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. 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. We believe our integrated omni-channel presence provides meaningful benefits to our consumers that are not easily replicated by our competitors.
The following financial and operational results were achieved during the three
and nine months ended
•
total net revenues decreased by 14.4% for the three months endedSeptember 30, 2022 and 2021, to$15.8 million from$18.5 million , respectively, and decreased by 3.1% to$51.9 million from$53.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively;
•
wholesale net revenues remained stable at$5.5 million both for the three months endedSeptember 30, 2022 and 2021, and increased by 28.3% to$16.9 million from$13.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively;
•
we expanded our retail accounts sold by 15.6% to 9,392 from 8,124 for the three months endedSeptember 30, 2022 and 2021, respectively, and by 40.7% to 16,143 from 11,476 for the nine months endedSeptember 30, 2022 and 2021, respectively;
•
we generated a net loss of$4.2 million and$5.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, and a net loss of$12.4 million and$9.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively; and
•
our Adjusted EBITDA loss increased to$3.0 million for the three months endedSeptember 30, 2022 from$1.4 million for the three months endedSeptember 30, 2021 and increased to$9.0 million for the nine months endedSeptember 30, 2022 from$4.3 million for the nine months endedSeptember 30, 2021 . 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 accounting principles generally accepted inthe United States ("GAAP").
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. Restrictions adopted during the height of the pandemic included limited
operating hours at restaurants and bars, 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 that of 2021, benefited from the easing or
lifting of COVID-19 restrictions.
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We do not believe COVID-19 had a direct material impact on DTC demand or
wholesale net revenues for the three months ended
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, including the emergence of new variants of the virus, 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 Alcoholic Beverage companies that is connecting with both the next generation of consumers who prefer to shop online and the legacy wholesale distribution channel, and we believe that this omni-channel approach will lead to a significant and expanding market opportunity. Our long-term 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 enhance our ability to acquire DTC consumers, grow our wholesale business and seize a larger portion of theU.S. Alcoholic Beverages market. Our DTC channel net revenues decreased by 22.0% and 13.2% for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 , respectively. DTC represented 62.5% and 66.1% of our total net revenues for the three and nine months endedSeptember 30, 2022 , respectively. Our DTC channel growth slowed in 2021 as COVID-19 restrictions were eased or lifted, and, as we take steps to improve profitability, such as by decreasing digital marketing spend, our DTC channel may experience periods of stable or declining net revenues. Our wholesale channel net revenues grew 0.8% and 28.3% for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 , respectively. Wholesale represented 35.1% and 32.5% of our total net revenues for the three and nine months endedSeptember 30, 2022 , respectively. The growth within the wholesale channel during the period was fueled primarily by an increase in retail accounts and more of our products being sold at each retailer. We believe wholesale net revenues will continue to increase as a percentage of total net revenues. Overall, we continue to see demand for our organic portfolio as consumers demand organic and natural wines. The remainder of revenue was generated through our non-reportable segment, which is comprised of a small business line focused on testing new products and the sale of bulk wine. We believe the following factors and trends in our business have driven our historic growth and are expected to remain key factors affecting our performance and growth for the foreseeable future:
Brand Awareness and Loyalty
Our ability to promote and maintain brand awareness and loyalty has been critical to our success. We believe we have the opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand marketing and performance marketing. We have made 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. The level of our investment in marketing impacts our ability to obtain new customers and to maintain existing customers, and periods of reduced investment in marketing may adversely affect our financial performance, particularly in our DTC channel.
Innovation
Ideation, development and innovation have been core elements underpinning our historic growth strategy. The improvement of existing products and the introduction of new products have been, and continue to be, integral to our growth. Our ability to successfully Ideate, Launch and Amplify new products will depend on a variety of factors, including our efforts to improve profitability, the level of our continued investment in innovation, integrated business planning processes and capabilities.
Execution of Omni-Channel Strategy
The continued execution of our omni-channel strategy impacts our financial
performance. 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, and we believe that investments in our DTC channel may
enable us to drive the performance of our existing wholesale brands and
effectively launch successful new core products into our wholesale channel,
thereby creating a wholesale brand portfolio that is increasingly attractive to
distributors and retail accounts. 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.
