WAG! GROUP CO. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this quarterly report on Form 10-Q, including the audited consolidated financial statements ofWag Labs, Inc. ("Legacy Wag!") as ofDecember 31, 2021 and 2020 and "Management's Discussion and Analysis of Financial Condition and Results of Operations ofWag Labs, Inc " included therein as well as our final prospectus/offer to exchange datedJuly 12, 2022 . Unless otherwise stated or as the context otherwise requires, references to "the Company," "we," "us," "our," "it," and similar references refer toWag! Group Co. ("Wag!"), aDelaware corporation, and its consolidated subsidiaries.
Forward Looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are identified by words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would," "potentially," or the negative of these terms or similar expressions in this Quarterly Report on Form 10-Q. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions, and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that are identified under "Risk Factors" in our Form S-1 filedSeptember 14, 2022 , as amended and filed onOctober 31, 2022 , as well as in other filings with theSEC in this Quarterly Report on Form 10-Q. Forward -looking statements are based on management's current beliefs and assumptions and based on information currently available. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law.
Overview
Our mission is to be the #1 partner to busy Pet Parents. We believe that being
busy shouldn't stop Pet Parents from owning or taking care of their pets. We are
dedicated to building a future in which every pet has access to safe,
high-quality care. Wag! exists to make pet ownership possible and to bring joy
to pets and those who love them.
Wag! was founded in 2015 to solve the guilt and stress of owning a pet. There
are over 90.5 million US households with a pet, and for many Pet Parents,
leaving their pet alone creates stress and guilt, as the existing solutions are
limited. We launched the Wag! platform to solve these problems because lonely
pets deserve healthier and happier lives. Wag! enabled on-demand pet services,
allowing us to provide a mobile first experience for 98% of Pet Parents on the
app. With numerous on-demand or scheduled service options provided by Pet
Caregivers to Pet Parents through the platform, we have created a trusted pet
service platform for Pet Parents. This has led to approximately 75% of Pet
Parents not being physically at home while services are being delivered and
high-frequency service utilization where Pet Parents use Wag! an average of four
to five times a month. We have built a compelling and trusted consumer brand
with a high level of customer engagement, effectively creating a solid platform
to leverage as we rapidly expand our business to new product lines.
Our proprietary marketplace technology, which is available as a mobile app and
website ("platform" or "marketplace"), enables independent Pet Caregivers to
connect with Pet Parents. Through our cutting- edge technologies and
multi-faceted platforms, Wag! connects Pet Parents with Pet Caregivers who
provide excellent pet care services. Our marketplace enables Pet Parents to find
a wide array of pet services provided by Pet Caregivers and third-party service
partners, such as walking, pet sitting and boarding, advice from licensed pet
experts, home visits, training services, and pet insurance comparison tools.
We are one of the largest, online marketplaces for pet care and strive to be the
#1 platform for busy pet parents, offering access to 5-star dog walking, pet
sitting, expert pet advice, wellness plans, and one-on-one
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training from our community of 400,000 local pet caregivers nationwide, in addition to pet insurance options from the leading pet insurance companies. Making pet parents happy is what we do best. With safety and wellness at the forefront, we have a trusted record of experience with pet care services completed by pet caregivers on the Wag! Platform across 5,300 cities and 50 states. Wag! also operates Petted.com, the nation's largest pet insurance comparison marketplace. Additionally, the Wag! Pet Caregiver App empowers pet caregivers to care for pets in their neighborhood and earn real money. For more information, visit wag.co. Since the beginning of 2021, monthly revenues has generally been steadily increasing leading to our highest monthly revenues in the third quarter of 2022, averaging over$5.0 million a month, since the Company was founded. From 2020 to the third quarter of 2022 Cohorts, Pet Parent activity for Pet Parents who joined the platform throughSeptember 2022 are significantly outperforming the 2017, 2018, and 2019 Cohorts on a year-to-date basis. We are still in the early stages of growth, but have made significant progress in extending the offerings and reach of our platform since our inception in 2015.
Principal Factors Affecting Our Results of Operations and Material Trends
Our results are impacted by the general economic environment, conditions and trends relating to pet ownership and demand for services, competition with other pet service providers, and other factors including promotions, seasonality, and the effectiveness of our marketing and advertising campaigns. The primary factors that impact our results and present significant opportunities, as well as pose risks and challenges, are described below. We believe that our performance and future success depend on the factors discussed below, those mentioned in the section titled "Risk Factors" and elsewhere in this document.
Investment in New Services
Founded in 2015, we were one of the first on-demand pet services platforms. Since then, we have remained committed to expanding our offerings and the reach of our platform. For example, in the past 24 months, we have launched new features in an effort to increase engagement by both Pet Parents and Pet Caregivers on our platform. For Pet Parents, we added direct booking, the ability to create preferred Pet Caregiver lists, in-home or in-app video dog training options, pet service requests for cats and other pets, insurance comparison from top pet insurance providers, browse and chat with Pet Caregivers before booking a request, browse through trusted caregivers, and the ability to pre-tip caregivers before the service. For Pet Caregivers, we added features to provide them with the opportunity to fulfill highest priority requests, the ability to set their own prices, the ability to expand their reach to new customers and grow their business with social media links to their profile and custom HTML Craigslist links, as well as the opportunity to access advice from seasoned veterans on the platform and tips to help them grow a successful pet care business. In the first quarter of 2020, we also launched our Wag! Premium subscription service, a monthly or annual subscription that offers Pet Parents 10% off all services, including waived booking fees, free advice from pet experts, priority access to top-rated Pet Caregivers, and VIP pet support. Wag! Premium accounts for over 50% of our monthly active users.
