Wag! Group Co.（「Wag!」，「Wag」，「公司」，「我們」或「我們的」），前身爲CHW收購公司（「CHW」），在特拉華州註冊，總部位於加利福尼亞州舊金山。該公司開發並支持通過網站和移動應用程序（「平台」或「市場」）提供的專有技術，使最終用戶例如寵物家長能夠與獨立服務和產品提供者連接，以獲取服務和產品。該公司在美國運營。
2. 重要會計政策
報告範圍
公司的未經審計的簡明合併中期基本報表已根據證券交易委員會（"SEC"）法規S-X第10條的規定編制。因此，如法規S-X第10條所允許的，未包含美國普遍接受的會計原則（"U.S. GAAP"）對完整基本報表所要求的所有信息。截至2023年12月31日的簡明合併資產負債表是根據該日期的審計基本報表得出的，並未包含法規S-X第10條所允許的U.S. GAAP所要求的所有披露。截止2024年9月30日的公司的未經審計的簡明合併基本報表以及截至2024年和2023年9月30日的三個月和九個月的報表包括Wag! Group Co.及其所有子公司。管理層認爲，附帶的基本信息包含所有的調整，包括正常的經常性調整，這些調整對公正陳述截止2024年9月30日及2024年和2023年截至9月30日的公司的未經審計的簡明合併基本報表是必要的。這些未經審計的簡明合併基本報表應與公司截至2023年12月31日的年度報告（"2023 10-K"）一起閱讀。截至2024年和2023年9月30日的三個月和九個月的經營結果，並不一定代表預計在2024年12月31日結束的年度可能取得的結果。
Judgment is required in determining whether the Company is the principal or agent in transactions with Pet Caregivers and Pet Parents. The Company evaluates the presentation of revenues on a gross or net basis based on whether the Company controls the service provided to the Pet Parent and is the principal (i.e., “gross”), or whether the Company arranges for other parties to provide the service to the Pet Parent and is an agent (i.e. “net”).
The Company’s role in a transaction on the platform is to facilitate Pet Caregivers finding, applying, and completing a successful pet care service for a Pet Parent. The Company has concluded it is the agent in transactions with Pet Caregivers and Pet Parents because, among other factors, the Company’s role is to facilitate pet service opportunities; it is not responsible for and does not control the delivery of pet services provided by the Pet Caregivers to the Pet Parents.
Gift Cards
The Company sells gift cards that can be redeemed by Pet Parents through the platform. Proceeds from the sale of gift cards are deferred and recorded as contract liabilities in Deferred revenue within the Company’s condensed consolidated balance sheets until Pet Parents use the card to place orders on our platform. When gift cards are redeemed, revenue is recognized on a net basis as the difference between the amounts collected from the purchaser less amounts remitted to Pet Caregivers. Unused gift cards are included in Deferred revenue within the Company’s condensed consolidated balance sheets.
The Company recognizes breakage revenue based on historical redemption patterns.
Incentives
The Company offers discounts and promotions to encourage use of the Company’s platform. These promotions are generally pricing actions in the form of discounts that reduce the price Pet Parents pay Pet Caregivers for services. These promotions result in a lower fee earned by the Company from the Pet Caregiver. Accordingly, the Company records the cost of these promotions as a reduction of revenues. Discounts on services offered through our subscription program are also recorded as a reduction of revenues.
Loss Per Share
The Company follows the two-class method when computing loss per share when shares issued meet the definition of participating securities. The two-class method determines loss per share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
For periods in which the Company reports net losses, diluted loss per share is the same as basic loss per share because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
3. Business Combination with CHW
On August 9, 2022 (the “Merger Date”), Wag! Labs, Inc. (“Legacy Wag!”), CHW Acquisition Corporation (“CHW”), and CHW Merger Sub, Inc. (“Merger Sub”) pursuant to the terms of the Business Combination Agreement and Plan of Merger (the “CHW Business Combination Agreement”) dated February 2, 2022, completed the business combination of Legacy Wag! and CHW which was effected by the merger of Merger Sub with and into Legacy Wag!, with Legacy Wag! surviving the Merger as a wholly-owned subsidiary of CHW (the “Merger,” and, together with the other transactions contemplated by the CHW Business Combination Agreement, the “CHW Business Combination”). Upon completion of the Merger on August 9, 2022, following the approval at the extraordinary general meeting of the stockholders of CHW held on July 28, 2022 (the “Special Meeting”), the Company changed its name to Wag! Group Co. and effectively assumed all of CHW’s material operations.
For more information regarding the CHW Business Combination, refer to Note 3, Business Combination with CHW, to the Consolidated Financial Statements included in the 2023 10-K.
In connection with the CHW 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 at the date of the Merger have the contingent right to Earnout Shares. The aggregate number of Earnout Shares and Management Earnout Shares is 10,000,000 and 5,000,000 shares of Wag! common stock, respectively. The Earnout Shares will be issued only if certain Wag! share price conditions are met over a three-year period from the Merger Date. The Earnout Shares are subject to the occurrence of certain triggering events based on a three-year period from the Merger Date as defined in the CHW Business Combination Agreement as:
1.5,000,000 shares are earned if the stock price of the Company is or exceeds $12.50 for 20 out of any 30 consecutive trading days (“Triggering Event I”)
2.5,000,000 shares are earned if the stock price of the Company is or exceeds $15.00 for 20 out of any 30 consecutive trading days (“Triggering Event II”); and
3.5,000,000 shares are earned if the stock price of the Company is or exceeds $18.00 for 20 out of any 30 consecutive trading days (“Triggering Event III”) (collectively, the “Triggering Events”).
Additionally, if there is a change of control transaction, the agreed upon selling price of the Company on a per share basis, would be the fair value of the shares inclusive of the resulting triggered Earnout Shares upon consummation of the proposed transaction. The per share price in a change in control would be used to determine whether the Triggering Events have been met, and depending on the per share price, a certain number of shares will be issued.
The Earnout Shares and Management Earnout Shares are classified as equity transactions at initial issuance and at settlement when and if the triggering conditions are met. The Earnout Shares are equity-classified since they do not meet the liability classification criteria outlined in FASB ASC Topic 480, Distinguishing Liabilities from Equity, and are both (i) indexed to the Company’s own shares and (ii) meet the criteria for equity classification. Until the shares are issued upon a Triggering Event, the Earnout Shares are not included in shares outstanding. As of the date of the CHW Business Combination, the Earnout Share awards had a total fair value of $23.9 million determined using a Monte Carlo fair value methodology in each of the $12.50, $15.00, and $18.00 Earnout tranches multiplied by the number of Earnout Shares allocated to each individual pursuant to the calculation defined in the CHW Business Combination Agreement.