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--------------------------------------------------------------------------------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 ofSeptember 30, 2022 , we had cash on hand of$2.8 million , inventory, net of$25.7 million , total current assets of$34.7 million , and total current liabilities of$32.8 million . As ofSeptember 30, 2022 , we had outstanding borrowings of$4.4 million on the BoC Line of Credit. InJune 2022 , we entered into an amendment to the BoC Credit Agreement, which, among other things, extended the maturity date of the BoC Line of Credit toDecember 31, 2022 and provided for an incremental reduction of our borrowing capacity under the BoC Line of Credit during the periods prior to the maturity date as follows: (i) for the period beginningJuly 1, 2022 ,$6.5 million ; (ii) for the period beginningAugust 1, 2022 ,$5.5 million ; (iii) for the period beginningSeptember 1, 2022 ,$4.5 million ; (iv) for the period beginningOctober 1, 2022 ,$3.5 million ; (v) for the period beginningNovember 1, 2022 ,$2.5 million ; and (vi) for the period beginningDecember 30, 2022 , zero. InOctober 2022 , the Company entered into a further amendment to the BoC Credit Agreement, which, among other things, delayed the reduction in borrowing capacity scheduled forNovember 1, 2022 toDecember 1, 2022 and deferred measurement of the minimum liquidity covenant untilDecember 31, 2022 . We continue to seek additional sources of capital, but there can be no assurance that we will be able to obtain required capital on acceptable terms, if at all. If we are unable to obtain alternative financing, there are no assurances that we will be able to repay the BoC Line of Credit at maturity or satisfy our other obligations and to maintain our current and planned future operations. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern. If we are unable to adequately reduce costs or obtain additional financing, we believe we will not have sufficient funds to meet our obligations within the next twelve months from the date of issuance of the consolidated financial statements included in this Quarterly Report on Form 10-Q. 38 --------------------------------------------------------------------------------
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
in thousands, except for average order value and retail accounts
DTC
DTC net revenues $ 9,883 $ 12,674 $ 34,291 $ 39,525
DTC gross profit 4,282 5,552 15,133 17,046
Average order value (AOV) 90.19 74.52 81.89 70.77
Wholesale
Wholesale net revenues $ 5,549 $ 5,507 $ 16,849 $ 13,131
Wholesale gross profit 1,567 2,096 5,731 5,398
Retail accounts 9,392 8,124 16,143 11,476
Consolidated
Net loss margin -26.4 % -31.1 % -23.9 % -16.9 %
Adjusted EBITDA¹ $ (2,999 ) $ (1,355 ) $ (9,063 ) $ (4,259 )
Adjusted EBITDA margin¹ -19.0 % -7.3 % -17.5 % -7.9 %
___________________
(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 21.0% to$90.19 from$74.52 for the three months endedSeptember 30, 2022 and 2021, respectively, and by 15.7% to$81.89 from$70.77 for the nine months endedSeptember 30, 2022 and 2021, respectively, as a result of ongoing initiatives aimed at optimizing customer activity. AOV in the three and nine months endedSeptember 30, 2022 was positively impacted by a 50.5% and 35.1% decrease in first-time orders, respectively, which contributed to the increased AOV because first-time orders offer significant discounts. 39 --------------------------------------------------------------------------------
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 sold by 15.6% to 9,392 from 8,124 for the three months endedSeptember 30, 2022 and 2021, respectively, and by 40.7% to 16,143 from 11,476 for the nine months endedSeptember 30, 2022 and 2021, respectively.
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. Winc.com 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 certain of our core brands and that do not require membership. Contract Liabilities - 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 convenience 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 and are non-refundable. We are not required by law to escheat the value of unredeemed credits. Based on historical redemption rates, a percentage of gift cards and prepaid credits will not be redeemed, which is referred to as "breakage." Breakage revenue is recognized in proportion to the pattern of redemption by our customers, which we determine based on the historical redemption rate. Breakage related to prepaid credits and gift cards is reported in DTC net revenues. Wholesale - We define wholesale net revenues as net revenues generated from wholesale distributors and state-operated licensees. Our wholesale channel success is based on long-standing relationships with a highly developed network of distributors in allU.S. states. We work closely with wholesale distributors to increase the volume of our wines and number of products that are sold by the retail accounts in their respective territories. 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 and the sale of bulk wine, which is not attributable to the other two reportable segments.
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; and
•
storage.
40
--------------------------------------------------------------------------------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, during any period in which our portfolio includes more subscale, high-growth brands, gross margin may be negatively impacted until economies of scale can be achieved.
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, pricing support for national chain retail brand promotion 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.
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."