Extending Offerings and Platform Reach
Since our founding in 2015, we have striven to be the #1 platform for premium
pet services, including on-demand walking, sitting, boarding, training, vet
services, wellness plans, and insurance comparison tools. Our ability to
establish trust via our traditional on-demand services across 5,300 cities in
all 50 states is a key way for Pet Parents to start experiencing the platform.
We are becoming the button on the phone for the paw, a place Pet Parents trust
with their pets' health and well-being. We are extremely excited about the
growth in all lines of our business, including the Wellness category
("Wellness"), which is a major propulsion for year over year revenue increase.
Pet Parents are appreciating the option to chat with a licensed pet expert 24/7,
pet wellness plans, and the ability to compare pet insurance through our
one-stop-shop platform as opposed to performing their own in depth research. By
simplifying what it takes to be a Pet Parent through our digital edge, we're
giving back valuable time that pets and their parents can spend together. This
is only scratching the
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surface of the Total Addressable Market ("TAM") in the pet care industry, and we are excited to see where our path takes us.
Investment in Innovation and Technology
The continued development of our platform capabilities and digital ecosystem requires substantial ongoing investment in resources and technology infrastructure, which can impact EBITDA. Our ability to continue to incorporate or develop innovative tools in line with our growth is crucial to ensuring the success of our strategy. As discussed above in "- Investment in New Services", we are committed to innovating new products and features. In addition, we are continuously integrating and evaluating acquisitions to enhance our technology platforms and launch features that are most beneficial to Pet Caregivers, Pet Parents, and third-party service partners.
Investment in New Markets
We plan to invest in existing and new markets, as well as new offerings. We believe that we can further expand in existing markets, to new markets withinNorth America , and internationally by carefully targeting locations with a high expected demand for pet services. We believe there is an opportunity to expand our services outside of our existing geographic locations into other countries and regions where there is an attractive spend per pet to address. As we invest in new markets and create new offerings, we may increase our marketing strategies in a manner that could extend our marketing payback target in order to accelerate growth in each new market. [[Image Removed: pet-20220930_g2.jpg]]
Pet Ownership Trends
The COVID-19 pandemic has impacted demand for pet care and has had a significant impact on Pet Parent and Pet Caregiver behavior. Beginning in the first quarter of 2020, many Pet Parents experienced travel restrictions, shelter-in-place orders, and work from home requirements. Accordingly, at the start of the COVID-19 pandemic inMarch 2020 , our revenues declined significantly, since many Pet Parents were home with their pets and did not require additional pet services. The services that we offer through our platform were also limited due to full and partial lockdowns. However, since the start of the COVID-19 pandemic, approximately 23 million pets were adopted byU.S. households throughMay 2021 . According to the APPA, 70% ofU.S. households own a pet, which equates to 90.5 million homes. We are focused on taking advantage of this significant opportunity to expand the base of Pet Parents using the Wag! platform given the increased size of the market in which we operate. We believe that the high volume of new Pet Parents, as well as return to office policies, may continue to have a positive effect on the number of bookings for pet services, and other pet related services over the longer term. 32
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Pet Parent Preferences and Demand
As 95% of theU.S. population has access to the Wag! platform through an iPhone or Android device, our objective for long-term sustained growth is to create a platform that results in existing Pet Parents becoming repeat bookers, together with attracting new Pet Parents to our platform and to successfully convert them into repeat bookers. We attract Pet Parents to our platform through word-of-mouth and a variety of channels, such as social media, video, and other online and offline channels. Our proprietary on-demand platform allows Pet Parents to easily and conveniently find top rated Pet Caregivers to serve their pet service needs either on-demand or scheduled at their convenience. Our primary mobile app allows Pet Parents to access Pet Caregivers from anywhere, at any time. With approximately 75% of Pet Parents not physically at home when their pet service is being performed, our platform allows Pet Caregivers and Pet Parents to avoid in-person contact if necessary or preferred by the Pet Parent. We believe this positions us well for ongoing growth as our platform allows both Pet Parents and Pet Caregivers the ability to mitigate COVID-19 related concerns. We attract Pet Caregivers to the platform primarily based on viral and word-of-mouth marketing strategies. We have industry-leading Net Promoter Scores for Pet Caregivers, which average between 45 to 55 as of the third quarter of 2021. Being a Pet Caregiver allows dog lovers to spend time with dogs and other animals, enabling them to lead a healthy lifestyle by getting exercise through dog walking while simultaneously participating in an activity that delights them. To serve Pet Parents in any given market, a critical density of caregivers must be present so that Pet Parents have options and availability for on-demand services. During certain peak periods, such as holidays, we have observed high Pet Parent demand that has resulted in Pet Caregiver constraints in some markets. Our platform provides a technology feature that allows Pet Caregivers to set their own prices, encouraging Pet Caregivers to be more engaged during peak periods.
Effects of the COVID-19 Pandemic
In addition to the foregoing factors, our results in 2020 were significantly impacted by the COVID-19 pandemic and the resulting measures undertaken by federal, state, and municipal governments. The COVID-19 pandemic has been a highly disruptive economic and societal event that initially negatively impacted demand for pet care due to shelter-in-place orders, travel restrictions, and work-from-home requirements implemented inMarch 2020 . As a result, our monthly revenues in 2020 decreased approximately 80% compared to pre-COVID revenues. However, the re-opening of the economy, despite the continuation of the pandemic and the emergence of new variants, has resulted in a meaningful recovery of revenues in 2021 relative to 2020. Uncertainties in the global economy may adversely impact our operations, brand partners, customers, and other business partners, which may impact future revenues, and require other changes to our operations.