4. Fair Value Measurements
The following tables provide information about the Company’s financial instruments that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such values as of September 30, 2024 and December 31, 2023:
Amortization expense related to customer relationships and licenses, media brand, developed technology, trademarks, and pharmacy board licenses is recorded in depreciation and amortization within the Company’s condensed consolidated statements of operations. Amortization expense of intangible assets with determinable lives was $0.5 million and $0.4 million for the three months ended September 30, 2024 and 2023, respectively, and $1.6 million and $1.1 million for the nine months ended September 30, 2024 and 2023, respectively.
The timing of Services revenue recognition may differ from the timing of invoicing to or collections from customers. The Company’s contract liabilities balance, which is included in Deferred revenue within the Company’s condensed consolidated balance sheets, is primarily comprised of unredeemed gift cards, prepayments received from consumers for Wag! Premium subscriptions, and certain consumer credits for which the revenue is recognized over time as they are used for services on its platform. The contract liabilities balance was $1.8 million and $1.8 million as of September 30, 2024 and December 31, 2023, respectively. Revenues recognized related to the Company’s contract liabilities as of the beginning of the year was $0.2 million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively, and $0.9 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively.
7. Long-Term Debt
Paycheck Protection Program Loan
On August 5, 2020, the Company received loan proceeds of approximately $5.1 million from a financial institution pursuant to the Paycheck Protection Program (the “PPP Loan”) established by the Coronavirus Aid, Relief, and Economic Security Act, of which $3.5 million was subsequently forgiven. The PPP Loan matures on August 5, 2025 and bears interest at a fixed rate of 1.00%. Principal and interest payments are payable monthly.
During the nine months ended September 30, 2024 and 2023, the Company repaid a total amount of $0.3 million and $0.3 million, respectively, on amounts outstanding under the PPP Loan. As of September 30, 2024 and December 31, 2023, the amount outstanding under the PPP Loan was $0.4 million and $0.8 million, respectively.
During the three and nine months ended September 30, 2024 and 2023, the Company recognized immaterial amounts of interest expense relating to the PPP Loan.
Blue Torch Financing and Warrant Agreement
On August 9, 2022, the Company entered into a financing agreement and warrant agreement with Blue 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, “Blue Torch”), pursuant to which, among other things, Blue Torch agreed to extend an approximately $32.2 million senior secured term loan (the “Financing Agreement”). The Financing Agreement is secured by a first priority security interest in substantially all assets of the Company and its subsidiaries.
The Financing Agreement bears interest at a floating rate of interest equal to, at the Company’s option, Secured Overnight Financing Rate (“SOFR”) plus 10.00% per annum or the reference rate plus 9.00% per annum, with the reference rate defined as the greatest of:
•2.00% per annum;
•the federal funds effective rate plus 0.50% per annum;
•one-month SOFR plus 1.00% per annum; and
•the prime rate announced by the Wall Street Journal from time to time.
SOFR will be subject to a floor of 1.00% per annum, and the reference rate will be subject to a floor of 2.00% per annum. Interest will be payable in arrears at the end of each SOFR interest period (but at least every three months) for SOFR borrowings and quarterly in arrears for reference rate borrowings.
The Financing Agreement matures in three years after the Merger Date and is subject to quarterly amortization payments of principal, in an aggregate amount equal to 2.00% of the outstanding principal amount in the first year after closing, 3.00% of the outstanding principal amount in the second year after closing, and 5.00% of the outstanding principal amount in the third year after closing. The remaining outstanding principal balance of the Financing Agreement is due and payable in full on the maturity date. In addition to scheduled amortization payments, the Financing Agreement contains customary mandatory prepayment provisions that require principal prepayments of the loan upon certain triggering events, including receipt of asset sale proceeds outside of the ordinary course of business, receipt of certain insurance proceeds, and receipt of proceeds of non-permitted debt. The loan may also be voluntarily prepaid at any time, subject to the payment of a prepayment premium and a make-whole payment. The prepayment premium is payable for voluntary payments and certain mandatory prepayments, and is equal to: (i) an interest make-whole payment plus 3.00% of the principal amount of such prepayment in the first year after closing; (ii) 2.00% of the principal amount of such prepayment in the second year after closing; and (iii) 0% thereafter.
The Financing Agreement contains customary representations and warranties, affirmative covenants, financial reporting requirements, negative covenants and events of default. The negative covenants impose restrictions on the ability of the Company and its subsidiaries to incur indebtedness, grant liens, make investments, make acquisitions, declare and pay restricted payments, prepay junior or subordinated debt, sell assets, and enter into transactions with affiliates, in each case, subject to certain customary exceptions.
The Company’s obligations under the Financing Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds. Such obligations, including the guarantees, are secured by substantially all of the personal property of the Company and its subsidiary guarantors, including pursuant to a Security Agreement simultaneously entered into on August 9, 2022. The Financing Agreement establishes the following financial covenants: (i) the Company's trailing annual aggregate revenue shall exceed certain thresholds as of the end of each monthly computation period as defined therein; and (ii) liquidity shall not be less than $5 million at any time. The Company was in compliance with these covenants as of September 30, 2024.
As of September 30, 2024 and December 31, 2023, the interest rate for borrowings under the Financing Agreement was 14.87% and 15.61%, respectively.
During the nine months ended September 30, 2024, the Company repaid a total amount of $10.9 million on amounts outstanding under the Financing Agreement, which included prepayments of $10.0 million that were treated as an extinguishment of debt for accounting purposes and resulted in a $1.2 million loss on extinguishment of debt. During the nine months ended September 30, 2023, the Company repaid a total amount of $0.6 million on amounts outstanding under the Financing Agreement. As of September 30, 2024 and December 31, 2023, the amount outstanding under the Financing Agreement was $20.3 million and $31.2 million, respectively.
During the three months ended September 30, 2024 and 2023, the Company recognized $1.0 million and $1.2 million, respectively, of interest expense relating to the Financing Agreement. During the nine months ended September 30, 2024 and 2023, the Company recognized $3.2 million and $3.7 million, respectively, of interest expense relating to the Financing Agreement.
