WINC, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited consolidated financial statements and related notes for the fiscal year endedDecember 31, 2021 , included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC onMarch 30, 2022 , and with the unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements" contained elsewhere in this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All references to years, unless otherwise noted, refer to our fiscal years, which end onDecember 31 . Unless the context otherwise requires, all references in this subsection to "we," "us," "our," "Winc" or the "Company" refer toWinc, Inc. and its consolidated subsidiaries.
Overview
We are a differentiated platform for growing Alcoholic Beverages brands, fueled by the joint capabilities of our data-driven brand development strategy paired with a true omni-channel distribution network. We believe our balanced platform is well-suited to gain market share and drive meaningful long-term growth in the Alcoholic Beverages market.Winc's mission is to become the leading brand builder within the Alcoholic Beverages industry through an omni-channel growth platform. As product innovators focused on building durable brands that consumers love, we have developed a proprietary process, called Ideate, Launch and Amplify, that has allowed us to consistently produce quality wine brands in a capital-efficient fashion. We believe this process is unique within the Alcoholic Beverages industry, incorporating the "Best of the New" and "Best of the Old" aspects of Alcoholic Beverages brand creation in a truly omni-channel fashion. The "Best of the New" is highlighted by our data-rich DTC relationships via theWinc digital platform. This data is a critical competitive advantage that we use to help shape the ideation and development of our brands. Our digitally native roots also provide us with a strong core competency in digital marketing and data analytics that allows us to interact in a more targeted and direct fashion with end-consumers and Amplify brands in ways the legacy Alcoholic Beverages companies have yet to consistently utilize. Our "Best of the Old" strategy is encompassed by our appreciation of the value creation potential and durable power of proprietary brand development, as well as the scale benefits that can be achieved by leveraging the legacy wholesale distribution channel, through which the vast majority of wine is still purchased. We view our omni-channel platform as highly complementary because it creates a positive feedback loop where incremental scale on either side of our platform begets scale and success on the other. We generate net revenues by building durable brands that consumers love. We offer high-quality products in all 50 states either through our DTC channel or the national distribution network in our wholesale channel. Our omni-channel approach allows us to create compelling order economics, differentiated product offerings, consumer-led brands, and a loyal consumer following. We seek to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility. We believe this distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products. Our integrated omni-channel presence provides meaningful benefits to our consumer which we believe is not easily replicated by our competitors. As we continue to execute on our omni-channel strategy, we have demonstrated success by growing net revenues, continuing to improve our online operational metrics, expanding our wholesale distribution, and increasing the efficiency of our brand development process. The following financial and operational results were achieved during the three months endedMarch 31, 2022 and 2021:
•
we grew net revenues by 5.7% to
•
wholesale net revenues increased 75.1% to
•
we expanded our retail accounts by 62.2% to 9,348 from 5,764 for the three
months ended
•
we generated a net loss of
•
our Adjusted EBITDA loss increased to
See the section titled "Non-GAAP Financial Measures" for information regarding Adjusted EBITDA, including a reconciliation to the most directly comparable financial measure prepared in accordance with GAAP.
24
--------------------------------------------------------------------------------Impact of COVID-19
The COVID-19 pandemic significantly accelerated consumer adoption of a wide variety of at-home delivery services, including in the Alcoholic Beverages sector. Beginning inMarch 2020 , we experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much ofthe United States in response to the COVID-19 pandemic. The growth in new consumer acquisition resulted in corresponding increases in "new consumer discount," resulting in lower DTC gross margins. This increased DTC demand continued through the first quarter of 2021. However, assuming positive trends relating to the pandemic continue, we believe the first quarter of 2021 was the last quarter of increased DTC demand as a result of COVID-19, and during the first quarter of 2022, we saw decreased demand in the DTC channel compared to the first quarter of 2021. Our wholesale net revenues declined in April and May of 2020 as a result of the pandemic and government measures to slow the spread of the COVID-19 pandemic. These restrictions included limited operating hours, reduced capacity at dining and other venues and decreased consumer interest in frequenting public gathering spaces. While it is difficult to quantify the full impact the COVID-19 pandemic had on the wholesale channel as a whole, we believe the rate of growth for our wholesale net revenues from 2020 through the first quarter of 2021 was impaired due to the restrictions noted above, specifically with respect to on-premise sales at venues such as restaurants and bars. We believe our first quarter 2022 wholesale net revenues, compared to the first quarter of 2021, benefited from the easing or lifting of COVID-19 restrictions. Although the global economy has begun to recover and the widespread availability of vaccines has encouraged greater economic activity, we are continuing to monitor the situation and we cannot predict for how long, or the ultimate extent to which, the pandemic may impact our operations, the markets in which we operate and consumer behavior.
