: Despite the fact that closets are growing, online sales represent the fastest growing part of the apparel market. U.S. online apparel grew at a 17% compound annual growth rate, or CAGR, between 2015 and 2020 while the broader apparel sector declined, according to Euromonitor.6

 

   

Social Media Driving Fashion: The ubiquity of fashion on social media has meant that consumers have a higher awareness of aspirational brands outside their income level. Millennials post nine selfies a week on social media, according to Now Sourcing, increasing the pressure for variety in the wardrobe.7

 

   

An Increasingly Female Workforce: As of January 2021, women represented 47% of the workforce according to the U.S. Bureau for Labor Statistics and U.S. Census.8 This increasingly female workforce is spending 3x more than their male counterparts on workwear, with 50% of women feeling pressure to be “put together” at work according to a Refinery29 study.9

 

4 

Access models within the recorded music market according to Recording Industry Association of America, Year-End Music Industry Revenue Report, 2020. Access models within the home entertainment market according to Digital Entertainment Group, DEG Year-End Digital Media Entertainment Report, 2020, Access models within the hospitality market according to Euromonitor International Ltd.

5 

Wall Street Journal, Ups and Downs of U.S. Clothes Shopping, September 2014.

6 

Euromonitor International Ltd, Apparel & Footwear 2021 (“Euromonitor Apparel & Footwear 2021”). Retail Value RSP includes sales tax, current prices, year-over-year exchange rates. Apparel is defined as apparel and footwear.

7 

Now Sourcing, How Augmented Reality Has Changed Selfies Forever.

8 

U.S. Bureau for Labor Statistics, Labor Force Statistics from the Current Population Survey—Household Data Annual Averages—Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race, 2020.

9 

Triple spend on clothing according to Glamour, The Glass Runway: Our Exclusive Survey on the State of the Fashion Industry, May 2018. 50% of women according to Refinery29 and Rent the Runway, Self Expression & Dressing: Survey Findings, February 2019 (“Refinery29 Survey”).


 

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Importance of Sustainability: Consumers are increasingly aware of the impact their choices are making on the environment and seeking more sustainable alternatives. 56% of women place more value on sustainability as it relates to fashion choices than they did five years ago. According to McKinsey, internet searches for “sustainable fashion” grew 3x between 2016 and 2019.10

 

   

Normalization of Secondhand: Secondhand fashion has become more mainstream, driven by its affordability, uniqueness, selection and alignment with environmental consciousness. According to the July 2021 Lab42 Survey, 91% of women have purchased or are open to purchasing secondhand clothing.

All designer brands, whether accessible or prestige, have faced structural shifts in the retail landscape that have made it more challenging for them to succeed. Those challenges include:

 

   

Decline of Traditional Wholesale Channels: It is estimated that 80,000 retailers, or 9% of the 878,000 stores in the U.S. will close their doors in the next five years.11 Department stores, one-fifth of which have closed since 2018, have traditionally represented a majority of brands’ revenue, making a decline in traffic a headwind on revenue.12

 

   

Heightened Competition from Mass and Fast Fashion: The desire for newness has led to enormous competition in the apparel industry from mass and fast fashion brands who can quickly manufacture and copy styles at lower prices than designer brands. In 2020, mass market and fast fashion comprised 42% of the U.S. apparel market, up from 31% ten years ago.13

 

   

Direct-to-Consumer, or DTC, as an Essential Channel for Every Brand: Given the growth in online and the challenges associated with traditional wholesale channels, brands are increasingly seeking DTC channels but often lack the financial or human capital to build them.

 

   

Larger, More Fractured Discovery Landscape: According to Publicis Sapient, 87% of shoppers today begin product searches online, meaning that younger customers are focused on direct search for brands they already know.14

 

   

Aging Consumer Base: The average age of a luxury department store customer is 51 years old, meaning it is more difficult for brand partners to reach younger customers through traditional channels.15

 

   

Growing Importance of Data: Data is critical to helping brands assess their product and efficiently acquire customers. Through traditional wholesale channels, brands receive very minimal data, and the data they do receive is often a season old.

Our Customer Value Proposition

Through our platform, we have helped more than 2.5 million lifetime customers discover the transformative power of utilizing our Closet in the Cloud across all of our offerings. Our customer base is diverse and spans age, household income distribution and U.S. geography. As of June 2021, approximately 35% of our customers lived in the Top 100 U.S. cities by population, and approximately 65% lived elsewhere.

 

10 

McKinsey & Co., Fashion’s New Must-Have: Sustainable Sourcing at Scale, October 2019.

11 

Quartz, What an Estimated 80,000 Store Closings Say About the Future of US Retail, April 2021.

12 

Forbes, Unprecedented Decline: One Fifth of All American Department Stores Have Closed Since 2018, July 2020.

13 

GlobalData, Resale Report, 2021. Mass market is defined as Amazon, off-price, and value retail.

14 

Salesforce and Publicis Sapient, Shopper First Retailing, 2018.

15 

Racked, More than 40% of Neiman Marcus Shoppers are Millionaires, August 2015.


 

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The Magic of Rent the Runway

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” of constantly rotating styles while saving money and time and reducing clothing waste.

 

   

Variety and Discovery. With over 18,000 styles across over 750 brands and hundreds of categories available in our Closet in the Cloud, Rent the Runway gives customers the ability to always wear something new to them and inspires customers to expand their fashion tastes without risk of buyer’s remorse. We are a brand discovery engine, as our subscribers wear 54 brands in their first year, on average.

 

   

Value. Rent the Runway makes thousands of designer styles accessible to all through our Subscription offering for a flat monthly price or through our Reserve offering on a per item basis. For instance, in our most popular $135 per month eight-item subscription plan, the effective cost to the customer per item is approximately $17, for an item that would typically retail for above $350, making Rent the Runway comparable to or cheaper than many mass-market and fast fashion players while offering access to authentic designer items. 60% of our subscribers report spending between $100 and $500 less per month on clothes when they have a subscription to RTR.

 

   

Self-Confidence. 83% of our subscribers say RTR makes them the most confident version of themselves at work or in social settings. Because there is no commitment to keep an item on RTR, we fuel greater self-expression for our customers. Our average subscriber receives four compliments each time she wears RTR.

 

   

Personalization and Convenience. We use our rich customer data to create a personalized storefront for customers based on their style preferences, browsing history and past rentals. Our understanding of our customer improves with each interaction, and we use our personalization algorithm to continuously tailor size and style recommendations. In fiscal year 2019, subscribers who used our personalized recommendations had 2.7x longer tenure.

 

   

Customer Experience and Community. Our customers are deeply engaged, as evidenced by the 22 million customer reviews submitted through June 2021. Our customers use the millions of reviews posted by our community to make smarter choices and feel good about their selections. As our community has grown, Rent the Runway has also benefited from powerful virality and word-of-mouth marketing. 81% of subscribers have shared RTR with at least five people; 32% have shared with over 20 people.

 

   

Sustainability. Our success in building a rent versus buy mindset is evidenced by the fact that 83% of our subscribers have bought less fast fashion since using RTR and 89% buy fewer clothes than they used to prior to joining RTR.

Our Brand Value Proposition

We designed our platform with the intent of creating deep partnerships with designer brands, enabling them to broaden their customer base and grow their businesses. Today, we partner with more than 750 brands, including many of the most renowned and relevant names in fashion. As of June 30, 2021, no single brand partner accounted for more than 2% of active units available on the RTR platform.

We procure virtually 100% of our products directly from brand partners with their explicit permission, and our business model has been built on shared success with brands. As they deepen


 

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their relationship with us, they get access to more data and more customers. Our partnerships with brands have created a significant product and cost advantage, in contrast to other secondhand resellers, and allows brands to make an aspirational first impression to a new and critical customer segment on RTR. Because we source directly from brands, we can control our assortment and acquire styles in the depths and sizes we want, we have access to current season items and all of our items are guaranteed authentic without the cost or infrastructure of traditional authentication platforms.

Brands that were on the RTR platform for five years from fiscal year 2014 through fiscal year 2019 saw the gross merchandise value, or GMV, of their products acquired by RTR increase by 293% over that time.16 We are widely recognized by the brand community as an important and growing distribution channel for their businesses.

Benefits for Brands

When our brand partners join Rent the Runway, they trust that our platform will grow their customer base, build their brand awareness and enable them to innovate their business.

 

   

Our Brand. Rent the Runway is a trusted platform for discovery and access, and we present our brand partners in an aspirational way. Brand partners appreciate that we are often a customer’s first exposure to their brand and so they trust us to provide an elevated customer experience. We are proud that we’ve retained nearly 100% of our brand relationships.

 

 

   

Customer Discovery and Acquisition. With over 2.5 million lifetime customers as of July 2021 across all offerings, we provide our brand partners with a new way to reach both current luxury consumers and aspirational luxury consumers. 91% of our brand partners say that RTR introduces them to new, desirable customers and deepens awareness of their brand. 82% of our subscribers purchased one or more brands they discovered on Rent the Runway (either from RTR or elsewhere).

 

   

Grow Their Business. We serve as an important channel for over 750 brands that see us as essential to their future business success. According to our June 2021 Rent the Runway Brand Survey, in fiscal year 2019, we were in the top 30% of distribution partners, by revenue, for 64% of our brands. Of our brand partners, approximately 85% believe that RTR is a growing distribution channel for their business. We have proven that we can help brands grow their businesses by attracting new customer segments.

 

   

More Profitable Partnership. We are a more profitable partner to brands than legacy retailers because we do not require brands to sign margin agreements with us or return-to-vendor agreements, which have historically levied brands with higher inventory risk than their retail partners.

 

   

Ability to Compete with Mass and Fast Fashion. We enable brands to compete with wear-it-once, mass and fast fashion by offering their premium products at a more accessible price point, enabling brands to connect with a broad customer base without diluting their brand.

 

   

Data. We provide our brand partners with actionable data and customer feedback that is not available via traditional wholesale channels and is differentiated from what they collect through their own DTC channels. This data allows them to adjust their designs in order to grow and optimize their businesses and manufacture styles that are more durable and sustainable.

 

16 

GMV is calculated using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.


 

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Sustainability. Our platform allows brands to participate in the circular economy and provides a way for them to address the secondhand market in an aspirational way. As of June 2021, 67% of our brand partners believed that RTR is an important part of their business’s sustainability strategy.

Rent the Runway Virality and Marketing Strategy

Our brand and deeply engaged consumer base have allowed us to acquire customers efficiently. Since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic. Approximately 88% of our customers over the last 12 years have been acquired organically. As of June 2021, we have had close to 3 trillion earned media impressions since 2018. As we have scaled, we have seen the value of the Rent the Runway brand grow and increasingly become a significant point of differentiation with consumers and brand partners. We have an opportunity to continue to increase brand awareness and as of June 2021, our unaided brand awareness is 20% among U.S. women ages 18 - 45 with a household income of $50,000 or more.

Total Addressable Market

Apparel is a large market that is rapidly shifting online. According to Euromonitor, the U.S. apparel market was $286 billion in 2020 of which 37% or $107 billion is online. The online U.S. apparel market is expected to grow at a 12% CAGR compared to the offline apparel market, which is expected to grow at a 3% CAGR between 2020 and 2025. In 2025, the U.S. apparel market is expected to be $395 billion of which 49% or $192 billion is expected to be online.17

We address the secondhand market, which is the fastest growing portion of the apparel market today. According to GlobalData, this market is at $27 billion in 2020 and is expected to increase to $77 billion in 2025, growing at a 23% CAGR. We are changing consumer purchasing behavior by creating a sharing economy for fashion and believe we will contribute to the growth of this market.

We believe we are in the early innings of this opportunity. As of the end of fiscal year 2019 and 2020, respectively, we had 147,866 and 95,245 total subscribers (which includes both active and paused). Since 2009, we have had over 2.5 million lifetime customers across all of our offerings, and as of July 31, 2021, we had over 126,841 total subscribers (active and paused), representing less than 1% of the total population of women aged 18 and above in the U.S.

According to the U.S. Census Bureau, as of 2020, there are 38 million women 25 years and older that both work and are college educated, 61 million women 18 years and older that are college educated, and 130 million total women 18 years and older in the U.S. Today, the majority of our subscribers and customers are college educated or working women, but we believe we can continue to diversify our subscriber and customer base over time, particularly given subscription and rental behavior trends in our favor. According to the July 2021 Lab42 Survey, 24% of women have subscribed to fashion in the past, and 59% are open to it. Additionally, 19% of women have rented clothing or accessories in the past, and 55% are open to it. 56% of women state that they will subscribe to fashion at some point in the next five years.

Our Growth Strategies

The key elements of our growth strategy are:

 

17 

Euromonitor Apparel & Footwear 2021. Euromonitor International Ltd, Retailing, 2020 (“Euromonitor Retailing 2020”). Retail Value RSP includes sales tax, current prices and year-over-year exchange rates. Apparel is defined as apparel and footwear.


 

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Grow our Subscribers. With our differentiated brand and organic virality, strong funnel of new customers through Reserve and Resale and our continued focus on marketing efficiency, we are focused on growing our subscriber base.

 

   

Expand our Assortment by Adding New Brand Partners and Deepening Existing Brand Partner Relationships. We are focused on expanding our product assortment and in particular, we intend to accelerate our capex-light partnerships via Share by RTR and Exclusive Designs.

 

   

Continue to Invest in the Customer Experience. By continuing to improve our customer experience, we aim to improve subscriber retention and engagement. Our customer experience includes interactions online and the experience customers have offline wearing Rent the Runway. We are focused on driving continuous improvements in both areas, particularly on personalization, social features and transportation innovation.

 

   

Launch New Categories and Offerings. Our flexible membership platform and physical logistical infrastructure means that we can launch new categories and offerings that resonate with our customers and their lifestyles.

 

   

Deepen our Brand Partner Marketplace Enablement Tools. Our goal is to help our brands build bigger businesses both on and off our platform. We intend to continue to expand Share by RTR and provide more tools to our brand partners to grow their businesses and assortments across subscription, rental and resale.

 

   

Drive Leverage in Operational Efficiency. We are focused on using our data to drive actionable insights and improve key parts of our operations.

 

   

Expand Internationally. We may invest in creating a sharing economy of physical goods around the world. We may choose to do this organically or through partnerships and acquisitions.

Recent Developments

We continue to experience strong momentum in the third quarter of fiscal year 2021. The spread of the COVID-19 Delta variant and the trend of continued work from home has had minimal impact on our business or financial performance as of the date of this prospectus, but we continue to monitor the situation. We grew to 111,732 active subscribers as of September 30, 2021, representing 104% growth since the beginning of fiscal year 2021. Active subscribers also grew 14% from the end of our second fiscal quarter on July 31, 2021 to September 30, 2021. Our total subscribers as of September 30, 2021 grew to 143,464 subscribers including paused and active subscribers representing 97% of the total subscribers at the end of fiscal year 2019.

We have seen the continued success of our strategy to diversify subscriber use cases. In August and September 2021, approximately 50% of her use cases have been more casual in nature - weekend wear, everyday casual occasions, lounge and outerwear — and approximately 50% of her use cases have been for work and evening. We are seeing a pent-up demand for self-expression within our customer base favoring bold, colorful, fashion-forward styles across every use case. We have also continued to see diversification in our subscriber base from a geographic perspective, with more subscribers joining from non-coastal cities, smaller metros or suburbs in the South, Southeast and Midwest.


 

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Concurrent Debt Prepayment and Credit Facility Amendment

On October 18, 2021, we entered into an amendment to the Credit Facility, or the Credit Facility Amendment, to our term loan agreement dated as of July 23, 2018, as amended to date, with Double Helix Pte Ltd., as administrative agent for the lenders party thereto, or the Lenders, which we refer to as our Credit Facility (our Credit Facility as amended by the Credit Facility Amendment, is referred to as our Amended Credit Facility). The Credit Facility Amendment is conditioned upon the closing of this offering and certain other customary conditions to effectiveness. The Credit Facility Amendment will, among other things, (i) extend the maturity of our Credit Facility to three years after the effective date of the Credit Facility Amendment, (ii) increase the stated amount of loans outstanding under the Amended Credit Facility to $301.5 million (with no additional debt proceeds and after giving effect to the Debt Repayment referred to below), (iii) amend the interest rate to 12% with up to 5% payable in kind, (iv) add a minimum liquidity maintenance covenant of $50 million and (v) amend the call protection applicable to the loans outstanding thereunder.

In connection with the Credit Facility Amendment, we intend to issue to the Lenders warrants to purchase 382,871 shares of our Class A common stock (assuming we offer 15,000,000 shares of Class A common stock at an initial public offering price of $19.50 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus)) that will remain outstanding following this offering. In addition, in connection with the Credit Facility Amendment, certain existing warrants held by the Lender will be amended to extend the expiration date for an additional six months following the date of this offering.

We intend to use the net proceeds from this offering to repay all amounts outstanding under our first lien facility, which we entered into in October 2020, as amended to date, with Alter Domus (US) LLC as administrative agent for Ares Corporate Opportunities Fund V, L.P., or Ares, which we call the Ares Facility, and $30 million of outstanding loans under our Credit Facility. These transactions are collectively referred to herein as the Debt Repayment, and the Credit Facility Amendment and the Debt Repayment are collectively referred to herein as the Refinancing. As of July 31, 2021, we had $74.5 million aggregate principal amount of borrowings outstanding under our Ares Facility and $230.0 million aggregate principal amount of borrowings outstanding under our Credit Facility. See “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Risk Factors Summary

Investing in our Class A common stock involves numerous risks, including the risks described in the section titled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations and prospects.

 

   

We have grown rapidly in recent years and have limited experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.

 

   

The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.

 

   

The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.


 

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Our continued growth depends on our ability to attract new, and retain existing, customers, which may require significant investment in paid marketing channels. If we are unable to cost-effectively grow our customer base, our business, financial condition and results of operations would be harmed.

 

   

If we fail to retain customers, our business, financial condition, and results of operations would be harmed.

 

   

If we are unable to accurately forecast customer demand, manage our products effectively and plan for future expenses, our operating results could be adversely affected.

 

   

Shipping and logistics are a critical part of our business and our supply chain and any changes or interruptions in shipping or logistics operations could adversely affect our operating results.

 

   

We rely heavily on the effective operation of our proprietary technology systems and software, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information.

 

   

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses in a timely manner, identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations, our ability to comply with applicable laws and regulations and our access to the capital markets to be impaired.

 

   

Our business is subject to a large number of U.S. and non-U.S. laws and regulations, many of which are evolving.

 

   

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets, and we could face criminal liability and other serious consequences for violations, which could harm our business.

 

   

Failure to adequately maintain and protect our intellectual property and proprietary rights could harm our brand, devalue our proprietary content, and adversely affect our ability to compete effectively.

 

   

We are subject to rapidly changing and increasingly stringent laws and industry standards relating to data privacy, data security, data protection, and consumer protection. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.

 

   

We face risks associated with brand partners from whom our products are sourced or co-manufactured.

 

   

We rely on third parties for elements of the payment processing infrastructure underlying our business. If these third-party elements become unavailable or unavailable on favorable terms, our business could be adversely affected.

 

   

We depend on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources to attract consumers to and promote our website and our mobile application, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.

 

   

Any failure by us, our brand partners, or our third-party manufacturers to comply with our vendor code of conduct, product safety, labor, or other laws, or to provide safe factory conditions for their workers, may damage our reputation and brand, and harm our business.


 

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The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on Nasdaq, including our Co-Founders, and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change of control.

 

   

An active, liquid, and orderly market for our Class A common stock may not develop or be sustained. You may be unable to sell your shares of Class A common stock at or above the price at which you purchased them.

 

   

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

 

   

After this offering, company insiders will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

 

   

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

If we are unable to adequately address these and other risks we face, our business may be harmed.

Corporate Information

We were incorporated as Rent the Runway, Inc. in Delaware on March 3, 2009. Our principal executive offices are located at 10 Jay Street, Brooklyn, New York 11201. Our telephone number is (212) 524-6860. Our website address is www.renttherunway.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

Our design logo, “Rent the Runway,” and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Rent the Runway, Inc. This prospectus also contains trademarks, trade names and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and tradenames.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

   

we are required to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, the Sarbanes-Oxley Act;


 

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we are permitted to take advantage of extended transition periods for complying with new or revised accounting standards which allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies;

 

   

we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” and

 

   

we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officers’ compensation to our median employee compensation.

We may take advantage of these reduced reporting and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of this offering, or such earlier time that we are no longer an emerging growth company. If certain events occur prior to the end of such five-year period, including if we have more than $1.07 billion in annual gross revenue, have more than $700 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. We may choose to take advantage of some but not all of these reduced requirements. We have elected to adopt the reduced requirements with respect to our financial statements and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. We also have elected to take advantage of the extended transition periods for complying with new or revised accounting standards. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity.


 

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THE OFFERING

 

Shares of Class A common stock offered by us

   15,000,000 shares (17,250,000 shares if the underwriters exercise in full their option to purchase additional shares).

Shares of Class A common stock to be outstanding after this offering

  


57,928,657 shares (60,178,657 shares if the underwriters exercise in full their option to purchase additional shares).

Shares of Class B common stock to be outstanding after this offering

  


2,939,928 shares.

Total shares of Class A common stock and Class B common stock to be outstanding after this offering

  



60,868,585 shares (63,118,585 shares if the underwriters exercise in full their option to purchase additional shares).

Over-allotment option to purchase additional shares of Class A common stock

  


2,250,000 shares.

Use of Proceeds

   We estimate, based upon an assumed initial public offering price of $19.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $267.2 million (or $308.1 million if the underwriters exercise in full their option to purchase additional shares), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to repay all amounts outstanding under our Ares Facility and $30.0 million outstanding under our Credit Facility. We intend to use any remaining net proceeds from this offering after such repayment to fund growth, fund other general corporate purposes, or to pay down additional amounts under the Credit Facility. We will have broad discretion in the way that we use the net proceeds of this offering. See “Use of Proceeds.”

Voting rights

   Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible into one share of Class A common stock at any time. Holders of shares of our Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders except as otherwise provided in our amended and restated

 

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   certificate of incorporation or as required by applicable law. Our Co-Founders and their affiliates will together hold all of the outstanding shares of Class B common stock. Immediately following the completion of this offering, shares of Class A common stock will collectively represent approximately 95.2% of our total issued and outstanding shares and 49.6% of the voting power attached to all of our issued and outstanding shares (or 95.3% and 50.6%, respectively, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and shares of Class B common stock will collectively represent approximately 4.8% of our total issued and outstanding shares and 50.4% of the voting power attached to all of our issued and outstanding shares (or 4.7% and 49.4%, respectively, if the underwriters exercise in full their option to purchase additional shares of Class A common stock). In addition, we and certain of our stockholders intend to enter into a stockholders’ agreement in connection with this offering with respect to the election of directors. See “Description of Capital Stock” for additional information.

Dividend policy

  

We do not expect to pay any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

Directed Share Program

  

At our request, the underwriters have reserved up to 5.0% of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares not purchased by these individuals will be offered by the underwriters to the general public on the same basis as the other shares of Class A common stock offered under this prospectus. See the section titled “Underwriting—Directed Share Program.”

 

Indications of Interest

   One or more funds affiliated with Franklin Templeton have indicated an interest in purchasing up to $75.0 million of our Class A common stock offered in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment

 

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to purchase, these funds may determine to purchase more, fewer or no shares in this offering,

or the underwriters may determine to sell more, fewer or no shares to such funds. The underwriters will receive the same discount from any of our shares of Class A common stock purchased by these funds as they will from any other shares of Class A common stock sold to the public in this offering.

Risk factors

   Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 23 and other information included in this prospectus for a discussion of factors you should carefully consider before investing in our Class A common stock.

Proposed trading symbol

   “RENT.”

The number of shares of Class A common stock and Class B common stock to be outstanding after this offering is based on 42,928,657 shares of our Class A common stock and 2,939,928 shares of our Class B common stock outstanding as of July 31, 2021, after giving effect to (i) the exercise of warrants to purchase 2,422,529 shares of Class A common stock, which will result in the issuance of 2,421,287 shares of Class A common stock in connection with this offering, assuming an initial public offering price of $19.50 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus), (ii) the automatic conversion of all outstanding shares of our redeemable preferred stock into 32,575,462 shares of our Class A common stock upon closing of this offering, (iii) reclassification of all of the shares of common stock into shares of Class A common stock upon the effectiveness of the Amended Charter, (iv) reclassification of all shares of common stock underlying outstanding equity awards under our 2009 Plan and 2019 Plan, other than those held by our Co-Founders, into shares of Class A common stock, (v) amendment of the terms of certain outstanding equity awards to provide that such awards are exercisable for or settle into shares of Class B common stock, and (vi) an exchange of 2,939,928 shares of Class A common stock held by our Co-Founders for an equivalent number of shares of our Class B common stock immediately after the effectiveness of the Amended Charter pursuant to the terms of certain exchange agreements, or the Class B Exchange (collectively, the Transactions) and excludes:

 

   

2,061,724 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Stock Incentive Plan, as amended, or the 2009 Plan, at a weighted average exercise price of $6.96 per share;

 

   

1,762,939 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Plan, at a weighted average exercise price of $6.34 per share;

 

   

3,819,036 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Stock Incentive Plan, as amended, or the 2019 Plan, at a weighted average exercise price of $7.07 per share;

 

   

1,621,206 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Plan, at a weighted average exercise price of $6.85 per share;


 

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1,925,231 restricted stock units, or RSUs, covering 1,925,231 shares of Class A common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

261,942 RSUs covering 261,942 shares of Class B common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

20,000 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021, granted to early participants of our “designer collective,” or the Designer Collective Grants, at a weighted average exercise price of $12.43 per share;

 

   

255,570 shares of our Class A common stock issuable upon exercise of stock options granted net of forfeitures after July 31, 2021, having a weighted-average exercise price of $13.63 per share;

 

   

73,356 shares of our Class A common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

50,881 shares of our Class B common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

118,988 shares of our Class A common stock, issued in connection with the exercise of stock options after July 31, 2021;

 

   

5,221,848 shares of Class A or Class B common stock reserved for future issuance under our 2021 Incentive Award Plan, or the 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan, as described in “Executive Compensation—Equity Compensation;”

 

   

870,308 shares of Class A common stock reserved for future issuance under our Employee Stock Purchase Plan, or the ESPP, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP, as described in “Executive Compensation—Equity Compensation;” and

 

   

237,240 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an average exercise price of $11.06 per share; 730,000 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an exercise price of $27.40 per share; and 382,871 shares of Class A common stock issuable upon exercise of warrants we intend to issue to the Lenders in connection with the Credit Facility Amendment, with an exercise price of $19.50 per share (assuming we offer 15,000,000 shares of Class A common stock at an initial public offering price of $19.50 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus)).