On the closing of the Financing Agreement, the Company also entered into the Lender Warrant Agreement with Vstock Transfer, LLC as warrant agent, pursuant to which affiliates of Blue Torch received 1,896,177 warrants to acquire common stock of the Company, par value $0.0001 per share (“Common Stock”), for $11.50 per whole share (such warrants, the “Lender Warrants”). The Lender Warrants were issued pursuant to the SPAC Warrant Agreement (as defined in the CHW Business Combination Agreement) and are subject to the terms and conditions thereof, as modified (whether reflected in the terms of the Lender Warrants issued on the Merger Date, or in an amendment to or exchange for the Lender Warrants consummated after the Merger Date) to provide that (i) the exercise period of the Lender Warrants will terminate on the earliest to occur of (x) the date that is ten years after completion of the CHW Business Combination, (y) liquidation of the Company, and (z) redemption of the Lender Warrants as provided in the SPAC Warrant Agreement (the “Lender Warrant Expiration Date”), (ii) Blue Torch has the ability to net exercise the Lender Warrants (based on the fair value of the stock at the time of net exercise, fair value being equal to the public trading price at the time of exercise) on a cashless basis, (iii) Blue Torch received the benefit of certain customary representations and warranties from the Company, and (iv) the Lender Warrants are not required to be registered under the Securities Act.
At the date of issuance, the Company classified the Lender Warrants as equity and recognized them in additional paid-in capital within its condensed consolidated balance sheet. As the Lender Warrants were classified as equity, the proceeds were allocated based on the relative fair values of the financial instruments issued as a whole.
Total Debt
As of September 30, 2024, annual scheduled principal payments of debt were as follows:
Amount
(in thousands)
2024
$
518
2025
20,227
Total principal payments
$
20,745
8. Commitments and Contingencies
Legal and Other Contingencies
From time to time, the Company may be a party to litigation and subject to claims, including non-income tax audits, in the ordinary course of business. The Company accrues a liability when management believes information available to it prior to the issuance of the consolidated financial statements indicates it is probable a loss has been incurred as of the date of the consolidated financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Legal costs are expensed as incurred. Although the results of litigation and claims cannot be predicted with certainty, management concluded that there was not a reasonable probability that it had incurred a material loss during the periods presented related to such loss contingencies. Therefore, the Company has not recorded a reserve for any such contingencies.
Given the inherent uncertainties and unpredictability of litigation, the ultimate outcome of ongoing matters cannot be predicted with certainty but the Company believes it has valid defenses with respect to the legal matters pending against it. Nevertheless, the consolidated financial statements could be materially adversely affected in a particular period by the resolution of one or more of these contingencies. Regardless of the outcome, litigation can have an adverse impact on the Company because of judgment, defense, and settlement costs, diversion of management resources, and other factors. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances changes, or contingencies are resolved; such changes are recorded in the accompanying statements of operations during the period of the change and reflected in accrued expenses and other current liabilities on the accompanying consolidated balance sheets.
The Company has been and continues to be involved in numerous legal proceedings related to Pet Caregiver classification. In California, Assembly Bill No. 5 (AB-5) implemented a presumption that workers are employees. However, AB-2257 exempts agencies providing referrals for certain animal services, including dog walking, from AB-5. The Company believes that it falls within this exemption. Nevertheless, the interpretation or enforcement of the exemption could change. The United States Department of Labor issued a new rule regarding the classification of workers as independent contractors or employees that went into effect in March 2024. The Company is evaluating any impact the new rule may have on its operations.
The Company is subject to audits by taxing authorities and other forms of investigation, audit, or inquiry conducted by federal, state, or local governmental agencies. Due to the inherent uncertainties in the final outcome of such matters, the Company can give no assurance that it will prevail in such matters, which could have an adverse effect on the Company’s business. In addition, the Company may be subject to greater risk of legal claims or regulatory actions as it increases and continues its operations in jurisdictions where the laws and regulations governing online marketplaces or the employment classification of service providers who use online marketplaces are uncertain or unfavorable.
In November 2019, California issued an assessment alleging various violations and penalties related to alleged misclassification of pet caregivers who use the Company’s platform as independent contractors. The Company has challenged both the legal basis and the amount of the assessment, of $1.7 million in unemployment insurance contributions for its independent contractors. In April 2022, the California Employment Development Department ("CA EDD") initiated a routine employment tax audit of the Company and alleges the Company owes approximately $1.3 million in additional unemployment insurance contributions for its independent contractors. The Company is engaged in ongoing discussions with the CA EDD and intends to defend itself vigorously in this pending matter. The Company believes given the inherent uncertainties of litigation, the outcome of this matter is not considered probable nor estimable and, therefore, the Company has not recorded a reserve.
In August 2018, the New York State Department of Labor (“NY DOL”) issued an Investigation Report assessing the Company with approximately $0.2 million in unemployment insurance contributions for its independent contractors. In August 2023, the Company completed payments of $0.4 million to the NY DOL, which represented the amount of the assessment plus interest and was recognized in general and administrative expenses within the Company’s condensed consolidated statement of operations during the third quarter of 2023.
In December 2019, Wag Hotels, Inc. filed a lawsuit against the Company alleging various claims related to breach of contract and trademark infringement. On June 29, 2023, the parties agreed to a settlement amount of $0.5 million to resolve all claims, with an initial payment up front and the remaining payments over 25 months. The settlement was executed on August 30, 2023. The $0.5 million was recognized in general and administrative expenses within the Company’s condensed consolidated statement of operations during the second quarter of 2023 and the Company has recorded a corresponding liability in Accrued expenses and other current liabilities and Other non-current liabilities within its condensed consolidated balance sheet as of September 30, 2024.
In December 2023, the NY DOL issued an investigation report assessing the Company with approximately $1.8 million in unemployment insurance contributions, including interest and penalties, for its independent contractors. On January 19, 2024, the Company submitted a request for hearing contesting assessment. The Company believes given the inherent uncertainties of litigation, the outcome of this matter is not considered probable nor estimable and, therefore, the Company has not recorded a reserve.
As of September 30, 2024, management did not believe that the outcome of pending matters would have a material effect on the Company’s financial position, results of operations, or cash flows.