Effectiveness of our word-of-mouth, marketing and advertising activities
Our objective for long-term, sustained growth is to create a platform that results in existing Pet Parents becoming repeat bookers, together with attracting new Pet Parents to the platform and converting them into repeat bookers, thus generating a lifetime of bookings from the Pet Parent. We attract Pet Parents and Pet Caregivers to the platform through word-of-mouth and a variety of other channels, such as social media, video, and other online and offline channels. The easy to use and convenient platform organically drives word-of-mouth marketing and references amongst Pet Parent. Additionally, our brand awareness advertising activities, including social media and television advertisements, allow us to reach new Pet Parents and Pet Caregivers.
When assessing the efficiency and effectiveness of our marketing spend, we monitor, amongst other things, new sign ups and first-time booking activity on the platform.
Our ability to attract Pet Parents to the platform is very efficient as we benefit from the network effects associated with our platform.
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Seasonality
Wag! experiences seasonality in the booking volume, which Wag! expects to continue and may become more substantial. Historically, Wag! has experienced lower walking service requests on the platform during holidays periods, offset by higher sitting and boarding requests during these periods.
The Business Combination Agreement and Public Company Costs
OnFebruary 2, 2022 , Wag!, CHW and the Merger Sub entered into the Business Combination Agreement. Pursuant to the Business Combination Agreement, at the Closing, Merger Sub was merged with and into Wag!, with Wag! continuing as the surviving corporation following the Merger, being a wholly owned subsidiary of CHW and the separate corporate existence of Merger Sub ceased. Upon the completion of the Business Combination, Wag! became the successor registrant with theSEC , meaning that Wag!'s financial statements for previous periods will be disclosed in the registrant's future periodic reports filed with theSEC . While the legal acquirer in the Business Combination Agreement is CHW, for financial accounting and reporting purposes underU.S. GAAP, Wag! is the accounting acquirer and the Merger is accounted for as a "reverse recapitalization." A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the combined company represent the continuation of the financial statements of Wag! in many respects. Under this method of accounting, CHW is treated as the "acquired" company for financial reporting purposes. For accounting purposes, Wag! is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Wag! (i.e., a capital transaction involving the issuance of stock by CHW for the stock of Wag!). Upon the Closing of the Business Combination and the PIPE andBackstop Investment , the most significant change in our reported financial position and results of operations was an increase in cash (as compared to our balance sheet atSeptember 30, 2022 ) including$29.3 million of which$24.7 million is held in escrow,$5.0 million in gross proceeds from the PIPE andBackstop Investment by the PIPE and Backstop Investor, and financing arrangement proceeds of$29.4 million . Total direct and incremental transaction costs of CHW and Wag! throughSeptember 30, 2022 were approximately$23.4 million , substantially all of which were offset to additional-paid-in-capital as costs related to the reverse recapitalization. Transaction costs were approximately$11.8 million , for Wag! and$11.6 million for CHW for legal, financial advisory, and other professional fees incurred in consummating the Business Combination. As a result of the Business Combination, Wag! is the successor to anSEC registrant and is listed on the Nasdaq, which will require Wag! to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.
Components of Our Results of Operations
The following is a summary of the principal line items comprising our operating results.
Revenues
We provide an online marketplace that enables Pet Parents to connect with Pet
Caregivers for various pet services. We recognize revenues in accordance with
ASC 606, Revenue from Contracts with its Customers from four distinct streams:
(1) service fees charged to Pet Caregivers for use of the platform to discover
pet service opportunities and to successfully complete a pet care service to a
Pet Parent, (2) subscription and other fees paid by Pet Parents for Wag!
Premium, (3) joining fees paid by Pet Caregivers to join and be listed on the
platform, and (4) Wellness revenue through affiliate fees paid by third-party
service partners based on 'revenue-per-action' or conversion activity. For some
of the Company's arrangements with third-party service providers, the
transaction price is considered variable and an estimate of the transaction
price is recorded when the action occurs. The estimated transaction price used
in the variable consideration is based on historical data with the respective
third-party service partner and the consideration is measured and settled
monthly.
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Cost of Revenues, Excluding Depreciation and Amortization
Cost of revenues consists of costs directly related to revenue generating transactions, which, primarily includes fees paid to payment processors for payment processing fees, hosting and platform-related infrastructure costs, third-party costs for background checks for Pet Caregivers, and other costs arising as a result of revenue transactions that take place on our platform, excluding depreciation and amortization.
Platform Operations and Support
Platform operations and support expenses include personnel-related compensation costs of technology and operations teams, and third-party operations support costs. Sales and Marketing
Sales and marketing expenses include personnel-related compensation costs of the marketing team, advertising expenses, and Pet Parent incentives. Sales and marketing expenses are expensed as incurred.
General and Administrative
General and administrative expense includes personnel-related compensation costs for employees on corporate functions, such as management, accounting, and legal as well as insurance and other expenses used to run the business, together with outside party service costs of related items such as auditors and lawyers.
Depreciation and Amortization
Depreciation and amortization expenses primarily consist of depreciation and amortization expenses associated with our property and equipment. Amortization includes expenses associated with our capitalized software and website development.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, and short-term investments.
Change in Fair Value of Derivatives
The net decrease in fair value of derivatives consists of fair value remeasurements of the Company's liability classified Forward Purchase Agreements.