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus assumes or gives effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation, or Amended Charter, and the adoption of our amended and restated bylaws, or Amended Bylaws, each of which will occur upon closing of this offering;

 

   

the Transactions;

 

   

the Refinancing;

 

   

no exercise of the outstanding options or settlement of outstanding RSUs described above after July 31, 2021, other than (i) 29,700 shares of our Class B common stock issued in


 

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connection with the exercise of stock options after July 31, 2021, (ii) 33,922 shares of our Class A common stock issued in connection with the settlement of RSUs vested upon the offering and (iii) 16,961 shares of our Class B common stock issued in connection with the settlement of RSUs vested upon the offering.

 

   

no exercise by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock from us; and

 

   

an initial public offering price of $19.50 per share of Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The summary consolidated statements of operations data for the years ended January 31, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the six months ended July 31, 2020 and 2021, and the summary consolidated balance sheet data as of July 31, 2021 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period and our results for the six months ended July 31, 2021 are not necessarily indicative of the results that may be expected for the year ending January 31, 2022 or any other future year or period.

You should read the following summary of consolidated financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 


 

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     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021     2020     2021  
     (in millions, except share and per share data)  

Consolidated Statements of Operations Data:

        

Revenue:

        

Subscription and Reserve rental revenue

   $ 235.4     $ 135.9     $ 76.3     $ 72.7  

Other revenue

     21.5       21.6       12.2       7.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue, net

     256.9       157.5       88.5       80.2  

Costs and expenses:

        

Fulfillment

     118.1       53.0       32.8       22.3  

Technology

     40.2       37.7       18.6       20.2  

Marketing

     22.9       8.1       5.1       7.4  

General and administrative

     98.9       77.2       42.0       40.6  

Rental product depreciation and revenue share

     85.2       89.0       47.0       31.6  

Other depreciation and amortization

     21.6       23.0       11.7       9.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     386.9       288.0       157.2       132.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (130.0     (130.5     (68.7     (51.8

Interest income / (expense), net

     (24.0     (46.6     (20.4     (29.4

Other income / (expense), net

     (0.1     6.0       1.1       (3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before benefit from income taxes

     (154.1     (171.1     (88.0     (84.8

Benefit from income taxes

     0.2                   0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (153.9   $ (171.1   $ (88.0   $ (84.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (14.04   $ (15.36   $ (7.91   $ (7.44
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted(1)

     10,964,634       11,138,851       11,124,993       11,375,889  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)(3)

     $ (3.09)       $ (1.19)  
    

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

       61,186,483         61,423,521  
    

 

 

     

 

 

 

 

(1)

See Note 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

(2)

Unaudited pro forma net loss per share basic and diluted is calculated by dividing pro forma net loss by pro forma weighted-average common shares attributable to common stockholders. For the year ended January 31, 2021 and the six months ended July 31, 2021, pro forma net loss is computed by adjusting net loss to give effect to the Transactions and the Refinancing, including: (i) the estimated impact of reduced interest expense related to the Refinancing, inclusive of the associated impact of amortization of the related deferred financing costs, of $3.1 million for the year ended January 31, 2021


 

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  and $7.7 million for the six months ended July 31, 2021; (ii) the loss on debt extinguishment charge of $12.3 million for the year ended January 31, 2021 resulting from the Refinancing; (iii) reversal of the gain on the remeasurement of the warrant liability of $0.4 million for the year ended January 31, 2021 and the loss of $7.9 million for the six months ended July 31, 2021; and (iv) stock compensation expense of $8.6 million for the year ended January 31, 2021 and $4.3 million for the six months ended July 31, 2021 for awards and commitments that vest upon IPO. The stock compensation expense for the year ended January 31, 2021 includes 203,526 RSUs that are being granted upon IPO. These adjustments assume an initial public offering price of $19.50 per share, which is the midpoint of the initial price range set forth on the cover page of this prospectus.
(3)

Unaudited pro forma weighted-average common shares outstanding for the year ended January 31, 2021 and the six months ended July 31, 2021 is computed by giving effect to the Transactions, which includes: (i) issuance of 15,000,000 shares of common stock related to this offering; (ii) conversion of all outstanding shares of our preferred stock into an aggregate of 32,575,462 shares of common stock which will occur immediately prior to the completion of this offering; (iii) the exercise of warrants that will automatically be exercised and convert into an aggregate of 2,421,287 shares of common stock upon completion of this offering; and (iv) 50,883 RSUs for each of the periods ended January 31, 2021 and July 31, 2021 that will be fully vested upon completion of this offering upon satisfaction of performance-based vesting conditions.

 

     As of July 31, 2021  
     Actual     Pro Forma As
Adjusted
 
     (in millions)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents(1)(2)

   $ 104.0     $ 257.2  

Working capital(2)(3)

     62.5       216.5  

Total assets(4)

     302.9       455.0  

Warrant liabilities(5).

     19.3       0.3  

Long-term debt, net(6)

     381.8       276.8  

Other Liabilities(7)

     0.7       0.3  

Redeemable preferred stock(8)

     409.3       —    

Additional paid-in capital(2)(4)(5)(8)(9)

     68.9       768.8  

Accumulated deficit(10)

     (674.1     (687.4

Total stockholders’ deficit

     (605.2     81.4  

 

(1)

Excluding restricted cash of $11.5 million ($1.8 million current and $9.7 million noncurrent) as of July 31, 2021.

(2)

Pro Forma As Adjusted cash and cash equivalents reflect the net proceeds of this offering of $267.2 million resulting from the issuance of 15,000,000 shares at a price of $19.50 per share, the mid-point of the initial price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us less the amount of proceeds used to pay down debt, as described below.

(3)

Working capital is defined as current assets less current liabilities. Pro Forma As Adjusted working capital reflects the paydown of the current portion of debt of $0.8 million related to the Refinancing.

(4)

Pro Forma As Adjusted total assets reflect deferred offering costs directly related to the offering of $1.1 million which are charged against additional paid-in capital upon completion of this offering, in addition to the net cash adjustments as described above.

(5)

Pro Forma As Adjusted warrant liabilities reflect the exercise of liability classified warrants of $19.0 million that will result in the issuance of shares of common stock upon completion of this offering.

(6)

Pro Forma As Adjusted long-term debt reflects the following: (i) paydown of long-term debt of $99.4 million related to the Refinancing; (ii) $4.8 million of common stock warrants that will be issued to Lenders in connection with the Refinancing upon completion of this offering; (iii) $0.7 million related to the modification of certain existing warrants held by the Lenders in connection with the Refinancing to extend the expiration date for an additional six months following the date of this offering; and (iv) $0.1 million of lender fees to be paid by the Company related to the Refinancing.

(7)

Pro Forma As Adjusted other liabilities reflects the $0.4 million payment of the partially accrued end of term payment related to the Refinancing.

(8)

Pro Forma As Adjusted redeemable preferred stock reflects the conversion of all outstanding shares of our preferred stock into shares of common stock which will occur immediately prior to the completion of this offering.

(9)

Pro Forma As Adjusted additional paid-in capital reflects $4.8 million of common stock warrants that will be issued to lenders in connection with the Refinancing upon completion of this offering and $0.7 million related to the modification of certain


 

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  existing warrants held by the Lenders in connection with the Refinancing to extend the expiration date for an additional six months following the date of this offering.
(10)

Pro Forma As Adjusted accumulated deficit reflects the impact of the loss on debt extinguishment charge of $13.3 million resulting from the Refinancing.


 

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Key Business and Financial Metrics

In addition to the measures presented in our 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 other 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, fulfillment and net loss.

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021     2020     2021  
     ($ in millions)  

Active subscribers (at the end of period)

     133,572       54,797       54,228       97,614  

Gross profit

   $ 53.6     $ 15.5     $ 8.7     $ 26.3  

Gross profit excluding product depreciation

   $ 129.3     $ 85.4     $ 46.8     $ 50.2  

Adjusted EBITDA

   $ (18.0   $ (20.3   $ (10.6   $ (8.1

Each of Gross Profit Excluding Product Depreciation and Adjusted EBITDA is a non-GAAP financial measure. See below for a reconciliation of Gross Profit Excluding Product Depreciation and Adjusted EBITDA to each of their most directly comparable GAAP financial measures, gross profit and net loss, respectively. For additional information about, and the definitions of, our key business and financial metrics and why we consider Gross Profit Excluding Product Depreciation and Adjusted EBITDA to be useful metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Key Business and Financial Metrics” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Metrics.”

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 prospectus. 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.

Reconciliations of each of the below non-GAAP financial metrics to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations 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.

We use Gross Profit Excluding Product Depreciation to measure our total variable profit excluding non-cash expenses as an indicator of the cash gross profit available to cover our costs and expenses and capital expenditures.


 

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We use Fulfillment Profit to measure the efficiency of inbound, outbound and processing costs. We use Contribution Profit as a key measure of our overall efficiency, including fulfillment expense, total product costs and credit card fees.

The following table presents a reconciliation of total revenue, net, the most comparable GAAP financial measure, to each of Fulfillment Profit, Gross Profit Excluding Product Depreciation, and Contribution Profit, respectively, for the periods presented:

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021         2020             2021      
     (in millions)  

Total revenue, net

   $ 256.9     $ 157.5     $ 88.5     $ 80.2  

Fulfillment

     118.1       53.0       32.8       22.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fulfillment profit

     138.8       104.5       55.7       57.9  

Revenue share

     9.5       19.1       8.9       7.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit excluding product depreciation

     129.3       85.4       46.8       50.2  

Rental product depreciation

     75.7       69.9       38.1       23.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     53.6       15.5       8.7       26.3  

Credit card processing fees

     8.2       4.4       2.6       2.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution profit

     45.4       11.1       6.1       24.0  

Technology

     40.2       37.7       18.6       20.2  

Marketing

     22.9       8.1       5.1       7.4  

General and administrative (excluding credit card processing fees)

     90.7       72.8       39.4    

 

38.3

 

Other depreciation and amortization

     21.6       23.0       11.7       9.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

   $ (130.0   $ (130.5   $ (68.7   $ (51.8

Adjusted EBITDA is included in this prospectus because it is a key performance measure used by management to assess our operating performance and the operating leverage of our business prior to capital expenditures. Our Adjusted EBITDA as a percentage of revenue increased from (12.9)% in fiscal year 2020 to (10.1)% in the six months ended July 31, 2021. Adjusted EBITDA as a percentage of revenue has also improved quarter-to-quarter in the six months ended July 31, 2021, from (18.5)% in the first quarter to (4.1)% in the second quarter.


 

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The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA, for the periods presented:

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021         2020             2021      
     (in millions)  

Net loss

   $ (153.9   $ (171.1   $ (88.0   $ (84.7

Interest (income) / expense, net(1)

     24.0       46.6       20.4       29.4  

Rental product depreciation

     75.7       69.9       38.1       23.9  

Other depreciation and amortization(2)

     21.6       23.0       11.7       9.9  

Stock compensation(3)

     6.8       8.2       3.8       4.3  

Write-off of liquidated assets(4)

     4.1       3.3       0.9       2.8  

Non-recurring adjustments(5)

     3.8       4.2       3.2       2.8  

Benefit from income taxes

     (0.2     —       —       (0.1

Other (income) / expense, net

     0.1       (6.0     (1.1     3.6  

Other (gains) / losses(6)

     —         1.6       0.4       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (18.0   $ (20.3   $ (10.6   $ (8.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes debt discount amortization of $4.0 million in fiscal year 2019, $5.0 million in fiscal year 2020, $2.0 million in the six months ended July 31, 2020 and $3.9 million in the six months ended July 31, 2021.

(2)

Includes non-rental product depreciation and capitalized software amortization.

(3)

Reflects the non-cash expense for stock-based compensation.

(4)

Reflects the write-off of the remaining book value of liquidated products that had previously been held for sale.

(5)

Fiscal year 2019 non-recurring adjustments includes $2.8 million of costs related to a September 2019 software outage and $1.0 million related to legal costs and settlements. Fiscal year 2020 non-recurring adjustments includes $3.2 million of costs associated with COVID-19-related matters including severance, furlough benefits, one-time bonuses and related legal fees and $0.5 million of shipping carrier transition costs. Non-recurring adjustments for the six months ended July 31, 2020 include $2.8 million of costs related to COVID-19 related matters including severance, furlough benefits, one-time bonuses, and related legal fees. Non-recurring adjustments for the six months ended July 31, 2021 include $2.7 million of costs related to public readiness preparation.

(6)

Includes costs associated with the write-off of asset disposals, operating lease termination and foreign exchange.


 

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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 prospectus, including our consolidated financial statements and related notes appearing elsewhere in this prospectus, 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. In such case, the trading price of our Class A common stock could decline, and you may lose some or all of your original investment. In addition, the impacts of the COVID-19 pandemic may exacerbate the risks described below as well as risks and uncertainties not presently known to us.

Risks Related to Our Business and Industry

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.

We have grown rapidly over the last several years, due in large part to the growth in demand for our subscription offerings, and therefore, our recent growth rates and financial performance should not necessarily be considered indicative of our future performance. Although the COVID-19 pandemic has materially adversely affected our fiscal year 2020 operating and financial results, resulting in our total revenue decreasing 38.7% from $256.9 million in fiscal year 2019 to $157.5 million, our revenue increased 39.4% from $33.5 million for the three months ended April 30, 2021 to $46.7 million for the three months ended July 31, 2021 and we may experience significant growth in the future. To effectively manage and capitalize on our growth, we must continue to expand our brand awareness and marketing, enhance customer experience, iterate our subscription products, invest in digital consumer innovation, and upgrade our management information and reverse logistics systems and other processes. Our continued growth has in the past, and could in the future, strain our existing resources, and we could experience ongoing operating difficulties in managing our business across numerous jurisdictions, including difficulties in hiring, training, and managing a diverse and growing employee base. Failure to scale and preserve our company culture as we grow could also harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

Our growth strategy is focused on continuing to grow and retain our subscriber and customer base, expanding our brand partner relationships and product assortment, increasing our brand awareness, advertising and other marketing spending, and continuing to invest in our offerings and technology. For the six months ended July 31, 2021, 83% of our total revenue was generated by our subscribers. Our base subscription plans range from $89 to $199 per month and customers can customize their subscription monthly by purchasing additional slots and shipments. Our subscriptions renew automatically on a monthly basis and the subscribers may disable automatic renewal by canceling their subscription prior to the next month’s bill date. Customers may also pause their subscriptions for one to three months at a time. 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 items via our Reserve offering a-la-carte for four or eight days at individual rates and we provide resale offerings allowing customers to purchase pre-loved items. Our plans and offerings do not have demonstrably long track records of

 

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success and may not grow as much or as fast as we expect. If our growth rate declines, investors’ perception of our business, financial condition and results of operations may be adversely affected. To the extent our growth rate slows, our business performance will become increasingly dependent on our ability to retain revenue from existing subscribers and increased sales to existing customers.

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 rental and resale;

 

   

price our subscription, a-la-carte and resale offerings so that we are able to attract new customers, and retain and expand our relationships with existing customers;

 

   

accurately forecast our revenue and plan our fulfillment and operating expenses;

 

   

ensure that we maintain an adequate depth and breadth of available products to meet evolving customer demands and respond swiftly and appropriately to new and changing styles, trends or desired consumer preferences;

 

   

successfully transition from “unlimited” subscriptions to usage-based subscription plans at different price points;

 

   

successfully maintain and grow our relationships with existing and new brand partners, including continuing to grow our Share by RTR and Exclusive Design offerings;

 

   

avoid disruptions in acquiring and distributing our products and offerings;

 

   

provide customers with a high-quality experience, including customer service and support that meets their needs;

 

   

maintain and enhance our reputation and the value of our brand;

 

   

hire, integrate and retain talented personnel across all levels of our organization;

 

   

successfully compete with other companies that are currently in, or may in the future enter, the industry or the markets in which we operate, and respond to developments from these competitors such as pricing changes and the introduction of new offerings;

 

   

comply with existing and new laws and regulations applicable to our business;

 

   

successfully expand into new and penetrate existing geographic markets in the United States;

 

   

successfully develop new offerings and innovate and enhance our existing offerings and their features, including in response to new trends, competitive dynamics or the needs of customers and subscribers;

 

   

effectively manage growth of our business, personnel, and operations, including expanding our shipping and distribution network and fulfillment center operations, as well as our logistics footprint and the number of facilities we operate in the future;

 

   

effectively manage our costs related to our business and operations;

 

   

avoid or manage interruptions in our business from information technology downtime, cybersecurity incidents and other factors that could affect our physical and digital infrastructure; and

 

   

successfully identify and acquire, partner or invest in products, technologies, or businesses that we believe could complement or expand our business.

Because we have a limited history operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future

 

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growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our offerings, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. Failure to manage our future growth effectively could have an adverse effect on our business, financial condition, and results of operations.

We also expect to continue to expend substantial financial and other resources to grow our business, and we may fail to allocate our resources in a manner that results in increased revenue growth in our business. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial condition, and results of operations may be harmed, and we may not achieve or sustain profitability in the future.

The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.

The COVID-19 pandemic and the travel restrictions, quarantines, and related public health measures and actions taken by governments and the private sector have adversely affected global economies, financial markets and the overall environment for our business, and the extent to which it may continue to impact our future results of operations and overall financial performance remains uncertain. The first Delta variant case was identified in December 2020, and the variant soon became the predominant strain of the virus and by the end of July 2021, the Delta variant was the cause of more than 80% of new U.S. COVID-19 cases. As a result, new restrictions are being contemplated and implemented by workforces and federal, state and local government officials. The global macroeconomic effects of the pandemic may persist for an indefinite period of time, even after the pandemic has subsided. In addition, we cannot predict the impact the COVID-19 pandemic has had and will have on our brand partners, third-party vendors and service providers, and we may continue to be materially adversely impacted as a result of the negative past, present and future impact upon our brand partners, third-party vendors and service providers.

The COVID-19 pandemic has materially adversely affected our fiscal year 2020 operating and financial results due to the occurrence of the following events or circumstances, among others:

 

   

the global shelter-in-place restrictions significantly reduced our number of active subscribers and engagement with all of our offerings because of the decrease in special events, social gatherings and interactions outside the home;

 

   

a significant number of subscribers paused or canceled their subscriptions or downgraded to lower-priced plans, and we experienced significant decreased demand for our a-la-carte offering and customers canceled their existing orders for special events;

 

   

subscribers engaged less, which impacted the success of our organic marketing and reduced the volume of our data and business insights;

 

   

disruptions of the operations of our brand partners and delays in shipment and delivery of our products;

 

   

pausing all of our paid marketing spend and eliminating or significantly reducing investments in growth initiatives;

 

   

carrying more products relative to customer demand, negatively impacting gross margins;

 

   

performance-based revenue share payments to brands were decreased due to lower total revenue, impacting our brand partner relationships and value proposition;

 

   

implementing temporary salary cuts, employee layoffs and furloughs, and pausing recruiting efforts, which negatively impacted employee morale and resulted in an increase in regrettable employee attrition; and

 

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the closure of our brick-and-mortar retail stores, which was perceived negatively by some customers.

As the recovery period continues, particularly in the United States, and shelter-in-place orders and travel advisories are lifted, the effects of the COVID-19 pandemic, including the identification and spread of new variants of the virus, such as the Delta variant, may continue to have a negative impact on our business operations and long-term financial results of operations due to the occurrence of the following events or circumstances, among others:

 

   

the difficulty in accurately predicting the timing and pace of our business recovery, particularly increased demand, subscriber levels, and Reserve and Resale orders, leading to potentially over-spending and lower profitability if recovery is not as strong as or when we expected;

 

   

our inability to meet increased demand and provide an optimal customer experience as a result of difficulty in hiring additional employees, particularly in our fulfillment, operations and customer experience functions;

 

   

continuing disruptions of the operations of our brand partners, which could impact our ability to acquire an adequate depth and breadth of products at favorable prices in a timely manner to match demand;

 

   

our ability to efficiently re-start our paid marketing efforts; and

 

   

possible resurgences of the COVID-19 pandemic, including as a result of new variants of the virus, such as the Delta variant, or otherwise, that lead to new or additional shelter-in-place orders and/or travel advisories, which may dampen future demand for our products and offering.

The continued scope and duration of the pandemic, whether additional actions may be taken to contain the virus, the impact on our customers and partners, the speed and extent to which markets fully recover from the disruptions caused by the pandemic, and the impact of these factors on our business, will depend on future developments that are highly uncertain and cannot be predicted with confidence. In addition, to the extent COVID-19 adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described in these Risk Factors.

Although we anticipate that our operating results in future fiscal years will begin to reflect a more normal operating environment, the current economic and public health climate has created a high degree of uncertainty and there is no assurance that our scale, number of customers and revenue will return to or surpass pre-pandemic levels for a sustained period of time. As such, we continue to closely monitor this global health crisis and will continue to reassess our strategy and operational structure on a regular, ongoing basis as the situation evolves. See “Management’s Discussion and Analysis of Financial Position and Results of Operations” for more details on the impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.

We compete with other fashion rental companies and also with a range of traditional and online retail and resale fashion companies and we expect competition to continue to increase in the future. To be successful, we need to continue to attract and retain customers and brand partners.

We believe our ability to compete effectively depends on many factors within and beyond our control, including:

 

   

our ability to normalize fashion rental and change traditional retail shopping habits and norms;

 

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how effectively differentiated our offerings and value proposition are from those of our competitors;

 

   

how effectively we market and communicate how to use our Subscription and Reserve offerings;

 

   

our ability to expand and maintain an appealing depth and breadth of our products to meet customer demand;

 

   

our ability to attract new brand partners and retain existing brand partners in our Share by RTR and Exclusive Design programs and acquire products on favorable and efficient terms;

 

   

the speed and cost at which we can deliver products to our customers and the ease with which they can return our products;

 

   

the effectiveness of our customer service;

 

   

further developing our data science capabilities for brand partners;

 

   

maintaining favorable brand recognition and effectively marketing our services to customers;

 

   

the amount, diversity, and quality of brands that we or our competitors offer;

 

   

the price at which we are able to offer our Rental and Resale offerings;

 

   

the success of our reverse-logistics processes in delivering products in good condition to customers; and

 

   

anticipating and successfully responding to changing apparel trends and consumer shopping preferences.

Many competitors or potential competitors may have longer operating histories, greater brand recognition, existing consumer and supplier relationships and significantly greater financial, marketing and other resources. In addition, they may be able to innovate and provide products and services faster and with more selection than we can. They may be willing to price their products and services more aggressively in order to gain market share or generally employ a low-cost pricing model. In addition, brands set pricing for their own new retail items, which can include promotional discounts that may adversely affect the relative value of rental and/or resale items offered by us, and, in turn, our revenue, results of operations and financial condition.

Additional competitors are expanding and may continue to expand into the rental and resale space in which we operate and we remain vulnerable to the marketing power and high level of customer recognition of these larger competitors and to the risk that these competitors or other smaller entrants could attract our customer base. Some of our potential competitors are vertically integrated and are also engaged in the manufacture and distribution of clothing. These competitors may advantageously leverage this structure to gain market share and certain vertically-integrated organizations with significant market power could potentially utilize this power to make it more difficult for us to compete.

Furthermore, we are revolutionizing the fashion industry by changing the way women get dressed. Although we believe that there are numerous trends in our favor that support the continued growth and success of online fashion rental, changing traditional retail and e-commerce shopping habits is difficult, particularly the shift from an ownership to an access model. Our business model may not achieve acceptance as broadly and within the time frame that we expect by customers and brand partners. In addition, the trends in our favor may evolve and no longer provide compelling support for our business model. If online fashion rental does not achieve broad acceptance by consumers and our brand partners, our growth could be limited and our competitiveness hampered.

Our inability to respond effectively to competitive pressures, improved performance by our competitors, failure to achieve broad acceptance and changes in the fashion retail markets could result

 

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in lost market share and have a material adverse effect on our business, financial condition, and results of operations.

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.

The growth of our business is dependent upon our ability to continue to grow by cost-effectively adding new customers. Historically, a substantial portion of new customer acquisition has originated from organic word-of-mouth and other non-paid referrals. Although we will continue to encourage customer engagement, loyalty, and word-of-mouth referrals, there is no guarantee that we will be successful and our organic growth may decline. Paid marketing is also a key part of our growth strategy and while we previously paused paid marketing during portions of the pandemic as a result of COVID-19, we have increased our spending and plan to significantly increase spending and run marketing campaigns to acquire additional subscribers and customers, all of which could impact our overall profitability. We may incur marketing expenses significantly in advance of the time we anticipate recognized revenue associated with such expenses, our paid marketing may not effectively reach potential customers, changes in regulations or third-party interference could limit the ability of search engines and social media platforms for marketing, they may decide not to rent through our platform or the spend of new customers may not yield the intended return on investment, any of which could negatively affect our results of operations. Moreover customer preferences may change and customers may not rent through our platform as frequently or spend as much with us. If we are not able to continue to expand our customer base through cost-effective methods, our revenue may grow slower than expected or decline. Relatedly, an inability to attract and retain customers could harm our ability to attract and retain brand partners, who may decide to partner with alternative platforms.

If we fail to retain customers, our business, financial condition, and results of operations would be harmed.

A high proportion of our revenue comes from highly engaged subscribers. For the six months ended July 31, 2021, 83% of our total revenue was generated by our subscribers. A decrease in the number of existing customers or a reduction in the amount existing customers spend on our offerings could negatively affect our operating results.    

Our number of customers and the amounts they spend on our offerings may decline materially or fluctuate as a result of many factors, including, among other things:

 

   

the quality, consumer appeal, price, and reliability of our offerings;

 

   

our ability to quality control the products delivered to our customers;

 

   

ensuring on-time delivery of orders;

 

   

a negative customer service experience;

 

   

intense competition in the fashion industry;

 

   

negative publicity that impacts our brand and reputation;

 

   

changes in consumer preferences regarding the use of pre-loved apparel;

   

lack of market acceptance of our business model;

 

   

the unpredictable nature of the impact of the COVID-19 pandemic or a future outbreak of disease or similar public health concern;

 

   

the failure (or perceived failure) to meet customer expectations regarding our environmental, social and governance, or ESG, initiatives;

 

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changes in efficiency of our historic or current customer acquisition methods; or

 

   

dissatisfaction with changes we make to our offerings and products.