41
--------------------------------------------------------------------------------Results of Operations
Comparison of the Three Months Ended
DTC
The following table summarizes the results of operations for our DTC reportable segment for the periods presented (in thousands):
Three Months Ended September 30,
2022 2021 Change $ Change %
DTC net revenues $ 9,883 $ 12,674 $ (2,791 ) -22.0 %
DTC cost of revenues 5,601 7,122 (1,521 ) -21.4 %
DTC gross profit $ 4,282 $ 5,552 $ (1,270 ) -22.9 %
DTC Net Revenues
DTC net revenues decreased $2.8 million or 22.0% for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 . This
decrease was primarily driven by a 36.2% decrease in order volume period over
period and a 25% decrease in breakage revenue period over period, partially
offset by a 21.0% increase in AOV. We believe the decrease in order volume was
driven by a decrease in digital marketing spend as compared to the third quarter
of 2021. During the three months ended September 30, 2022 , we had a 50.5%
decrease in first-time orders, which contributed to the increased AOV period
over period because first-time orders offer significant discounts.
DTC Cost of Revenues
DTC cost of revenues decreased$1.5 million or 21.4% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The decrease in DTC cost of revenues was primarily due to the decrease in DTC net revenues. Additionally, improved product costs resulted in a decrease of$0.3 million and improved logistics costs resulted in a decrease of$0.6 million . DTC cost of revenues as a percentage of DTC net revenues increased approximately 48 basis points, resulting in decreased gross profit margin, which is due to decreased breakage revenue period over period as breakage revenue does not have a corresponding cost of revenue impact.
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 decreased$1.3 million or 22.9% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 .
Wholesale
The following table summarize the results of operations for our wholesale reportable segment for the periods presented (in thousands):
Three Months Ended September 30,
2022 2021 Change $ Change %
Wholesale net revenues $ 5,549 $ 5,507 $ 42 0.8 %
Wholesale cost of revenues 3,982 3,411 571 16.7 %
Wholesale gross profit $ 1,567 $ 2,096 $ (529 ) -25.2 %
Wholesale Net Revenues
Wholesale net revenues increased slightly by less than $0.1 million or 0.8%,
which was attributable to an increase in sales volume in this channel. We
increased our cases sold in our wholesale channel by 7.2% to 71,511 for the
three months ended September 30, 2022 from 66,732 for the three months ended
September 30, 2021 . The increase in case volume was primarily driven by a
one-time sale of select inventory below cost.
During the three months ended September 30, 2022 , one wholesale distributor
accounted for approximately 10.4% of wholesale net revenues. During the three
months ended September 30, 2021 , another wholesale distributor accounted for
approximately 14.5% of wholesale net revenues.
Wholesale Cost of Revenues
Wholesale cost of revenues increased$0.6 million or 16.7% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . During the three months endedSeptember 30, 2022 , wholesale cost of revenues increased as a result of$0.2 million of inventory sold below cost and$0.1 million related to an inventory reserve recognized during the period, which contributed to decreased gross profit margin. 42 --------------------------------------------------------------------------------
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 decreased$0.5 million or 25.2% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 .
Other Non-Reportable
The following table summarizes the results of operations for our other non-reportable segments for the periods presented (in thousands):
Three Months Ended September 30,
2022 2021 Change $ Change %
Other non-reportable net revenues $ 374 $ 276 $ 98 35.5 %
Other non-reportable cost of revenues 454 120 334 278.3 %
Other non-reportable gross profit $ (80 ) $
156
Other Non-Reportable Net Revenues
Other non-reportable net revenues increased$0.1 million or 35.5% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase in other net revenues was primarily attributable to$0.3 million in sales of bulk wine inventory during the three months endedSeptember 30, 2022 , partially offset by$0.1 million lower net revenues of Wonders (formerlyWonderful Wine Company ) due to decreased marketing spend as advertising priorities shifted during the period and$0.1 million lower net revenues from innovation projects.
Other Non-Reportable Cost of Revenues
Other non-reportable cost of revenues increased$0.3 million or 278.3% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase in other non-reportable cost of revenues was driven by sales of bulk wine which deliver lower overall margins but offer other benefits such as increased inventory turnover per year and beneficial working capital dynamics, as well as$0.1 million related to an inventory reserve recognized during the period.
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 decreased$0.2 million or 151.3% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 .