Key Performance Indicators ("KPIs") and Non-GAAP Measures
We regularly review several metrics, including the following key performance indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures and the comparable GAAP measure is net income (loss). Please refer to the "- Non-GAAP Measures" section below for further discussion with respect to how we define these measures, as well as for reconciliations to the most comparableU.S. GAAP measures. Adjusted EBITDA provides a basis for comparison of our business operations between current, past, and future periods by excluding items from net income (loss) that we do not believe are indicative of our core operating performance. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance withU.S. GAAP, and may not be comparable to similarly titled amounts used by other companies or persons, because they may not calculate these non-GAAP measures in the same manner. 35
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Bookings
We define Bookings as the total dollar value of transactions booked via the platform for pet Services and Wellness services, in each case without any adjustment for discounts and refunds, Pet Caregiver earnings, and Pet Parent incentives. Bookings are an indication of the scale of our current platform, which ultimately impacts revenues. We define Take Rate as revenues as percentage of Gross Bookings. Take Rate is an indication of marketplace economics, and is impacted by product offerings with different margin structures. We use take rate to identify key revenues drivers in our business. Our gross bookings in the three and nine months endedSeptember 30, 2022 were$25 million and$65 million , compared to$31 million and$14 million for the three and nine months endedSeptember 30, 2021 . The increase in the periods ended in 2022 are largely attributable to economic recovery from the impact of the COVID-19 pandemic, return to pre-pandemic levels of activity in the travel industry, significant growth in publicity for our platform via strategic partnerships and performance marketing initiatives, and growth of Wag! Wellness services since launch in the third quarter of 2021. The following tables present our non-GAAP measures and key performance indicators for the periods presented (in thousands except Adjusted EBITDA Margin). Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands, except percentages) 2022 2021 2022 2021 U.S. GAAP Measures: Revenues$ 15,379 $ 5,880 $ 37,829 $ 12,036 Net income (loss)$ (40,931) $ 1,554 $ (44,371) $ (3,587) Net income (loss) % (266.1) % 26.4 % (117.3) % (29.8) % Net cash flows provided by (used in) operating activities$ 568 $ (2,927) $ (3,578) $ (10,350) Key Performance Indicators and non-GAAP measures: Adjusted EBITDA$ (461) $ (2,552) $ (3,448) $ (7,443) Adjusted EBITDA Margin (3.0) % (43.4) % (9.1) % (61.8) % Bookings$ 25,328 $ 13,688 $ 64,804 $ 30,764 Take Rate 61 % 43 % 58 % 39 %
Adjusted EBITDA and Adjusted EBITDA Margin
In addition to revenues and net loss, which are measures presented in accordance withU.S. GAAP, management believes that Adjusted EBITDA and Adjusted EBITDA Margin provide relevant and useful information that is widely used by analysts, investors, and competitors in our industry to assess performance. We define Adjusted EBITDA as net income (loss), adjusted for interest expense, depreciation and amortization, share-based compensation, income taxes, as well as other items to be consistent with definitions typically used by lenders, including transaction costs. Additionally, we exclude the impact certain non-recurring items which are not indicative of our operating performance, including but not limited to, business combination transaction costs and PPP Loan Forgiveness. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenues. However, you should be aware that when evaluating Adjusted EBITDA and Adjusted EBITDA Margin, Wag! may incur future expenses similar to those excluded when calculating these measures. Wag!'s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Further, these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance withU.S. GAAP. Wag! compensates for these limitations by relying primarily on itsU.S. GAAP results and using Adjusted EBITDA and Adjusted EBITDA Margin on a supplemental basis. Wag!'s computation of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to other similarly titled measures computed by other companies because not all companies calculate this measure in the same fashion. You should review the reconciliation of 36
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net loss to Adjusted EBITDA and Adjusted EBITDA Margin below and not rely on any single financial measure to evaluate Wag!'s business.
Adjusted EBITDA and Adjusted EBITDA Margin are useful to an investor in evaluating our performance because these measures:
•are widely used by analysts, investors, and competitors to measure a company's operating performance;
•are used by our lenders and/or prospective lenders to measure our performance; and
•are used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting.
The reconciliations of net loss, which is the most comparableU.S. GAAP measure, to non-GAAP Adjusted EBITDA for the three and nine months endedSeptember 30, 2022 and 2021 are as follows: Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2022 2021 2022 2021 Revenues$ 15,379 $ 5,880 $ 37,829 $ 12,036 Adjusted EBITDA reconciliation: Net income (loss) (40,931) 1,554 (44,371) (3,587) Add (deduct): Interest expense (income) 735 (9) 784 5 Depreciation and amortization 134 122 431 232 Share based compensation [1] 23,922 60 24,016 182 Issuance of Community Shares to Pet Caregivers [2] 1,971 - 1,971 - Change in fair value of derivatives [3] 13,708 - 13,708 - Gain on forgiveness of PPP loan - (3,482) - (3,482) Tax (benefit) expense - (797) 13 (793) Adjusted EBITDA$ (461) $ (2,552) $ (3,448) $ (7,443) [1] Includes stock-based compensation expense in 2022 incurred in connection with the Business Combination of$23.9 million . Of the$23.9 million ,$2.8 million is included in Platform operations and support,$2.1 million in Sales and marketing, and$19.0 million in General and administrative expenses on the condensed consolidated statement of operations. [2] Of this amount,$1.8 million is included General and administrative expenses and the remainder as contra revenue on the condensed consolidated statement of operations. [3] Relates to the changes in the fair value of Forward Purchase Agreements that were entered into prior to the closing of the Business Combination. See Note 3 - Business Combinations and Note 6 - Fair Value Measurements for more details. [4] Excluding the impacts noted in [1] and [2] above, Platform and Operations Expense is approximately 18% of revenues, Sales and marketing approximately 59%, and General and administrative approximately 19% for the three months endedSeptember 2022 . For the nine months endedSeptember 30, 2022 , excluding the same impacts, Platform and Operations Expense is approximately 22% of revenues, Sales and marketing approximately 59%, and General and administrative approximately 20%.