Key Factors Affecting Our Performance and Growth
The Alcoholic Beverages market represents one of the largest total addressable market opportunities in the CPG landscape, and, within the Alcoholic Beverages market, the wine industry is a sizable market. We believe we are one of the few wine companies that is connecting with the next generation of consumers who prefer to shop online, and we expect that connection will lead to a significant and expanding market opportunity. With a strong portfolio of brands and driven sales and performance marketing teams, we believe we have the potential to seize a larger portion of theU.S. Alcoholic Beverages market. Our primary goal is to grow by building a portfolio of durable brands that consumers love. As we strengthen our portfolio of brands and increase our brand awareness, we believe that it will become easier to acquire DTC consumers and grow our wholesale business. Our DTC channel net revenues decreased by 6.7% for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . DTC represented 72.1% of our total net revenues for the three months endedMarch 31, 2022 . Our Wholesale channel net revenues grew 75.1% for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Wholesale represented 26.9% of our total net revenues for the three months endedMarch 31, 2022 . Our DTC channel growth slowed in 2021 as COVID-19 restrictions were eased or lifted, and we believe we will return to growth in the near future through an improved marketing mix, website optimization and development of new customer acquisition channels and branded websites. We believe wholesale net revenues will continue to increase as a percentage of total net revenues. Additionally, the significant growth within the Wholesale channel was fueled primarily by an increase in retail accounts, more of our products being sold at each retailer and an acceleration in the rate at which products sell at retail accounts. These factors were further amplified by ourMay 2021 purchase of certain assets ofNatural Merchants, Inc.
We believe the following factors and trends in our business have driven our recent growth and are expected to remain key drivers of our growth for the foreseeable future:
Brand Awareness and Loyalty
Our ability to promote and maintain brand awareness and loyalty is critical to our success. We believe we have a significant opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand marketing and performance marketing. We have made significant investments to strengthen our brand and generate awareness of our products through our marketing strategy, which includes brand marketing campaigns across various platforms, including email, digital, display, site, direct-mail, commercials, and social media, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our mobile application. We plan to continue to invest in our brand and performance marketing to help drive our future growth.
Innovation
Ideation, development and innovation are core elements underpinning our growth
strategy. The improvement of existing products and the introduction of new
products have been, and continue to be, integral to our growth. While we
launched an aggregate of 7 innovation brands during 2021 and 2020, we have made
significant investments in our product development capabilities, which should
allow us to iterate faster and more efficiently in the future. Our ability to
successfully Ideate, Launch and Amplify new products will depend on a variety of
factors, including our continued investment in innovation, integrated business
planning processes and capabilities.
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--------------------------------------------------------------------------------Execution of Omni-Channel Strategy
The continued execution of our omni-channel strategy impacts our financial performance. We intend to continue leveraging our marketing strategy to grow our DTC channel by driving increased consumer traffic to our digital platform. We believe our digital platform is a valuable tool for creating direct connections with our consumers, influencing brand experience and understanding consumer preference and behavior. Our wholesale channel is focused on relationships with leading national distributors and retailers that have broadened our consumer reach, raised our brand awareness and allowed us to achieve additional scale. We aim to strengthen these relationships to further increase their benefit. Our ability to execute this strategy will depend on a number of factors, such as distributors' and retailers' satisfaction with the sales of our products, our ability to develop high-quality and culturally relevant brands and our introduction of innovative products.