If existing customers no longer find our offerings and products appealing or appropriately priced or if we are unable to provide high-quality support to customers to help them resolve issues in a timely and acceptable manner, they may stop using our offerings, negative publicity may be generated and word-of-mouth and other referrals may be hampered. Even if our existing customers continue to find our offerings and products appealing and our customer service satisfactory, they may decide to downgrade to a less frequent, lower cost subscription and rent fewer items over time as their demand for apparel and accessories declines. For example, as a result of changes to daily life due to the COVID-19 pandemic, including increased rates of working remotely from home, many customers’ demand for a variety of apparel was, and in the future may be, reduced or eliminated. If customers who rent most frequently and rent a significant amount of items from us were to make fewer or lower priced rentals or stop using our offerings, our financial results could be negatively affected.

If we fail to anticipate and respond successfully to new and changing fashion trends and consumer preferences, our business could be harmed.

Our success is, in large part, dependent upon our ability to identify fashion trends, predict and gauge the tastes of our customers, and provide availability of items and a service that satisfies customer demand in a timely manner. However, lead times for many of our purchasing decisions may make it difficult for us to respond rapidly to new or changing apparel trends or customer acceptance of products chosen by us. In addition, external events may disrupt or change customer preferences and behaviors in ways we are not able to anticipate. For example, the COVID-19 pandemic has resulted in significant changes to daily life, working arrangements, and social events, which has impacted the type of apparel our customers seek to rent. We generally enter into purchase contracts in advance of anticipated rentals and typically before apparel trends are confirmed by customer rentals. We have not always predicted our customers’ preferences and acceptance levels of our products with accuracy.

Additionally, our success is dependent on the ability of our brand partners to anticipate, identify and respond to the latest fashion trends and consumer demands and to translate such trends and demands into product options in a timely manner. The failure of our brand partners to anticipate, identify or respond swiftly and appropriately to new and changing styles, trends or desired consumer preferences, to accurately anticipate and forecast demand for certain product offerings or to provide relevant and timely product offerings to rent on our platform may lead to lower demand for our offerings, which could have a material adverse effect on our business and financial condition.

Further, although we use our data and business insights to predict our customers’ preferences and gauge demand for our products, there is no guarantee that our data and business insights will accurately anticipate demand. To the extent we misjudge the market for the service we offer or fail to execute on trends and deliver attractive products to customers, we may not attract and retain customers effectively and our operating results will be adversely affected.

We have a history of losses, and we may be unable to achieve or sustain profitability.

We had a net loss of $171.1 million and $84.7 million for the year ended January 31, 2021 and the six months ended July 31, 2021, respectively, and have in the past had net losses. As of July 31, 2021, we had an accumulated deficit of $674.1 million. Because we have a short operating history at scale, it is difficult for us to predict our future operating results. We will need to generate and sustain increased revenue and manage our costs to achieve profitability. Even if we do, we may not be able to sustain or increase our profitability.

 

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Our ability to generate profit depends on our ability to grow revenues and drive operational efficiencies in our business to generate better margins. We expect to incur increased operating costs and may continue to generate net losses in the near term in order to:

 

   

acquire products;

 

   

increase the engagement of customers;

 

   

drive customer acquisition and brand awareness through marketing and promotional initiatives;

 

   

enhance our website and mobile offerings and functionality; and

 

   

invest in our operations, including our logistics fulfillment and capacity, to support the growth in our business.

We may discover that these initiatives are more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these expenses or realize the benefits we anticipate. We will also face greater compliance costs associated with the increased scope of our business and being a public company. Any failure to adequately increase revenue or manage operating costs could prevent us from achieving or sustaining profitability. We may not realize the operating efficiencies we expect to achieve through our efforts to scale the business, reduce friction in the rental experience, and optimize costs. As such, due to these factors and others, we may not be able to achieve or sustain profitability in the near term or at all. If we are unable to achieve or sustain profitability, the value of our business and the trading price of our Class A common stock may be negatively impacted.

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 are vulnerable to demand and pricing shifts and to suboptimal selection and timing of product purchases. We obtain substantially all of our products directly from over 750 brand partners through purchasing products from our brand partners typically at a discount to wholesale cost, or Wholesale, acquired directly from brand partners on consignment at low upfront cost, with performance-based revenue share payments to our brand partners over time, or Share by RTR, and designing items using our data in collaboration with our brand partners and manufacturing items through third-party partners, or Exclusive Designs, arrangements with designer or manufacturing partners. For our business to be successful, our brand partners must be willing and able to provide us with products in specific quantities and styles of sufficient quality, in compliance with regulatory requirements, at acceptable costs and on a timely basis. We typically do not enter into long-term contracts with our brand partners and, as such, we operate without significant contractual assurances of continued supply, pricing or access to products. Although we believe we have had limited attrition of brand partners to date, a brand partner could choose to no longer work with us or provide less favorable terms for a variety of reasons, including as a result of the COVID-19 pandemic and resulting impacts. In addition, some of our brand partners may not have the capacity to supply us with sufficient products to keep pace with our growth plans, especially if we plan to demand significantly greater amounts of products. In such cases, our ability to pursue our growth strategy will depend in part upon our ability to expand capacity with existing brand partners or develop new brand partners relationships.

In fiscal years 2019, 2020 and through the first six months of fiscal year 2021, we expanded our relationships with brand partners and increased the proportion of our products procured under Share by RTR, and Exclusive Designs arrangements, which reduced our upfront cost of products. For Wholesale and Share by RTR items, entering into contracts in advance of a particular season requires brand partners to agree to incur costs related to manufacturing products before we have paid for it, which requires the brand partner and brands to continue to trust us. If we were viewed as less financially viable, we may receive less favorable terms and conditions from our brand partners, including requiring upfront payments or other demonstrations of credit. The cash flow benefits we

 

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currently experience from our brand partners’ willingness to revenue share could be adversely affected if revenue share terms change or if brand partners no longer wish to revenue share due to (1) lack of trust in us, (2) lack of revenue earned in comparison to the projections we provided, (3) their inability to continue to spread their earnings out over the time period that the products are earning revenue on our site, among other reasons. For our Exclusive Design arrangements, we must continue to increase the number of brand partners with whom we work, design an assortment of styles that meet customer demand, maintain and enhance our third-party manufacturing capabilities and partners and ensure the products manufactured meets brand partners’ and our quality standards. Our ability to obtain a sufficient selection or volume of Share by RTR products on a timely basis at competitive prices could suffer as a result of any deterioration or change in our brand partner relationships or events that adversely affect our partners.

We also source products directly from brand partners outside of the United States, including Europe, Asia and around the globe. Global sourcing and foreign trade involve numerous factors and uncertainties beyond our control including increased shipping costs, the imposition of additional import or trade restrictions, including legal or economic restrictions on overseas brand partners’ ability to produce and deliver products, increased custom duties and tariffs, unforeseen delays in customs, more restrictive quotas, loss of a most favored nation trading status, currency exchange rates, transportation delays, foreign government regulations, political instability and economic uncertainties in the countries from which we or our brand partners source our products. As a result of the COVID-19 pandemic, most of our products sourcing in fiscal years 2020 and 2021 was handled remotely via video and teleconference instead of in-person. Future extended disruptions in travel and the ability to source products in-person may not be successful, and our partners may continue to face challenges in capital availability, which could lead to reduced or suboptimal products and harm our business. For the next several quarters, we anticipate facing, and having to address challenges relating to, inefficiencies in the global transportation network as a result of the COVID-19 pandemic that may impact our business operations. In addition, negative press or consumer sentiment about internationally sourced products may lead to reduced demand for our products. These and other issues affecting our international brand partners or internationally sourced products could have a material adverse effect on our business, financial condition, and results of operations.

In addition, we rely on our merchandising team to order styles that our customers will rent and we rely on our data science to inform the levels of and which products we purchase, including when to reorder items that are renting well and when to sell or write-off items that are not renting well. If our teams do not predict customer demand and tastes well or if our algorithms do not help us reorder the right products or write off the right products timely, we may not effectively manage our products and our operating results could be adversely affected.    

Furthermore, we must execute our cleaning and repair protocols and reverse logistics operations efficiently and at a significant scale to maximize the utilization of units and reduce the number of units purchased, the failure of which may adversely affect our operating results. We cannot control products while they are out of our possession or prevent all damage while in our fulfillment centers, during shipping, or while with customers, third-party suppliers or partners. We may incur additional expenses and our reputation could be harmed if customers and potential customers believe that our products are not of high quality or may be damaged.

If we are not able to keep pace with technological changes and enhance our current offerings and develop new offerings to respond to the changing needs of partners and customers, our business, financial performance, and growth may be harmed.

Our industry is characterized by rapidly changing technology, new service and product introductions, and changing customer demands and preferences, and we are not able to predict the

 

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effect of these changes on our business. The technologies that we currently use to support our business platform may become inadequate or obsolete, and the cost of incorporating new technologies into our offerings and services may be substantial. Any failure by us to adequately integrate technological developments in our approach to data management could harm our ability to leverage data, including customer data, collected through our technology and our systems, which could have a negative effect on our business. If we are unable to adequately utilize our data in support of our operations due technical or other limitations, our ability to drive leverage in operational efficiencies and to attract new customers and retain existing customers could be impaired. In addition, if we are unable to successfully leverage new technology to automate and otherwise drive efficiencies in our operations, our business, results of operations and financial condition could be harmed.

Our partners and customers may not be satisfied with our technological or other platform enhancements or new offerings or may perceive that these offerings do not respond to their needs or create value for them. Our customers may also be dissatisfied with the product mix we currently or will offer in the future.

Additionally, as we invest in and experiment with new offerings or changes to our platform, our partners and customers may find these changes to be disruptive and may perceive them negatively. For example, we have recently phased out our “unlimited swaps” subscription plan and shifted to several subscription plans at different price points based on usage, which may introduce too much complexity for customers or be perceived as less value than the previously offered plans. We have increased our resale offerings of pre-loved products, which could introduce the uncertainty of merchandise returns and negatively impact our business. We also have expanded the categories of products we offer, such as kidswear and home accessories, and may further expand our categories in the future. These new plans and offerings do not have demonstrably long track records of success for us. In addition, developing new offerings and services is complex, and the timetable for their public launch is difficult to predict and may vary from our historical experience. As a result, the introduction of new offerings may occur after anticipated release dates, or they may be introduced as pilot programs, which may not be continued for various reasons. In addition, new offerings may not be successful due to defects or errors, negative publicity, or our failure to market them effectively. New offerings may not drive revenue growth, customer acquisition or retention, may require substantial investment and planning, and may bring us more directly into competition with companies that are better established or have greater resources than we do. If we do not continue to cost-effectively develop new offerings that satisfy our brand partners and customers, then our competitive position and growth prospects may be harmed. In addition, new offerings may have lower margins than we anticipate or than existing offerings, and our revenue from the new offerings may not be enough to offset the cost of developing and maintaining them, which could adversely affect our business, financial performance, and growth.

If we fail to maintain and enhance our brand, our ability to attract and retain customers will be impaired and our business, financial condition, and results of operations may suffer.

Maintaining and enhancing our appeal and reputation as a stylish, revolutionary and trusted brand is critical to attracting and retaining customers and brand partners. The successful promotion of our brand and awareness of our offerings and products will depend on a number of factors, including our marketing efforts, ability to continue to develop our offerings and products, the quality and appeal of our products, and ability to successfully differentiate our offerings from competitive offerings. We expect to invest substantial resources to promote and maintain our brand, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased customer acquisition and sales. The strength of our brand will depend largely on our ability to provide a compelling customer value proposition for our rental and resale offerings and continued customer engagement and word of mouth organic marketing. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in promoting and maintaining our brand and reputation.

 

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Furthermore, whether accurate or not, negative publicity about our business, operations, or employees, and customer complaints could harm our reputation, customer trust and referrals of our services, brand partner confidence, employee morale and culture, and our ability to recruit new employees effectively. In addition, negative publicity related to our brand partners, influencers and other vendors that we have partnered with may damage our reputation, even if the publicity is not directly related to us. Negative commentary concerning us or our brand partners may also be posted on social media platforms at any time and may have an adverse impact on our brand, reputation and business. The harm of negative publicity, particularly on social media platforms, may be immediate, without affording us an opportunity for redress or correction.

If we fail to maintain, protect, and enhance our brand successfully or to maintain loyalty among customers, or if we incur substantial expenses in unsuccessful attempts to maintain, protect, and enhance our brand, we may fail to attract or increase the engagement of customers, and our business, financial condition, and operating results may suffer.

We rely heavily on the effective operation of our proprietary technology systems and software, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information.

We rely heavily on in-house proprietary technology, third-party software, and customized off-the-shelf technology solutions across our business. Our ability to effectively manage all areas of our business, particularly our product management and fulfillment operations, depends significantly on the reliability and capacity of these systems. We are critically dependent on the integrity, connectivity, security and consistent operations of these systems, which are highly dependent on coordination of our internal business, operations, product and engineering teams. For example, in September 2019, we experienced a software outage at our Secaucus, New Jersey facility, during which we were unable to fulfill thousands of Reserve and Subscription orders on a timely basis and made the decision to stop taking new orders until the issue was adequately resolved. We also experienced significant negative customer reviews and negative press as a result of the outage, which we believe damaged our customer relationships, reputation and brand. The outage also resulted in substantial financial losses and increased costs largely due to: lost revenues, customer refunds, credits, promotions and/or related payments, and incremental labor and shipping costs. Our insurance policy covered a substantial portion of these losses but not all of them. While we have taken remediation measures in response to the outage, similar outages or other disruptions may occur in the future, which could harm our ability to meet customer expectations, fulfill orders, manage our products, and achieve our objectives for operating efficiencies and profitability.

The technology underlying our platform is highly interconnected and complex and may contain undetected errors or vulnerabilities. Due to the interconnected nature of the software underlying our platform, updates to parts of our code, third-party code, and APIs, on which we rely and that maintain the functionality of our systems, could have an unintended impact on other sections of our code, which may result in errors or vulnerabilities to our platform that negatively impact the customer experience and functionality of our offerings. In some cases, such as our mobile application, errors may only be correctable through updates distributed through slower, third-party mechanisms, such as app stores, and may need to comply with third-party policies and procedures to be made available, which may add additional delays due to app review and customer delay in updating their mobile apps. In addition, our systems are increasingly reliant on machine learning systems, which are complex and may have errors or inadequacies that are not easily detectable. These systems may inadvertently reduce the efficiency of our systems, or may cause unintentional or unexpected outputs that are incorrect, do not match our business goals, do not comply with our policies, or otherwise are inconsistent with our brand, guiding principles and mission. Any errors or vulnerabilities discovered in our code could also result in damage to our reputation, loss of our customers, unauthorized disclosure of personal and confidential

 

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information, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.

Any significant technology disruption or failure or data security incident could adversely affect our business, financial condition and operation.

Our ability to effectively manage our business, particularly our products management and fulfillment operations, depends significantly on the reliability and capacity of our in-house proprietary technology, third-party software and infrastructure, and customized off-the-shelf solutions. We also collect, process and store sensitive and confidential information, including our proprietary business information and information regarding our customers, employees, suppliers and business partners. The secure processing, maintenance and transmission of this information is critical to our operations. Our systems or those of our service providers and business partners may be subject to damage or interruption from power outages or damages, telecommunications problems, data corruption, software errors, network failures, acts of war or terrorist attacks, fire, flood and natural disasters. Our existing safety systems, data backup, access protection, user management and information technology emergency planning may not be sufficient to prevent data loss or long-term network outages. In addition, we may have to upgrade our existing information technology systems or choose to incorporate new technology systems from time to time in order for such systems to support the increasing needs of our expanding business. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.

Our systems and those of our third-party service providers and business partners may be vulnerable to security incidents, attacks by hackers, acts of vandalism, malware, social engineering, denial or degradation of service attacks, computer viruses, supply chain attacks, phishing attacks, ransomware attacks, misplaced or lost data, human errors or other similar events. If unauthorized parties gain access to our networks or databases, or those of our third-party service providers or business partners, they may be able to steal, publish, sell, delete, use inappropriately or modify private and sensitive information including credit card information and personally identifiable information, any or all of which could harm our business, financial condition and results of operations. Ransomware attacks, including those from organized criminal threat actors, nation-states and nation-state supported actors, are becoming increasingly prevalent and can lead to significant interruptions, delays, or outages in our operations, loss of data, loss of income, significant extra expenses to restore data or systems, reputational loss and the diversion of funds. To alleviate the financial, operational and reputational impact of a ransomware attack it may be necessary to make extortion payments, but we may be unable to do so if applicable laws or governmental pressure prohibit or prevents such payments. In addition, employees may intentionally or inadvertently cause data or security incidents that result in unauthorized release of personal or confidential information. Because the techniques used to circumvent security systems can be highly sophisticated, change frequently, are increasingly designed to evade detection, are often not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to address all possible techniques or implement adequate preventive measures for all situations.

Certain of the aforementioned types of security incidents have occurred in the past, and may occur in the future, resulting in unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of sensitive, proprietary and confidential information. For example, although no sensitive information was affected, our platform has been the subject of credential stuffing attacks (i.e., email addresses and passwords involved in security incidents reported by other companies have been used to attempt to gain unauthorized access to our platform) and brute force attacks (i.e., attempts to try different username and password credentials to gain access to our platform). The security measures we employ to prevent, detect, and mitigate potential harm to our users from the theft of or misuse of user credentials on our network may not be effective in every instance.

 

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Moreover, while we maintain cyber insurance that may help provide coverage for these types of events, we cannot assure you that our insurance will be adequate to cover costs and liabilities related to these incidents. Any such incident, attack, virus or other event could result in costly investigations and litigation exceeding applicable insurance coverage or contractual rights available to us, in particular because certain data privacy laws, including the California Consumer Privacy Act, or CCPA, grant individuals a private right of action arising from certain data security incidents, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures, and negative publicity that could adversely affect our business, financial condition, and results of operations.

We also rely on a number of third-party service providers to operate our critical business systems and process confidential and personal information, such as our shipping partners, Human Resources Information System and payment processor. These service providers may not have adequate security measures and could experience a security incident that compromises the confidentiality, integrity, or availability of the systems they operate for us or the information they process on our behalf and may not react or notify us in a timely manner. Moreover, we or our third-party service providers may be more vulnerable to such attacks in remote work environments, which have increased in response to the COVID-19 pandemic. Any cyberattack, security incident, or material disruption or slowdown affecting our systems or those of our third-party service providers and business partners, could have a material adverse effect on our business, financial condition, and results of operations.

Our e-commerce business faces distinct risks, such as fulfillment of orders, and our failure to successfully manage these risks could have a negative impact on our profitability.

As an e-commerce business, we encounter risks and difficulties frequently experienced by businesses with significant internet operations. The successful operation of our business as well as our ability to provide a positive customer experience that will generate subscription and rental and resale orders depends on efficient and uninterrupted e-commerce order-taking and fulfillment operations. If we are unable to allow real-time and accurate visibility to products availability when customers are ready to order, quickly and efficiently fulfill our customers’ orders using the fulfillment and payment methods they demand, provide a convenient and consistent experience for our customers regardless of the ultimate channel or effectively manage our online sales, our ability to compete and our results of operations could be adversely affected.

Risks associated with our e-commerce business include:

 

   

uncertainties associated with our website and mobile application including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our systems software, inadequate system capacity, computer viruses, human error, security incidents, legal claims related to our systems operations and fulfillment;

 

   

disruptions in internet service or power outages;

 

   

reliance on third parties for computer hardware and software, as well as delivery of products to our customers;

 

   

rapid technology changes;

 

   

credit or debit card fraud and other payment processing related issues;

 

   

changes in applicable federal, state and international regulations;

 

   

liability for online content;

 

   

cybersecurity and consumer privacy concerns and regulation; and

 

   

natural disasters or adverse weather conditions.

 

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Our online offerings also expose us to broader applicability of regulations, as well as additional regulations, such as the rules relating to registration of internet sellers, certain anti-money laundering, trade sanction, anti-corruption, anti-bribery and international trade laws. Problems in any of these areas could result in a reduction in sales, increased costs, sanctions or penalties and damage to our reputation and brands.

In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces, virtual and augmented reality and other e-commerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not increase sales or attract customers. Our competitors, some of whom have greater resources than we do, may also be able to benefit from changes in e-commerce technologies or adapt better than us, which could harm our competitive position.

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 currently rely on several third-party national and regional shipping vendors for our outbound and inbound logistics. A substantial majority of our inbound shipments from customers are currently returned through a single vendor—we have from time to time transitioned, and are currently in the process of transitioning, inbound shipments from this vendor to multiple other vendors, and we cannot predict how this transition may impact our costs and our customer sentiment and satisfaction.

Additionally, our business relies on the successful management of reverse logistics needed to ingest, clean, and restock returned items quickly and efficiently in order to offer them for rental or resale to other customers. If we are not able to negotiate acceptable pricing and other terms with these vendors or they experience performance problems or other difficulties, our operating results and customers’ experience could be negatively impacted.

Our ability to receive inbound products efficiently and ship products to and from customers may be negatively affected by many events outside of our control including, inclement weather, public health crises such as the COVID-19 pandemic, governmental regulations, labor disputes and other factors. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our customers do not receive their orders in good condition on time, they could become dissatisfied and cease using our services, which would adversely affect our business and operating results. Our shipping vendors have faced and may continue to face increased volumes which, in turn, could cause a decrease in their service levels or result in an increase of their prices. Increases in shipping costs or other significant shipping difficulties or disruptions or any failure by our brand partners or third-party carriers to deliver high-quality products to us or to our customers, as applicable, in a timely manner or to otherwise adequately serve our customers could damage our reputation and brand and may substantially harm our business.

In addition to offering the ability to return products through our third-party shipping vendors, we offer multiple physical drop-off points for customers located in certain cities, including, for example, New York City, Boston, Nashville, Houston, and San Francisco to return their orders. In the event that we do not successfully manage these logistics, it will make it more difficult for us to maintain our products, and satisfy our customers which will negatively affect our brand, financial condition and results of operations.

Our quarterly and annual results of operations may fluctuate, which may make it difficult to predict our future performance.

Our results of operations could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. Even if our revenue increases, our revenue growth rates may decline in the future as a result of a variety of factors, including

 

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macroeconomic factors, increased competition, and the maturation of our business. As a result, comparing our results of operations on a period-to-period basis or our revenue growth rate for any prior period may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

   

our success in attracting and retaining customers and subscribers;

 

   

maintaining successful relationships with brand partners and our ability to acquire products at acceptable prices and offer a compelling mix of products that are available for subscription, a-la-carte rental or purchase at any given time;

 

   

the amount and timing of our fulfillment costs and operating expenses;

 

   

the timing and success of product launches, including new services and features we may introduce;

 

   

the success of our marketing and promotional efforts;

 

   

adverse economic and market conditions, such as those related to the COVID-19 pandemic, and other adverse global events that negatively impact commerce and consumer behavior;

 

   

disruptions or defects in our software or operations, such as privacy or data security incidents, outages, or other incidents that impact the availability, reliability, or performance of our business;

 

   

the impact of competitive developments and our response to those developments;

 

   

our ability to manage our business and future growth;

 

   

our ability to recruit and retain employees including fulfillment center labor to process, itemize, list, pack and ship our products; and

 

   

changes to financial accounting standards and the interpretation of those standards, which may affect the way we recognize and report our financial results.

The impact of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, quarter-to-quarter and year-over-year comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance.

Fluctuations in our quarterly operating results and key metrics may be particularly pronounced in the current economic environment due to the uncertainty caused by, and the unprecedented nature of, the COVID-19 pandemic, consumer spending patterns, and the impacts of the gradual reopening of the offline economy and lessening of restrictions on movement. Fluctuations in our quarterly operating results and key metrics may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our Class A common stock to decline.

Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our Class A common stock, we could experience liquidity issues, our ability to retain or attract key personnel may diminish, and other unanticipated issues may arise. We believe that our quarterly operating results and key metrics may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our overall historical growth rate and the impacts of the COVID-19 pandemic may have overshadowed the effect of seasonal variations on our historical operating results. These seasonal effects may become more pronounced over time, which could also cause our operating results and key metrics to fluctuate.

 

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Environmental, social and governance matters may impact our business and reputation.

There has been increased focus, including by consumers, investors, employees and other stakeholders, as well as by governmental and non-governmental organizations, on environmental, social and governance matters generally and with regard to the fashion industry specifically.

We have and plan to continue undertaking environmental, social and governance, or ESG initiatives. Any failure by us to meet our commitments or loss of confidence on the part of customers, investors, employees, brand partners, and other stakeholders as it relates to our ESG initiatives could negatively impact our brand, the demand for our offerings, our financial condition, results of operations and prospects. These impacts could be difficult and costly to overcome, even if such concerns were based on inaccurate or misleading information.

In addition, achieving our ESG initiatives may result in increased costs in our supply chain, fulfillment, and/or corporate business operations, and could deviate from our initial estimates and have a material adverse effect on our business and financial condition. In addition, standards and research regarding environmental, social, and governance initiatives could change and become more onerous for both for us and our third-party suppliers and vendors to meet successfully. Evolving data and research could undermine or refute our current claims and beliefs that we have made in reliance on current research, which could also result in costs, a decrease in revenue, and negative market perception that could have a material adverse effect on our business and financial condition.

A variety of organizations measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. Topics taken into account in such assessments include, among others, the company’s efforts and impacts on climate change and human rights, ethics and compliance with law and the role of the company’s board of directors in supervising various sustainability issues. In light of investors’ increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s ESG expectations or achieve our financial goals.

We rely on the experience and expertise of our Co-Founder and Chief Executive Officer, senior management team, key technical and strategic employees and hourly personnel.

Our success and future growth depend largely upon the continued services of our senior management team, including our Co-Founder, Chief Executive Officer and Chair, Jennifer Y. Hyman. From time to time, there may be changes in our executive management team resulting from the hiring or departure of these executives. Our executive officers are employed on an at-will basis, which means they may terminate their employment with us at any time. The loss of one or more of our executive officers, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business. We do not maintain key man life insurance with respect to any member of management or other employee.

In addition, our future success will depend upon our ability to fill key roles, such as engineering, data science, analytics, buying and planning, and logistics, as well as hourly fulfillment workers and customer service agents. Such efforts will require significant time, expense, and attention as there is intense competition for such individuals, particularly in New York City, Galway, New Jersey and Texas, and new hires require significant training and time before they achieve full productivity. In addition to maintaining competitive wage and salary levels, which are likely to increase further due to inflation and the potential minimum wage increases, prospective and existing employees often consider the value of the equity awards they may receive in connection with their employment. If the perceived value of our equity awards declines or experiences significant volatility, it may adversely affect our ability to recruit and retain key employees.

 

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Our corporate and customer service employees are currently almost fully remote. As COVID-19 restrictions are lifted and we contemplate reopening our offices, we plan to move to a hybrid model for New York City and Galway, and we anticipate that employees will be present in the office two to three days per week. If our needs are not aligned with our employees’ preferences, it may adversely affect our ability to recruit and retain employees. In addition, the hybrid model may negatively impact our company culture, collaboration and productivity.