9. Stockholders’ Equity (Deficit)
On July 18, 2024, the Company issued and sold an aggregate of 7.4 million shares of common stock at a price of $1.35 per share in a registered public offering. The aggregate net proceeds were approximately $8.6 million, after deducting offering costs of $0.8 million and underwriting discounts and commissions of $0.6 million. The Company used a portion of the net proceeds to repay indebtedness.
Common Stock Warrants
Prior to the Merger, CHW issued 12,500,000 of Public Warrants and 4,238,636 of Private Warrants (together, the “Warrants”) in connection with its initial public offering to CHW Acquisition Sponsor LLC, the sponsor of CHW. After consummation of the Merger on August 9, 2022, the 4,238,636 Private Warrants held by the Sponsor were exchanged for 3,895,564 warrants to purchase shares of common stock of the Company issuable upon the exercise of Private Placement Warrants originally issued to CHW and the 12,500,000 shares of common stock that are issuable upon the exercise of Public Warrants remained outstanding. Each whole warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment, at any time commencing on September 8, 2022, which was the later of 30 days after the completion of the CHW Business Combination or 12 months from CHW's IPO closing date. The Warrants will expire on the fifth anniversary of the CHW Business Combination, or earlier upon redemption or liquidation.
The Company may call the Warrants for redemption:
•in whole or in part;
•at a price of $0.01 per warrant;
•upon a minimum of 20 days’ prior written notice of redemption; and
•if, and only if, the reported last sale price of the Public Shares equals or exceeds $16.50 per share (as adjusted for share subdivisions, share consolidations, share capitalizations, rights issuances, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders.
If the Company calls the Warrants for redemption, management will have the option to require all holders that wish to exercise the public warrants to do so on a “cashless basis,” as described in the warrant agreement.
The exercise price and number of shares of common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a share dividend, recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuance of common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Warrants.
Management has concluded that the Warrants issued pursuant to the CHW IPO qualify for equity classification.
Accumulated Other Comprehensive Income
There were no changes in accumulated other comprehensive income for the three and nine months ended September 30, 2024 and 2023.
10. Revenues
The following table presents the Company’s revenues disaggregated by offering:
The Company has stock-based compensation plans, which are more fully described in Note 12, Stock-Based Compensation, to the Consolidated Financial Statements included in the 2023 10-K. During the nine months ended September 30, 2024, the Company granted restricted stock units (“RSUs”) subject to service conditions.
Stock Options
The following table summarizes the activities for all stock options under the Company’s stock-based compensation plans for the nine months ended September 30, 2024:
Number of Options Outstanding
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Life
Aggregate Intrinsic Value(1)
(in thousands)
(in thousands)
Outstanding as of December 31, 2023
6,163
$
0.44
6.06 years
$
8,934
Granted
—
$
—
Exercised
(1,110)
$
0.10
Forfeited or expired
(54)
$
0.93
Outstanding as of September 30, 2024
4,999
$
0.51
5.39 years
$
3,237
Exercisable as of September 30, 2024
4,963
$
0.51
5.38 years
$
3,216
Vested and expected to vest as of September 30, 2024
4,999
$
0.51
5.39 years
$
3,237
(1) The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the stock awards.
There were no stock options granted during the three and nine months ended September 30, 2024 and 2023. The total intrinsic value of stock options exercised during the three months ended September 30, 2024 and 2023 was immaterial. The total intrinsic value of stock options exercised during the nine months ended September 30, 2024 and 2023 was $1.9 million and $2.2 million, respectively.
As of September 30, 2024, the total unrecognized compensation cost related to all nonvested stock options was immaterial and the related weighted-average period over which it is expected to be recognized was approximately 0.91 years.
Restricted Stock Units
The following table summarizes the activities for all RSUs under the Company’s stock-based compensation plans for the nine months ended September 30, 2024:
Number of Shares
Weighted-Average Grant Date Fair Value Per Share
(in thousands)
Outstanding and nonvested as of December 31, 2023
4,322
$
2.39
Granted
3,338
$
2.22
Vested
(1,621)
$
2.39
Forfeited
(60)
$
2.49
Outstanding and nonvested as of September 30, 2024
The total vesting date fair value of RSUs which vested during the three months ended September 30, 2024 and 2023 was $0.8 million and $0.9 million, respectively. The total vesting date fair value of RSUs which vested during the nine months ended September 30, 2024 and 2023 was $2.2 million and $3.2 million, respectively.
As of September 30, 2024, the total unrecognized compensation cost related to all nonvested RSUs was $11.8 million and the related weighted-average period over which it is expected to be recognized was approximately 1.87 years.
Stock-Based Compensation Expense
The following table provides information about stock-based compensation expense by financial statement line item:
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
(in thousands)
Platform operations and support
$
254
$
209
$
703
$
815
Sales and marketing
292
174
782
533
General and administrative
1,301
682
3,314
2,180
Total stock-based compensation expense
$
1,847
$
1,065
$
4,799
$
3,528
12. Income Taxes
The quarterly income tax provision reflects an estimate of the corresponding quarter’s state taxes in the United States. The provision for income tax expense for the three and nine months ended September 30, 2024 and 2023 was determined based upon estimates of the Company’s annual effective tax rate for the years ending December 31, 2024 and 2023, respectively. Since the Company is in a full valuation allowance position due to losses incurred since inception, the provision for taxes consists solely of certain state income taxes.
13. Acquisitions
Acquisition of Dog Food Advisor
On January 5, 2023, the Company entered into an Asset Purchase Agreement with Clicks and Traffic LLC to purchase its Dog Food Advisor assets for cash consideration of $9.0 million. Of the $9.0 million of cash consideration, $8.1 million was paid on the acquisition date and the remaining $0.9 million was deposited into an escrow account as an indemnification holdback for a period of 12 months. No working capital was acquired as part of the transaction. The Company incurred less than $0.1 million in transaction-related costs during the first quarter of 2023 in connection with the acquisition, which are included in general and administrative expenses within the Company’s condensed consolidated statement of operations. The acquisition marked the Company’s entrance into the Pet Food & Treats market, in line with its strategy to be an all-inclusive, trusted partner for the premium Pet Parent.
The assets acquired were recognized at fair value as of the date of the acquisition. During 2023, the Company finalized the analysis of the purchase price and no adjustments were made to the assessed fair values. The following table summarizes the final fair values assigned to the assets acquired:
The table below summarizes the fair value and the estimated useful lives of the acquired intangible assets:
January 5, 2023
Estimated Weighted-Average Useful Life
(in thousands)
Developed technology and website content
$
1,950
5 years
Strategic customer relationships and subscriber lists
3,600
8 years
Trademarks
400
10 years
Total intangible assets
$
5,950
7 years
Goodwill recognized as a result of this acquisition is deductible for tax purposes.