Going Concern
Our operations have been financed to date by a combination of issuances and sales of capital stock, borrowings under our credit facilities and cash generated from operations. Our primary cash needs have been to fund working capital requirements, debt service payments, and operating expenses. As ofMarch 31, 2022 , we had cash on hand of$4.3 million , inventory of$23.1 million , total current assets of$37.7 million , and total current liabilities of$28.1 million . As ofMarch 31, 2022 ,$4.0 million of the total$7.0 million BoC Line of Credit also remained undrawn and we had no outstanding term loan debt. Subsequent toMarch 31, 2022 , we borrowed an additional$2.0 million on the BoC Line of Credit, which matures onJune 30, 2022 . InMay 2022 , we entered into a non-binding term sheet with a lender to provide a new credit facility providing a$5.0 million line of credit. In addition, we are in discussions to extend the maturity date of the BoC Line of Credit. However, any definitive agreement as to either process remains subject to further negotiations and there can be no assurance that either the maturity date extension or the new credit facility will ultimately be agreed and become available to us or that, if a definitive agreement is reached, the terms will be more favorable to us than our prior or existing indebtedness. If we are unable to extend the maturity date of the BoC Line of Credit or obtain alternative debt financing, there are no assurances that we will be able to repay the BoC Line of Credit at maturity. These conditions raise substantial doubt about our ability to continue as a going concern.
Key Financial and Operating Metrics
In addition to the measures presented in our financial statements, we use the
following key financial and operational metrics to evaluate our business,
measure our performance, develop financial forecasts and make strategic
decisions:
Three Months Ended March 31,
2022 2021
in thousands, except for average order
value and retail accounts
DTC
DTC net revenues $ 13,311 $ 14,273
DTC gross profit 5,639 6,479
Average order value 75.27 67.37
Wholesale
Wholesale net revenues $ 4,963 $ 2,835
Wholesale gross profit 1,743 1,153
Retail accounts 9,348 5,764
Consolidated
Net (loss) income margin -23.0 % 3.4 %
Adjusted EBITDA¹ $ (3,110 ) $ (432 )
Adjusted EBITDA margin¹ -16.8 % -2.5 %
___________________
(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are
presented for supplemental informational purposes only and should not be
considered as alternatives or substitutes to financial information presented in
accordance with GAAP. See the section titled "Non-GAAP Financial Measures" for
additional information and a reconciliation of net (loss) income to Adjusted
EBITDA and net (loss) income margin to Adjusted EBITDA margin.
Average Order Value
We believe the continued growth of our average order value, or AOV, demonstrates both our increasing value proposition for our consumer base and their increasing affinity for our premium brands. We define AOV as the sum of DTC net revenues, divided by the total orders placed in that period. Total orders are the summation of all completed individual purchase transactions in a given period. AOV may fluctuate as we expand into and increase our presence in additional product categories. We increased AOV by 11.7%, to$75.27 from$67.37 for the three months endedMarch 31, 2022 and 2021, respectively, as a result of ongoing initiatives aimed at optimizing customer activity. AOV in the three months endedMarch 31, 2022 was positively impacted by a 19.0% decrease in first time orders, which contributed to the increased AOV because first time orders offer significant discounts. 26 --------------------------------------------------------------------------------
Retail Accounts
Retail account growth is a key metric for our continued growth in wholesale as it is a measure of how widely our products are distributed. The metric represents the number of retail accounts in which we sold our products in a given period.
We expanded our retail accounts by 62.2% to 9,348 from 5,764 for the three
months ended
Components of Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) DTC and (ii) Wholesale.
Net Revenues
We generate net revenues from the following revenue streams:
DTC - We define DTC net revenues as net revenues generated from consumers through our monthly membership or individual orders on our digital platform. Members are charged a monthly membership and are awarded credits in the same monetary value. Members can then utilize their credits to purchase our brand wines at their discretion. Members have the option to skip monthly charges, accumulate credits or use credits when purchased so that the membership is tailored to everyone's preference and lifestyle. Additionally, we have dedicated brand websites that generate orders and net revenues for our core brands. Breakage revenue related to prepaid credits and gift cards is reported in DTC net revenues. Breakage revenue is recognized based on historical redemption rates of payments received in advance of performance. We determined that a percentage of prepaid credits goes unredeemed. We recognize breakage proportionally with credit redemptions in net revenues, or when redemption is remote.