We laid off 33% of all employees and furloughed 37% of employees in fiscal year 2020 due to the unprecedented impact of COVID-19 on our business and also experienced increased voluntary attrition. If we experience continued voluntary attrition at significant rates in the future, and/or if we are unable to attract and retain qualified employees in a timely fashion, particularly in critical areas of operations such as engineering, data science and analytics, our ability to achieve our strategic objectives will be adversely impacted, and our business and future growth prospects will be harmed.

Our company culture has contributed to our success and if we cannot maintain this culture as we grow, our business could be harmed.

We believe that our company culture has been critical to our success. Our company culture stands for being entrepreneurial, passionate, kind and positive. Our ability to continue to cultivate and maintain this culture is essential to our growth and continued success. We face a number of challenges that may affect our ability to sustain our corporate culture, including:

 

   

failure to identify, attract, reward, and retain people in leadership positions in our organization who share and further our culture, values, and mission;

 

   

the increasing size, complexity and geographic diversity of our workforce, and our ability to promote a uniform and consistent culture across all our offices and employees;

 

   

the employee and market perception of our ESG efforts, which may impact employee morale and recruiting efforts;

 

   

competitive pressures to move in directions that may divert us from our mission, vision, and values;

 

   

the continued challenges of a rapidly-evolving industry; and

 

   

the increasing need to develop expertise in new areas of business that affect us.

In particular, Diversity, Equality and Inclusion is a strategic imperative at RTR. We are focused on driving inclusiveness, innovation and stronger business results by attracting a diverse talent pool and continuing to foster an inclusive work environment for all our employees across offices. Although we have adopted policies to promote compliance with laws and regulations as well as to foster a respectful workplace for all employees, our employees may fail to abide by these policies. In addition to damaging our reputation, actual or alleged misconduct could tarnish our culture, result in negative publicity, affect the confidence of our stockholders, regulators and other parties and could have a material adverse effect on our business, financial condition and operating results.

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.

We are subject to variable industry and global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment; higher consumer debt levels; reductions in net worth, declines in asset values, and related market uncertainty; home foreclosures and reductions in home values; fluctuating interest rates and credit availability; fluctuating fuel and other energy costs; fluctuating commodity prices; and general uncertainty regarding the overall future political and economic environment. We

 

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have experienced many of these factors due to the COVID-19 pandemic and related responses and have seen negative impacts on customer demand at varying levels as a result. For example, we experienced a significant decrease in consumer demand during the COVID-19 pandemic due to shelter-at-home orders and more limited social events, increased unemployment and work-from-home trends, and general economic uncertainty.

Furthermore, any increases in consumer discretionary spending or immediately after times of crisis may be temporary, such as those related to government stimulus programs or the tail of the COVID-19 pandemic in the United States, and consumer spending may decrease again. Economic conditions in certain regions may also be affected by natural disasters, such as hurricanes, tropical storms, earthquakes, and wildfires; other public health crises; and other major unforeseen events. Consumer purchases or rental of discretionary items, including the products that we offer, generally decline during recessionary periods or periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence.

Additionally, adverse economic changes could reduce consumer confidence, and could thereby negatively affect our operating results. In challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business. Any of these developments could harm our business, financial condition and results of operations.

Our business is affected by seasonality.

Our business is subject to seasonal fluctuation. We typically realize a higher portion of revenue from our Reserve rentals during our third and fourth fiscal quarter as a result of increased wedding and holiday events and we expect this to continue in the future. For our subscription rentals, we typically acquire the highest number of subscribers in the third and fourth fiscal quarters, and we tend to see a greater number of paused subscriptions in the winter and summer months. Adverse events, such as higher unemployment or deteriorating economic conditions can deter consumers from shopping and renting. Any significant decrease in revenue during the third or fourth quarter could have a disproportionately large impact on our operating results and financial condition for that year. Any factors that harm our third or fourth quarter operating results, including disruptions in our brand partners’ supply chains or unfavorable economic conditions, including as a result of the COVID-19 pandemic, could have a disproportionate effect on our results of operations for our entire fiscal year.

In anticipation of increased rental activity during the third or fourth quarter, we may incur significant additional expenses, including additional marketing and additional staffing in our customer support operations. In addition, we may experience an increase in our net shipping costs due to ensuring timely delivery for peak seasons. In the future, our seasonal revenue patterns may become more pronounced or may change, may strain our personnel and operational activities, and may cause a shortfall in net sales as compared with expenses in a given period, which could substantially harm our business, financial condition and results of operations.

Furthermore, our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business, and the effects of the COVID-19 pandemic may alter our historical seasonality trends. Accordingly, yearly or quarterly comparisons of our operating results may not be useful and our results in any particular period will not necessarily be indicative of the results to be expected for any future period. Seasonality in our business can also be affected by introductions of new or enhanced products and offerings, including the costs associated with such introductions.

Strategic investments, partnerships, alliances, or acquisitions could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute

 

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stockholder value, and adversely affect our business, financial condition, and results of operations.

Our success will depend, in part, on our ability to expand our services and grow our business in response to changing technologies, customer demands, and competitive pressures. We may choose to expand our services and grow our business by entering into partnerships or alliances with third parties rather than through internal development or through the acquisition of complementary businesses and technologies. The identification of suitable alliance partners or acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to successfully complete identified transactions. In addition, if we pursue and complete an acquisition, we may not be able to successfully integrate the acquired business. The risks we face in connection with partnerships and acquisitions include:

 

   

a partnership or acquisition may disrupt our ongoing business, divert resources, increase our expenses, and distract our management;

 

   

an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, offerings, technologies, personnel, or operations of any company that we partner with or acquire; and

 

   

if we incur debt or issue a significant amount of equity securities to fund such joint venture or acquisition, such debt may subject us to material restrictions on our ability to conduct our business, as well as financial maintenance covenants and such equity securities may cause dilution for our existing stockholders and earning per share may decrease.

The occurrence of any of these foregoing risks could adversely affect our business, financial condition, and results of operations and expose us to unknown risks or liabilities.

We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.

We have funded our operations since inception primarily through equity and debt financings and revenue generated from our offerings. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to develop and grow our business. For example, we may need additional funding to obtain products, for marketing, and headcount or other operating expenses, to develop new features or enhance our offerings, to improve our operating infrastructure, and/or to acquire complementary businesses and technologies. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to support our business growth, and respond to business challenges could be significantly impaired, and our business may be adversely affected.

If we incur additional debt, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests.

 

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Material changes in the pricing practices of our brand partners could negatively impact our profitability.

Our brand partners may increase their pricing if their raw materials become more expensive or become subject to other pricing pressures. The inputs used to manufacture the products from our brand partners are subject to availability constraints and price volatility. Our brand partners may pass the increase in sourcing costs to us through price increases, thereby impacting our margins. The fabrics used by our brand partners are made of raw materials including petroleum-based products and cotton. Significant price fluctuations or shortages in petroleum, cotton, or other raw materials could significantly increase our cost of revenue. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used in the manufacture of the products we offer, our partners might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price. For example, disruptions in the supply chain as a result of the COVID-19 pandemic has increased raw material costs, impacting pricing with certain of our partners, and caused shipping delays for certain of our products.

Our level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfill our obligations under such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.

As of July 31, 2021, we had $74.5 million aggregate principal amount of borrowings outstanding under our first lien facility, which we entered into in October 2020, and was subsequently amended in April 2021, with Alter Domus (US) LLC as administrative agent for Ares Corporate Opportunities Fund V, L.P., or Ares, which we call the Ares Facility and $230.0 million aggregate principal amount of borrowings under a subordinated, junior lien loan agreement in July 2018, as subsequently amended in December 2018, April 2019, November 2019, June 2020, August 2020 and October 2020, with Double Helix Pte Ltd. as administrative agent for the lenders party thereto, which we refer to as our Credit Facility, and together with the Ares Facility, the Existing Credit Agreements. On a pro forma basis, after giving effect to this offering and the Refinancing, our aggregate principal amount of indebtedness outstanding under our Existing Credit Agreements would have been approximately $276.8 million as of July 31, 2021. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our current or future debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. We cannot assure you that our business will be able to generate sufficient levels of cash or that future borrowings or other financings will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs. These financing risks, in addition to potential rising interest rates and changes in market conditions, if realized, could negatively impact our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Our Existing Credit Agreements and Amended Credit Facility contain financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our business, financial condition and results of operations.

The terms of our Existing Credit Agreements and Amended Credit Facility include a number of covenants that limit our ability to (subject to negotiated exceptions), among other things, incur additional indebtedness, incur liens on assets, enter into agreements related to mergers and acquisitions, dispose of assets or pay dividends and make distributions. In particular, under the Ares Facility, we are required to meet specified financial covenants that are measured based on pre-defined consolidated EBITDA thresholds starting in the second quarter of the fiscal year 2021. We intend to use the net proceeds from this offering to repay all amounts outstanding under our Ares Facility. The terms of our Amended Credit Facility may restrict our current and future operations and could

 

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adversely affect our ability to finance our future operations or capital needs, including the financial covenant to maintain a minimum of $50 million in liquidity. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies which are not subject to such restrictions.

A failure by us to comply with the covenants specified in the Existing Credit Agreements, and the Amended Credit Facility we intend to enter into, could result in an event of default under the agreement, which would give the lenders the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. If the debt under the Existing Credit Agreements, including the Amended Credit Facility we intend to enter into, were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could adversely affect our business, financial condition and results of operations.

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 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.

In connection with the preparation of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting as of January 31, 2021, as described below. 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.

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, or 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.

 

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The material weaknesses described above did not result in a misstatement to our annual or interim 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 the annual or interim consolidated financial statements that would not be prevented or detected.

To address these material weaknesses, we have commenced actions to formalize the company’s framework and policies with respect to maintaining evidence in the operation of control procedures and improve our IT general controls, segregation of duties controls, and journal entry controls. In particular, we are implementing 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 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 the early stages, 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 and we may not fully remediate during 2021. We can give no assurance that our efforts will remediate these material weaknesses in our internal control over financial reporting, or that additional material weaknesses will not be identified in the future. If the steps we take do not remediate the material weaknesses in a timely manner, or if we fail to implement and maintain effective internal control over financial reporting, there could be errors in our consolidated financial statements that could result in a restatement of our financial statements, and could cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our Class A common stock.

Additionally, ineffective internal control over financial reporting could expose us to an increased risk of financial reporting fraud and the misappropriation of assets and subject us to potential delisting from the stock exchange on which we list or to other regulatory investigations and civil or criminal sanctions. If we are unable to remediate the material weakness in a timely manner, or if additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, results of operations and financial condition could suffer.

The requirements of being a public company may strain our resources, divert managements attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the listing standards of Nasdaq, and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, financial condition, and results of operations. Furthermore, several members of our management team do not have prior experience in running a public company. Although we have already hired additional employees to assist us in complying with these requirements, we intend to invest substantial resources in our compliance efforts, including hiring more employees or engaging outside consultants, which will increase our operating expenses. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

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We also expect that being a public company that is subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations may also make it more difficult for us to attract and retain qualified members of our board of directors, particularly members who can serve on our audit committee and compensation committee, and qualified executive officers.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our Class A common stock.

We will not be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

In addition to the material weaknesses in internal control over financial reporting identified in connection with the audit of our financial statements as of and for the fiscal year ended January 31, 2021, subsequent testing by us or our independent registered public accounting firm, may reveal additional deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. During the evaluation and testing process of our internal controls, if we identify additional material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective. We cannot assure you that there will not be additional material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if we or our independent registered public accounting firm determines we have additional material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including:

 

   

the auditor attestation requirements of Section 404;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

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exemptions from the requirements of holding a non-binding advisory stockholder vote on executive compensation and non-binding advisory stockholder vote to approve any golden parachute payments not previously approved.

Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our Class A common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest of:

 

   

the last day of the fiscal year following the fifth anniversary of this offering;

 

   

the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more;

 

   

the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and

 

   

the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates.

We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock, and our stock price may be more volatile.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. The accounting for our business is complicated, particularly in the area of revenue recognition, and is subject to change based on the evolution of our business model, interpretations of relevant accounting principles, enforcement of existing or new regulations, and changes in SEC or other agency policies, rules, regulations, and interpretations of accounting regulations. Changes to our business model and accounting methods, principles, or interpretations could result in changes to our financial statements, including changes in revenue and expenses in any period, or in certain categories of revenue and expenses moving to different periods, may result in materially different financial results, and may require that we change how we process, analyze, and report financial information and our financial reporting controls.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses. Significant estimates and judgments involve: revenue recognition, as well as treatment of rental products, including estimates of salvage value and

 

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useful life for rental products, share-based compensation, warrants and right of use asset. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, or at all.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including as a result of any of the risks described in this prospectus.

The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of addressable customers and subscribers covered by our market opportunity estimates will become a customer or subscriber or generate any particular level of revenues for us. In addition, our ability to expand in any of our target markets depends on a number of factors, including the cost, performance and perceived value associated with our products and offerings. Even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

Expansion of our operations internationally requires management attention and resources, involves additional risks, and may be unsuccessful.

We do not currently offer our products and services internationally. In the event we decide to expand our geographic market internationally, we will need to adapt to different local cultures, standards, laws, and policies. The business model we employ may not appeal as strongly to customers in international markets. Our entry into new markets will also require us to become familiar with different trends and customer preferences in such markets. In addition, consumer shopping behavior may continue to evolve and we may need to adapt our service to such changes.

Furthermore, to succeed with customers in international locations, we will need to locate fulfillment centers in foreign markets, hire local employees and source products appealing to local preferences, and we will have to invest in these facilities, employees and products before proving we can successfully run foreign operations. We may not be successful in expanding into additional international markets or in generating revenue from foreign operations for a variety of reasons, including:

 

   

lower acceptance of our offerings and the concept of renting apparel and accessories and the need to localize our products offerings;

 

   

competition from local incumbents that understand the local market and may operate more effectively;

 

   

regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, export quotas, custom duties, or other trade restrictions, or any unexpected changes thereto; and

 

   

risks resulting from changes in currency exchange rates.

 

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If we invest substantial time and resources to establish and expand our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.

Risks Related to Our Legal and Regulatory Environment

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 numerous evolving laws and regulations in the United States and around the world, including those relating to consumer protection, environmental protection, intellectual property, consumer product safety, privacy and information security, taxation, and immigration, labor, and other employment law matters, such as workplace safety, particularly in our fulfillment centers, and wage and hour regulations. There has been a recent focus on automatically renewing subscription offerings. For example, California’s Automatic Renewal Law, and the federal Restore Online Shoppers’ Confidence Act, or ROSCA, require companies to adhere to enhanced disclosure and cancellation requirements when entering into automatically renewing contracts with subscription customers. Regulators and private plaintiffs have brought enforcement and litigation actions against companies, challenging automatic renewal and subscription programs.

We strive to comply with all applicable laws; however, despite our efforts, we may not have fully complied in the past and may not in the future. If we fail to comply with existing or future laws or regulations, or if these laws or regulations are violated by our brand partners, suppliers or vendors, we may be subject to criminal and civil liabilities, fines, or sanctions and, while incurring substantial legal fees and costs and reputational harm. In addition, compliance and remediation efforts can be costly.

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets, and we could face criminal liability and other serious consequences for violations, which could harm our business.

We are subject to export control laws and regulations (including the U.S. Export Administration Regulations), U.S. Customs and import regulations, various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control, the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and generally prohibit companies and their employees, agents, contractors, and other partners from authorizing, promising, offering, or providing, directly or indirectly, corrupt payments of anything of value to recipients in the public or private sector to obtain or retain business or an improper business advantage. As a public company, we also are subject to the FCPA’s accounting provisions, which require us to make and keep complete and accurate books and records, and to maintain a system of adequate internal accounting controls. We have brand partners, suppliers, and vendors operating outside the United States and may engage other third parties to sell our products and services or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals outside the United States. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors, and other partners, even if we do not explicitly authorize such activities. Although we have policies and controls in place to promote compliance with these laws and regulations, there are no assurances that these policies and controls will always prevent illegal or improper acts by employees, agents, third parties, or business partners. Violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, investigation costs, and other consequences, any of

 

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which could have a material adverse effect on our business, financial condition, and results of operations.

Failure to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights could harm our brand, devalue our proprietary content, and adversely affect our ability to compete effectively.

Our success depends in part on our ability to obtain, maintain, protect, and enforce our intellectual property rights, including those in our proprietary technologies, know-how, and brand. To protect our rights to our intellectual property, we rely on a combination of trademark, copyright patent, and trade secret laws, domain name registrations, confidentiality agreements, and other contractual arrangements with our employees, affiliates, customers, strategic partners, vendors, and others. However, the protective steps we have taken and plan to take may be inadequate to deter infringement, misappropriation or other violations of our intellectual property or proprietary rights and we may be unable to broadly enforce all of our intellectual property rights. Failure to adequately protect our intellectual property could harm our brand, devalue our proprietary technology and content, and adversely affect our ability to compete effectively.

If we fail to protect our intellectual property rights adequately, our competitors may gain access to our intellectual property and proprietary technology and develop and commercialize substantially identical offerings or technologies. We may not timely or successfully register our trademarks in all jurisdictions, which could enable third parties to use our brand name and create potential roadblocks to any expansion of the business outside of the U.S. The copyright registrations we have obtained for our website may not adequately protect all material contained on our website, and these registrations do not cover any material that is not part of our website. The patent prosecution process is expensive and time-consuming. We may not be able to prepare, file and prosecute all necessary or desirable patent applications at a commercially reasonable cost or in a timely manner or in all jurisdictions, creating an opportunity for third parties to patent the same technology while preventing us from continuing to use it. It is also possible that we may fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology in-licensed from third parties. Therefore, these patents and patent applications containing in-licensed content may not be prosecuted and enforced in a manner consistent with the best interests of our business. Any patents, trademarks, copyrights, or other intellectual property rights that we have or may obtain may be challenged or circumvented by others or invalidated or held unenforceable through administrative proceedings, or litigation. There can be no assurance that our patent applications will result in issued patents, or that any such patents will be of sufficient scope to adequately protect our proprietary technology or provide us with any meaningful competitive advantage. Moreover, failure to comply with applicable procedural, documentary, maintenance, renewal, fee payment and other similar requirements with the United States Patent and Trademark Office or other similar governmental agencies or administrative bodies could result in abandonment or lapse of the affected intellectual property rights. Further, the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights in those countries may be inadequate. Accordingly, despite our efforts to obtain and protect our intellectual property, it may be possible for unauthorized third parties to copy our offerings and capabilities and use information that we regard as proprietary to create offerings that compete with ours.

We generally enter into confidentiality and invention assignment agreements with our employees and consultants, as well as agreements with other third parties, including suppliers and other partners, that contain confidentiality obligations and assignment provisions. However, we cannot guarantee that

 

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we have entered into such agreements with each party that has developed intellectual property for us or that may have had access to our proprietary information and technology, know-how, and trade secrets. Moreover, no assurance can be given that these agreements will be effective in controlling access to our proprietary information or preventing the unauthorized distribution, use, misappropriation, reverse engineering, or disclosure of our proprietary intellectual property and other proprietary rights, information, technology, know-how, and trade secrets. These agreements may be breached, and we may not have adequate remedies for any such breach. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed, possibly leaving us without an adequate remedy to make us whole.

We may be required to spend significant financial and managerial resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management. In the alternative, the failure to enforce our intellectual property rights could result in the impairment or loss of portions of our intellectual property rights. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights, and if such defenses, counterclaims, or countersuits are successful, it could result in the loss, impairment or narrowing of valuable intellectual property rights. In patent litigation in the United States, counterclaims alleging invalidity and/or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. In an infringement proceeding, a court may decide that the patent claims we are asserting are invalid and/or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover the technology in question. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings). Such proceedings could result in revocation of our patents, or could result in narrowing the scope of the patent claims so that they no longer cover our technology. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose some, and perhaps all, of the patent protection on our technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could have a material adverse impact on our business by making the technology at issue freely available for others to use. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our offerings and capabilities, impair the functionality of our offerings and capabilities, delay or prevent introductions of new offerings, result in our substituting inferior or more costly technologies into our offerings, allow our competitors to gain momentum or overtake us, or injure our brand and reputation. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Class A common stock.

 

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We may incur costs to defend against, face liability or be vulnerable to intellectual property infringement, misappropriation, and other claims and allegations brought against us by others, which could result in substantial damages and diversion of managements efforts and attention.

Third parties may assert claims against us alleging that we infringe upon, misappropriate, dilute or otherwise violate their intellectual property rights, particularly as we expand our business. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. These claims, regardless of their merit, could be expensive and time consuming to defend and could divert management resources. We cannot predict the outcome of lawsuits or administrative proceedings, and we cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition or results of operations. These claims are resolved against us, they could result in significant monetary liability, or prevent us from renting or selling some of our products or using some of our technology. In addition, a finding of liability or other resolution of claims may require us to change our business model, redesign or rebrand our products, replace portions of our technology platform, license rights from third parties, cease using certain brand names or other intellectual property rights altogether, or make substantial payments for royalty or license fees, legal fees, disgorgement of profits, corrective advertising, settlement payments or other costs or damages. Further, licenses may not be available to us on reasonable terms, if at all. Any of these events could harm our business and cause our results of operations, liquidity and financial condition to suffer.

Our use of third-party open-source software could adversely affect our ability to offer our products and offerings and subjects us to possible litigation.

We use third-party open-source software in connection with the development and deployment of our software applications and will likely use third-party open source software in the future. Some open-source licenses require that source code that is developed using open source software be made available to the public at no cost and that any modifications or derivative works to certain open source software continue to be licensed under open source licenses, which in some circumstances could include valuable proprietary code. In some circumstances this could require valuable proprietary code to be made available as open-source software, and may also prohibit charging fees to licensees. While we employ practices designed to monitor our compliance with the licenses of open-source software and try to ensure that we do not use any of the open-source software in a manner that would require us to disclose our proprietary source code or preclude us from charging fees, we cannot guarantee that we will be successful. We cannot guarantee that all open-source software is reviewed prior to use in our platform, or that our developers have not incorporated (and will not in the future incorporate) open-source software into our products and offerings without our knowledge. Furthermore, there are an increasing number of open-source software license types, almost none of which have been tested in a court of law, resulting in a dearth of guidance regarding the proper legal interpretation of such licenses. As a result, there is a risk that open-source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our products and offerings. If we were to receive a claim of non-compliance with the terms of any of our open-source licenses, we may be required purchase a costly license, to publicly release certain portions of our proprietary source code, limit or prohibit our use of some or all of our software, or expend substantial time and resources to re-engineer some or all of our software. We could also be precluded from charging fees for third-party use of our proprietary code.

In addition, the use of third-party open-source software typically carries greater technical and legal risks than the use of third-party commercial software because open-source licensors generally do not provide support, warranties or controls on the functionality or origin of the software. To the extent that our platform depends upon the successful operation of open-source software, any undetected errors or defects could prevent the deployment or impair the functionality of our systems and injure our reputation. Use of open-source software may also present additional security risks because the public

 

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availability of such software may make it easier for hackers and other third parties to compromise our platform. Any of the foregoing could be harmful to our business, financial condition, or results of operations and could help our competitors develop offerings that are similar to or better than ours.

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 collect, process, store, and use a wide variety of data from current and prospective customers, including personal information, such as home addresses, credit card numbers (through our payment processor) and geolocation. These activities are regulated by a variety of federal, state, local, and foreign data privacy, data security, data protection and consumer protection laws and regulations, as well as industry standards and guidelines, which have become increasingly stringent in recent years.

U.S. data privacy and data security laws are complex and changing rapidly, with the frequent imposition of new and changing requirements across our business. Many U.S. states have enacted laws regulating the online collection, use, and disclosure of personal information and are requiring that companies implement reasonable data security measures. Laws in all U.S. states and territories also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security incidents affecting personal information.

Further, the CCPA took effect on January 1, 2020. The CCPA gives California residents expanded rights related to their personal information, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared. The CCPA also created restrictions on “sales” of personal information that allow California residents to opt-out of certain sharing of their personal information and may restrict the use of cookies and similar technologies for advertising purposes, and could cause us to incur additional CCPA compliance costs or create adverse effects as a result of its restrictions. The CCPA provides for civil penalties for violations, and creates a private right of action for data security incidents that is expected to increase data security-related litigation. Additionally, the California Privacy Rights Act, or CPRA, passed in California in November 2020. The CPRA will restrict use of certain categories of sensitive personal information that we handle; further restrict the use of cross-context behavioral advertising techniques on which our products and offerings may rely on in the future; expand requirements on businesses that “sell” personal information under the CCPA to businesses like ours that “share” it; require all businesses with any California employees to limit uses of employee data; establish restrictions on the retention of personal information; expand the types of data security incidents subject to the private right of action; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. The majority of the CPRA’s provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes will likely be required. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, a comprehensive privacy statute that shares similarities with the CCPA, CPRA, and legislation proposed in other states. Some observers have noted that the CCPA, CPRA, and CDPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply.

In addition, the Telephone Consumer Protection Act, or TCPA, imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the

 

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prior consent of the person being contacted. We use text messages frequently to communicate service-related issues to our customers. Efforts to comply with the TCPA do not prevent third-party claims that we have violated the TCPA from being brought, and such claims could be costly to litigate, and if successful, expose us to substantial statutory damages. The Controlling the Assault of Non-Solicited Pornography and Marketing Act, or CAN-SPAM, imposes specific restrictions and requirements on our efforts to send marketing materials via email, including notice obligations that must be included in our marketing emails and the ability for recipients to unsubscribe from such emails. The Federal Trade Commission enforces CAN-SPAM, and our efforts to comply with CAN-SPAM may not prevent claims that we have violated the law, which could be costly to resolve, and if successful, expose us to substantial penalties and potential injunctive relief.

We are also subject to the European Union General Data Protection Regulation, or GDPR, due to certain of our employees being based in Ireland. The GDPR, which is wide-ranging in scope and applies extraterritorially, imposes several requirements relating to the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EU, including to the U.S. In addition, GDPR compliance requirements are consistently and rapidly evolving. For example, in July 2020, the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield data transfer mechanism, and other data transfer mechanisms such as the Standard Contractual Clauses, have also faced challenged in European courts, potentially limiting how organizations can lawfully transfer personal data from EEA to the U.S. Notably, the GDPR imposes large penalties for noncompliance, including the potential for fines of up to 20 million or 4% of the annual global revenues of the noncompliant entity, whichever is greater.