Pro forma disclosures required under ASC 805-10-50 are not presented because the pro forma impacts on the current period and prior year comparable period are not material.
Acquisition of maxbone
On April 6, 2023, the Company acquired 100% of the outstanding equity interests of MaxBone, Inc. (“maxbone”), a top-tier digital platform for modern pet essentials, for cash consideration of $0.5 million and 0.1 million common shares with a fair value of $0.2 million as of the closing date. Of the $0.2 million of common stock consideration, $0.1 million was issued on the acquisition date and the remaining $0.1 million was issued after the indemnification holdback period expired 12 months after the acquisition close. The acquisition expanded the Company’s reach into the Pet Supplies market, while remaining committed to the needs and standards of the premium Pet Parent.
Acquisition of WoofWoofTV
On December 15, 2023, the Company acquired 100% of the outstanding equity interests of Rowlo Woof Limited (“WoofWoofTV”), a digital media publishing company focusing on content for dog lovers, for cash consideration of $1.3 million. Of the $1.3 million of cash consideration, $1.1 million was paid on the acquisition date and the remaining $0.2 million was deposited into an escrow account as an indemnification holdback for a period of 12 months. The Company accounted for the transaction as an asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset.
The table below summarizes the fair value and the estimated useful life of the acquired intangible asset:
The following securities have been excluded from the computation of diluted loss per share for the periods presented because including them would have been anti-dilutive:
Nine Months Ended
September 30, 2024
September 30, 2023
(in thousands)
Earnout Shares
15,000
15,000
Options and RSUs issued and outstanding
10,978
10,896
Warrants issued and outstanding
18,292
18,292
Shares related to acquisition indemnification holdback
—
51
Total
44,270
44,239
All unvested Earnout Shares are excluded from basic and diluted loss per share as such shares are contingently issuable only when the share price of the Company’s common stock exceeds specified thresholds, which had not been achieved as of September 30, 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We strive to be the go-to platform for the modern U.S. pet household, offering solutions for service, product, and wellness needs. We provide a range of products and services, including the Wag! app, which offers access to 5-star dog walking, sitting, and one-on-one training; Petted, one of the nation’s largest pet insurance comparison marketplaces; Dog Food Advisor, one of the most visited and trusted pet food review platforms; WoofWoofTV, a multi-media company bringing pet content to over 18 million followers across social media; maxbone, a digital platform for modern pet essentials; and Furmacy, software to simplify pet prescriptions.
Wag! has been a leader in on-demand dog walking since 2015 and we’ve grown our community to include more than 500,000 local Pet Caregivers nationwide. From those roots, we expanded to the wellness space by acquiring Petted.com, which makes it easy to shop for and compare pet insurance options. In 2023, we expanded to the Pet Food & Treats market by acquiring Dog Food Advisor, which is one of the most visited and trusted dog food marketplaces. We also expanded our reach into the Pet Supplies market with our acquisition of maxbone, a premium pet product brand.
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 revenue in accordance with ASC 606, Revenue from Contracts with Customers, from the following distinct streams: (1) service fees charged to Pet Caregivers, (2) subscription fees for Wag! Premium and other fees paid by Pet Parents, (3) joining fees paid by Pet Caregivers to join and be listed on our platform, (4) wellness revenue through affiliate fees, and (5) Pet Food & Treat revenue also through affiliate fees.
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, hosting and platform-related infrastructure costs, product 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 and advertising expenses. Sales and marketing expenses are expensed as incurred.
Royalty
Royalty expenses represent fees paid by us to be the exclusive marketer of certain pet insurance products.
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 expense, net consists primarily of interest incurred on debt and interest earned on our cash, cash equivalents, and short-term investments.
Key Operating and Financial Metrics and Non-GAAP Financial Measures
We regularly review several metrics, including the following key financial metrics and non-GAAP financial measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. These key financial metrics and non-GAAP financial measures are set forth below for the periods presented:
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2024
September 30, 2023
$
%
September 30, 2024
September 30, 2023
$
%
(in thousands, except percentages)
Platform Participants (as of period end)
367
632
(265)
(41.9)
%
367
632
(265)
(41.9)
%
Revenues
$
13,204
$
21,800
(8,596)
(39.4)
%
$
55,074
$
62,243
(7,169)
(11.5)
%
Net loss
$
(6,262)
$
(2,196)
(4,066)
185.2
%
$
(12,754)
$
(9,852)
(2,902)
29.5
%
Net loss margin
(47.4)
%
(10.1)
%
(23.2)
%
(15.8)
%
Net cash used in operating activities
$
(3,253)
$
(2,297)
(956)
41.6
%
$
(5,274)
$
(4,624)
(650)
14.1
%
Adjusted EBITDA (loss)(1)
$
(1,943)
$
1,007
(2,950)
*
$
(136)
$
717
(853)
*
Adjusted EBITDA (loss) margin(1)
(14.7)
%
4.6
%
(0.2)
%
1.2
%
* Comparisons between positive and negative numbers are not meaningful.
(1)Adjusted EBITDA (loss) and Adjusted EBITDA (loss) margin are non-GAAP measures which may not be comparable to similarly-titled measures used by other companies. See below for a reconciliation of Adjusted EBITDA (loss) to net loss.
Platform Participants
A Platform Participant is defined as a Pet Parent or Pet Caregiver who transacted on the Wag! platform for a service in the quarter. Services include dog walking, sitting, boarding, drop-ins, training, premium telehealth services, wellness plans, and pet insurance plan comparison.
Non-GAAP Financial Measures
Adjusted EBITDA (Loss) and Adjusted EBITDA (Loss) Margin
Adjusted EBITDA (loss) means net loss adjusted to exclude, where applicable in a given period, interest expense, net; income taxes; depreciation and amortization; stock-based compensation; integration and transaction costs associated with acquired businesses; severance costs; loss on extinguishment of debt; and legal settlements. Adjusted EBITDA (loss) margin represents Adjusted EBITDA (loss) divided by revenues. We use Adjusted EBITDA (loss) and Adjusted EBITDA (loss) margin, which are both non-GAAP metrics, to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes. We believe that Adjusted EBITDA (loss) and Adjusted EBITDA (loss) margin, when taken collectively with our U.S. GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results.