Wholesale - We define wholesale net revenues as net revenues generated from
wholesale distributors, state-operated licensees and directly to retail
accounts. Our wholesale channel success is based on long-standing relationships
with a highly developed network of distributors in all
Other Non-Reportable - We also generate an immaterial amount of net revenues from a non- reportable segment comprised of a small business line focused on testing new products to determine if they have long-term viability prior to integration into the DTC and/or wholesale distribution channels. Cost of Revenues Cost of revenues consists of: •
wine-related inputs, such as grapes and semi-finished bulk wine;
•
bottling materials (bottles, corks, and labeling materials);
•
boxes/packaging;
•
fulfillment costs (costs attributable to receiving, inspecting and warehousing inventories, picking, packaging, and preparing orders for shipment, including the variable costs of employing hourly employees and temporary staff provided by agencies at our fulfillment centers);
•
credit card fees related to DTC transactions;
•
inbound and outbound freight;
• storage; and • barrel depreciation.
Gross Profit and Gross Margin
We define gross profit as net revenues less cost of revenues as discussed above.
Gross margin is gross profit expressed as a percentage of net revenues. Our
gross margin has fluctuated historically and may continue to fluctuate from
period to period based on a number of factors, including the timing and mix of
the product offerings we sell, the timing and mix of sales through our DTC and
wholesale channels, and our ability to reduce costs, including with respect to
inflation and supply chain factors, in any given period. For example, we may
choose to prioritize certain portfolios of product offerings that have lower
margins but offer other benefits such as increased inventory turnover per year
and beneficial working capital dynamics. Additionally, as our portfolio includes
more subscale, high-growth brands, gross margin may be negatively impacted until
economies of scale can be achieved.
27
--------------------------------------------------------------------------------DTC Gross Profit
We define DTC gross profit as DTC net revenues less DTC cost of revenues. DTC gross margin is DTC gross profit expressed as a percentage of DTC net revenues. DTC gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our DTC channels, and our ability to reduce costs, in any given period.
Wholesale Gross Profit
We define wholesale gross profit as wholesale net revenues less wholesale cost of revenues. Wholesale gross margin is gross profit expressed as a percentage of wholesale net revenues. Wholesale gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our wholesale network, and our ability to reduce costs, in any given period. Operating Expenses
Operating expenses primarily consist of marketing, personnel, and general and administrative expenses.
•
Our marketing expenses consist primarily of costs incurred to acquire new consumers, retain existing consumers, build our brand awareness through various offline and online paid advertising channels, including television, digital and social media, direct mail, radio and podcasts, email, brand activations, and strategic brand partnerships.
•
Our personnel expenses consist primarily of payroll and related expenses, including stock- based compensation.
•
Our general and administrative expenses consist of: (i) costs associated with general corporate functions, such as depreciation expense and rent relating to facilities and equipment and insurance expense; (ii) professional fees and other general corporate costs; (iii) travel-related expenses; and (iv) customer services costs, such as third-party staffing to respond to inquiries from consumers. We anticipate our operating expenses will decrease as a percentage of revenue over the remainder of 2022 as a result of business growth and continued cost containment to move towards profitability. We believe we have sufficient personnel to support public company operations and scale the business for future growth. Contract Liability Contract liabilities, also referred to as deferred revenues, arise as a result of the Winc.com subscription model. Deferred revenues represent payments received from consumers in advance of ordering goods and are referred to as "credits". Winc.com members are charged a monthly fee and are awarded credits equivalent to the monetary value. Members are then able to utilize member credits at their leisure to place an order on our website. Revenue is recognized when the member takes control of the ordered goods, at delivery. Credits do not expire or lose value over periods of inactivity. We are not required by law to escheat the value of unredeemed credits.
Other Income and Expense
Other income and expense consist primarily of interest expense associated with our credit facilities, rental income from sublease agreements, gains from the forgiveness of debt, and changes in fair value of warrants that were issued in connection with past financing transactions. See "- Liquidity and Capital Resources - Credit Facilities."