In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards by which we are legally or contractually bound. If we fail to comply with these contractual obligations or standards, we may face substantial liability or fines. Consumer resistance to the collection and sharing of the data used to deliver targeted advertising, increased visibility of consent or “do not track” mechanisms as a result of industry regulatory or legal developments, the adoption by consumers of browser settings or “ad-blocking” software, and the development and deployment of new technologies could materially impact our ability to collect data or reduce our ability to deliver relevant promotions or media, which could materially impair the results of our operations.

Further, we are subject to the PCI Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card industry entities. We rely on vendors to handle PCI matters for us and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, based on past, present, and future business practices, which could have an adverse impact on our business and reputation, and be costly for us to defend.

We may not be successful in achieving compliance with the rapidly evolving privacy, data security, and data protection requirements discussed above, as well as other data privacy, security and consumer protection frameworks that currently, or may in the future, apply to us, despite our efforts to comply, as all of these frameworks are constantly evolving and are not always consistent with each other, leading to uncertainty in interpretation. Any actual or perceived non-compliance could result in litigation and proceedings against us by governmental entities, customers or others, fines and civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our business in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products and offerings. Such occurrences could adversely affect our business, financial condition, and results of operations. Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruptions in or failure or security intrusion of our systems or third-party systems where information important to our business operations

 

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is stored. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance policies may not cover all claims made against us and could have high deductibles, and defending a suit, regardless of its merit, could be costly and divert management attention.

We could incur significant liabilities related to, and significant costs in complying with, environmental, health and safety laws and regulations.

Our operations are subject to a variety of federal, state, local and foreign laws and regulations relating to health, safety and the protection of the environment. These environmental, health and safety laws and regulations include those relating to, among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the environment; and the health and safety of our employees. Failure to comply with such laws and regulations which tend to become more stringent over time can result in significant fines, penalties, costs, liabilities or restrictions on operations , injunctive relief, civil or criminal sanctions, and could expose us to costs of investigation or remediation, as well as tort claims for property damage or personal injury, and could negatively affect our business, financial condition or results of operations.

We manage our waste materials as non-hazardous waste, but we cannot guarantee that our supply chain or the products we use will not contain hazardous materials or result in the generation of hazardous waste. Further, liability for the improper release or disposal of waste can be joint and several and there can be no assurance that we will not have to expend material amounts to remediate the consequences of the generation or disposal of waste in the future, particularly with respect to our dry cleaning operations. Further, we may be responsible as a lessee operator for the costs of investigation, removal or remediation of hazardous substances or waste located on or in or emanating from leased property, as well as any property damage. There can be no assurance that our future uses or conditions will not result in the imposition of liability upon us under environmental laws or expose us to third-party actions such as tort suits. Furthermore, we rely on third-party suppliers to provide chemicals, cleaning supplies, and handling instructions that comply with applicable health, safety and environmental regulations. A failure of such suppliers to abide by applicable regulations may subject us to material liabilities.

From time to time, we may be subject to legal proceedings, regulatory disputes, and governmental inquiries that could cause us to incur significant expenses, divert our managements attention, and materially harm our business, financial condition, and operating results.

From time to time, we may be subject to claims, lawsuits, government investigations, and other proceedings involving products liability, competition and antitrust, intellectual property, privacy, consumer protection, securities, tax, labor and employment, commercial disputes, and other matters that could adversely affect our business operations and financial condition. In recent years, we have seen a rise in the number and potential significance of these disputes and inquiries and evolving areas of focus for regulators and private plaintiffs. For example, there has been an increase in consumer class action lawsuits relating to subscription products. Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our products and offerings, all of which could negatively affect our revenue growth. The results of litigation, investigations, claims, and regulatory proceedings cannot be predicted with certainty, and determining reserves for pending litigation and other legal and regulatory matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash

 

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settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, financial condition, and results of operations.

In addition, as a public company, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, and results of operations would be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, would divert the resources of our management and harm our business, financial condition, and results of operations.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes to offset taxable income or taxes may be limited.

As of January 31, 2021, we had federal net operating loss carryforwards of $459.3 million, $152.0 million of which will expire at various times through 2038. Furthermore, we had state net operating loss carryforwards of $26 million, which will expire at various times through 2041. Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the legislation enacted in 2017, commonly referred to as the Tax Cuts and Jobs Act, or Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security, or CARES Act, U.S. federal net operating losses incurred in taxable years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in taxable years beginning after December 31, 2020, is limited. It is uncertain how various states will respond to the Tax Act and the CARES Act. For state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, California recently imposed limits on the usability of California state net operating losses to offset taxable income in tax years beginning on or after January 1, 2020 and before January 1, 2023.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” (very generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. In 2021, we completed a Section 382 analysis covering the period beginning in March 2009 and ending in March 2021. From the study, we concluded we experienced an ownership change in 2010 (but not since then) and $1.3 million of NOLs were subject to the limitation. However, all of those NOLs were available by the year ended January 31, 2017. We may experience additional ownership changes as a result of subsequent shifts in our stock ownership, including upon completion of this offering, some of which may be outside of our control. If we undergo another ownership change, we may incur additional limitations on our ability to utilize our NOLs existing at the time of the ownership change. Future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our cash flows may be adversely affected. We have recorded a full valuation allowance against our U.S. deferred tax assets, which includes net operating loss carryforwards.

Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

We are subject to income and other taxes in the United States and in various states within the United States. Our effective tax rate or tax liability could be adversely affected due to several factors, including:

 

   

changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;

 

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changes in the United States or foreign tax laws, tax treaties, and regulations or the interpretation of them;

 

   

changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business;

 

   

the outcome of current and future tax audits, examinations, or administrative appeals; and

 

   

limitations or adverse findings regarding our ability to do business in some jurisdictions.

In the event any tax audit or other proceeding is determined adversely to us, the resulting liabilities (including any penalties and interest) may have an adverse effect on our cash flows. If we expand the scale of our international business activities, any changes in the United States or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, financial condition, and results of operations.

In particular, new income or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws and regulations could be interpreted, modified, or applied adversely to us. For example, the Tax Act enacted many significant changes to the U.S. tax laws. Future guidance from the IRS and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. In addition, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, tax legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and suppliers. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our suppliers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.

Risks Related to Our Dependence on Third Parties

We face risks associated with brand partners from whom our products are sourced or co-manufactured.

We obtain substantially all of our products directly from over 750 brand partners through Wholesale, Share by RTR, and Exclusive Designs arrangements with designer or manufacturing partners. The benefits we currently experience from these brand partner relationships could be adversely affected if they:

 

   

discontinue selling products to us;

 

   

enter into arrangements with competitors that could impair our ability to source their products, including by giving our competitors exclusivity arrangements or limiting our access to certain products;

 

   

raise the prices they charge us;

 

   

are not satisfied with the value proposition we offer them;

 

   

do not view our brand favorably;

 

   

change pricing terms to require us to pay a significant portion of the cost of items on delivery or upfront;

 

   

experience negative publicity or reputational issues;

 

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do not follow our vendor code of conduct and/or violate legal and regulatory requirements;

 

   

experience supply chain disruptions that cause lead times to be lengthened; or

 

   

fail to execute on the design we have provided for co-manufactured products.

Events that adversely impact our brand partners could impair our ability to obtain adequate and timely products. We also source products directly from brand partners outside of the United States and many of our brand partners use manufacturers in the same geographic region, and as a result we may be subject to magnified impact from such events including, among others, difficulties or problems associated with our brand partners’ business, the financial instability and labor problems of brand partners, product quality and safety issues, natural or man-made disasters, inclement weather conditions, war, acts of terrorism and other political instability, economic conditions, imposition of additional import or trade restrictions, including legal or economic restrictions on overseas partners’ ability to produce and deliver products, increased custom duties and tariffs, unforeseen delays in customs clearance of goods, more restrictive quotas, loss of a most favored nation trading status, currency exchange rates, transportation delays, port of entry issues, the availability of their raw materials and increased production costs. Our brand partners may be forced to reduce their production, shut down their operations or file for bankruptcy. Our ability to obtain products may also depend on our brand partners’ ability to obtain financing, including through factoring companies and other entities, which may also assess our creditworthiness and procurement ability. To the extent our brand partners are unable to secure sufficient credit, we may not be able to purchase merchandise from them. The occurrence of one or more of these events could impact our ability to acquire products, which may result in a less appealing assortment of styles for our customers and reduced availability of the styles we are able to obtain. Similarly, the occurrence of a contagious disease or illness could cause delays or increase costs in the manufacture of certain products. For example, the COVID-19 pandemic caused delays in some shipments from our brand partners.

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.

The convenient customer payment mechanisms provided by our business are key factors contributing to the development of our business. We rely on third parties, including for our payment processing infrastructure, to accept payments from customers and in connection with our banking partners, to remit payments to suppliers. These third parties may refuse to renew our agreements with them on commercially reasonable terms or at all. Furthermore, we rely on a single payment processor, which may increase our risks of being unable to process payments and deliver our products in a timely and cost-effective manner. In the event of interruption, we may not be able to develop alternate or secondary processing without incurring material additional costs and substantial delays. If these companies become unwilling or unable to provide these services to us on acceptable terms or at all, our business may be disrupted. For certain payment methods, including credit and debit cards, we generally pay interchange fees and other processing and gateway fees, and such fees result in significant costs. In addition, online payment providers are under continued pressure to pay increased fees to banks to process funds, and there is no assurance that such online payment providers will not pass any increased costs on to us. If these fees increase over time, our operating costs will increase, which could adversely affect our business, financial condition, and results of operations.

Outages or other failures of the payment processing infrastructure underlying our business could harm our business and cause customers to lose trust in our payment operations and cause them to discontinue use of our products and services. If the quality or convenience of our payment processing infrastructure declines for any reason, the attractiveness of our business to customers could be adversely affected. If we are forced to migrate to other third-party payment service providers for any

 

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reason, the transition would require significant time and management resources, and may not be available on acceptable terms or as effective, efficient, or well-received by our customers.

Our business relies on third-party cloud infrastructures, and any disruption of, or interference with, our use of cloud infrastructures could adversely affect our business, financial condition or results of operations.

We are in the process of migrating a substantial portion of our primary production environment, core architecture, and data centers to a new third-party cloud provider, which provides a distributed computing infrastructure as a service platform for business operations. We also use another third-party cloud provider for portions of our business. Our third-party cloud providers will provide the cloud computing infrastructure we use to host our website and mobile application, serve our customers and support our operations and many of the internal tools we use to operate our business. Our website, mobile application and internal tools will use computing, storage, data transfer and other functions and services provided by our third-party cloud providers. We do not have control over the operations of the facilities of our third-party cloud providers. In addition, our third-party cloud providers’ facilities may be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, power losses, telecommunications failures and other events beyond our control. In the event that any third-party provider’s systems or service abilities are hindered by any of the events discussed above, particularly in a region where our website is mainly hosted, our ability to operate our business may be impaired. A decision to close the facilities without adequate notice or other unanticipated problems or disruptions could result in lengthy interruptions to our business. Further, our agreements with our third-party cloud providers do not provide us with an adequate remedy for every scenario that could negatively affect our business. All of the aforementioned risks may be exacerbated if our business continuity and disaster recovery plans prove to be inadequate.

Additionally, data stored with our third-party cloud providers may experience threats or attacks from computer malware, ransomware, viruses, social engineering (including phishing attacks), denial of service or other attacks, employee theft or misuse and general hacking. Any of these security incidents could result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of our data or our customers’ data or disrupt our ability to provide our products and offerings, including due to any failure by us to properly configure our cloud environment. Our business’ continuing and uninterrupted performance is critical to our success. Customers may become dissatisfied by any system failure that interrupts our ability to provide our merchandise and offerings to them. We may not be able to easily switch our third-party cloud operations to another cloud or other data center provider if there are disruptions or interference with cloud services and, even if we do switch our operations, other cloud and data center providers are subject to the same risks. Sustained or repeated system failures would reduce the attractiveness of our products and offerings, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our brand and reputation and may adversely impact our business.

Our third-party cloud providers do not have an obligation to renew their agreements with us on terms acceptable to us. Although alternative data center providers could host our business on a substantially similar basis to our current third-party cloud providers, transitioning our cloud infrastructure to alternative providers could potentially be disruptive, and we could incur significant one-time costs. If we are unable to renew our agreement for our cloud services on commercially acceptable terms, our agreements with our third-party cloud providers are prematurely terminated, or we add additional infrastructure providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new data center providers. If our third-party cloud providers or other infrastructure providers increase the costs of their services, our business, financial condition or results of operations could be materially and adversely affected.

 

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We depend on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources to attract consumers to and promote our website and our mobile application, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.

Our success depends on our ability to attract consumers to our website and mobile application and convert them into customers in a cost-effective manner. We depend, in large part, on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources for traffic to our website and mobile application.

With respect to search engines, we are included in search results for both paid search listings, where we purchase specific search terms resulting in inclusion of our advertisements, and free search listings, which depend on algorithms used by search engines. For paid search listings, if one or more of the search engines or other online sources on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, we could lose consumers who access our advertisements and traffic to our website could decrease, any of which could have a material adverse effect on our business, financial condition, and results of operations. For free search listings, if search engines on which we rely for algorithmic listings modify their algorithms, our websites may appear less prominently or not at all in search results, which could result in reduced traffic to our websites.

Our ability to maintain and increase the number of consumers directed to our products from digital platforms is not entirely within our control. Search engines, social media platforms and other online sources often revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which we rely for traffic to our website and our mobile application were to modify its general methodology for how it displays our advertisements or keyword search results, resulting in fewer consumers clicking through to our website and our mobile application, our business and operating results are likely to suffer. For example, Apple recently moved to “opt-in” privacy models for mobile applications using its operating system such as ours, requiring consumers to voluntarily choose to receive targeted ads, which may reduce the efficacy of our marketing tracking. In addition, if our online display advertisements are no longer effective or are not able to reach certain customers due to their use of ad-blocking software, our business and operating results could suffer. Furthermore, changes in customer acceptance or usage of our online sources for traffic could adversely impact the effectiveness of our advertising.

Additionally, changes in regulations could limit the ability of search engines and social media platforms, including, but not limited to, Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating our advertisements to our target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (DASHBOARD) Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies, such as, but not limited to, Facebook, Google and Amazon, including how revenue is generated by user data and what measures are taken to protect the data. If the costs of advertising on search engines and social media platforms increase, we may incur additional marketing expenses or be required to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected.

Furthermore, because many of our customers access our products through our mobile application, we depend on the Apple App Store to distribute our mobile application. Apple has broad discretion to change its respective terms and conditions, including those relating to the amount of (and requirement to pay) certain fees associated with our use of the Apple App Store, to interpret its respective terms and conditions in ways that may limit, eliminate or otherwise interfere with our ability to distribute our mobile application through its stores, the features we provide and the manner in which we market in-application products. We cannot assure you that Apple will not limit, eliminate or

 

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otherwise interfere with the distribution of our mobile application, the features we provide and the manner in which we market our mobile application. To the extent it does so, our business, financial condition, and results of operations could be adversely affected.

As existing social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we use change their policies or algorithms, we may not be able to fully optimize such platforms, and our ability to maintain and acquire consumers and our financial condition may suffer. Furthermore, as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have an adverse effect on our business, financial condition, results of operations and prospects.

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.

Our standard vendor terms and conditions, vendor code of conduct, and other policies require our brand partners to comply with applicable laws and certain business standards. The failure of these partners to comply with our vendor code of conduct or applicable laws and regulations could damage our reputation, lead to negative press and/or customer sentiment, or result in costly litigation against us.

The products we rent or sell to our customers is subject to regulation by the Federal Consumer Product Safety Commission, the Federal Trade Commission, and similar state and international regulatory authorities. As a result, such products could in the future be subject to mandatory recalls and other remedial actions. Product safety, labeling, and licensing concerns may also result in us voluntarily removing selected products from our assortment. Such recalls or voluntary removal of products can result in, among other things, lost revenue, diverted resources, potential harm to our reputation, and increased customer service costs and legal expenses, which could have a material adverse effect on our operating results.

It is possible that some of the products we rent or sell may expose us to product liability claims and litigation or regulatory action relating to personal injury. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms or at all. In addition, our partners may not have sufficient resources or insurance to satisfy their indemnity and defense obligations to us in connection with product liability claims or regulatory actions.

We may incur significant losses from fraud.

We have in the past incurred and may in the future incur losses from various types of fraud, including claims that a customer did not authorize a purchase, customers who have closed bank accounts or have insufficient funds to satisfy payments, customers who use stolen credit cards to make purchases, customers who fraudulently rented multiple products at once and customers who have failed to return rentals. In addition to the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could result in us paying higher fees or losing the right to accept credit cards for payment. In addition, under current credit card practices, we are typically liable for fraudulent credit card transactions. We have implemented fraud prevention measures, such as detection tools to identify irregular or high risk customer order patterns, to reduce the risk of fraud.

 

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However, our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action, and lead to expenses that could substantially impact our operating results.

If our insurance coverage is insufficient for the needs of our business or our insurance providers are unable to meet their obligations, we may not be able to mitigate the risks facing our business.

We procure third-party insurance policies to cover various operations-related risks including employment practices liability, workers’ compensation, property and business interruptions, cybersecurity and data security incidents, crime, directors’ and officers’ liability, and general business liabilities. We cannot guarantee that we will continue to receive adequate insurance coverage on favorable terms. Insurance providers may discontinue their coverage or significantly increase the cost of coverage, and we cannot guarantee that we would be able to secure replacement coverage on reasonable terms or at all. In addition, if our insurance carriers change the terms of our policies in a manner not favorable to us, our insurance costs could increase. Further, if the insurance coverage we maintain is not adequate to cover losses that occur, or if we are required to purchase additional insurance for other aspects of our business, we could be liable for significant additional costs. Additionally, if any of our insurance providers becomes insolvent, it would be unable to pay any operations-related claims that we make.

Insurance providers have also raised premiums and deductibles for many businesses, including ours, and may do so in the future. As a result, our insurance and claims expense could increase, or we may decide to raise our deductibles or self-insured retentions when our policies are renewed or replaced. Our business, financial condition, and results of operations could be adversely affected if the cost per claim, premiums, the severity of claims, or the number of claims significantly exceeds our historical experience and coverage limits; we experience a claim in excess of our coverage limits; our insurance providers fail to pay on our insurance claims; we experience a claim for which coverage is not provided; or the number of claims under our deductibles or self-insured retentions differs from historical averages.

Risks Related to this Offering and Ownership of Our Class A Common Stock

The dual class structure of our common stock and stockholders’ agreement among us and certain stockholders has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on Nasdaq, including our Co-Founders, and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change of control.

Our Class B common stock has 20 votes per share, and our Class A common stock, which is the stock we are listing on Nasdaq and is being registered pursuant to the registration statement of which this prospectus forms a part, has one vote per share. As of July 31, 2021, our Co-Founders, and their affiliates held in the aggregate 50.4% of the voting power of our capital stock. Because of the 20-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively could continue to control a significant percentage of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the date of automatic conversion described below, when all outstanding shares of Class B common stock and Class A common stock will convert automatically into shares of a single class of common stock. In addition, we and certain stockholders, including our CEO and Co-Founder, Jennifer Y. Hyman, intend to enter into a stockholders’ agreement in connection with this offering with respect to the election of directors. This concentrated control may limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets,

 

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or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may believe are in your best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon the date that is the earlier of (i) the transfer of such share to a person that is not in the same Permitted Ownership Group (as defined in the Amended Charter) as such Permitted Class B Holder (as defined in the Amended Charter), (ii) November 1, 2033, or (iii) with respect to any shares held by any person in our Co-Founder’s Permitted Ownership Group, (A) such time as a Co-Founder is removed or resigns from the Board of Directors, or otherwise ceases to serve as a director on the Board of Directors, (B) such time as a Co-Founder ceases to be either an employee, officer or consultant, or (C) the date that is 12 months after the death or disability of a Co-Founder.

An active, liquid, and orderly market for our Class A common stock may not develop or be sustained. You may be unable to sell your shares of Class A common stock at or above the price at which you purchased them.

We currently expect our Class A common stock to be listed and traded on Nasdaq. Prior to listing on Nasdaq, there has been no public market for our Class A common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. The initial public offering price was determined by negotiations between us and the underwriters and may not be indicative of the future prices of our Class A common stock.

Further, one or more funds affiliated with Franklin Templeton have indicated an interest in purchasing up to $75.0 million of our Class A common stock offered in this offering, at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, these funds may determine to purchase more, fewer or no shares in this offering, or the underwriters may determine to sell more, fewer or no shares to such funds. Moreover, if funds affiliated with Franklin Templeton are allocated all or a portion of the shares in which they have indicated an interest in this offering, and they purchase any such shares, such purchases could reduce the available public float for shares of our Class A common stock if these funds hold shares long-term as existing holders of our common stock.

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to the risk factors described in this prospectus, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our revenue or other operating metrics;

 

   

our actual or anticipated operating performance and the operating performance of our competitors;

 

   

changes in the financial projections we provide to the public or our failure to meet these projections;

 

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the perceived adequacy of our ESG efforts;

 

   

positive or negative publicity;

 

   

failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the expectations of investors;

 

   

any major change in our board of directors, management, or key personnel;

 

   

the economy as a whole and market conditions in our industry;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

announcements by us or our competitors of significant innovations, new products, services, features, integrations, or capabilities, acquisitions, strategic investments, partnerships, joint ventures, or capital commitments;

 

   

the legal and regulatory landscape and changes in the application of existing laws or adoption of new laws that impact our business, including changes in e-commerce and tax laws;

 

   

legal and regulatory claims, litigation, or pre-litigation disputes and other proceedings;

 

   

the pace of the COVID-19 pandemic recovery and its impact on our business or the fashion industry and sharing economy generally;

 

   

sales or expected sales of our Class A common stock by us, our officers, directors, principal stockholders, and employees; and

 

   

other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

If the market price of our Class A common stock after this offering does not exceed the initial public offering price, you will not realize any return on your investment in us and will lose some or all of your investment. In addition, stock markets, and the trading of e-commerce companies’ and technology companies’ stocks in particular, have experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner often unrelated to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our Class A common stock shortly following the listing of our Class A common stock on Nasdaq as a result of the supply and demand forces described above. In the past, stockholders have instituted securities class action litigation following periods of stock volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and materially adversely affect our business, financial condition and results of operations.

After this offering, company insiders will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

Following the completion of this offering, our executive officers, directors, and greater than 5% stockholders, in the aggregate, will beneficially own approximately 51% of our outstanding common stock. In addition, if any of our executive officers, directors, and greater than 5% stockholders purchase shares in this offering, or if any of our other current investors purchase shares in this offering and become greater than 5% stockholders as a result, the ability of such persons, acting together, to control or significantly influence such matters will increase. This concentration of ownership may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

 

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Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

Our management will have broad discretion in the application of the net proceeds of this offering, which may include working capital, to fund growth and for other general corporate purposes. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time. We cannot specify with certainty the uses to which we will apply these net proceeds. We may also spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our ability to pursue our growth strategies and expand our business. Pending their use, the net proceeds from our initial public offering may be invested in a way that does not produce income or that loses value.

We cannot predict the effect our dual class structure may have on the trading price of our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile trading price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the dual class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to passively track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Because of the dual class structure of our common stock, we will likely be excluded from certain indices, and we cannot assure you that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and would make our Class A common stock less attractive to other investors. As a result, the trading price of our Class A common stock could be adversely affected.

Our business and financial performance may differ from any projections that we disclose or any information that may be attributed to us by third parties.

From time to time, we may provide guidance regarding our projected business and/or financial performance. However, any such projections involve risks, assumptions, and uncertainties, and our actual results could differ materially from such projections. Factors that could cause or contribute to such differences include, but are not limited to, those identified in these Risk Factors, some or all of which are not predictable or within our control. Other unknown or unpredictable factors also could adversely impact our performance, and we undertake no obligation to update or revise any projections, whether as a result of new information, future events, or otherwise. In addition, various news sources, bloggers, and other publishers often make statements regarding our historical or projected business or financial performance, and you should not rely on any such information even if it is attributed directly or indirectly to us.

 

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Our trading price and trading volume could decline if securities or industry analysts do not publish research about our business, or if they publish unfavorable research.

Equity research analysts do not currently provide coverage of our Class A common stock, and we cannot assure that any equity research analysts will adequately provide research coverage of our Class A common stock after the listing of our Class A common stock on Nasdaq. A lack of adequate research coverage may harm the liquidity and trading price of our Class A common stock. To the extent equity research analysts do provide research coverage of our Class A common stock, we will not have any control over the content and opinions included in their reports. The trading price of our Class A common stock could decline if one or more equity research analysts downgrade our stock or publish other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to regularly publish reports on us, the demand for our Class A common stock could decrease, which in turn could cause our trading price or trading volume to decline.

Future sales of our common stock in the public market could cause our share price to fall.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

We may issue additional securities following the closing of this offering. In the future, we may sell Class A common stock, other series of common stock, convertible securities, or other equity securities, including preferred securities, in one or more transactions at prices and in a manner we determine from time to time. We also expect to issue Class A common stock to employees, consultants, and directors pursuant to our equity incentive plans. If we sell Class A common stock, other series of common stock, convertible securities, or other equity securities in subsequent transactions, or Class A common stock or Class B common stock is issued pursuant to equity incentive plans, investors may be materially diluted. New investors in subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our Class A common stock.

In addition, we may issue our capital stock or securities convertible into our capital stock from time to time in connection with a financing, acquisition, investments, or otherwise. Additional issuances of our stock will result in dilution to existing holders of our stock. Also, to the extent outstanding stock options to purchase our stock are exercised or RSUs settle, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuance or exercise. Any such issuances could result in substantial dilution to our existing stockholders and cause the trading price of our Class A common stock to decline.

Upon closing of this offering, based on the shares outstanding as of July 31, 2021, we will have 57,928,657 shares of Class A common stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares, and 2,939,928 shares of Class B common stock outstanding. Of the outstanding shares, the 15,000,000 shares of Class A common stock sold or issued in this offering (or 17,250,000 shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding shares of common stock held by our existing owners after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and the holders of substantially all of our outstanding stock will sign lock-up agreements with the underwriters that will,

 

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subject to certain customary exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for 180 days following the date of this prospectus. Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and Barclays Capital Inc., or the Lock-Up Release Parties, may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other described in “Shares Eligible for Future Sale.”

As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

We do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our Class A common stock will likely depend on whether the price of our Class A common stock increases.

We have never declared or paid any cash dividends on our Class A common stock, and we do not intend to pay any cash dividends in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business and for general corporate purposes. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors. Furthermore, our ability to pay dividends may also be restricted by the terms of our Existing Credit Agreements and Amended Credit Facility or any future debt or preferred equity securities of us or our subsidiaries. Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. For more information, see the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Dividend Policy.”