Non-GAAP financial measures are presented for supplemental informational purposes only. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for financial information presented in accordance with U.S. GAAP. There are a number of limitations related to the use of non-GAAP financial measures versus comparable financial measures determined under U.S. GAAP. For example, other companies in our industry may calculate these non-GAAP financial measures differently or may use other measures to evaluate their performance. All of these limitations could reduce the usefulness of these non-GAAP financial measures as analytical tools. Investors are encouraged to review the related non-GAAP financial measures and the reconciliations of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures and to not rely on any single financial measure to evaluate our business.
The following table provides a reconciliation of net loss to Adjusted EBITDA (loss):
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
(in thousands, except percentages)
Net loss
$
(6,262)
$
(2,196)
$
(12,754)
$
(9,852)
Interest expense, net
1,392
1,683
4,647
4,972
Income taxes
—
41
81
79
Depreciation and amortization
583
414
1,741
1,170
Stock-based compensation
1,847
1,065
4,799
3,528
Integration and transaction costs associated with acquired business
Comparison of the Three and Nine Months Ended September 30, 2024 and 2023
The following table sets forth our results of operations for the three and nine months ended September 30, 2024 and 2023. These results of operations are not necessarily indicative of the future results of operations that may be expected for any future period.
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2024
September 30, 2023
$
%
September 30, 2024
September 30, 2023
$
%
(in thousands, except percentages)
Revenues
$
13,204
$
21,800
(8,596)
(39.4)
%
$
55,074
$
62,243
(7,169)
(11.5)
%
Costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)
1,146
1,441
(295)
(20.5)
%
3,874
3,710
164
4.4
%
Platform operations and support
2,798
2,968
(170)
(5.7)
%
8,472
9,630
(1,158)
(12.0)
%
Sales and marketing
8,862
12,755
(3,893)
(30.5)
%
35,554
36,788
(1,234)
(3.4)
%
Royalty
—
—
—
100.0
%
—
1,791
(1,791)
(100.0)
%
General and administrative
4,231
4,682
(451)
(9.6)
%
12,279
14,487
(2,208)
(15.2)
%
Depreciation and amortization
583
414
169
40.8
%
1,741
1,170
571
48.8
%
Total costs and expenses
17,620
22,260
(4,640)
(20.8)
%
61,920
67,576
(5,656)
(8.4)
%
Interest expense
1,497
1,915
(418)
(21.8)
%
4,979
5,686
(707)
(12.4)
%
Interest income
(105)
(232)
127
(54.7)
%
(332)
(714)
382
(53.5)
%
Loss on extinguishment of debt
454
—
454
100.0
%
1,180
—
1,180
100.0
%
Other expense, net
—
12
(12)
(100.0)
%
—
21
(21)
(100.0)
%
Loss before income taxes
(6,262)
(2,155)
(4,107)
190.6
%
(12,673)
(10,326)
(2,347)
22.7
%
Income taxes
—
41
(41)
(100.0)
%
81
79
2
2.5
%
Equity in net earnings of equity method investments
—
—
—
100.0
%
—
553
(553)
(100.0)
%
Net loss
$
(6,262)
$
(2,196)
(4,066)
185.2
%
$
(12,754)
$
(9,852)
(2,902)
29.5
%
Revenues
Revenues decreased by $8.6 million, or approximately 39.4%, from $21.8 million for the three months ended September 30, 2023 to $13.2 million for the three months ended September 30, 2024. The decrease was attributable to a $1.1 million decrease in Services revenue, a $7.1 million decrease in Wellness revenue, and a $0.4 million decrease in Pet Food & Treats revenue as a result of a 42% decrease in Platform Participants year-over-year and decreased revenue-per-action conversion activity.
Revenues decreased by $7.2 million, or approximately 11.5%, from $62.2 million for the nine months ended September 30, 2023 to $55.1 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a $1.8 million decrease in Services revenue and a $5.6 million decrease in Wellness revenue as a result of a 42% decrease in Platform Participants year-over-year and decreased revenue-per-action conversion activity, partially offset by a $0.3 million increase in Pet Food & Treats revenue as a result of increased revenue-per-action conversion activity.
Cost of Revenues, Exclusive of Depreciation and Amortization
Cost of revenues, exclusive of depreciation and amortization, decreased by $0.3 million, or approximately 20.5%, from $1.4 million for the three months ended September 30, 2023 to $1.1 million for the three months ended September 30, 2024. The decrease was primarily attributable to a decrease in product costs related to certain pet insurance products and a decrease in payment processing fees as a result of lower Services revenue.
Cost of revenues, exclusive of depreciation and amortization, increased by $0.2 million, or approximately 4.4%, from $3.7 million for the nine months ended September 30, 2023 to $3.9 million for the nine months ended September 30, 2024. The increase was primarily attributable to an increase in product costs related to the sale of merchandise and certain pet insurance products, partially offset by a decrease in payment processing fees as a result of lower Services revenue.
Platform Operations and Support
Platform operations and support expenses decreased by $0.2 million, or approximately 5.7%, from $3.0 million for the three months ended September 30, 2023 to $2.8 million for the three months ended September 30, 2024. The decrease was primarily attributable to a $0.4 million decrease in personnel costs and a $0.1 million decrease in technology, facilities, and other allocated costs, partially offset by a $0.2 million increase in professional services.
Platform operations and support expenses decreased by $1.2 million, or approximately 12.0%, from $9.6 million for the nine months ended September 30, 2023 to $8.5 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a $1.5 million decrease in personnel costs and a $0.2 million decrease in technology, facilities, and other allocated costs, partially offset by a $0.5 million increase in professional services.
Sales and Marketing
Sales and marketing expenses decreased by $3.9 million, or approximately 30.5%, from $12.8 million for the three months ended September 30, 2023 to $8.9 million for the three months ended September 30, 2024. The decrease was primarily attributable to a $2.3 million decrease in investing in new and expanding existing partnerships related to our Wellness offerings, a $1.5 million decrease in personnel costs, and a $0.3 million decrease in professional services.
Sales and marketing expenses decreased by $1.2 million, or approximately 3.4%, from $36.8 million for the nine months ended September 30, 2023 to $35.6 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a $1.7 million increase in investing in new and expanding existing partnerships related to our Wellness offerings, partially offset by a $3.0 million decrease in personnel costs and a $0.2 million decrease in professional services.