Results of Operations
Comparison of the Three Months Ended
The following table summarizes the results of operations for our DTC reportable
segment for the three months ended
Three Months Ended March 31,
2022 2021 Change $ Change %
DTC net revenues $ 13,311 $ 14,273 $ (962 ) -6.7 %
DTC cost of revenues 7,672 7,794 (122 ) -1.6 %
DTC gross profit $ 5,639 $ 6,479 $ (840 ) -13.0 %
DTC Net Revenues
DTC net revenues for the three months ended March 31, 2022 was $13.3 million ,
compared to $14.3 million for the three months ended March 31, 2021 , a decrease
of $1.0 million or 6.7%. This decrease was primarily driven by a 25.1% decrease
in order volume period over period, partially offset by a 11.7% increase in AOV.
The decrease in order volume was driven by the decrease in digital marketing
since the first quarter of 2021. During the three months ended March 31, 2022 ,
we had a 19.0% decrease in first time orders, which contributed to the increased
AOV because first time orders offer significant discounts. Year-over-year DTC
comparisons to 2021 remain challenging given the high growth in 2021 and rising
customer acquisition costs, but we anticipate a return to growth in net DTC
28
--------------------------------------------------------------------------------
revenues over the coming quarters through an improved marketing mix, website
optimization and development of new customer acquisition channels and branded
websites.
DTC Cost of Revenues
DTC cost of revenues for the three months ended March 31, 2022 was $7.7 million ,
compared to $7.8 million for the three months ended March 31, 2021 , a decrease
of $0.1 million or 1.6%. The decrease in DTC cost of revenues is primarily due
to the decrease in DTC net revenues. DTC cost of revenues as a percentage of DTC
net revenues increased approximately 300 basis points, resulting in decreased
margin. This change is primarily due to increased excise tax costs period over
period as credits were utilized for the three months ended March 31, 2021 , as
well as increased logistics related expenses.
DTC Gross Profit
Changes in DTC gross profit are a function of the changes in DTC net revenues and DTC cost of revenues discussed above. DTC gross profit for the three months endedMarch 31, 2022 was$5.6 million , compared to$6.5 million for the three months endedMarch 31, 2021 , a decrease of$0.8 million or 13.0%. The following table summarize the results of operations for our wholesale reportable segment for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Change $ Change % Wholesale net revenues$ 4,963 $ 2,835 $ 2,128 75.1 % Wholesale cost of revenues 3,220 1,682 1,538 91.4 % Wholesale gross profit$ 1,743 $ 1,153 $ 590 51.2 % Wholesale Net Revenues Wholesale net revenues for the three months endedMarch 31, 2022 was$5.0 million , compared to$2.8 million for the three months endedMarch 31, 2021 , an increase of$2.1 million or 75.1%. Growth in wholesale net revenues was attributable to a$0.6 million increase in organic growth of our brands sales through new retail accounts, the purchase of certain assets fromNatural Merchants, Inc. , and increased sales to existing distributors.
During the three months ended
Wholesale Cost of Revenues
Wholesale cost of revenues for the three months endedMarch 31, 2022 was$3.2 million , compared to$1.7 million for the three months endedMarch 31, 2021 , an increase of$1.5 million or 91.4%. The increase in wholesale cost of revenues was primarily attributable to the increase in wholesale net revenues for the period, as well as a shift in product mix to an increased percentage of sales of imported wines with higher freight costs and lower overall margins but that offer other benefits such as increased inventory turnover per year and beneficial working capital dynamics. This increase was partially offset by$0.3 million in lower product costs due to strategic sourcing.
Wholesale Gross Profit
Changes in wholesale gross profit are a function of the changes in wholesale net revenues and wholesale cost of revenues discussed above. Wholesale gross profit for the three months endedMarch 31, 2022 was$1.7 million compared to$1.2 million for the three months endedMarch 31, 2021 , an increase of$0.6 million or 51.2%. The following table summarizes the results of operations for our other non-reportable segments for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Change $ Change % Other non-reportable net revenues $ 183 $ 357$ (174 ) -48.7 % Other non-reportable cost of revenues 122 150 (28 ) -18.7 %
Other non-reportable gross profit $ 61 $ 207
Other Non-Reportable Net Revenues
Other non-reportable net revenues for the three months endedMarch 31, 2022 was$0.2 million , compared to$0.4 million for the three months endedMarch 31, 2021 , a decrease of$0.2 million or 48.7%. The decrease in other net revenues was primarily attributable to$0.3 million lower net revenues ofWonderful Wine Company due to decreased marketing spend as advertising priorities shifted during the period, partially offset by a sale of bulk wine inventory. 29 --------------------------------------------------------------------------------
Other Non-Reportable Cost of Revenues
Other non-reportable cost of revenues for the three months endedMarch 31, 2022 was$0.1 million , compared to$0.2 million for the three months endedMarch 31, 2021 , a decrease of$0.1 million or 18.7%. The decrease in other non-reportable cost of revenues was entirely driven by the decrease in other non-reportable net revenues discussed above.