Comparison of the Nine Months Ended
DTC
The following table summarizes the results of operations for our DTC reportable segment for the periods presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change $ Change %
DTC net revenues $ 34,291 $ 39,525 $ (5,234 ) -13.2 %
DTC cost of revenues 19,158 22,479 (3,321 ) -14.8 %
DTC gross profit $ 15,133 $ 17,046 $ (1,913 ) -11.2 %
DTC Net Revenues
DTC net revenues decreased $5.2 million or 13.2% for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . This
decrease was primarily driven by a 30.0% decrease in order volume period over
period, partially offset by a 15.7% increase in AOV. The decrease in order
volume was driven by a decrease in digital marketing spend as compared to the
nine months ended September 30, 2021 . During the nine months ended September 30,
2022 , we had a 35.1% decrease in first-time orders, which contributed to the
increased AOV and gross profit margin period over period because first-time
orders offer significant discounts.
DTC Cost of Revenues
DTC cost of revenues decreased$3.3 million or 14.8% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . 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 decreased approximately 100 basis points, resulting in increased margin. Improved 43 --------------------------------------------------------------------------------
product costs resulted in a
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 decreased$1.9 million or 11.2% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 .
Wholesale
The following table summarize the results of operations for our wholesale reportable segment for the periods presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change $ Change %
Wholesale net revenues $ 16,849 $ 13,131 $ 3,718 28.3 %
Wholesale cost of revenues 11,118 7,733 3,385 43.8 %
Wholesale gross profit $ 5,731 $ 5,398 $ 333 6.2 %
Wholesale Net Revenues
Wholesale net revenues increased $3.7 million or 28.3% for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . Growth
in wholesale net revenues was attributable to a $2.4 million increase in organic
growth of our brands sales through new retail accounts, the May 2021 purchase of
certain assets from Natural Merchants, Inc. and increased sales to existing
distributors. We increased our cases sold by 33.5% to 205,907 for the nine
months ended September 30, 2022 from 154,219 for the nine months ended September
30, 2021 .
During the nine months ended September 30, 2022 , one wholesale distributor
accounted for approximately 11.8% of wholesale net revenues. During the nine
months ended September 30, 2021 , another wholesale distributor accounted for
approximately 13.9% of wholesale net revenues.
Wholesale Cost of Revenues
Wholesale cost of revenues increased$3.4 million or 43.8% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . 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. During the nine months endedSeptember 30, 2022 , wholesale cost of revenues increased as a result of$0.2 million of inventory sold below cost and$0.1 million related to an inventory reserve recognized during the period, which contributed to decreased gross profit margin.
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 increased$0.3 million or 6.2% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 .
Other Non-Reportable
The following table summarizes the results of operations for our other non-reportable segments for the periods presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change $ Change %
Other non-reportable net revenues $ 765 $ 917 $ (152 ) -16.6 %
Other non-reportable cost of revenues 741 393 348 88.5 %
Other non-reportable gross profit $ 24 $ 524 $ (500 ) -95.4 %
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Other Non-Reportable Net Revenues
Other non-reportable net revenues decreased$0.2 million or 16.6% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The decrease in other net revenues was primarily attributable to$0.5 million lower net revenues of Wonders (formerlyWonderful Wine Company ) due to decreased marketing spend as advertising priorities shifted during the period,$0.2 million lower net revenues from innovation projects, partially offset by$0.6 million in sales of bulk wine inventory during the nine months endedSeptember 30, 2022 .
Other Non-Reportable Cost of Revenues
Other non-reportable cost of revenues increased$0.3 million or 88.5% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Other non-reportable cost of revenues as a percentage of Other non-reportable net revenues increased, resulting in decreased margins. The increase in other non-reportable cost of revenues was driven by sales of bulk wine which deliver lower overall margins but offer other benefits such as increased inventory turnover per year and beneficial working capital dynamics, as well as$0.1 million related to an inventory reserve recognized during the period.