Comparison of the Three and Nine Months ended
The following table sets forth our unaudited condensed consolidated operations data for the three and nine months endedSeptember 30, 2022 and 2021. The information has been prepared on the same basis as our unaudited consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, and includes, in our opinion, all adjustments, necessary to state fairly our results of operations for these periods. This data should be read in conjunction with our audited consolidated statements of operations for the years endedDecember 31, 2021 and 2020 and our unaudited condensed consolidated statements of operations for the three and nine months endedSeptember 30, 2022 and 2021, included elsewhere herein. These results of 37
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operations are not necessarily indicative of the future results of operations that may be expected for any future period.
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands, except $ % $ %
percentages) 2022 2021 Change Change 2022 2021 Change Change
Revenues $ 15,379 $ 5,880 $ 9,499 162 % $ 37,829 $ 12,036 $ 25,793 214 %
Costs and expenses:
Cost of revenues, excluding
depreciation and amortization 1,021 861 160 19 % 3,027 1,934 1,093 57 %
Platform operations and
support 5,641 2,508 3,133 125 % 11,035 7,768 3,267 42 %
Sales and marketing 11,290 3,151 8,139 258 % 24,656 4,991 19,665 394 %
General and administrative 23,781 1,972 21,809 1106 % 28,546 4,968 23,578 475 %
Depreciation and amortization 134 122 12 10 % 431 232 199 86 %
Total costs and expenses 41,867 8,614 33,253 386 % 67,695 19,893 47,802 240 %
Change in fair value of
derivatives (13,708) - (13,708) NM (13,708) - (13,708) NM
Gain on forgiveness of PPP
loan - 3,482 (3,482) NM - 3,482 (3,482) NM
Interest income (expense), net (735) 9 (744) NM (784) (5) (779) 15580 %
Loss before income taxes (40,931) 757 (41,688) NM (44,358) (4,380) (39,978) 913 %
Income tax benefit (expense) - 797 (797) NM (13) 793 (806) NM
Net income (loss) $ (40,931) $ 1,554 $ (42,485) NM $ (44,371) $ (3,587) $ (40,784) 1137 %
*Comparisons between positive and negative numbers and with a zero are not meaningful.
** Percentage figures included in the below section have been calculated on the basis of rounded figures as presented and not on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in the table above or the condensed consolidated financial statements.
Revenues
Revenues increased by$9.5 million , or approximately 161%, from$5.9 million in the three months endedSeptember 30, 2021 to$15.4 million for the three months endedSeptember 30, 2022 . The increase was primarily attributable to a$8.0 million increase in Wellness revenue which was launched in the third quarter of 2021. The increase also includes a$2.9 million increase in Service revenue due to an increase in service fees stemming from increased Pet Parents engagement of Pet Caregivers ("PCGs") to provide pet care services as a result of increased return-to-office and travel trends, growth of Wag! Premium subscription revenues, and PCG services. The increase was partially offset by a one-time$0.2 million contra revenue charge associated with the issuance of Community shares in the third quarter of 2022 in connection with the Business Combination. Revenues increased by$25.8 million , or approximately 215%, from$12.0 million in the nine months endedSeptember 30, 2021 to$37.8 million for the nine months endedSeptember 30, 2022 . The increase was primarily attributable to a$20.3 million increase in Wellness revenue which was launched during the third quarter of 2021. The increase also includes a$8.6 million increase in Service revenue due to an increase in service fees stemming from increased Pet Parents engagement of Pet Caregivers to provide pet care services as a result of increased return-to-office and travel trends, growth of Wag! Premium subscription revenues, and PCG services. The increase was partially offset by a one-time$0.2 million contra revenue charge associated with the issuance of Community shares in the third quarter of 2022 in connection with the Business Combination.
Cost of Revenues, Excluding Depreciation and Amortization
Cost of revenues, excluding depreciation and amortization, increased by$0.1 million , or approximately 11%, from$0.9 million in the three months endedSeptember 30, 2021 to$1.0 million for the three months endedSeptember 30, 2022 . The increase was primarily attributable to a$0.1 million increase in background check costs driven by an increase in new Pet Caregivers together with a slight increase in payment processing fees driven by higher transaction volume. 38
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Cost of revenues, excluding depreciation and amortization, increased by$1.1 million , or approximately 58%, from$1.9 million in the nine months endedSeptember 30, 2021 to$3.0 million for the nine months endedSeptember 30, 2022 . The increase was primarily attributable to a$0.6 million increase in background check costs driven by an increase in new Pet Caregivers and a$0.5 million increase in payment processing fees driven by higher transaction volume and other related software costs.