If you purchase shares of our Class A common stock in this offering, you will incur immediate and substantial dilution.

The initial public offering price of $19.50 per share of our Class A common stock is substantially higher than the net tangible book value per share of our Class A common stock, which on a pro forma as adjusted basis was $1.45 per share of our common stock as of July 31, 2021. As a result, you will incur immediate and substantial dilution in net tangible book value when you buy our Class A common stock in this offering. This means that you will pay a higher price per share than the amount of our total tangible assets, less our total liabilities, divided by the number of shares of all of our Class A common stock outstanding. In addition, you may also experience additional dilution if options, RSUs, or other rights to purchase our Class A common stock that are outstanding or that we may issue in the future are exercised, vest, or are converted or we issue additional shares of our Class A common stock at prices lower than our net tangible book value at such time. See “Dilution.”     

Certain provisions in our corporate charter documents and under Delaware law may prevent or hinder attempts by our stockholders to change our management or to acquire a controlling interest in us, and the trading price of our Class A common stock may be lower as a result.

There are provisions in our Amended Charter and Amended Bylaws, as they will be in effect following the effectiveness of the registration statement of which this prospectus forms a part, that may

 

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make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control were considered favorable by our stockholders. These anti-takeover provisions include:

 

   

authorization of the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

provide for a dual class common stock structure in which holders of our Class B common stock, which has 20 votes per share, have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class B and Class A common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

   

a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

a requirement that our directors may only be removed for cause;

 

   

the ability of our directors to fill all board vacancies, subject to the rights granted pursuant to the stockholders’ agreement;

 

   

a prohibition on stockholder actions by written consent, thereby requiring that all stockholder actions be taken at a meeting of our stockholders;

 

   

advance notice procedures for stockholder director nominees and annual meeting matters (other than the parties to our stockholders’ agreement for nominations made pursuant to the terms of the stockholders’ agreement);

 

   

an inability of our stockholders to call special meetings of stockholders;

 

   

the ability of our directors to amend our Amended Bylaws without stockholder consent;

 

   

the requirement of a super-majority to amend some provisions in our Amended Charter and for stockholders to amend the Amended Bylaws; and

 

   

a prohibition on cumulative voting for directors.

Although we will opt out of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, our Amended Charter will contain provisions that are similar to Section 203. Specifically, our Amended Charter will provide that, subject to certain exceptions, we will not be able to engage in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless certain requirements are met. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” or the sale of more than 10% of our assets or to an interested stockholder. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any affiliates or associates of such entity or person.

Any provision in our Amended Charter, Amended Bylaws, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

 

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Our Amended Charter will designate the Court of Chancery of the State of Delaware and the federal district courts of the United States of America as the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our Amended Charter, as will be in effect following the effectiveness of the registration statement of which this prospectus forms a part, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising under the Delaware General Corporation Law, our Amended Charter, or our Amended Bylaws (as either may be amended or restated), and any action asserting a claim against us that is governed by the internal affairs doctrine or as to which the Delaware General Corporation Law confers exclusive jurisdiction on the Court of Chancery of the State of Delaware. This provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Amended Charter will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our Amended Charter. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our Amended Charter to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

Our Amended Charter will provide that the doctrine of “corporate opportunity” does not apply with respect to any directors (or their affiliates) who are not our employees.

Our Amended Charter will provide that the doctrine of “corporate opportunity” does not apply with respect to any director (or their respective affiliates) who is not employed by us or our subsidiaries. The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources or information obtained in their corporate capacity for their personal advantage, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers, directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Pursuant to our Amended Charter, we will, to the extent permitted by Delaware law, renounce any present or expectancy interest that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to time presented to our directors, or their respective affiliates (other than those who are employed by us or our subsidiaries). Any directors, or their respective affiliates, other than those directors, or affiliates

 

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who are employed by us or our subsidiaries, will have no duty to communicate or present corporate opportunities to us, and will have the right to either hold any corporate opportunity for their (and their affiliates’) own account and benefit or to recommend, assign or otherwise transfer such corporate opportunity to persons other than us, including to any directors, or their respective affiliates (other than those who are employed by us or our subsidiaries). Notwithstanding the foregoing, pursuant to our Amended Charter, we will not renounce our present or expectancy interest in any business opportunity that is expressly offered to a director, executive officer or employee of us or our subsidiaries, solely in his/her capacity as a director, executive officer or employee.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy, and plans and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” or “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our ability to manage our future growth effectively;

 

   

the effects of the COVID-19 pandemic, including new variants of the virus, such as the Delta variant;

 

   

our ability to compete successfully;

 

   

our ability to attract new, and retain existing, customers;

 

   

our ability to acquire and drive return on investment of our products;

 

   

our ability to manage operating and capital efficiencies in our business;

 

   

our ability to accurately estimate our market opportunity and forecast market growth;

 

   

our ability to anticipate and respond successfully to changing fashion trends and consumer preferences;

 

   

our ability to receive inbound products from brand partners and ship products to and from customers efficiently;

 

   

the ability of our brand partners to adequately and timely deliver products to us;

 

   

the effects of seasonal trends on our results of operations;

 

   

the increased expenses associated with being a public company;

 

   

our ability to remain in compliance with extensive laws and regulations that apply to our business and operations;

 

   

our ability to adequately maintain and protect our intellectual property and proprietary rights;

 

   

the future trading prices of our Class A common stock;

 

   

other risks and uncertainties, including those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and

 

   

the completion of the concurrent Refinancing.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the sections titled

 

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“Risk Factors,” and Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely on these statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, actual results, revised expectations or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance and events and circumstances may be materially different from what we expect. See “Where You Can Find Additional Information.”

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains statistical data, estimates, forecasts and information concerning our industry, including market size and growth of the market in which we participate, that are based on independent industry publications and reports, including those published by Euromonitor International Limited, or Euromonitor, as well as our internal sources and general knowledge of, and expectations concerning, the industry.

The industry market and sales positions, shares, market sizes and growth estimates included in this prospectus are based on estimates using the foregoing independent industry publications and our internal data and estimates based on data from various industry analyses, our internal research and adjustments and assumptions that we believe to be reasonable. Although we have no reason to believe this industry information is not reliable, we have not independently verified data from industry publications and analyses and cannot guarantee their accuracy or completeness. In addition, we believe that the data regarding the industry and industry market and sales positions, shares, market sizes and growth provide general guidance but are inherently imprecise. Further, these estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section of this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions. Accordingly, investors should not place undue reliance on this information.

This prospectus also includes references to our April 2021 Rent the Runway Subscriber Survey, or the April 2021 Subscriber Survey, which we use to measure our subscriber preferences. Our methodology of conducting the subscriber survey measures responses from active subscribers who chose to respond to the survey questions from April 29, 2021 through May 6, 20201. Paused subscribers and subscribers who joined for the first time between February 22, 2021 and April 30, 2021 were not included. We give no weight to subscribers who decline to answer the survey question.

This prospectus also includes references to our June 2021 Rent the Runway Customer Survey, or the June 2021 Customer Survey, which we use to measure our customer preferences. Our methodology of conducting the Customer Survey measures responses from two pools of respondents, (A) all subscribers, from which we excluded our employees and subscribers who joined for the first time between May 7, 2021 and June 30, 2021, and (B) a random sample of 30% of our Reserve customers who placed a Reserve order in fiscal year 2019 or later, excluding employees, Reserve customers who placed their first order in June 2021, and Reserve customers with a reported order issue in the last 30 days before the conclusion of the survey. Both (A) and (B) respondents responded to the survey questions from June 28, 2021 through July 1, 2021. We give no weight to customers who decline to answer the survey question, and certain references to the June 2021 Customer Survey may isolate responses from group (A) (subscribers) or group (B) (Reserve customers) as specified.

This prospectus also includes references to our July 2021 survey we commissioned with Lab42 Research, LLC, or the July 2021 Lab42 Survey, which we use to measure consumer preferences. Our methodology of conducting the consumer survey measures responses from 3,000 individuals that indicated that they met the following criteria when completing the survey: female, ages 18 to 44, with a household income of $50,000 or more that spend $150 or more on clothing in an average year and describe themselves as at least neutrally agreeing with the statements “I am interested in style and fashion” and “I am comfortable shopping online.” The survey included soft quotas such that 75% of respondents were between the ages of 25 and 45 and at least 50% of the respondents had a household income of greater than $100,000. We give no weight to customers who decline to answer the survey question.

This prospectus also includes references to our June 2021 Rent the Runway Brand Survey, which we use to measure brand partner engagement. Our methodology of conducting the Brand

 

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Survey measures responses from a pool of respondents we actively partnered with for the Spring 2021 season. Brand partners responded to the survey questions from June 24, 2021 through July 12, 2021.

Certain of the statistics and estimates related to our ESG efforts are derived from a life cycle assessment and addendum thereto, or LCA Study, of linear and rental systems (owning versus rental of apparel) conducted by third-party partners, SgT Group and Green Story Inc., which was commissioned by us. Certain management estimates are based on the LCA Study, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, the industry and linear and rental systems, which we believe to be reasonable.

This prospectus also includes customer case studies from Rent the Runway customers. One of these customers is a brand ambassador. In that capacity, she has previously been gifted extra spots or months of membership to promote Rent the Runway.

 

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USE OF PROCEEDS

We estimate that we will receive approximately $267.2 million from the sale of 15,000,000 shares of Class A common stock in this offering, or approximately $308.1 million if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price of $19.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $19.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $14.0 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, each 1,000,000 share increase or decrease, as applicable, in the number of shares offered in this offering would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $18.2 million, assuming that the price per share for the offering remains at $19.50 (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to repay all amounts outstanding under our Ares Facility and $30.0 million outstanding under our Credit Facility. We intend to use any remaining net proceeds from this offering after such repayment to fund growth, fund other general corporate purposes, or to pay down additional amounts under the Credit Facility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in the application of these proceeds. We intend to invest the net proceeds to us from this offering that are not used as described above in investment-grade, interest-bearing instruments. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively” for additional information.

As of July 31, 2021, the outstanding balance on the Ares Facility consisted of $74.5 million of outstanding principal, $4.7 million of payment-in-kind interest, netted with $9.0 million of unamortized debt discount and debt issuance costs. The Ares Facility bears an interest rate of 8% per annum to be accrued as non-cash interest, or we can elect to pay cash interest at 6.5% per annum, and the facility matures at the earlier of October 2023 or 91 days prior to the maturity of the Credit Facility. Under the terms of the Ares Facility, we are required to pay an exit payment of $1.5 million and a debt prepayment penalty of $3.2 million to be paid once the facility matures or the original principal is paid in full. As of July 31, 2021, the outstanding balance on the Credit Facility consisted of $230.0 million of outstanding principal and $82.4 million of payment-in-kind interest. The initial commitments under the Credit Facility bear an interest rate of 15% per annum that accrue as non-cash interest and, after the third anniversary of the loan, we can elect to pay cash interest at 13% per annum in lieu of the 15% non-cash interest. The subsequent commitments under the Credit Facility bear a cash interest rate of 13% per annum, payable quarterly. The Credit Facility matures in July 2023. The interest rates and maturity, among other provisions, under the Credit Facility will be amended by the Credit Facility Amendment. For further information on the Existing Credit Agreements and the Credit Facility Amendment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all future earnings and do not anticipate declaring or paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to compliance with applicable law and contractual restrictions in the agreements governing our current and future indebtedness, and will depend on a number of then-existing factors, including our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant.

See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock— We do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our Class A common stock will likely depend on whether the price of our Class A common stock increases.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our capitalization as of July 31, 2021 as follows:

 

   

on an actual basis; and

 

   

on a Pro Forma As Adjusted basis to give effect to (i) the Transactions; (ii) the Refinancing; (iii) the filing and effectiveness of our Amended Charter and the adoption of our Amended Bylaws, in each case as if such event had occurred on July 31, 2021; and (iv) the issuance and sale of Class A common stock in this offering at an assumed initial public offering price of $19.50 per share (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom as described under “Use of Proceeds.”

You should read this information together with our consolidated financial statements and the related notes included in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of July 31 , 2021  
     Actual     Pro Forma
As Adjusted
 
     (in millions, except
share and
per share data)
 

Cash and cash equivalents(1)(2)

   $ 104.0     $ 257.2  
  

 

 

   

 

 

 

Indebtedness:

    

Warrant liabilities(3)

     19.3       0.3  

Long-term debt, net(4)(5)

     381.8       276.8  

Redeemable preferred stock, $0.001 par value per share; 36,055,409 shares authorized, 32,575,462 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma(6)

     409.3        
  

 

 

   

 

 

 

Total deficit:

    

Stockholders’ deficit:

    

Common stock, $0.001 par value per share; 62,500,000 shares authorized, 10,791,253 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

            

Class A common stock, $0.001 par value per share; 300,000,000 shares authorized, issued or outstanding, actual; 57,928,657 shares authorized, shares issued and outstanding, pro forma

            

Class B common stock, $0.001 par value per share; 50,000,000 shares authorized, issued or outstanding, actual; 2,939,928 shares authorized, shares issued and outstanding, pro forma

            

Additional paid-in capital(2)(3)(6)(7)

     68.9       768.8  

Accumulated deficit(8)

     (674.1     (687.4)  
  

 

 

   

 

 

 

Total stockholders’ deficit

     (605.2     81.4  
  

 

 

   

 

 

 

Total capitalization

   $ 185.9     $ 358.2  
  

 

 

   

 

 

 

 

(1)

Excluding restricted cash of $11.5 million ($1.8 million current and $9.7 million noncurrent) as of July 31, 2021.

(2)

Pro Forma As Adjusted cash and cash equivalents reflects the net proceeds of this offering of $267.2 million resulting from the issuance of 15,000,000 shares at a price of $19.50 per share, the mid-point of the initial price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us less the amount of proceeds used to pay down debt, as described below. Debt paydown includes the payment of current debt of $0.8 million and the $0.4 million payment of the partially accrued end of term payment related to the Refinancing.

 

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(3)

Pro Forma As Adjusted warrant liabilities reflects liability classified warrants of $19.0 million that will convert into shares of common stock upon completion of this offering.

(4)

Actual long-term debt, net consists of our Ares Facility, which had an outstanding balance as of July 31, 2021 of $73.7 million of outstanding long-term principal, $4.7 million of payment-in-kind interest, netted with $9.0 million of unamortized debt discount, and our Temasek Facility, which had an outstanding balance as of July 31, 2021 of $230.0 million of outstanding principal and $82.4 million of payment-in-kind interest.

(5)

Pro Forma As Adjusted long-term debt reflects the following: (i) paydown of long-term debt of $99.4 million related to the Refinancing; (ii) $4.8 million of common stock warrants that will be issued to Lenders in connection with the Refinancing upon completion of this offering; (iii) $0.7 million related to the modification of certain existing warrants held by the Lenders in connection with the Refinancing to extend the expiration date for an additional six months following the date of this offering; and (iv) $0.1 million of lender fees to be paid by the Company related to the Refinancing.

(6)

Pro Forma As Adjusted redeemable preferred stock reflects the conversion of all outstanding shares of our preferred stock into shares of common stock which will occur immediately prior to the completion of this offering.

(7)

Pro Forma As Adjusted additional paid-in capital reflects the deferred offering costs directly related to the offering of $1.1 million which are charged against additional paid-in capital upon completion of this offering and $4.8 million of common stock warrants that will be issued to lenders in connection with the Refinancing upon completion of this offering and $0.7 million related to the modification of certain existing warrants held by the Lenders in connection with the Refinancing to extend the expiration date for an additional six months following the date of this offering.

(8)

Pro Forma As Adjusted accumulated deficit reflects the impact the loss on debt extinguishment charge of $13.3 million resulting from the Refinancing.

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $19.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, each of cash and cash equivalents, additional paid in capital, total stockholders’ deficit and total capitalization on a pro forma as adjusted basis by approximately $14.0 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, each 1,000,000 share increase or decrease, as applicable, in the number of shares offered in this offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid in capital, total stockholders’ deficit and total capitalization on a pro forma as adjusted basis by approximately $18.2 million, assuming that the price per share for the offering remains at $19.50 (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of Class A common stock and Class B common stock to be outstanding after this offering is based on 42,928,657 shares of our Class A common stock and 2,939,928 shares of our Class B common stock outstanding as of July 31, 2021, after giving effect to the Transactions, and excludes:

 

   

2,061,724 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Plan, at a weighted average exercise price of $6.96 per share;

 

   

1,762,939 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Plan, at a weighted average exercise price of $6.34 per share;

 

   

3,819,036 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Plan, at a weighted average exercise price of $7.07 per share;

 

   

1,621,206 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Plan, at a weighted average exercise price of $6.85 per share;

 

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1,925,231 RSUs, covering 1,925,231 shares of Class A common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

261,942 RSUs covering 261,942 shares of Class B common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

20,000 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021, granted as Designer Collective Grants, at a weighted average exercise price of $12.43 per share;

 

   

255,570 shares of our Class A common stock issuable upon exercise of stock options granted net of forfeitures after July 31, 2021, having a weighted-average exercise price of $13.63 per share;

 

   

73,356 shares of our Class A common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

50,881 shares of our Class B common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

118,988 shares of our Class A common stock, issued in connection with the exercise of stock options after July 31, 2021;

 

   

5,221,848 shares of Class A or Class B common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan, as described in “Executive Compensation—Equity Compensation;”

 

   

870,308 shares of Class A common stock reserved for future issuance under our Employee Stock Purchase Plan, or the ESPP, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP, as described in “Executive Compensation—Equity Compensation;” and

 

   

237,240 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an average exercise price of $11.06 per share; 730,000 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an exercise price of $27.40 per share; and 382,871 shares of Class A common stock issuable upon exercise of warrants we intend to issue to the Lenders in connection with the Credit Facility Amendment, with an exercise price of $19.50 per share (assuming we offer 15,000,000 shares of Class A common stock at an initial public offering price of $19.50 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus)).

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Our pro forma net tangible book value as of July 31, 2021 was $(176.7) million, or $(3.85) per share. Pro forma net tangible book value per share is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock and Class B common stock deemed to be outstanding, after giving effect to the Transactions.

Our pro forma as adjusted net tangible book value as of July 31, 2021, after giving effect to this offering and the Refinancing, including the application of the net proceeds from this offering as described in “Use of Proceeds,” would have been approximately $88.3 million, or $1.45 per share of Class A common stock. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $5.30 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $18.05 per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $ 19.50  

Pro forma net tangible book value per share as of July 31, 2021 before this offering

   $ (3.85)     
  

 

 

    

Increase in pro forma as adjusted net tangible book value per share attributable to investors in this offering

     5.30     

Pro forma as adjusted net tangible book value per share after this offering

      $ 1.45  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new Class A common stock investors in this offering

      $ 18.05  
     

 

 

 

A $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $19.50 per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by approximately $0.23, and dilution in pro forma as adjusted net tangible book value per share to new investors by approximately $0.77, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease, as applicable, of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase our pro forma as adjusted net tangible book value by $0.27 per share and decrease the immediate dilution to new investors by $0.28 per share, in each case assuming the assumed initial public offering price of $19.50 per share of Class A common stock remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase additional shares of Class A common stock from us , the pro forma as adjusted net tangible book value after the offering would be $2.05 per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $5.90 per share and the dilution in pro forma as adjusted net tangible book value to new investors would be $17.45 per share, in each case assuming an initial public offering price of $19.50 per share, which is the midpoint of the price range listed on the cover page of this prospectus.

 

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The following table summarizes, as of July 31, 2021, after giving effect to this offering, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing stockholders and by the new investors. The calculation below is based on an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased      Total
Consideration
    Average price  
     Number      Percent      Amount      Percent     per Share  

Existing stockholders

     45,868,585        75.4    $ 699.9        70.5%     $ 15.3  

New investors

     15,000,000        24.6      292.5        29.5%       19.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     60,868,585        100    $ 992.4        100   $ 16.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $19.50 per share would increase (decrease) the total consideration paid by new investors and the total consideration paid by all stockholders by $14.0 million, assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions but before estimated offering expenses. Similarly, each increase or decrease, as applicable, of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by $18.2 million, assuming the assumed initial public offering price of $19.50 per share of Class A common stock remains the same, and after deducting estimated underwriting discounts and commissions.

Except as otherwise indicated, the discussion and the tables above assume no exercise by the underwriters’ of their option to purchase additional shares of Class A common stock from us. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of July 31, 2021, after giving effect to the Transactions, and excludes:

 

   

2,061,724 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Plan, at a weighted average exercise price of $6.96 per share;

 

   

1,762,939 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2009 Plan, at a weighted average exercise price of $6.34 per share;

 

   

3,819,036 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Plan, at a weighted average exercise price of $7.07 per share;

 

   

1,621,206 shares of Class B common stock issuable upon exercise of stock options outstanding as of July 31, 2021 under our 2019 Plan, at a weighted average exercise price of $6.85 per share;

 

   

1,925,231 RSUs, covering 1,925,231 shares of Class A common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

261,942 RSUs covering 261,942 shares of Class B common stock as of July 31, 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

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20,000 shares of Class A common stock issuable upon exercise of stock options outstanding as of July 31, 2021, granted as Designer Collective Grants, at a weighted average exercise price of $12.43 per share;

 

   

255,570 shares of our Class A common stock issuable upon exercise of stock options granted net of forfeitures after July 31, 2021, having a weighted-average exercise price of $13.63 per share;

 

   

73,356 shares of our Class A common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

50,881 shares of our Class B common stock subject to RSUs granted, net of forfeitures, after July 31, 2021;

 

   

118,988 shares of our Class A common stock, issued in connection with the exercise of stock options after July 31, 2021;

 

   

5,221,848 shares of Class A or Class B common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan, as described in “Executive Compensation—Equity Compensation;”

 

   

870,308 shares of Class A common stock reserved for future issuance under our Employee Stock Purchase Plan, or the ESPP, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as well as any shares that become issuable pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP, as described in “Executive Compensation—Equity Compensation;” and

 

   

237,240 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an average exercise price of $11.06 per share; 730,000 shares of Class A common stock issuable upon the exercise of warrants outstanding as of July 31, 2021 with an exercise price of $27.40 per share; and 382,871 shares of Class A common stock issuable upon exercise of warrants we intend to issue to the Lenders in connection with the Credit Facility Amendment, with an exercise price of $19.50 per share (assuming we offer 15,000,000 shares of Class A common stock at an initial public offering price of $19.50 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus)).

To the extent any of these outstanding options are exercised, there will be further dilution to new investors.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Summary Consolidated Financial and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, which involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this prospectus. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31, and January 31. References to fiscal years 2019 and 2020 in this prospectus refer to our fiscal years ended January 31, 2020 and 2021, respectively.

Overview

We built the world’s first and largest shared designer closet — that we call the Closet in the Cloud — with over 18,000 styles by over 750 designer brands. We give customers ongoing access to our “Unlimited Closet” 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 126,841 ending total subscribers (active and paused) as of July 31, 2021. For fiscal year 2019 and 2020, respectively, 78% and 89% of our total revenue (including Reserve and Resale revenue) was generated by subscribers while they were active or paused. For the six months ended July 31, 2020 and 2021, respectively, 89% and 83% of our total 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 cost-effective 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, and over 40% of our styles turn for three or more years. We price our items at a fraction of their retail value, creating an attractive price and value proposition for our subscribers and customers.

We launched our Reserve offering in 2009 and focused on normalizing shared closet behavior with consumers and designer brands by giving customers the ability to rent a-la-carte for special occasions. In 2016, we launched our Subscription offering. Today, we source 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.

 

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The following graph illustrates key developments in the evolution of our business:

 

LOGO

We have achieved the following operating and financial results for fiscal year 2019 and 2020, respectively:

 

   

We had 147,866 and 95,245 ending total subscribers at the end of fiscal year 2019 and fiscal year 2020, respectively, and 133,572 and 54,797 ending active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $256.9 million and $157.5 million, respectively;

 

   

Gross Profit was $53.6 million and $15.5 million, respectively;

 

   

Gross Profit Excluding Product Depreciation was $129.3 million and $85.4 million, respectively;

 

   

Net Loss was $(153.9) million and $(171.1) million, respectively;

 

   

Adjusted EBITDA was $(18.0) million and $(20.3) million, respectively;

 

   

Adjusted EBITDA as a percentage of revenue was (7.0)% and (12.9)%, respectively;

 

   

Net cash used in operating activities plus net cash used in investing activities was $(176.2) million and $(101.2) million, respectively; and

 

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Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (68.6)% and (64.3)%, respectively.

We have achieved the following operating and financial results for the six months ended July 31, 2020 and 2021, respectively:

 

   

We had 108,752 and 126,841 ending total subscribers, respectively, and 54,228 and 97,614 ending active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $88.5 million and $80.2 million, respectively;

 

   

Gross Profit was $8.7 million and $26.3 million, respectively;

 

   

Gross Profit Excluding Product Depreciation was $46.8 million and $50.2 million, respectively;

 

   

Net Loss was $(88.0) million and $(84.7) million, respectively;

 

   

Adjusted EBITDA was $(10.6) million and $(8.1) million, respectively;

 

   

Adjusted EBITDA as a percentage of revenue was to (12.0)% and (10.1)%, respectively;

 

   

Net cash used in operating activities plus net cash used in investing activities was $(71.7) million and $(16.1) million, respectively; and

 

   

Net cash used in operating activities plus net cash used in investing activities as a percentage of revenue was (81.0)% and (20.1)%, respectively.

Our Business Model

The Power of Subscription

We operate an innovative subscription model with the following attributes:

 

   

We monetize our products over multiple years;

 

   

We acquire a large and broad assortment of products to provide variety to subscribers and customers; and

 

   

We incur fulfillment expense to ship items to/from subscribers and customers and restore products to excellent condition.

Our business model aligns the success and engagement of our subscribers, our customers, our brand partners and our business. Our success is a function of:

 

   

Our ability to grow revenue through growth and loyalty of subscribers and customers;

 

   

Our ability to acquire and drive return on investment of products; and

 

   

Our ability to manage operating and capital efficiencies in our business.

How We Make Money

We generate revenue when subscribers and customers access our Closet in the Cloud across subscription, a-la-carte rentals and resale. The majority of revenue is highly recurring and is generated by our subscribers, representing 83% of total revenue in the first six months of fiscal year 2021. Our platform approach allows us to monetize subscribers across multiple offerings, including Reserve and Resale. Our Subscription offerings are structured so that subscribers pay for their usage - the more shipments and items a subscriber receives, the higher the monthly subscription price. We have priced each base subscription program to generate similar Gross Margins to our company.

 

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Subscription and Reserve Rental Revenue: Subscription and Reserve rental revenue was $135.9 million in fiscal year 2020 and $72.7 million in the six months ended July 31, 2021, representing 86.3% and 90.6% of total revenue, respectively.