Other Non-Reportable Gross Profit
Changes in other non-reportable gross profit are a function of the changes in other non-reportable net revenues and other non-reportable cost of revenues discussed above. Other non-reportable gross profit for the three months endedMarch 31, 2022 was$0.1 million compared to$0.2 million for the three months endedMarch 31, 2021 , a decrease of$0.1 million or 70.5%.
Operating Expenses
The following table identifies our operating expenses and other income and expense items for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Change $ Change % Marketing $ 2,644$ 4,105 $ (1,461 ) -35.6 % Personnel 4,208 2,416 1,792 74.2 % General and administrative 4,833 2,152 2,681 124.6 % Production and operation 150 34 116 341.2 % Creative development 80 41 39 95.1 % Total operating expenses$ 11,915 $ 8,748 Interest expense (23 ) (140 ) 117 -83.6 % Expense from change in fair value of - (21 ) 21 100.0 % warrant liabilities Other income, net 270 296 (26 ) -8.8 % Gain on debt forgiveness from Paycheck - 1,364 (1,364 ) -100.0 % Protection Program note payable Total other income, net $ 247 $
1,499
Income tax expense (benefit) 16 (3 ) 19 -633.3 % Marketing Expenses Marketing expenses decreased by$1.5 million or 35.6% to$2.6 million for the three months endedMarch 31, 2022 , from$4.1 million for the three months endedMarch 31, 2021 . The decrease in marketing expense was primarily driven by a$1.6 million decrease in digital advertising costs during the three months endedMarch 31, 2022 , as we continue to focus marketing efforts to maintain payback targets and aim to achieve profitability.
Personnel Expenses
Personnel expenses increased by$1.8 million or 74.2%, to$4.2 million during the three months endedMarch 31, 2022 , from$2.4 million during the three months endedMarch 31, 2021 . This increase was primarily attributable to a$0.8 million increase in stock-based compensation expense and$0.9 million attributable to increased headcount to support functions as we grow our business and operate as a public company. We expect personnel expenses to stabilize during the remainder of 2022 but remain higher than 2021 in absolute dollars, primarily due to increased headcount in late 2021 and early 2022 to support public company processes. We believe we have sufficient personnel to support public company operations and continue to scale our business.
General and Administrative Expenses
General and administrative expenses increased by$2.7 million or 124.6%, to$4.8 million during the three months endedMarch 31, 2022 , from$2.2 million during the three months endedMarch 31, 2021 . This increase was primarily attributable to$1.2 million related to increased professional services fees, including accounting, investor relations, legal and consulting, as well as$0.8 million in insurance expenses associated with being a public company. Other increases in general and administrative expenses include rent related costs of$0.2 million , travel of$0.1 million and depreciation of$0.2 million . We expect general and administrative expenses to stabilize or decline during the remainder of 2022 but remain higher than 2021 in absolute dollars, primarily due to a full year of being a public company. 30 --------------------------------------------------------------------------------
Change in Fair Value of Warrant Liabilities
The warrants were remeasured as ofMarch 31, 2021 , but subsequent to the IPO, they were no longer classified as liabilities and remeasured and therefore, there is no remeasurement as ofMarch 31, 2022 . Refer to Note 10 in our condensed consolidated financial statements as of and for the three months endedMarch 31, 2022 included elsewhere in this quarterly report for further information.