Platform Operations and Support
Platform operations and support expenses increased by$3.1 million , or approximately 125%, from$2.5 million in the three months endedSeptember 30, 2021 to$5.6 million for the three months endedSeptember 30, 2022 . The increase was primarily attributable to a$0.5 million increase in employee personnel costs related to our expansion initiatives in the operations and technology areas and an increase in travel to support public company initiatives, offset by a decrease of$0.2 million in professional service costs arising from system and process optimization and reduction in the use of outside services. Additionally, there was a$2.8 million increase due to stock compensation expense related to Earnout Shares upon closing of the Business Combination. Platform operations and support expenses increased by$3.3 million , or approximately 42%, from$7.8 million in the nine months endedSeptember 30, 2021 to$11.0 million for the nine months endedSeptember 30, 2022 . The increase was primarily attributable to a$1.0 million increase in personnel-related compensation costs for our technology and operations teams, partially offset by a decrease of$0.1 million in facilities and operations and technology costs as well as a decrease of$0.3 million in professional service costs. Additionally, there was a$2.8 million increase due to stock compensation expense related to Earnout Shares upon closing of the Business Combination.
Sales and Marketing
Sales and marketing expenses increased by$8.1 million , or approximately 253%, from$3.2 million in the three months endedSeptember 30, 2021 to$11.3 million for the three months endedSeptember 30, 2022 . The increase was primarily attributable to a$4.7 million increase in partnerships, as we invest in launching with new partners. Additionally, there was a$1.3 million increase in personnel-related compensation costs for our marketing team, consultants, and advertising agency costs. Additionally, there was a$2.1 million increase due to stock compensation expense related to Earnout Shares upon closing of the Business Combination. Sales and marketing expenses increased by$19.7 million , or approximately 394%, from$5.0 million in the nine months endedSeptember 30, 2021 to$24.7 million for the nine months endedSeptember 30, 2022 . The increase was primarily attributable to a$10.6 million increase in partnerships, as we invest in launching with new partners, a$2.9 million increase in advertising expense,$4.1 million increase in personnel-related compensation costs for our marketing team, consultants, and advertising agency costs. Additionally, there was a$2.1 million increase due to stock compensation expense related to Earnout Shares upon closing of the Business Combination.
General and Administrative
General and administrative expenses increased by$21.8 million , or approximately 1090%, from$2.0 million in the three months endedSeptember 30, 2021 to$23.8 million for the three months endedSeptember 30, 2022 . The increase was primarily as a result of the one time expense incurred in connection with Earnout Shares of$19.0 million , and$1.8 million due to the issuance of Community Shares in connection with the Business Combination. For further information, see Note 3 - Business Co mbinations of Notes to the Condensed Consolidated Financial Statements. The remainder of the increase was due to$1.0 million in other administrative expenses incurred in order to operate as a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of the Nasdaq, increased legal, audit and consulting fees, and employee related expenses to attract and retain top talent. General and administrative expenses increased by$23.6 million , or approximately 475%, from$5.0 million in the nine months endedSeptember 30, 2021 to$28.5 million for the three months endedSeptember 30, 2022 . The increase was primarily attributable to the one time expense upon the Community Share issuance, stock compensation expense due to Earnout Shares, and other public company administrative expenses in the third quarter of 2022, as noted in the immediately preceding paragraph. 39
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Depreciation and Amortization
Depreciation and amortization expenses remained flat from 2021 to 2022. An
increase in amortization expense arising from the acquisition of CPI in
Depreciation and amortization expenses increased from$0.2 million in the nine months endedSeptember 30, 2021 to$0.4 million for the nine months endedSeptember 30, 2022 . The increase of$0.2 million , or approximately 100%, was primarily attributable to a$0.3 million increase in amortization expense arising from the acquisition of CPI, partially offset by a$0.1 million reduction in depreciation expense of property and equipment as a result of decreased leased office space with depreciating leasehold improvements.
Interest Income (Expense), net
Interest income (expense), net, changed from$9 thousand income in the three months endedSeptember 30, 2021 to$0.7 million expense for the three months endedSeptember 30, 2022 . The increase in expense was primarily attributable to interest related to the Blue Torch Financing and Warrant Agreement entered into in connection with the closing of the Business Combination with CHW. For further information on the debt and warrant agreement, refer to Note 9 - Debt of Notes to Condensed Consolidated Financial Statements.
Interest expense, net, increased from
Liquidity and Capital Resources
Since inception, and in line with our growth strategy, we have incurred operating losses and negative cash operating cash flows and have financed our operations through the sale of equity securities. For the nine months endedSeptember 30, 2022 and 2021, and for the years endedDecember 31, 2021 , and 2020, we had a net loss of$44.4 million ,$3.6 million ,$6.3 million ,$18.8 million , respectively. We expect that operating losses and negative operating cash flows could continue into the foreseeable future as we continue to invest in growing our business. Based upon our current operating plans, we believe that cash and equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months from the date of this quarterly report on Form 10-Q. However, these forecasts involve risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources earlier than we expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including, but not limited to, our ability to grow our revenue and the impact of the COVID-19 pandemic and other factors described in the section titled Risk Factors included within Item 1A of Part II of this Quarterly Report on Form 10-Q. We may seek additional equity or debt financing. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations could be adversely affected. Although we may need to repurchase shares pursuant to the Forward Purchase Agreements, we do not believe this to have an impact on our liquidity position. We placed$24.7 million in escrow at the closing of the Business Combination to secure our purchase obligations to the Investors under the Forward Purchase Agreements. If any Investor exercises its respective options, we will apply funds in escrow to purchase those shares. As these funds are held in escrow and recorded as restricted on our balance sheet, our business strategy will not be impacted in the event that we are required to purchase all or some requisite shares of stock pursuant to the Forward Purchase Agreement.