 

   

Subscription

Subscription rental revenue consists of recurring subscription membership fees and related add-on revenue. Our Subscription offering allows members to receive a certain number of items (each item fills a “spot”) and shipments (which we call a “swap”) each month. We offer plans including 4, 8, 12 or 16 items. Membership prices include:

 

   

$89 for 4 items per month (max 1 swap, 4 spots; more limited assortment)

 

   

$135 for 8 items per month (max 2 swaps, 4 spots each) (our most popular plan)

 

   

$174 for 12 items per month (max 3 swaps, 4 spots each)

 

   

$199 for 16 items per month (max 4 swaps, 4 spots each)

Our subscribers also generate add-on revenue as they are able to customize their subscription program by adding spots or swaps in any given month at a price of $25 per additional spot per month on the one-shipment plan, $29 per additional spot per month on all other plans, and $25 to $39 per swap per month depending on the plan. We also allow our subscribers to pause their memberships as their lifestyle evolves or changes.

 

   

Reserve

Reserve rental revenue consists of a-la-carte rentals, typically used for special occasions, which can be booked up to 4 months in advance. Customers, which include subscribers, have the option to rent items for four or eight days at rental rates per item which typically range from $5 to $525. Reserve customers receive one primary item and can select a complimentary backup size, as well as a backup style at a discounted price.

Other Revenue: Through our Resale offering, subscribers and customers can purchase pre-worn items they love from our closet—no subscription is required. Our Other revenue was $21.6 million in fiscal year 2020 and $7.5 million in the six months ended July 31, 2021 representing 13.7% and 9.4% of total revenue, respectively.

Our Product Acquisition Strategy

Our ability to serve our subscribers and customers depends on the quantity and quality of our products. We acquire and monetize products in three ways: Wholesale, Share by RTR and Exclusive Designs, as described in the table below. Increases or decreases in (1) the proportion of total items acquired via Share by RTR and Exclusive Designs, and (2) the usage of Share by RTR and Exclusive Designs items, will increase or decrease our Rental Product Depreciation and Revenue Share line item on our consolidated statement of operations.

Our brand partnerships and customer data enable us to acquire and manage our products effectively. We have expanded the portion of our products acquired through Share by RTR and Exclusive Designs, which has reduced initial cash outlay and total spend. We have maintained nearly 100% retention of our brand partners over the life of our business. In fiscal year 2020, approximately 54% of new items were acquired through these more cost-effective channels, compared to approximately 26% in fiscal year 2019. We anticipate a similar acquisition mix to fiscal year 2020 for the full year of fiscal year 2021.

 

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LOGO

Our product acquisition methods, Wholesale, Share by RTR and Exclusive Designs, 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

 

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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.

We may strategically adjust our mix of product acquisition channels in the future. 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, defined as total upfront spend for items acquired in a period divided by the number of items acquired. For items ordered in fiscal year 2021 year to date (as of September 2021), our average upfront cost per item has decreased by 18% compared to items acquired in fiscal year 2019. Our average upfront cost per item decreased by approximately 40% for items acquired in fiscal year 2019 compared to items acquired in fiscal year 2014. We define total upfront spend as the total cost 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. Our total upfront spend was $113.1 million in fiscal year 2019 and $6.5 million in the first six months of fiscal year 2021.

Our Financial Model

The below chart illustrates the economics of our business from total revenue and ending at Contribution Profit for fiscal year 2020, both in dollars and as a percentage of total revenue:

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The below chart illustrates the economics of our business from total revenue and ending at Contribution Profit for the six months ended July 31, 2021, both in dollars and as a percentage of total revenue:

 

 

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Fulfillment Profit. We define Fulfillment Profit as total revenue less fulfillment expense. Fulfillment expense has typically been our largest variable expense and includes our outbound shipping and labor costs to send items to customers, as well as inbound shipping, labor and product restoration costs when customers return their items. We use Fulfillment Profit and Fulfillment Profit as a percentage of revenue, or Fulfillment Margin, to measure the efficiency of inbound, outbound and processing costs. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Fulfillment Profit to the most relevant GAAP measure.

 

   

Gross Profit Excluding Product Depreciation. We define Gross Profit Excluding Product Depreciation as total revenue less fulfillment expense and revenue share. Revenue share includes upfront payments and performance-based revenue share for items we acquire through Share by RTR and Exclusive Designs. We use Gross Profit Excluding Product Depreciation and Gross Profit Excluding Product Depreciation as a percentage of revenue, or Gross Margin Excluding Product Depreciation, to measure our total variable profit excluding non-cash expenses as an indicator of the cash gross profit available to cover our costs and expenses and capital expenditures. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Gross Profit Excluding Product Depreciation to the most relevant GAAP measure.

 

   

Gross Profit. We define Gross Profit as total revenue less fulfillment expense, revenue share and rental product depreciation. 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 and remaining cost of items when sold or retired on our statement of operations. Rental product depreciation expense is time-based and reflects all 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 total cost of our products are included.

 

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Contribution Profit: We define Contribution Profit as total revenue, less fulfillment expense, revenue share, rental product depreciation and credit card processing fees. We measure Contribution Profit and Contribution Profit as a percentage of revenue, or Contribution Margin, as a key measure of our overall efficiency, including fulfillment expense, total product costs and credit card fees. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Contribution Profit to the most relevant GAAP measure.

The below graph depicts Fulfillment Margin, Gross Margin Excluding Product Depreciation, Gross Margin and Contribution Margin in fiscal year 2019, fiscal year 2020, and the six months ended July 31, 2021. As we scale and continue to invest in our infrastructure, technology and platform, we expect our margins to improve over time.

 

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Fulfillment Margin. Fulfillment Margin improved from 54% in fiscal year 2019 to 66% in fiscal year 2020 due to a lower average number of monthly shipments per subscriber in fiscal year 2020, partly due to the phase out of our unlimited swaps program and partly due to lower engagement during the COVID-19 pandemic. Fulfillment Margin improved to 72% in the six months ended July 31, 2021 attributable to the lower average number of monthly shipments per subscriber due to the phase out of our unlimited swaps program, and fulfillment process efficiencies. Historically, our unlimited swaps program allowed subscribers to receive as many shipments per month as desired, driving higher fulfillment expense as a percentage of revenue. Today, all of our memberships are structured around subscriber usage and priced to achieve similar target Gross Margins, such that subscribers pay for their desired number of items and shipments per month. In fiscal year 2020 and through the first six months of fiscal year 2021, we implemented additional labor automation, process efficiencies and transportation network diversification. We expect to continue to improve our Fulfillment Margin over time, although we anticipate shipping cost headwinds due to macro global transportation network inefficiencies over the next several quarters.

 

   

Gross Margin Excluding Product Depreciation. Gross Margin Excluding Product Depreciation improved from 50% in fiscal year 2019 to 54% in fiscal year 2020 due to an improvement in our Fulfillment Margin, partially offset by higher revenue share expense as a percentage of total revenue. Gross Margin Excluding Product Depreciation improved to 63% in the six months ended July 31, 2021 due to the improvement in our Fulfillment Margin. We have focused on reducing our upfront cash outlay for product acquisition by acquiring a greater portion of our product through Share by RTR, which has increased revenue share expense. Our revenue share expense increased from 4% of total revenue in fiscal year 2019 to 12% of total revenue

 

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in fiscal year 2020 and was 10% in the first six months of fiscal year 2021. The mix of channels we use to acquire products will impact our Gross Margin Excluding Product Depreciation.

 

   

Gross Margin. Gross Margin decreased from 21% in fiscal year 2019 to 10% in fiscal year 2020. Due to a decrease in active subscribers caused by COVID-19, the level of product on hand during fiscal year 2020 was over-sized relative to our average active subscriber base in the period. Since depreciation is recognized on a time-basis for all of our owned assets, rental product depreciation in fiscal year 2020 reflected costs associated with a level of product that had been acquired to support the higher number of active subscribers experienced in fiscal years 2018 and 2019 and planned growth in fiscal year 2020 prior to the COVID-19 pandemic. As a result, rental product depreciation increased from 29% of total revenue in fiscal year 2019 to 44% of total revenue in fiscal year 2020, as our total revenue and active subscribers decreased relative to fiscal year 2019 due to the COVID-19 pandemic. Gross Margin increased to 33% in the six months ended July 31, 2021 due to the increase in Fulfillment Margin, including the phase out of the unlimited swaps program and the decrease in rental product depreciation. Rental product depreciation as a percentage of total revenue decreased to 30% in the first six months ended July 31, 2021 due to lower levels of product sold and the partial right-sizing of product relative to the level of active subscribers and revenue. The mix of channels we use to acquire products will impact our Gross Margin.

 

   

Contribution Margin. Contribution Margin decreased from 18% in fiscal year 2019 to 7% in fiscal year 2020, driven by the same trends that led to a decrease in Gross Margin. Contribution Margin increased to 30% in the six months ended July 31, 2021, driven by the same trends that led to an increase in Gross Margin.

The below graphic depicts our unit economics, or the economics of a weighted average subscription month and Reserve order (based on the proportion of Subscription and Reserve transactions in each period), in fiscal year 2019, fiscal year 2020, and the six months ended July 31, 2021. Revenue, Fulfillment Profit, Gross Profit Excluding Product Depreciation, Gross Profit and Contribution Profit include revenue and profit from all of our offerings.

 

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In addition to the profitability trends mentioned above, the increase in unit economics revenue from $127 in fiscal year 2019 to $150 in fiscal year 2020 was driven by a greater portion of our business coming from our Subscription offering. Unit economics revenue decreased to $132 in the first six months of fiscal year 2021 driven by the new subscription program pricing. Our unit economics contribution profit in fiscal year 2019 and 2020 was $22 and $11, respectively, and increased to $39 in the first six months of fiscal year 2021.

Our business model and margins were impacted by COVID-19, refer to the section titled “Impact of COVID-19 on Our Business” for more information.

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, including those discussed below and in the section titled “Risk Factors.”

Subscribers and Customers

Our Attractive Cohort Trends.    We believe that we have a significant market opportunity ahead of us to increase our base of subscribers and customers, and our long-term growth depends in large part on our continued ability to acquire new subscribers and retain existing subscribers. We attract new subscribers directly into our Subscription offering, and through conversions of customers into subscribers from our Reserve and Resale offerings. Reserve has historically been a productive funnel into our Subscription offering, and we believe our Resale offering could provide a similar opportunity to drive acquisition into our Subscription offering.

We assess the health of our business, subscribers and customers by analyzing the individual performance of our historical customer cohorts over time. We believe that the performance of our historical customer cohorts supports our strategy of investing in subscriber and customer acquisition and enhancing the scale of our platform.

Customer Cohorts.    The chart below indicates cumulative revenue per customer by customer cohort, which is defined as cumulative total revenue generated by a cohort across all of our product offerings, divided by the original number of customers in the cohort. Customers are placed in cohorts based on the fiscal year in which they first transacted with RTR. Due to varying customer behavior throughout fiscal year 2020, we have divided the 2020 cohort into two sub-cohorts, each of which includes smaller monthly cohorts than those of fiscal year 2018 and 2019. We define the FY 2020 Early COVID cohort as new customers who joined from February 2020 to May 2020, and this cohort is characterized by broad shelter-in-place restrictions during their initial customer months. We define the FY 2020 Late COVID cohort as new customers who joined from June 2020 to January 2021, and this cohort is characterized by a partial return-to-work, special events and social events through social distancing requirements. We define the FY 2021 YTD cohort as new customers who joined from February 2021 to May 2021. Our customer cohorts demonstrate the continued spend and expansion of our customers:

 

   

Each successive cohort has higher spending patterns, except for the FY 2020 Early COVID cohort, which was most impacted by COVID-19. Higher spending is driven by increased customer loyalty and customers renting for more days per year, particularly through our Subscription offering.

 

   

A significant portion of our total revenue in each year is generated from customers acquired in previous years.

 

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Our FY 2020 Late COVID cohort and our FY 2021 YTD cohort, which are less impacted by COVID-19, are exhibiting better trends than our FY 2019 cohort.

 

   

Over the last two and a half years, we have become better at directing customers to higher revenue offerings, particularly our subscriptions, which has driven a year-over-year improvement in cumulative revenue per customer by cohort as a greater percentage of our customers are subscribers. After the first six months as a customer, we see an inflection in spending as our most loyal customers remain on the platform.

 

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Subscriber Cohorts.    In addition to evaluating the behavior of our entire customer base, we also focus specifically on the behavior of subscribers given they contribute to the majority of our revenue. For the first six months of fiscal year 2021, 83% of our total revenue was generated by subscribers, while they were active or paused. This makes understanding their continued spend, expansion and potential lifetime value relative to customer acquisition cost particularly important.

The table below presents cumulative revenue per subscriber by cohort. Cumulative revenue per subscriber by cohort is defined as cumulative total revenue generated across all of our product offerings (including Subscription, Reserve or Resale) by customers who are current or previous subscribers, divided by the original number of subscribers in the cohort. Subscribers are placed in cohorts based on the fiscal year in which they first joined a subscription program.

 

   

Within 3, 6 and 12 months, subscribers from our fiscal year 2018 and 2019 cohorts generated an average of $286, $460 and $691 in cumulative revenue, respectively.

 

   

Our FY 2020 Late COVID and FY 2021 YTD cohorts are exhibiting similar or better trends compared to our FY 2018 and FY 2019 cohorts.

 

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We provide a flexible offering that allows our subscribers to pause their membership. We have seen historically that many subscribers customize their subscription as their everyday life changes, choosing to pause and reactivate their membership as needed. We give customers the flexibility to adapt the usage of their membership and have increased functionality to allow subscribers to pause more easily. We have historically seen that many subscribers who cancel their subscription will often return to the platform and resubscribe when membership again makes sense for their everyday life.

We acquire subscribers efficiently as evidenced by approximately 88% of our lifetime customers having joined organically. Historically, our annual cost to acquire a customer, or CAC, has remained below $55 and we define our CAC as total marketing expense, other than employee expenses, during a twelve month fiscal period divided by the number of new customers acquired in that period. Contribution Margins of 18%, 7% and 30% in fiscal year 2019, 2020 and the first six months of fiscal year 2021, respectively, drive our efficient payback on customer acquisition cost.

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 relies on us having the right assortment. Due to our deep partnerships with brands, we can acquire products directly from them in multiple ways: Wholesale, Share by RTR and Exclusive Designs, and due to our expertise in reverse logistics and garment restoration we can monetize our products effectively over their useful life. We have demonstrated the ability to diversify our product acquisition away from 100% Wholesale, driving high overall product return on investment and reducing the capital needs of the business. In fiscal year 2020, approximately 54% of new items were acquired through Share by RTR and Exclusive Designs, our more capital efficient channels, compared to 26% in fiscal year 2019. We anticipate a similar acquisition mix to fiscal year 2020 for the full year of fiscal year 2021. We continuously evaluate our product acquisition mix to maximize our strategic priorities.

We evaluate the potential revenue and profit we generate on products over their lifetime, relative to the upfront cost of the products. We are presenting fiscal year 2019 in this prospectus because it was a more normalized period for our business and operations prior to the onset of the COVID-19 pandemic than fiscal year 2020, as well as the first six months of fiscal year 2021 because it is our most recent period. We also present fiscal year 2020 below, however we note that revenue and profit per turn in fiscal year 2020 benefited from reduced usage of our subscription programs during peak COVID-19 periods.

We measure product return on investment, or ROI, of a single item on a revenue and profit basis over its predicted lifetime. Product ROI is defined as the average revenue or profit per turn of all items calculated in a given period, divided by the upfront cost per item of items acquired in that period. We define profit as revenue less fulfillment costs, credit card fees, and performance based revenue share expense.

 

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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, items ordered to date as of September 2021, our average upfront cost per item was $90, representing an 18% decrease from an average upfront cost of $111 for items acquired in fiscal year 2019. Our diversification into acquiring a greater portion of our product through Share by RTR and Exclusive Designs meaningfully reduced our upfront spend.

Our ROI calculation assumes an average of 20 lifetime turns per unit. Based on the average lifetime turns as of June 2021 of all items we acquired in fiscal years 2015, 2016 and 2017, we have determined that an item can turn a minimum of 20 times on average over its lifetime. Our calculation of lifetime turns is inclusive of items that have been taken out of circulation due to damage, deactivation or resale, and we expect turns for these historical cohorts to increase as a portion of these items are still in circulation.

From fiscal year 2019 to the first six months of fiscal year 2021, we improved revenue per turn by 20% from $22 to $27, respectively, and improved profit per turn by 52% from $11 to $16, respectively.

When we multiply the item economics from fiscal year 2019 and the first six months of fiscal year 2021 by 20 turns, this implies total lifetime revenue of $445 and $536, respectively, and total lifetime profit of $212 and $324, respectively.

Therefore, our product ROI has improved from 4.0x to 5.9x on a revenue basis, and from 1.9x to 3.6x on a profit basis based on item economics in fiscal year 2019 and the first six months of fiscal year 2021 applied over the expected lifetime of units, respectively. We believe we have the ability to drive improvements in product ROI over time as we continue to decrease our fulfillment expenses to improve profitability per item and use more efficient product acquisition channels to reduce upfront product cost.

 

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Our Business

Ability to Achieve Leverage in our Cost Structure.    Improving operational efficiency of our platform is imperative to maintaining or increasing profitability. As we continue to grow, we expect our operating costs to increase but do not expect these costs to grow at the same pace as our total revenue.

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 monitor profitability by assessing Fulfillment Margin, Gross Margin Excluding Product Depreciation, Gross Margin and Contribution Margin.

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.

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subscribers in the third and fourth fiscal quarters, and we generally see a greater number of paused subscriptions in the winter and summer months. We typically realize a higher portion of revenue from Reserve rentals during our third and fourth fiscal quarters as a result of increased wedding and holiday events.

Impact of COVID-19 on Our Business

The COVID-19 pandemic materially adversely affected our fiscal year 2020 operating and financial results. Beginning in March 2020, positivity rates and shelter-in-place restrictions significantly reduced consumer demand for our Subscription and Reserve offerings due to a sharp decrease in interactions outside the home, social gatherings, special events and in-office work. Unlike the retail model where a customer can invest in an article of clothing to wear in the future, we primarily operate a “rent now, wear now” subscription model where subscribers are picking items for immediate use. Throughout 2020, we observed that consumer demand decreases were closely tied to COVID-19 positivity rates and social distancing/shelter-at-home restrictions. As COVID-19 restrictions have been relaxed and virus positivity rates have declined, we have seen increased demand for our offerings. The first Delta variant case was identified in December 2020, and the variant soon became the predominant strain of the virus and by the end of July 2021, the Delta variant was the cause of more than 80% of new U.S. COVID-19 cases. As a result, new restrictions are being contemplated and implemented by workforces and federal, state and local government officials. As of the date of this prospectus, our operations and customer demand have not been significantly impacted, but we continue to monitor the situation.

Immediate Response to COVID-19

Our first priority was to protect the health and safety of our employees. In February 2020, we created a cross-functional taskforce to lead our COVID-19-related employee initiatives and we have instituted numerous health and safety measures throughout the pandemic based on public health guidelines and recommended best practices. For example, in our fulfillment centers, we instituted numerous health and safety measures including social distancing, on-site medical services, and enhanced cleaning, and we relaxed attendance policies. We shifted nearly all of our corporate and customer service employees to a remote work model in March 2020 and implemented additional measures to better enable them to work remotely.

We took immediate financial actions to withstand COVID-19. We paused paid advertising and marketing activities and implemented other cost-saving measures to reduce operating and capital expenditures in the short term. In April 2020, we reduced salaries for the large majority of corporate employees for three months, and temporarily paused all recruiting efforts. After being temporarily closed since March 2020, we announced the permanent closure of our brick and mortar retail stores in July and August 2020. Both of our fulfillment centers remained open throughout the pandemic, however we resized our workforce to better align labor to demand and managed our fulfillment expense through releases, furloughs, and shift schedule adjustments. Overall, during fiscal year 2020, we laid off 33% and furloughed 37% of all employees. In addition, the financial actions we took resulted in a 53% reduction in operating expenses, capital expenditures and product costs, as compared to our pre-COVID-19 budget for April 2020 through January 2021, the remainder of fiscal year 2020 that we had the opportunity to impact.

Agility and Resilience During COVID-19

In addition to cost cutting, we took a number of steps to emerge from COVID-19 as a stronger business financially and strategically. We believed that the pandemic would shift consumer values and behaviors. With that goal in mind, we took the following actions:

 

  1.

Transformed product acquisition from a majority Wholesale model to more Share by RTR. We increased the penetration of Share by RTR from 32% of units acquired in our original

 

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  pre-COVID-19 plan to 54% for the second half of fiscal year 2020. Through Share by RTR, we allowed our brand partners to participate in revenue generated during COVID-19 and potential financial upside post-pandemic. By April 2020, we reduced upfront product spend for the second half of fiscal 2020 by over 80% as compared to our original budget.

 

  2.

Phased out our “unlimited swaps” program and transitioned towards customizable subscription plans that are intended to better meet customer needs, and drive higher margins than our previous subscription offering. Our belief was that multiple subscription programs and more diverse price points would offer a lower entry price point into subscription during COVID-19 and help attract and retain a more diversified subscriber base as a go-forward strategy.

 

  3.

Launched Resale for subscribers and then expanded it to all customers to better monetize our active subscribers during COVID-19 and to broaden our funnel for the future. Our belief was that resale could be a new growth engine and customer acquisition funnel for RTR.

 

  4.

While volume in our fulfillment centers was lower, we implemented significant process changes and technological innovation, such as increased automation, radio-frequency identification tags, or RFID tags, machine vision and new garment science processes to continue to improve our operational efficiencies and processing capacity.

 

  5.

Encouraged new use cases, including at-home casual wear, loungewear, knits and activewear, which went from being 25% of items at home in May 2019 to 46% in May 2020, expanding how subscribers think about our business. As subscribers are resuming more normal lives in 2021, we are seeing an expansion in the diversity of use cases for which they think of using Rent the Runway.

 

  6.

Launched new features such as cross-ship and expanded our drop-off box network and inbound customer return options, providing subscribers with more flexibility and immediacy in their swapping experience and removing friction from the experience in order to increase retention of subscribers.

 

  7.

From approximately April 2020 to August 2020, made it easy for customers to pause, rather than cancel, their subscriptions to encourage retention during the COVID-19 pandemic by announcing proactive extensions of “pause” states so that subscribers did not have to return to the website, or reach out to customer service, to extend their paused states themselves; proactively re-pausing subscribers who automatically resumed their subscription out of paused states, but did not use their subscription, within four days of their resume date; and launching a feature where subscribers could pause their membership and keep some or all of the items at home for a fixed fee per item per month. The new feature gave subscribers flexibility to keep enjoying a limited number of items and/or gave subscribers the option to continue to shelter-in-place rather than visiting a return location or scheduling a pick-up. Additionally, during the COVID-19 pandemic through April 2021, subscribers were able to pause one month at a time using our online “pause” button, or were able to pause for one, two, or three months at a time by reaching out to our customer service team. Currently, subscribers are able to pause their subscriptions for one month at a time. As of the end of fiscal year 2020, our total subscriber base (active and paused) represented 64% of our pre-COVID-19 total subscriber base (as measured on March 8, 2020).

 

  8.

Focused on sustainability, including conducting a Life Cycle Assessment, or LCA Study, to further understand the impact of Rent the Runway’s rental platform compared to existing linear models in the fashion industry. We also launched an internal taskforce dedicated to driving our sustainability efforts internally.

 

  9.

Focused on employee experience and providing high-touch, transparent, real-time communication. Throughout 2020, our employees at every level of the organization exemplified our Core Values of passion, innovation and resiliency by acting like founders, helping the business to withstand the COVID-19 pandemic and creating opportunities to make the business better.

 

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Financial Impact

As a result of decreased demand related to COVID-19, our total revenue was $157.5 million in fiscal year 2020 and decreased 38.7% compared to fiscal year 2019. Shipment volume decreased as a result of lower subscriber levels, less frequent swapping behavior, and lower demand for a-la-carte rentals. These dynamics, combined with our operational response and cost-saving actions, resulted in a decrease of fulfillment expenses as a percentage of total revenue to 33.7% in fiscal year 2020, compared to 46.0% in fiscal year 2019.

Product depreciation and revenue share increased as a percentage of total revenue to 56.5% in fiscal year 2020, as compared to 33.2% in fiscal year 2019, due to a significant oversupply of rental items on hand relative to reduced subscriber levels. We anticipate product depreciation and revenue share to decrease meaningfully as a percentage of total revenue as we see COVID-19 recovery and increases in active subscriber levels and Reserve orders.

Marketing expense as a percentage of total revenue decreased from 8.9% in fiscal year 2019 to 5.1% in fiscal year 2020 as a result of intentional reductions in paid marketing due to COVID-19. The cost-saving initiatives decreased technology and general and administrative expenses from $40.2 million for technology and $98.9 million for general and administrative in fiscal year 2019 to $37.7 million and $77.2 million in fiscal year 2020, respectively, but increased as a percentage of total revenue due to the decline in total revenue.

Ongoing Impact

Since March 2021, we have seen indications of COVID-19 recovery, with a significant number of paused subscribers resuming their subscriptions, new subscribers joining our platform, and an increased level of Reserve orders. In response to the growth in demand, we have increased hiring for customer service and fulfillment labor, adjusting shift structures at our fulfillment centers to increase throughput capacity, investing in additional products to support future subscriber growth, and investing in capital expenditures to support operational efficiencies. We have also accelerated corporate hiring to support increased levels of growth and operations and to support our plans to become a public company, and we have begun to resume marketing activities and increase other operating expenses.

We expect the effects of the COVID-19 pandemic, including the spread of any new strains, such as the Delta variant, to have a continued impact on our business, results of operations, and financial condition through at least the end of fiscal year 2021, and we continue to take actions to adjust to the changing COVID-19 business environment. For example, we are increasing wage rates to attract and retain talent at our fulfillment centers, diversifying our transportation network to mitigate the negative impact of nationwide shipping carrier delays, resuming corporate recruiting efforts, and managing longer lead times for products from brand partners. Although we continue to face a challenging hiring environment due to the COVID-19 pandemic, rising wages and a decreased level of workforce participation, we have been able to and expect to continue hiring 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 strains, such as the Delta variant, will directly or indirectly impact our business, results of operations, 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, refer to the section titled “Risk Factors.”

 

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Key Business and Financial Metrics

In addition to the measures presented in our 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, fulfillment and net loss.