Liquidity and Capital Resources
Our operations have been financed to date by a combination of issuances and sales of capital stock, borrowings under our credit facilities and cash generated from operations. Our primary cash needs have been to fund working capital requirements, debt service payments, and operating expenses. As ofMarch 31, 2022 , we had cash on hand of$4.3 million , inventory of$23.1 million , total current assets of$37.7 million , and total current liabilities of$28.1 million . As ofMarch 31, 2022 ,$4.0 million of the total$7.0 million BoC Line of Credit also remained undrawn and we had no outstanding term loan debt. Subsequent toMarch 31, 2022 , we borrowed an additional$2.0 million on the BoC Line of Credit, which matures onJune 30, 2022 . Our operating lease obligations of$6.4 million relate to our facilities under long-term operating leases, which will expire on varying dates throughFebruary 2033 . As part of our acquisition of certain assets ofNatural Merchants, Inc. , up to$4.0 million of cash payments are contingent upon achieving certain performance targets during 2021 and 2022, which we estimate we will pay to the seller$1.5 million and$1.8 million inJune 2022 and 2023, respectively. InMay 2022 , we entered into a non-binding term sheet with a lender to provide a new credit facility providing a$5.0 million line of credit. In addition, we are in discussions to extend the maturity date of the BoC Line of Credit. However, any definitive agreement as to either process remains subject to further negotiations and there can be no assurance that either the maturity date extension or the new credit facility will ultimately be agreed and become available to us or that, if a definitive agreement is reached, the terms will be more favorable to us than our prior or existing indebtedness. If we are unable to extend the maturity date of the BoC Line of Credit or obtain alternative debt financing, there are no assurances that we will be able to repay the BoC Line of Credit at maturity. These conditions raise substantial doubt about our ability to continue as a going concern. Management believes it will continue to require third-party financing to support future operations until the Company itself achieves profitability. However, there can be no assurance that projected revenue growth and improvement in operating results will occur or that we will successfully implement our plans. In the event cash flow from operations and borrowings are not sufficient, additional sources of financing, such as equity offerings, will be required in order to maintain the Company's current and planned future operations.
Issuances of Stock
InNovember 2021 , we completed our IPO through an underwritten sale of 1,692,308 shares of our common stock at a price of$13.00 per share. The aggregate net proceeds from the offering after deducting underwriting discounts and commissions and other offering expenses, were approximately$17.7 million .
Concurrent with the IPO, all then-outstanding shares of our redeemable convertible preferred stock outstanding were automatically converted into an aggregate of 8,395,808 shares of common stock and were reclassified into permanent equity. Following the IPO, there were no shares of redeemable convertible preferred stock outstanding.
Credit Facilities
Banc of California
InDecember 2020 , we entered into a credit agreement, or the BoC Credit Agreement, withPacific Mercantile Bank (subsequently acquired by Banc of California inOctober 2021 ) for a new$7.0 million line of credit, or the BoC Line of Credit. The BoC Line of Credit bears interest at a variable annual rate equal to 1.25% plus the Prime Rate. We had an outstanding balance of$3.0 million and zero under the BoC Line of Credit as ofMarch 31, 2022 andDecember 31, 2021 , respectively. The BoC Line of Credit matures onJune 30, 2022 .
InDecember 2017 , we entered into a loan and security agreement, or the Multiplier LSA, withMultiplier Capital II, LP , or Multiplier, for a term loan of$5.0 million , all of which was disbursed to us at the time of execution. While outstanding, the loan bore interest at a variable annual rate equal to the greater of 6.25% above the Prime Rate (as defined in the loan and security agreement), with a minimum interest rate of 11.5% per annum and a maximum interest rate of 14.0% per annum. The loan was secured by all of our assets. InNovember 2021 , we repaid the remaining outstanding principal and interest of$1.2 million , and the Multiplier LSA was terminated. In connection with this transaction, we recognized a loss on early extinguishment of debt of$0.1 million in the fourth quarter of 2021.