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 decreased$0.5 million or 95.4% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . 45 --------------------------------------------------------------------------------
Operating Expenses
Comparison of the Three Months Ended
The following table identifies our operating expenses and other income and expense items for the periods presented (in thousands):
Three Months Ended September 30,
2022 2021 Change $ Change %
Marketing $ 2,417 $ 3,700 $ (1,283 ) -34.7 %
Personnel 3,274 7,153 (3,879 ) -54.2 %
General and administrative 4,248 2,987 1,261 42.2 %
Production and operation 66 44 22 50.0 %
Creative development 14 131 (117 ) -89.3 %
Total operating expenses $ 10,019 $ 14,015
Interest expense (244 ) (127 ) (117 ) 92.1 %
Change in fair value of warrant liabilities - 248 (248 ) -100.0 %
Other income, net 323 358 (35 ) -9.8 %
Total other income $ 79 $ 479
Income tax expense 4 1 3 300.0 %
Marketing Expenses
Marketing expenses decreased by $1.3 million or 34.7% for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 . The
decrease in marketing expense was primarily driven by a $1.4 million decrease in
digital advertising costs during the three months ended September 30, 2022 , as
we took steps to focus marketing efforts to maintain payback targets and improve
profitability. This decrease was partially offset by an increase of $0.1 million
related to external marketing consulting services.
Personnel Expenses
Personnel expenses decreased by$3.9 million or 54.2% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This decrease was primarily attributable to a$3.8 million decrease in non-cash compensation expense as a result of employee promissory notes related to the early exercise of stock options that were forgiven during the three months endedSeptember 30, 2021 .
General and Administrative Expenses
General and administrative expenses increased by$1.3 million or 42.2% for three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This increase was primarily attributable to$0.8 million related to increased professional services fees, including accounting, investor relations, legal and consulting. This also includes a$0.6 million increase in insurance expenses associated with being a public company, partially offset by a$0.1 million decrease in bad debt expense period over period. 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.
Change in Fair Value of Warrant Liabilities
The warrants were remeasured as ofSeptember 30, 2021 , but subsequent to the IPO, they were no longer classified as liabilities and remeasured and therefore, there is no remeasurement as ofSeptember 30, 2022 . Refer to Note 10 in our unaudited condensed consolidated financial statements as of and for the three months endedSeptember 30, 2022 included elsewhere in this quarterly report for further information. 46 --------------------------------------------------------------------------------
Comparison of the Nine Months Ended
The following table identifies our operating expenses and other income and expense items for the periods presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change $ Change %
Marketing $ 8,176 $ 11,678 $ (3,502 ) -30.0 %
Personnel 11,260 12,540 (1,280 ) -10.2 %
General and administrative 13,928 8,555 5,373 62.8 %
Production and operation 258 97 161 166.0 %
Creative development 123 287 (164 ) -57.1 %
Total operating expenses $ 33,745 $ 33,157
Interest expense (390 ) (548 ) 158 -28.8 %
Change in fair value of warrant - (644 ) 644 100.0 %
liabilities
Other income, net 872 966 (94 ) -9.7 %
Gain on debt forgiveness from Paycheck - 1,364 (1,364 ) -100.0 %
Protection Program note payable
Total other income $ 482 $ 1,138
Income tax expense 24 17 7 41.2 %
Marketing Expenses
Marketing expenses decreased by $3.5 million or 30.0% for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . The
decrease in marketing expense was primarily driven by a $4.7 million decrease in
digital advertising costs during the nine months ended September 30, 2022 , as we
continue to focus marketing efforts to maintain payback targets and aim to
improve profitability. This decrease was partially offset by an increase of $1.0
million related to marketing events, branding, and offline advertising costs
related to the launch of summerwater.com in June 2022 and targeted marketing of
the Summer Water brand.
Personnel Expenses
Personnel expenses decreased by $1.3 million or 10.2% for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . This
decrease was primarily attributable to a $2.5 million decrease in non-cash
compensation expense as a result of employee promissory notes related to the
early exercise of stock options that were forgiven during the three months ended
September 30, 2021 . This decrease was partially offset by a $1.1 million
increase in wages primarily attributable to increased headcount to operate as a
public company, as well as executive severance costs of $0.2 million .
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$5.4 million or 62.8% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . This increase was primarily attributable to$3.0 million related to increased professional services fees, including accounting, investor relations, legal and consulting, of which we believe$0.5 million consists of non-recurring costs. This also includes a$1.9 million increase in insurance expenses associated with being a public company, a$0.4 million increase in rent-related costs and a$0.3 million increase in depreciation, partially offset by a$0.5 million decrease in bad debt expense.
Interest Expense
Interest expense decreased
Change in Fair Value of Warrant Liabilities
The warrants were remeasured as ofSeptember 30, 2021 , but subsequent to the IPO, they were no longer classified as liabilities and remeasured and therefore, there is no remeasurement as ofSeptember 30, 2022 . Refer to Note 10 in our unaudited condensed consolidated financial statements as of and for the nine months endedSeptember 30, 2022 included elsewhere in this Quarterly Report for further information.