For proceeds, payments and additional financing arrangements arising from the Business Combination, please see Note 3 - Business Combinations for additional detail.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and real-estate leases for our office locations. In connection with the closing of the Business Combination inAugust 2022 , we entered into a credit agreement withBlue Torch Capital LP that provides us with up to$32 million of credit. Refer to Note 9 - Debt and Note 7 - Leases , included in Item 1 of 40
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Part I of this 10-Q, for further details, including interest and future principal payments and lease commitment details.
Cash Flows
The following table summarizes our cash flows for the periods indicated.
Nine Months Ended
September 30,
($ in thousands) 2022 2021
Net cash flows used in operating activities $ (3,578) $ (10,350)
Net cash flows (used in) provided by investing activities 1,952
4,956
Net cash flows provided by financing activities 51,524
2
Net change in cash, cash equivalents, and restricted cash
(5,392) Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$3.6 million , a decrease of$6.8 million from$10.4 million for the nine months endedSeptember 30, 2021 . The decrease in cash used was primarily due to an increase of$5.9 million in accounts payable, accrued expenses and other liabilities, operating lease liabilities, deferred revenue and other non- current liabilities, partially offset by a$2.5 million decrease in accounts receivable, and current and other assets. Additionally, there was a$3.4 million increase in net loss, excluding the impact of depreciation and stock-based compensation, and other non-cash items.
Investing Activities
The Company's investments are classified as available for sale and we invest in a diversified portfolio of investments, primarily short-termU.S. government and agency securities, money market funds, commercial paper, and corporate bonds. In addition, we limit the concentration of our investment in any particular security. Net cash from investing activities for the nine months endedSeptember 30, 2022 was$2.0 million , a decrease of$3.0 million from$5.0 million provided for the nine months endedSeptember 30, 2021 . The decrease was primarily due to$19.5 million less of proceeds received from the sale and maturities of investments, offset by$15.6 million of reduced purchases of investments as a direct reflection of a decrease in the Company's consolidated total investments atSeptember 30, 2022 .
Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2022 was$52 million , an increase of$52 million from$2 thousand for the nine months endedSeptember 30, 2021 . The increase in cash provided by financing activities is primarily due to cash received from the trust account, PIPE andBackstop Investors and the financing agreement withBlue Torch Capital LP ("Blue Torch") for a senior secured Credit Facility, partially offset by payment of transaction costs incurred by Wag! and CHW in connection with the Business Combination. Debt PPP Loan InAugust 2020 , the Company received loan proceeds of approximately$5.1 million from a financial institution pursuant to the Paycheck Protection Program (the "PPP Loan") as administered by theU.S. Small Business Administration (the "SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). InAugust 2021 , the Company applied for forgiveness of$3.5 million of the PPP Loan, and inSeptember 2021 , the SBA approved the Company's loan forgiveness application in the amount of$3.5 million . The term of the PPP Loan is five years with a maturity date ofAugust 2025 and contains a fixed annual interest rate of 1.00%. Principal and interest payments began inNovember 2021 .
For additional information regarding the PPP Loan, refer to Note 9 - Debt
of
Notes to Condensed Consolidated Financial Statements.
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Blue Torch Financing and Warrant Agreement
OnAugust 9, 2022 , Legacy Wag! entered into a financing agreement and warrant agreement withBlue Torch Finance, LLC (together with its affiliated funds and any other parties providing a commitment thereunder, including any additional lenders, agents, arrangers or other parties joined thereto after the date thereof, collectively, the "Debt Financing Sources"), pursuant to which, among other things, the Debt Financing Sources agreed to extend an approximately$32.17 million senior secured term loan credit facility (the "Credit Facility"). Legacy Wag! is the primary borrower under the Credit Facility, the Company is a parent guarantor and substantially all of the Company's existing and future subsidiaries are subsidiary guarantors. The Credit Facility is secured by a first priority security interest in substantially all assets of the Company and the guarantors.
For additional information regarding the Blue Torch financing arrangements, refer to Note 9 - Debt of Notes to Condensed Consolidated Financial Statements.
We do not have any off-balance sheet arrangements, as defined by applicable rules and regulations of theSEC , that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
While all of our significant accounting policies are described in more detail in
Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements in the notes to the unaudited condensed consolidated financial statements, the Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from
Contracts with its Customers. Through its Services offerings, the Company
principally generates Service revenue from service fees charged to PCGs for use
of the platform to discover pet service opportunities and to successfully
complete a pet care service to a pet parent. The Company also generates revenue
from subscription fees paid by pet parents for Wag! Premium, and fees paid by
PCGs to join the platform. Additionally, through its Wellness offerings, the
Company generates revenue through commission fees paid by third party service
partners in the form of 'revenue-per-action' or conversion activity defined in
our agreements with the third party service partner. For some of the Company's
arrangements with third party service partners, the transaction price is
considered variable, and an estimate of the transaction price is recorded when
the action occurs. The estimated transaction price used in the variable
consideration is based on historical data with the respective third-party
service partner and the consideration is measured and settled monthly.
The Company enters into terms of service with PCGs and pet parents to use the
platform ("Terms of Service Agreements"), as well as an Independent Contractor
Agreement ("ICA") with PCGs (the ICA, together with the Terms of Service
Agreements, the "Agreements"). The Agreements govern the fees the Company
charges the PCGs for each transaction. Upon acceptance of a transaction, PCGs
agree to perform the services that are requested by a pet parent. The acceptance
of a transaction request combined with the Agreements establishes enforceable
rights and obligations for each transaction. A contract exists between the
Company and the PCGs after both the PCGs and pet parent accept a transaction
request and the PCGs ability to cancel the transaction lapses. For Wag! Wellness
revenue, the Company enters into agreements with third party service partners
which define the action by a pet parent that results in the Company earning and
receiving a commission fee from the third-party service partner.