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021     2020     2021  
     ($ in millions)  

Active subscribers (at the end of period)

     133,572       54,797       54,228       97,614  

Gross profit

   $ 53.6     $ 15.5     $ 8.7     $ 26.3  

Gross profit excluding product depreciation

   $ 129.3     $ 85.4     $ 46.8     $ 50.2  

Adjusted EBITDA

   $ (18.0   $ (20.3   $ (10.6   $ (8.1

 

(1)

Each of Gross Profit Excluding Product Depreciation and Adjusted EBITDA is a non-GAAP financial measure; for a reconciliation to each of their most directly comparable GAAP financial measures, gross profit and net loss, respectively, and why we consider Gross Profit Excluding Product Depreciation and Adjusted EBITDA to be useful metrics, see “—Non-GAAP Financial Metrics” below.

Key Business Metrics

Active Subscribers: Active Subscribers represent the number of subscribers with an active membership as of the last day of any given period and excludes paused subscribers. In fiscal year 2020, we saw our active subscriber count decrease due to the COVID-19 pandemic. However, a significant number of our subscribers put their membership on pause rather than canceling. As of July 31, 2021, we had 97,614 active subscribers, up 78% from the end of fiscal year 2020.

Gross Profit and Gross Margin: In fiscal year 2020, Gross Profit was $15.5 million compared to $53.6 million in fiscal year 2019 representing Gross Margins of 9.8% and 20.9%, respectively. The decrease in Gross Profit and Gross Margin in fiscal year 2020 was driven by lower total revenue and relatively constant rental product depreciation and revenue share, which represented a larger percentage of total revenue due to the impact of the COVID-19 pandemic. Gross Profit was $26.3 million for the six months ended July 31, 2021 compared to $8.7 million for the six months ended July 31, 2020 representing Gross Margins of 32.8% and 9.8%, respectively. The increase in Gross Profit and Gross Margin in the first six months of fiscal year 2021 was driven by the improvement in fulfillment costs and lower rental product depreciation and revenue share, which represented a lower percentage of total revenue than in the prior period. We expect to have the opportunity to improve Gross Profit by driving growth in total revenue, fulfillment and operational efficiency gains, and strategically evolving our mix of product acquisition.

Gross Profit Excluding Product Depreciation and Gross Margin Excluding Product Depreciation: Gross Profit Excluding Product Depreciation and Gross Margin Excluding Product Depreciation indicate the total variable profit of our offerings excluding non-cash expenses and reflect the cash profit available to cover our operating expenses and capital expenditures. In fiscal year 2020, Gross Profit Excluding Product Depreciation was $85.4 million compared to $129.3 million in fiscal year 2019, representing margins of 54.2% and 50.3%, respectively. Gross Profit Excluding Product Depreciation was $50.2 million for the six months ended July 31, 2021 compared to $46.8 million for the six months ended July 31, 2020, representing margins of 62.6% and 52.9%, respectively. Gross Profit Excluding Product Depreciation has improved as we have reduced our fulfillment expense, and in fiscal year 2020

 

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was partially offset by increased revenue share expense, as we shifted to acquiring a greater portion of our products through Share by RTR. Our Gross Margin Excluding Product Depreciation will continue to vary based on our fulfillment expense efficiency and resulting Fulfillment Margin, and the mix of channels through which we acquire product.

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, stock-based compensation expense, write-off of liquidated assets, certain non-recurring, one-time, costs (see above footnotes), income taxes, other income and expense, and other gains / losses. We define Adjusted EBITDA Margin as Adjusted EBITDA calculated as a percentage of total revenue, net for a period. In fiscal year 2020, Adjusted EBITDA was $(20.3) million compared to $(18.0) million in fiscal year 2019, representing margins of (12.9)% and (7.0)% respectively. Adjusted EBITDA decreased due to the decrease in profitability and net loss. Adjusted EBITDA was $(8.1) million for the six months ended July 31, 2021 compared to $(10.6) million for the six months ended July 31, 2020, representing margins of (10.1)% and (12.0)%, respectively. Adjusted EBITDA has increased due to the improvement in profitability and net loss compared to the prior period. We have the opportunity to improve Adjusted EBITDA as we drive operating expense leverage.

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.

Subscription and Reserve Rental Revenue.    We generate Subscription and Reserve rental revenue from subscription and a-la-carte (through our Reserve offering) 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 recognize a-la-carte rental fees over the rental period, which starts on the date of delivery of the product to the customer. A-la-carte rental orders can be placed up to four months prior to the rental start date and the customer’s payment form is charged upon order confirmation. We defer recognizing the rental fees and any related promotions for a-la-carte 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.

Costs and Expenses

Fulfillment.    Fulfillment expenses consist of all variable costs to receive, process and fulfill customer orders. This primarily includes shipping costs to/from customers and personnel and related costs, which includes 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 expense to increase in absolute dollars in future periods to support our growth, especially due to competitive pressures in the labor market which could lead to higher wage rates, and as costs to ship and process orders to/from customers will increase as order volume increases. We expect to continue to invest in

 

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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, user 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, site monitoring costs, and software and license fees. We expect to increase technology expenses as we continue to invest in our technology stack and grow our infrastructure to support overall growth in our business and distribution network. 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 brand 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, including customer service, finance, tax, legal, human resources, fashion and photography and fixed operations costs. General and administrative expenses also include occupancy costs (including warehouse-related), photography costs, professional services, credit card fees, general corporate and warehouse expenses, other administrative costs, gains and losses associated with consolidating our foreign subsidiary at each period end, and gains and losses associated with asset disposals and operating lease terminations. We expect to increase general and administrative expenses 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.

Other Depreciation and Amortization.    Other depreciation and amortization expenses consist of depreciation and amortization amounts for fixed assets, intangible assets including capitalized software, and financing right-of-use assets.

Interest Income / (Expense)

Interest income / (expense) consists primarily of accrued paid-in-kind interest, cash interest and debt issuance cost amortization associated with our Ares Facility and Credit Facility (each as defined below).

 

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Other Income / (Expense)

Other income / (expense) consists primarily of changes in fair value of warrants associated with debt and equity issuances, debt extinguishment costs, proceeds from previous insurance claims and proceeds from monetizing tax credits associated with growth.

Benefit from Income Taxes

Income taxes consist primarily of state minimum taxes and Irish refundable tax credits. We have established a valuation allowance for our deferred tax assets, including federal and state NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.

Results of Operations

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in the prospectus. The following tables set forth our results of operations for the periods presented:

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
     2020     2021     2020     2021  
     (in millions)  

Consolidated Statements of Operations Data:

        

Revenue:

        

Subscription and Reserve rental revenue

   $ 235.4     $ 135.9     $ 76.3     $ 72.7  

Other revenue

     21.5       21.6       12.2       7.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue, net

     256.9       157.5       88.5       80.2  

Costs and expenses:

        

Fulfillment

     118.1       53.0       32.8       22.3  

Technology

     40.2       37.7       18.6       20.2  

Marketing

     22.9       8.1       5.1       7.4  

General and administrative

     98.9       77.2       42.0       40.6  

Rental product depreciation and revenue share

     85.2       89.0       47.0       31.6  

Other depreciation and amortization

     21.6       23.0       11.7       9.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     386.9       288.0       157.2       132.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (130.0     (130.5     (68.7     (51.8

Interest income / (expense), net

     (24.0     (46.6     (20.4     (29.4

Other income / (expense), net

     (0.1     6.0       1.1       (3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before benefit from income taxes

     (154.1     (171.1     (88.0     (84.8

Benefit from income taxes

     0.2       —         —         0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (153.9   $ (171.1   $ (88.0   $ (84.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Years Ended January 31, 2021 and 2020

Total Revenue, Net.    Total revenue, net was $157.5 million for fiscal year 2020, a decrease of $99.4 million, or 38.7%, compared to $256.9 million for fiscal year 2019. This decrease was primarily driven by the reduction in overall demand directly attributable to the COVID-19 pandemic.

Subscription and Reserve Rental Revenue.    Subscription and Reserve rental revenue was $135.9 million for fiscal year 2020, a decrease of $99.5 million, or 42.3%, compared to $235.4 million for fiscal year 2019. This decrease was primarily driven by the 59.0% year over year decrease in active subscriber counts as a result of the COVID-19 pandemic.

 

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Other Revenue.    Other revenue was $21.6 million for fiscal year 2020, an increase of $0.1 million, or 0.5%, compared to $21.5 million for fiscal year 2019. This increase was primarily driven by a temporary mix shift from Subscription and Reserve rental revenue to Other revenue during the COVID-19 pandemic. We launched additional resale initiatives and increased promotional activities for resale items in order to increase revenue from subscribers, which resulted in Other revenue representing 13.7% of our total revenue in fiscal year 2020, up from 8.4% in fiscal year 2019.

Costs and Expenses.    Total costs and expenses were $288.0 million for fiscal year 2020, a decrease of $98.9 million, or 25.6%, compared to $386.9 million in fiscal year 2019. This decrease was primarily driven by reduced total shipments to be fulfilled as a result of the COVID-19 pandemic, as well as cost saving initiatives put in place as a direct response to the COVID-19 pandemic’s impact on the overall business.

Fulfillment.    Fulfillment expenses were $53.0 million for fiscal year 2020, a decrease of $65.1 million, or 55.1%, compared to $118.1 million in fiscal year 2019. This decrease was primarily driven by the reduction in total shipments to be fulfilled as a result of the reduced number of active subscribers during the COVID-19 pandemic and the lower number of shipments received by such subscribers. Fulfillment expenses as a percentage of revenue also decreased as a result of efficiencies in transportation rates and fulfillment labor.

Technology.    Technology expenses were $37.7 million for fiscal year 2020, a decrease of $2.5 million, or 6.2%, compared to $40.2 million in fiscal year 2019. This decrease was primarily driven by cost saving initiatives put in place as a result of the impact of the COVID-19 pandemic, including contract renegotiations and technology personnel cost reductions.

Marketing.    Marketing expenses were $8.1 million for fiscal year 2020, a decrease of $14.8 million, or 64.6%, compared to $22.9 million in fiscal year 2019. This decrease was primarily driven by the decision to reduce paid and brand marketing spend during the COVID-19 pandemic in addition to marketing personnel cost reductions. Marketing expenses unrelated to personnel costs were $4.2 million in fiscal year 2020 and $18.1 million in fiscal year 2019, representing 2.7% and 7.0% of total revenue, respectively.

General and Administrative.    General and administrative expenses were $77.2 million for fiscal year 2020, a decrease of $21.7 million, or 21.9%, compared to $98.9 million in fiscal year 2019. This decrease was primarily driven by cost saving initiatives put in place as a result of the impact of the COVID-19 pandemic, including retail store closures and associated personnel and operating expense reductions, contract renegotiations, and other general and administrative personnel cost reductions, partially offset by operating lease disposals as a result of the COVID-19 pandemic. Occupancy expenses (including warehouse-related expenses) contributed to the increase in general and administrative expenses as a percentage of total revenue, increasing from 7.9% in fiscal year 2019 to 11.7% in fiscal year 2020.

Rental Product Depreciation and Revenue Share.    Rental product depreciation and revenue share was $89.0 million for fiscal year 2020, an increase of $3.8 million, or 4.5%, compared to $85.2 million in fiscal year 2019. This increase was primarily driven by increased performance based and upfront revenue share payments related to a higher penetration of items acquired through Share by RTR in fiscal year 2020. Rental product depreciation and revenue share increased to 56.5% of total revenue in fiscal year 2020, compared to 33.2% in fiscal year 2019. This increase was primarily driven by a higher level of product on hand relative to lower active subscriber and revenue levels due to COVID-19.

 

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Other Depreciation and Amortization.    Other depreciation and amortization was $23.0 million for fiscal year 2020, an increase of $1.4 million, or 6.5%, compared to $21.6 million in fiscal year 2019. This increase was primarily driven by an increase in capitalized software amortization and the timing of depreciation expense associated with assets related to the build out of our new corporate HQ office in Brooklyn, NY put in use in fiscal year 2020.

Interest Income / (Expense), Net.    Interest expense, net was $(46.6) million for fiscal year 2020, an increase of $22.6 million, or 94.2%, compared to $(24.0) million for fiscal year 2019. This increase was primarily driven by the incremental accrued payment-in-kind interest and cash interest related to the additional draw downs on our Credit Facility and payment-in-kind interest, or PIK, related to the addition of our Ares Facility. Of the $(46.6) million total interest expense in fiscal year 2020, $(36.9) million was PIK interest, $(4.7) million was cash, financing lease interest and other interest, and $(5.0) million was debt discount amortization, compared with $(19.0) million PIK interest, $(1.0) million cash, financing lease interest and other interest and $(4.0) million debt amortization in fiscal year 2019.

Other Income / (Expense), Net.    Other income / (expense), net was $6.0 million for fiscal year 2020, an increase of $6.1 million, compared to $(0.1) million for the fiscal year 2019. This increase was primarily driven by the receipt of insurance claim proceeds and monetization of a tax credit, partially offset by a loss on debt extinguishment, all of which did not occur in the prior year.

Comparison of the Six Months Ended July 31, 2021 and 2020

Total Revenue, Net.    Total revenue, net was $80.2 million for the six months ended July 31, 2021, a decrease of $8.3 million, or 9.4%, compared to $88.5 million for the six months ended July 31, 2020. This decrease was primarily driven by the lower average subscriber count in the current period due to COVID-19.

Subscription and Reserve Rental Revenue.    Subscription and Reserve rental revenue was $72.7 million for the six months ended July 31, 2021, a decrease of $3.6 million, or 4.7%, compared to $76.3 million for the six months ended July 31, 2020. While the active subscriber count at July 31, 2021 was 80.0% higher than at July 31, 2020, the average number of active subscribers during the six months ended July 31, 2021 (defined as the average of the number of active subscribers at the end of the current period and the number of active subscribers at the end of the prior period) was 18.8% lower than in the prior period due to timing differences in the impact of COVID-19 on each respective period.

Other Revenue.    Other revenue was $7.5 million for the six months ended July 31, 2021, a decrease of $4.7 million, or 38.5%, compared to $12.2 million for the six months ended July 31, 2020. This decrease in the current period was primarily driven by an intentional mix shift of revenue during the first half of fiscal year 2020 (at the peak of the COVID-19 pandemic) from Subscription and Reserve rental revenue to Other revenue which was not done in the first half of fiscal year 2021. In the prior period, we launched additional resale initiatives and increased promotional activities for resale items in order to increase revenue from subscribers. These promotional activities were reduced in the first six months of fiscal year 2021 which resulted in Other revenue representing 9.4% of total revenue in the first six months of fiscal year 2021, down from 13.8% in the same period of fiscal year 2020.

Costs and Expenses.    Total costs and expenses were $132.0 million for the six months ended July 31, 2021, a decrease of $25.2 million, or 16.0%, compared to $157.2 million for the six months ended July 31, 2020. This decrease to the prior period was primarily driven by reduced total shipments and lower fulfillment expenses partly as a result of the COVID-19 pandemic and also due to the phase out of the unlimited swap program, as well as lower rental product depreciation and revenue share driven by lower levels of product sold and the partial right-sizing of product relative to the level of active subscribers and revenue and lower revenue share.

 

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Fulfillment.    Fulfillment expenses were $22.3 million for the six months ended July 31, 2021, a decrease of $10.5 million, or 32.0%, compared to $32.8 million for the six months ended July 31, 2020. The decrease in dollars and as a percentage of revenue was primarily driven by the reduction in total shipments to be fulfilled from the reduced average number of active subscribers during the COVID-19 pandemic impacted periods and due to the phase out of the unlimited swap program, as well as fulfillment process efficiencies compared to the prior period.

Technology.    Technology expenses were $20.2 million for the six months ended July 31, 2021, an increase of $1.6 million, or 8.6%, compared to $18.6 million for the six months ended July 31, 2020. This increase was primarily driven by an increase in hiring and personnel costs for the first six months of fiscal year 2021 to support future technology growth initiatives, compared to the prior period which was impacted by COVID-19 related personnel cost reductions.

Marketing.    Marketing expenses were $7.4 million for the six months ended July 31, 2021, an increase of $2.3 million, or 45.1%, compared to $5.1 million for the six months ended July 31, 2020. This increase was primarily driven by the increase in paid marketing spend compared to the prior period which had reduced marketing spend during the COVID-19 pandemic. Marketing expenses unrelated to personnel costs were $5.3 million in the six months ended July 31, 2021 and $3.0 million in the six months ended July 31, 2020, representing 6.6% and 3.4% of total revenue, respectively.

General and Administrative.    General and administrative expenses were $40.6 million for the six months ended July 31, 2021, a decrease of $1.4 million, or 3.3%, compared to $42.0 million in the six months ended July 31, 2020. This decrease was partially driven by a $1.9 million decrease in customer experience personnel costs due to fewer subscribers requiring support during the six months ended July 31, 2021, compared to the support required at the onset of COVID-19 in the same period last year. The decrease is also attributable to a $1.2 million increase in the gain/loss from liquidated rental product sales and to a lesser extent the continued benefits of cost-saving initiatives undertaken at the onset of COVID-19, including retail store closures, associated expense reductions and contract renegotiations. This decrease was partially offset by an increase in public readiness preparation costs incurred in the first six months of fiscal year 2021 and $1.8 million of higher corporate personnel costs as the prior period was impacted by COVID-19 related corporate personnel cost reductions.

Rental Product Depreciation and Revenue Share.    Rental product depreciation and revenue share was $31.6 million for the six months ended July 31, 2021, a decrease of $15.4 million, or 32.8%, compared to $47.0 million in the six months ended July 31, 2020. Rental product depreciation and revenue share was 39.4% of revenue in the six months ended July 31, 2021, down from 53.1% in the prior period as a result of lower levels of product sold, the partial right-sizing of product relative to the level of active subscribers and lower revenue share.

Other Depreciation and Amortization.    Other depreciation and amortization was $9.9 million for the six months ended July 31, 2021, a decrease of $1.8 million, or 15.4%, compared to $11.7 million in the six months ended July 31, 2020. This decrease was primarily driven by lower depreciation associated with our reusable garment bags as this depreciation is time based and fewer bags were purchased and depreciated, as a result of the reduction in shipment volume over the past year.

Interest Income / (Expense), Net.    Interest expense, net was $(29.4) million for the six months ended July 31, 2021, an increase of $9.0 million, or 44.1%, compared to $(20.4) million for the six months ended July 31, 2020. This increase was driven by the incremental accrued payment-in-kind interest related to the additional Ares debt entered in October 2020. Of the $(29.4) million total interest expense in the six months ended July 31, 2021, $(23.2) million was PIK interest, $(2.3) million was

 

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cash, financing lease interest and other interest and $(3.9) million was debt discount amortization, compared with $(16.2) million PIK interest, $(2.2) million cash and financing lease interest and $(2.0) million debt amortization in the six months ended July 31, 2020.

Other Income / (Expense), Net.    Other income / (expense), net was $(3.6) million for the six months ended July 31, 2021, a decrease of $4.7 million, compared to $1.1 million for the six months ended July 31, 2020. This decrease was primarily driven by a non-cash warrant revaluation expense, which did not occur in the prior year, partially offset by the receipt of insurance claim proceeds.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statements of operations data by quarter from the first quarter of fiscal year 2019 to the second quarter of fiscal year 2021. The unaudited quarterly consolidated results of operations set forth below have been prepared on the same basis as our audited consolidated financial statements and in our opinion contains all adjustments, consisting only of normal and recurring adjustments, necessary for the fair statement of this financial information. You should read the following information in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period, and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period.

 

    Three Months Ended  
    April 30,
2019
    July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
    January 31,
2021
    April 30,
2021
    July 31,
2021
 
Consolidated Statement of
Operations Data:
  (in millions, except share and per share amounts)  

Revenue:

                   

Subscription and Reserve rental revenue

  $         50.6     $         58.6     $         59.2     $         67.0     $         52.3     $         24.0     $         30.5     $         29.1     $         29.8     $         42.9  

Other revenue

    4.8       4.8       5.1       6.8       7.3       4.9       5.0       4.4       3.7       3.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue, net

    55.4       63.4       64.3       73.8       59.6       28.9       35.5       33.5       33.5       46.7  

Costs and expenses:

                   

Fulfillment

    23.7       27.9       33.7       32.8       23.0       9.8       11.0       9.2       8.8       13.5  

Technology

    8.3       9.1       10.9       11.9       10.6       8.0       9.4       9.7       9.7       10.5  

Marketing

    4.6       4.9       6.3       7.1       3.9       1.2       1.4       1.6       2.6       4.8  

General and administrative

    19.2       23.4       28.5       27.8       24.6       17.4       17.9       17.3       19.0       21.6  

Rental product depreciation and revenue share

    17.9       17.9       21.7       27.7       26.5       20.5       22.1       19.9       16.6       15.0  

Other depreciation and amortization

    3.9       5.1       6.3       6.3       6.1       5.6       5.7       5.6       5.1       4.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    77.6       88.3       107.4       113.6       94.7       62.5       67.5       63.3       61.8       70.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (22.2     (24.9     (43.1     (39.8     (35.1     (33.6     (32.0     (29.8     (28.3     (23.5

Interest income / (expense), net

    (5.6     (5.2     (5.6     (7.6     (8.9     (11.5     (11.8     (14.4     (14.5     (14.9

Other income / (expense), net

    —         (0.1     —         —         0.9       0.2       (0.5     5.4       0.5       (4.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before benefit from income taxes

    (27.8     (30.2     (48.7     (47.4     (43.1     (44.9     (44.3     (38.8     (42.3     (42.5

Benefit from income taxes

    —         —         —         0.2       —         —         —         —         —         0.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (27.8   $ (30.2   $ (48.7   $ (47.2   $ (43.1   $ (44.9   $ (44.3   $ (38.8   $ (42.3     (42.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, based and diluted

  $ (2.56   $ (2.78   $ (4.45   $ (4.30   $ (3.88   $ (4.04   $ (3.98   $ (3.48   $ (3.75     (3.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

    10,838,607       10,894,782       10,945,994       10,976,735       11,112,667       11,112,706       11,115,005       11,127,721       11,287,251       11,300,395  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our quarterly key business and financial metrics by quarter from the first quarter of fiscal year 2019 to the second quarter of fiscal year 2021. The calculation of the key business and financial metrics discussed below may differ from other 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 total revenue, net, fulfillment expenses and net loss.

 

    Three Months Ended  
    April 30,
2019
    July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
    January 31,
2021
    April 30,
2021
    July 31,
2021
 
    ($ in millions)        

Active subscribers (at the end of period)

    101,607       106,192       118,827       133,572       52,886       54,228       65,545       54,797       74,018       97,614  

Gross profit

  $ 13.8     $ 17.6     $ 8.9     $ 13.3     $ 10.1     $ (1.4   $ 2.4     $ 4.4     $ 8.1     $ 18.2  

Gross profit excluding product depreciation

    30.8       34.0       27.9       36.6       32.2       14.6       19.2       19.4       20.8       29.4  

Adjusted EBITDA

    0.8       (1.1     (10.6     (7.1     (3.1     (7.5     (5.4     (4.3     (6.2     (1.9

 

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The following table presents a reconciliation of total revenue, net, the most comparable GAAP financial measure, to each of Fulfillment Profit, Gross Profit Excluding Product Depreciation, and Contribution Profit, respectively, by quarter from the first quarter of fiscal year 2019 to the second quarter of fiscal year 2021:

 

    Three Months Ended  
    April 30,
2019
    July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
    January 31,
2021
    April 30,
2021
    July 31,
2021
 
    (in millions)        

Total revenue, net

  $ 55.4     $ 63.4     $ 64.3     $ 73.8     $ 59.6     $ 28.9     $ 35.5     $ 33.5     $ 33.5     $ 46.7  

Fulfillment

    23.7       27.9       33.7       32.8       23.0       9.8       11.0       9.2       8.8       13.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fulfillment profit

    31.7       35.5       30.6       41.0       36.6       19.1       24.5       24.3       24.7       33.2  

Revenue share

    0.9       1.5       2.7       4.4       4.4       4.5       5.3       4.9       3.9       3.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit excluding product depreciation

          30.8             34.0       27.9       36.6       32.2           14.6       19.2       19.4       20.8       29.4  

Rental product depreciation

    17.0       16.4       19.0       23.3       22.1       16.0       16.8       15.0       12.7       11.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    13.8       17.6       8.9       13.3       10.1       (1.4     2.4       4.4       8.1       18.2  

Credit card processing fees

    1.9       1.9       2.1       2.3       1.7       0.9       1.0       0.8       1.0       1.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution profit

    11.9       15.7       6.8       11.0       8.4       (2.3     1.4       3.6       7.1       16.9  

Technology

    8.3       9.1       10.9       11.9       10.6       8.0       9.4       9.7       9.7       10.5  

Marketing

    4.6       4.9       6.3       7.1       3.9       1.2       1.4       1.6       2.6       4.8  

General and administrative (excluding credit card processing fees)

    17.3       21.5       26.4       25.5       22.9       16.5       16.9       16.5       18.0       20.3  

Other depreciation and amortization

    3.9       5.1       6.3       6.3       6.1       5.6       5.7       5.6       5.1       4.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

  $ (22.2   $ (24.9   $ (43.1   $ (39.8   $ (35.1   $ (33.6   $ (32.0   $ (29.8   $ (28.3   $ (23.5

The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA by quarter from the first quarter of fiscal year 2019 to the second quarter of fiscal year 2021:

 

    Three Months Ended  
    April 30,
2019
    July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
    January 31,
2021
    April 30,
2021
    July 31,
2021
 
    (in millions)        

Net loss

  $ (27.8   $ (30.2   $ (48.7   $ (47.2   $ (43.1   $ (44.9   $ (44.3   $ (38.8   $ (42.3   $ (42.4

Interest (income) / expense, net (1)

    5.6       5.2       5.6       7.6       8.9       11.5       11.8       14.4       14.5       14.9  

Rental product depreciation

    17.0       16.4       19.0       23.3       22.1       16.0       16.8       15.0       12.7       11.2  

Other depreciation and amortization (2)

    3.9       5.1       6.3       6.3       6.1       5.6       5.7       5.6       5.1       4.8  

Stock compensation (3)

    1.4       1.5       2.0       1.9       2.0       1.8       2.5       1.9       1.9       2.4  

Write-off of liquidated assets (4)

    0.7       0.5       1.6       1.3       0.6       0.3       0.7       1.7       1.4       1.4  

Non-recurring adjustments (5)

    —         0.3       3.6       (0.1     1.2       2.0       0.7       0.3       1.0       1.8  

Benefit from income taxes

    —         —         —         (0.2     —         —         —         —         —         (0.1

Other (income) / expense, net

    —         0.1       —         —         (0.9     (0.2     0.5       (5.4     (0.5     4.1  

Other (gains) / losses (6)

    —         —         —         —         —         0.4       0.2       1.0       —         —