Gain on Debt Forgiveness from Paycheck Protection Program Note Payable
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. 47 --------------------------------------------------------------------------------
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 used to fund working capital requirements, debt service payments, and operating expenses. As ofSeptember 30, 2022 , we had cash on hand of$2.8 million , inventory, net of$25.7 million , total current assets of$34.7 million , and total current liabilities of$32.8 million . As ofSeptember 30, 2022 , we had outstanding borrowings of$4.4 million on the BoC Line of Credit and we had no outstanding term loan debt. InJune 2022 , we entered into an amendment to the BoC Credit Agreement, which, among other things, extended the maturity date of the BoC Line of Credit toDecember 31, 2022 and provided for an incremental reduction of our borrowing capacity under the BoC Line of Credit during the periods prior to the maturity date as follows: (i) for the period beginningJuly 1, 2022 ,$6.5 million ; (ii) for the period beginningAugust 1, 2022 ,$5.5 million ; (iii) for the period beginningSeptember 1, 2022 ,$4.5 million ; (iv) for the period beginningOctober 1, 2022 ,$3.5 million ; (v) for the period beginningNovember 1, 2022 ,$2.5 million ; and (vi) for the period beginningDecember 30, 2022 , zero. SinceSeptember 30, 2022 , we have repaid$1.0 million of the outstanding borrowings under the BoC Line of Credit, resulting in an outstanding balance of$3.4 million as of the date of this Quarterly Report on Form 10-Q. InOctober 2022 , we entered into a further amendment to the BoC Credit Agreement, which, among other things, delayed the reduction in borrowing capacity scheduled forNovember 1, 2022 toDecember 1, 2022 and deferred measurement of the minimum liquidity covenant untilDecember 31, 2022 . InJune 2022 , we entered into an agreement providing for the sale on a non-recourse basis of the proceeds from future sales from its DTC channel to a third-party financial institution in exchange for an advance of a portion of such proceeds. Total available advances under the agreement equal$2.9 million , all of which has been advanced as ofSeptember 30, 2022 . In exchange for advances on future DTC sales, 9% of daily DTC receipts are applied towards the balance owed. Payments applied towards the balance owed totaled$0.9 million and$1.2 million for the three and nine months endedSeptember 30, 2022 , respectively. As the advances are expected to be paid off within one year from being advanced, the balance is classified as short-term advances on our unaudited condensed consolidated balance sheet as ofSeptember 30, 2022 . We present cash proceeds as cash provided from financing activities in the unaudited condensed consolidated statements of cash flows. Fees under the agreement totaling$0.4 million , or 13.5% of the total advance of$2.9 million , are recorded in other income (expense) over the estimated term of the agreement. Eligible discounts, which reduce the fees, totaled$0.1 million and$0.2 million for the three and nine months endedSeptember 30, 2022 , respectively. In addition to the BoC Credit Agreement, we have long term lease and earnout commitments. Our operating lease obligations of$4.2 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 betweenMay 2021 andMay 2023 . Contingent consideration due for the earnout period endingMay 2022 totaled$1.6 million . We estimate we will pay the seller$1.4 million for the earnout period endingMay 2023 . InAugust 2022 , we entered into an amendment to the purchase agreement withNatural Merchants, Inc. that, among other things, restructured the payment of the$1.6 million contingent consideration for the earnout period endingMay 2022 (the "2021 Earnout Amount") into nine monthly installments beginningSeptember 15, 2022 . The amendment also made the repayment of the 2021 Earnout Amount subject to a 10% annualized interest rate, accruing monthly fromJuly 1, 2022 . Each of the first eight payments will equal one-twelfth of the balance, and the ninth and final payment will equal the remaining balance. The amendment also provides that the payment of any unpaid amount of the 2021 Earnout Amount may be accelerated under certain circumstances, including in the event we secure certain third-party financing or undergo a change of control or sale of all or substantially all of our assets. We continue to seek additional sources of capital, but there can be no assurance that we will be able to obtain required capital on acceptable terms, if at all. If we are unable to obtain alternative financing, there are no assurances that we will be able to repay the BoC Line of Credit at maturity or satisfy our other obligations. These conditions raise substantial doubt about our ability to continue as a going concern. Management believes we will continue to require third-party financing to repay the BoC Line of Credit at maturity or satisfy our other obligations and to support future operations until we achieve profitability. We continue to take steps to improve profitability and seek additional sources of capital. However, there can be no assurance that improvement in operating results will occur or that we will successfully implement our plans. In addition, there can be no assurances that an agreement for additional capital would ultimately be reached or that the additional capital would become available to us at all or on terms favorable to us. In the event cash flow from operations and factoring or borrowings arrangements are not sufficient, additional sources of financing, such as equity offerings, will be required in order to repay the BoC Line of Credit at maturity or satisfy our other obligations and to maintain our current and planned future operations. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern. If we are unable to adequately reduce costs or obtain additional financing, we believe we will not have sufficient funds to meet our obligations within the next twelve months from the date of issuance of the consolidated financial statements included in this Quarterly Report on Form 10-Q.