Paycheck Protection Program Loan
InApril 2020 , we received a$1.4 million loan fromWestern Alliance Bank under the Paycheck Protection Program, or PPP, to assist in maintaining payroll and operations through the period impacted by the COVID-19 pandemic. We applied for and were granted loan forgiveness inMarch 2021 by utilizing the funds in accordance with defined loan forgiveness guidance issued by the government. 31 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Three Months Ended March 31,
2022 2021
Net cash used in operating activities
(322 ) (112 )
Net cash provided by financing activities 3,000 13,062
Net (decrease) increase in cash $ (611 ) $
7,941
Cash Flows from Operating Activities
Operating cash flow is derived by adjusting our net loss for non-cash operating items, such as depreciation and amortization, provision for doubtful accounts, deferred income tax benefits or expenses, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. Cash flows used in operating activities resulted in net outflows of$3.3 million and$5.0 million for the three months endedMarch 31, 2022 and 2021, respectively. Changes in operating assets and liabilities resulted in outflows of$0.2 million for the three months endedMarch 31, 2022 compared to$4.5 million for the three months endedMarch 31, 2021 . This decrease was primarily driven by an increase in cash spent on inventory to meet demand, partially offset by timing of settling accounts payable and accrued liabilities.
Cash Flows from Investing Activities
Cash used in investing activities was$0.3 million and$0.1 million for the three months endedMarch 31, 2022 and 2021, respectively. Investing cash flows for the three months endedMarch 31, 2022 and 2021 included$0.3 million and$0.1 million for purchases of property and equipment, respectively.
Cash Flows from Financing Activities
Cash flows from financing activities resulted in net inflows of$3.0 million for the three months endedMarch 31, 2022 and net inflows of$13.1 million for the three months endedMarch 31, 2021 . Financing cash flows for the three months endedMarch 31, 2022 included$3.0 million in borrowings on the BoC Line of Credit. Financing cash flows for the three months endedMarch 31, 2021 included$13.5 million in proceeds for the issuance of preferred stock and warrants offset by$0.4 million for repayments of the Multiplier Term Loan.
Non-GAAP Financial Measures
Our management believes Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts and other interested parties because these measures can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors and other interested parties to evaluate and assess performance. We define Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, stock-based compensation expense and other items we believe are not indicative of our operating performances, such as gain or loss attributable to the change in fair value of warrants. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net revenues. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations that are necessary to run our business. Some of these limitations include:
•
Adjusted EBITDA and Adjusted EBITDA margin do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
•
Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for our working capital needs;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and
•
Adjusted EBITDA and Adjusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures.
Other companies, including other companies in our industry, may not use such
measures or may calculate the measures differently than as presented in this
Quarterly Report, limiting their usefulness as comparative measures.
A reconciliation of net loss to Adjusted EBITDA and net loss margin to Adjusted
EBITDA margin is set forth below (dollars in thousands). Adjusted EBITDA margin
is defined as Adjusted EBITDA divided by net revenues (in thousands).
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Three Months Ended March 31,
2022 2021
Net (loss) income $ (4,241 ) $ 593
Interest expense 23 140
Income tax expense (benefit) 16 (3 )
Depreciation and amortization expense 270 109
EBITDA $ (3,932 ) $ 839
Stock-based compensation 822 72
Gain on debt forgiveness from Paycheck Protection - (1,364 )
Program note payable
Change in fair value of warrant liabilities - 21
Adjusted EBITDA $ (3,110 ) $ (432 )
Net (loss) income margin -23.0 % 3.4 %
Adjusted EBITDA margin -16.8 % -2.5 %
Critical Accounting Policies and Significant Judgments and Estimates
There have been no significant changes to our critical accounting policies from our disclosure reported in "Critical Accounting Policies and Significant Judgements and Estimates" in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSEC onMarch 30, 2022 . We believe that the assumptions and estimates associated with fair value of financial instruments, fair value of acquired assets, revenue recognition and stock-based compensation have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting estimates.
Recent Accounting Pronouncements
See "New Accounting Pronouncements" in Note 2 of the notes to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for recent accounting pronouncements.
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--------------------------------------------------------------------------------Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" as defined in the JOBS Act. For as long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, on the frequency of the advisory vote on executive compensation, and on any golden parachute payments not previously approved. In addition, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to utilize this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. As described in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report, we have early adopted accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. We expect to use the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i)December 31, 2026 , (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion , (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700 million as of the last business day of the second fiscal quarter of such year or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than$250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than$100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than$700 million measured on the last business day of our second fiscal quarter.
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