Wag!'s service obligations are performed, and revenue is recognized for fees
earned from PCGs related to the facilitation and completion of a pet service
transaction between the pet parent and the PCG through the use of our platform.
Revenue generated from the Company's Wag! Premium subscription is recognized on
a ratable
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basis over the contractual period, which is generally one month to one year depending on the type of subscription purchased by the pet parent. Unused subscription amounts are recorded as gift card and subscription liabilities on the condensed consolidated balance sheet. Revenue related to the fees paid by the PCG to join the platform are recognized upon processing of the applications. Wag! Wellness revenue performance obligation is completed, and revenue is recognized when an end-user completes an action or conversion activity.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to the valuation of intangible assets. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
Stock-Based Compensation
The Company has an equity incentive plan under which it grants equity awards, including stock options. The Company determines compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the expected term, and expected annual dividend yield. For all stock options granted, the Company calculates the expected term using the simplified method as it has limited historical exercise data to provide a reasonable basis upon which to otherwise estimate expected term, and the options have characteristics of "plain-vanilla" options. The risk-free interest rate is based on the yield available onU.S. Treasury zero-coupon issues similar in duration to the expected term of the stock-based award. Due to the limited trading history of the Company's common stock, the expected volatility assumption is generally based on volatilities of a peer group of similar companies whose share prices are publicly available. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own common stock price becomes available. The Company utilizes a dividend yield of zero, as it has no history or plan of declaring dividends on its common stock.
The Company generally recognizes compensation expense using a straight-line
amortization method over the respective service period for awards that are
ultimately expected to vest. Stock-based compensation expense for the nine
months ended
In connection with the Business Combination, Legacy Wag! stockholders and
certain members of management and employees of Legacy Wag! that held either a
share of common stock, a Legacy Wag! option or a Legacy Wag! RSU Award
(collectively "Eligible Company Equityholders") at the date of the Merger, have
the contingent right to Earnout Shares as more fully described in Note 3 -
Business Combinations . For Eligible Company Equityholders who were employees
or members of management immediately prior to the completion of the Merger, the
rights to the Earnout Shares fully vested on the Merger Date and represent a
separate award from their existing share-based payment award. In addition, the
rights of the Earnout awards are not dependent upon continued employment by the
employee or management with the Company in order to receive the Earnout shares
if the conditions of issuance are met in the future. The Company determined that
the market condition will not affect the term over which the related
compensation expense will be recorded because the employee is not required to be
employed at the time the market condition is achieved in order to vest in the
award. As such, all service conditions were met and, in accordance with ASC 718,
Compensation - Stock Compensation ("ASC
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718"), the company recorded a charge to stock compensation of$23.9 million on the Merger Date for the full fair value of the employee and management Earnout Shares awarded. Income Taxes The Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting basis and the tax basis of assets and liabilities result in a deferred tax asset, the Company evaluates the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that either some portion or the entire deferred tax asset will not be realized. The Company records a valuation allowance to reduce the deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. We regularly review the deferred tax assets for recoverability based on historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed. The Company recognizes a tax benefit from uncertain tax positions only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authorities' administrative practices and precedents. The tax benefits recognized from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being recognized upon settlement. The Company did not recognize any tax benefits from uncertain tax positions during the nine months endedSeptember 30, 2022 and 2021.
Accounting for Warrants
The Company accounts for warrants as either equity-classified or
liability-classified instruments based on an assessment of the instruments'
specific terms and applicable authoritative guidance in ASC 480 and ASC 815,
Derivatives and Hedging ("ASC 815"). The assessment considers whether the
instruments are free standing financial instruments pursuant to ASC 480, meet
the definition of a liability pursuant to ASC 480, and whether the instruments
meet all of the requirements for equity classification under ASC 815, including
whether the instruments are indexed to the Company's own common shares and
whether the instrument holders could potentially require "net cash settlement"
in a circumstance outside of the Company's control, among other conditions for
equity classification. This assessment, which requires the use of professional
judgment, is conducted at the time of warrant issuance and as of each subsequent
period end date while the instruments are outstanding. Management has concluded
that the Public Warrants and Private Placement Warrants issued pursuant to the
Business Combination qualify for equity accounting treatment. Additionally, the
Company considers its warrants ("Lender Warrants") issued in conjunction with
the Blue Torch Financing Arrangement (see Note 9 - Debt for additional
detail) to be equity classified since they do not meet the liability
classification criteria. For further detail on the Company's Warrants (Public,
Private and Lender), refer to Note 10 - Stockholders' Deficit and Mezzanine
Equity .
Forward Share Purchase Agreements
The Company accounts for the Forward Share Purchase Agreements ("FPAs"") as a
liability under ASC 480, Distinguishing Liabilities from Equity, because it
embodies an obligation to repurchase the Company's shares by paying cash.
Therefore, the option is classified as a current liability and is measured at
fair value on the Company's condensed consolidated balance sheets. The
unrealized gains and losses from changes in the fair value of the FPAs is
reflected in the Condensed Consolidated Statements of Operations.This liability
is subject to re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in our Condensed Consolidated Statement of
Operations.
In developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the financial statements.
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New Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies in the notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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