Royalty
Royalty expenses were $1.8 million for the nine months ended September 30, 2023. These expenses represent fees paid by us to be the exclusive marketer of certain pet insurance products.
General and Administrative
General and administrative expenses decreased by $0.5 million, or approximately 9.6%, from $4.7 million for the three months ended September 30, 2023 to $4.2 million for the three months ended September 30, 2024. The decrease was primarily attributable to a $0.2 million decrease in personnel costs and a $0.2 million decrease in business licenses, fees, and permits.
General and administrative expenses decreased by $2.2 million, or approximately 15.2%, from $14.5 million for the nine months ended September 30, 2023 to $12.3 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a $0.9 million decrease in personnel costs, a $0.5 million decrease in legal settlements, a $0.5 million decrease in business licenses, fees, and permits, and a $0.3 million decrease in professional services.
Depreciation and amortization expenses increased by $0.2 million, or approximately 40.8%, from $0.4 million for the three months ended September 30, 2023 to $0.6 million for the three months ended September 30, 2024. The increase was primarily attributable to the acquisition of WoofWoofTV in 2023 and the related amortization of acquired intangible assets.
Depreciation and amortization expenses increased by $0.6 million, or approximately 48.8%, from $1.2 million for the nine months ended September 30, 2023 to $1.7 million for the nine months ended September 30, 2024. The increase was primarily attributable to the acquisition of WoofWoofTV in 2023 and the related amortization of acquired intangible assets.
Interest Expense, Net
Interest expense, net was as follows:
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2024
September 30, 2023
$
%
September 30, 2024
September 30, 2023
$
%
(in thousands, except percentages)
Interest expense
$
1,497
$
1,915
(418)
(21.8)
%
$
4,979
$
5,686
(707)
(12.4)
%
Interest income
(105)
(232)
127
(54.7)
%
(332)
(714)
382
(53.5)
%
Interest expense, net
$
1,392
$
1,683
(291)
(17.3)
%
$
4,647
$
4,972
(325)
(6.5)
%
Interest expense, net decreased by $0.3 million, or approximately 17.3%, from $1.7 million for the three months ended September 30, 2023 to $1.4 million for the three months ended September 30, 2024. The decrease was primarily attributable to a decrease in interest expense as a result of a decrease in the amount outstanding under the Financing Agreement.
Interest expense, net decreased by $0.3 million, or approximately 6.5%, from $5.0 million for the nine months ended September 30, 2023 to $4.6 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a decrease in interest expense as a result of a decrease in the amount outstanding under the Financing Agreement.
Loss on Extinguishment of Debt
During the three months ended September 30, 2024, we recognized a $0.5 million loss on extinguishment of debt related to a $5.0 million prepayment of the Financing Agreement during the third quarter of 2024 (See Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).
During the nine months ended September 30, 2024, we recognized a $1.2 million loss on extinguishment of debt related to prepayments of $10.0 million of the Financing Agreement during 2024 (See Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).
Liquidity and Capital Resources
We have historically generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt. In July 2024, we issued and sold an aggregate of 7.4 million shares of common stock at a price of $1.35 per share in a registered public offering. The aggregate net proceeds were approximately $8.6 million, after deducting offering costs of $0.8 million and underwriting discounts and commissions of $0.6 million. As of September 30, 2024, we had cash and cash equivalents of $8.4 million.
We expect operating losses to continue in the foreseeable future as we continue to invest in growing our business. Our primary uses of cash include operating costs such as product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth.
Pursuant to the requirements of FASB ASC Topic 205-40, Presentation of Financial Statements—Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented or are not within our control as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
As of September 30, 2024, we had cash and cash equivalents of approximately $8.4 million and accounts receivable of $6.5 million, and the amount outstanding under our debt obligations was $20.7 million, of which $20.3 million and $0.4 million related to the Financing Agreement and PPP Loan, respectively. Additionally, for the nine months ended September 30, 2024, net loss was $12.8 million and net cash used in operating activities was $5.3 million. Our ability to continue as a going concern is dependent on our ability to generate significant cash flows, obtain sufficient proceeds from any future offerings of securities, renegotiate the existing terms of the Financing Agreement, and/or obtain alternative financing prior to the maturity of the Financing Agreement in August 2025. We expect operating losses to continue in the foreseeable future as we continue to invest in growing our business. To alleviate these conditions, we completed a registered public offering of common stock in July 2024 for net proceeds of approximately $8.6 million (See Note 9, Stockholders’ Equity (Deficit), to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for more information) and management is actively engaged in discussions to refinance the Financing Agreement. However, there can be no assurance that we will be able to complete the refinancing as it is ultimately outside of our control.
Due to our projected cash needs (which includes amounts due under the Financing Agreement) combined with our current liquidity level and history of net losses and cash used to fund operating activities, there is substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
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 factors described in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and Part I, Item 1A, Risk Factors, of our 2023 10-K. We may seek additional equity or debt financing. See the section titled “Risk Factors—Risks Related to Our Operations—We may require additional capital to support business growth and this capital might not be available on acceptable terms, or at all” within the 2023 10-K.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Net cash used in operating activities for the nine months ended September 30, 2024 was $5.3 million, an increase of $0.7 million from $4.6 million for the nine months ended September 30, 2023. The increase was primarily due to $1.0 million of unfavorable changes in operating assets and liabilities, partially offset by a $0.4 million decrease in net loss excluding non-cash and reconciling items disclosed within our condensed consolidated statement of cash flows. The $1.0 million of unfavorable changes in operating assets and liabilities was primarily driven by unfavorable changes in accounts payable, accrued expenses and other current liabilities, and other non-current liabilities, partially offset by favorable changes in accounts receivable, prepaid expenses and other current assets, and deferred revenue. The $0.4 million decrease in net loss excluding non-cash and reconciling items was primarily driven by lower costs and expenses and favorable changes in non-cash and reconciling items including stock-based compensation, loss on extinguishment of debt, and depreciation and amortization, partially offset by lower revenues.
Changes in Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 was $1.4 million, a decrease of $9.3 million from $10.7 million for the nine months ended September 30, 2023. The decrease was primarily due to a $9.0 million decrease in cash paid for acquisitions, net of cash acquired and a $1.5 million decrease in cash paid for equity method investments, partially offset by a $1.2 million increase in purchases of property and equipment.