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 . 48 --------------------------------------------------------------------------------
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$4.4 million and zero under the BoC Line of Credit as ofSeptember 30, 2022 andDecember 31, 2021 , respectively.
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 Multiplier LSA), 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 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.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Nine Months Ended September 30,
2022 2021
Net cash used in operating activities
(524 ) (9,247 )
Net cash provided by financing activities 6,155 17,647
Net decrease in cash $ (2,123 ) $ (5,396 )
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. For the nine months endedSeptember 30, 2022 and 2021, net cash used by operating activities was$7.8 million and$13.8 million , respectively. Our operating activities included our net loss of$12.4 million and$9.1 million , respectively, which were offset by non-cash adjustments of$3.1 million and$4.7 million , respectively. For the nine months endedSeptember 30, 2022 , cash used in operating activities was offset by a decrease in working capital of$1.5 million . Net cash used in operating activities for the nine months endedSeptember 30, 2021 increased by a net increase in working capital of$9.5 million . The net changes in working capital for both periods are primarily due to the timing of cash receipts from sales and the timing of payments to suppliers.
Cash Flows from Investing Activities
Cash used in investing activities was$0.5 million and$9.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Investing cash flows for the nine months endedSeptember 30, 2022 included$0.2 million for purchases of property and equipment and$0.3 million of capitalized software development costs. Investing cash flows for the nine months endedSeptember 30, 2021 included$0.3 million for purchases of property and equipment,$0.2 million of capitalized software development costs and$8.8 million related to the acquisition of intangible assets through the acquisition of certain assets fromNatural Merchants, Inc.
Cash Flows from Financing Activities
Cash flows from financing activities resulted in net inflows of$6.2 million and$17.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Financing cash flows for the nine months endedSeptember 30, 2022 consisted of$6.5 million in borrowings on the BoC Line of Credit and$1.7 million of advances received under financing arrangements, net of repayments. This was partially offset by$2.1 million of repayments on the BoC Line of Credit. Financing cash flows for the nine months endedSeptember 30, 2021 included$13.3 million in proceeds from the issuance of preferred stock, net of issuance costs,$0.1 million of proceeds from 49 --------------------------------------------------------------------------------
stock option exercises, as well as
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 unaudited 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; and
•
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).
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net loss $ (4,175 ) $ (5,733 ) $ (12,399 ) $ (9,068 )
Interest expense 244 127 390 548
Income tax expense 4 1 24 17
Depreciation and amortization expense 278 226 828 520
EBITDA $ (3,649 ) $ (5,379 ) $ (11,157 ) $ (7,983 )
Stock-based compensation 484 819 1,928 991
Gain on debt forgiveness from Paycheck - - - (1,364 )
Protection Program note payable
Forgiveness of employee promissory notes - 3,453 - 3,453
issued for stock option exercises
Change in fair value of warrant - (248 ) - 644
liabilities
Executive severance 166 - 166 -
Adjusted EBITDA $ (2,999 ) $ (1,355 ) $ (9,063 ) $ (4,259 )
Net loss margin -26.4 % -31.1 % -23.9 % -16.9 %
Adjusted EBITDA margin -19.0 % -7.3 % -17.5 % -7.9 %
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with
GAAP. The preparation of these condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, expenses, and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. By their nature, estimates are subject to an
inherent degree of uncertainty. Certain of our estimates and assumptions require
increased judgment and carry a higher degree of variability and volatility that
could result in material changes to our estimates in future periods. Our actual
results could differ materially from these 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
50
--------------------------------------------------------------------------------
Results of Operations" in our Annual Report on Form 10-K for the fiscal year
ended
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 unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for recent accounting pronouncements.
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 unaudited 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$1.235 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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