Changes in Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2024 was $3.2 million, an increase of $1.8 million from $1.4 million for the nine months ended September 30, 2023. The increase was primarily due to a $10.3 million increase in repayment of debt related to prepayments of $10.0 million prepayment of the Financing Agreement during 2024 (See Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q), partially offset by a $8.6 million increase in proceeds from registered public offering of common stock, net of issuance costs (See Note 9, Stockholders’ Equity (Deficit), to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).
Paycheck Protection Program Loan
On August 5, 2020, the Company received loan proceeds of approximately $5.1 million from a financial institution pursuant to the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act, of which $3.5 million was subsequently forgiven. The PPP Loan matures on August 5, 2025 and bears interest at a fixed rate of 1.00%. Principal and interest payments are payable monthly, and as of September 30, 2024, the amount outstanding under the PPP Loan was $0.4 million.
For additional information regarding the PPP Loan, refer to Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Blue Torch Financing and Warrant Agreement
On August 9, 2022, we entered into a financing agreement and warrant agreement with Blue Torch, pursuant to which, among other things, Blue Torch agreed to extend an approximately $32.2 million senior secured term loan (the “Financing Agreement”). The Financing Agreement is secured by a first priority security interest in substantially all assets of us and our subsidiaries.
For additional information regarding the Financing Agreement, refer to Note 7, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable rules and regulations of the SEC, 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.
U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the year. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses. Actual results could differ from those estimates.
There have been no material changes to our critical accounting policies since the 2023 10-K. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our condensed consolidated financial statements, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2023 10-K.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
New Accounting Pronouncements
See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for information on new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective at a reasonable assurance level.
Previously Reported Material Weaknesses in Internal Control over Financial Reporting
As previously disclosed in our 2023 10-K, in connection with the audit of our financial statements for the fiscal year ended December 31, 2023, we identified the following material weaknesses, which still exist as of September 30, 2024. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. We identified a material weakness in our internal control over financial reporting related to insufficient resources needed to fully implement our internal control risk assessment process, evaluate the technical accounting aspects of certain material transactions and effectively design and implement certain process level controls. We also identified a material weakness regarding the risk assessment process related to information technology general controls and activities of service organizations, the design and implementation of logical access, segregation of duties and program change controls and certain process level controls related to information used in the execution of those controls that impact our financial reporting processes.
These material weaknesses resulted in the immaterial misstatement of our consolidated financial statements for the year ended December 31, 2023 and for quarterly periods in 2023. Additionally, these material weaknesses could result in a misstatement of the account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan
We have implemented, or are in the process of implementing, measures designed to remediate the control deficiencies that led to the material weaknesses.
•We have hired finance and accounting personnel with the appropriate level of knowledge and experience to establish and maintain internal control over financial reporting.
•We have designed and implemented controls over our internal control risk assessment process to identify and assess risk and implement or enhance controls to mitigate those risks.
•We have redesigned and implemented our information technology (“IT”) general controls, including logical access controls and program change controls, and hired additional IT personnel.
•We have redesigned and implemented our controls related to the assessment of service organizations and segregation of duties.
•We designed and implemented control enhancements to evaluate the technical accounting aspects of material transactions.
•We designed and implemented control enhancements across certain business process-level controls, including the information used in the operation of the control.
•We engaged third-party consultants to assist management in evaluating the design and performing operating effectiveness testing of certain internal controls over financial reporting.
We will consider the material weaknesses to be remediated once the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. In addition, as we continue to monitor the effectiveness of our internal control over financial reporting, we may implement additional internal control changes as we deem necessary.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified during the evaluation that occurred during our quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See discussion under Note 8, Commitments and Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
We are supplementing the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of our 2023 10-K and Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (“Q2 2024 10-Q”) to include the following risk factor, which should be read in conjunction with the other risk factors presented in our 2023 10-K and Q2 2024 10-Q.
We have failed to comply with the continued listing requirements of Nasdaq, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
On September 24, 2024, we received a written notice from the staff of the Listing Qualifications Department of Nasdaq that for 30 consecutive business days from August 9, 2024 to September 23, 2024, the closing bid price of our common stock listed on the Nasdaq Global Market was below $1.00 and no longer meets the minimum bid price requirement for continued listing on the Nasdaq Global Market under Nasdaq Listing Rules 5450(a)(1), which requires a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The staff also notified us that for 30 consecutive business days from August 8, 2024 to September 23, 2024 our Market Value of Listed Securities (“MVLS”) was below the $50,000,000 minimum required for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(2)(A). The notice had no immediate effect on the listing or trading of our common stock.
In accordance with Nasdaq Listing Rules 5810(c)(3)(A) and 5810(c)(3)(C), we have a period of 180 calendar days or until March 24, 2025, to regain compliance with the Minimum Bid Price Requirement and the MVLS Requirement or we will receive written notification that our securities are subject to delisting. We are considering options to resolve the non-compliance with the Minimum Bid Price Requirement and MVLS Requirement. However, there can be no assurance that we will regain or maintain compliance with the applicable continued listing standards set forth in the Nasdaq Listing Rules. Delisting from Nasdaq could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. In addition, without a Nasdaq market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our common stock, the sale or purchase of our common stock would likely be made more difficult and the trading volume and liquidity of our common stock could decline.
In the event we are delisted from Nasdaq, the only established trading market for our common stock would be eliminated, and we would be forced to list our shares on the OTC Markets or another quotation medium, depending on our ability to meet the specific listing requirements of those quotation systems. As a result, an investor would likely find it more difficult to trade or obtain accurate price quotations for our shares. Delisting would likely also reduce the visibility, liquidity, and value of our common stock, reduce institutional investor interest in our company, and may increase the volatility of our common stock. Delisting could also cause a loss of confidence of potential industry partners, lenders, and employees, which could further harm our business and our future prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)On September 5, 2024, David Cane, our Chief Customer Officer, adopted a 10b5-1 trading arrangement providing for the sale from time to time of an aggregate of up to 99,328 shares of common stock. The trading plan is intended to satisfy the affirmative defense in Rule 10b5-1(c). The duration of the trading plan is until December 12, 2025, or earlier if all transactions under the trading plan are completed.
No other officers, as defined in Rule 16a-1(f), or directors adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Regulation S-K Item 408, during the last fiscal quarter.
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
** Furnished herewith.
† Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K under the Securities Act. The Company agrees to furnish supplementally any omitted schedules to the Securities and Exchange Commission upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
