Rover (ROVR) - 2023 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements subject to substantial risks and uncertainties, with actual results potentially differing materially from projections - This report contains forward-looking statements subject to substantial risks and uncertainties, relating to future events or financial/operating performance. These statements are based on current expectations and projections, but actual results may differ materially due to various factors[8][12] - Key areas of forward-looking statements include macroeconomic conditions, COVID-19 impact, litigation outcomes, future operating and financial performance, growth strategies, marketing effectiveness, and regulatory compliance[9][15] Risk Factors Summary The business faces numerous risks including economic downturns, operational challenges, technology vulnerabilities, and regulatory compliance issues - The business faces numerous risks, including declines in travel/pet care industries due to economic downturns, pandemics, or inflation, and a history of net losses with no guarantee of future profitability[17][20] - Operational risks include ineffective marketing, off-platform bookings, failure to retain users, competition, and potential reclassification of pet care providers as employees, which could materially impact financial results[17][20] - Technology and regulatory risks involve cybersecurity attacks, privacy law changes, system failures, intellectual property protection, and compliance with various laws, all of which could harm operations and reputation[22][26] Part I - Financial Information This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section provides the unaudited condensed consolidated balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with their accompanying notes Condensed Consolidated Balance Sheets (unaudited) The balance sheet shows an increase in total assets and liabilities, with a slight decrease in total stockholders' equity from December 2022 to March 2023 Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change | % Change | | :-------------------- | :------------- | :---------------- | :----- | :------- | | Assets | | | | | | Total current assets | $336,809 | $312,042 | $24,767 | 7.9% | | Total assets | $431,689 | $418,261 | $13,428 | 3.2% | | Liabilities | | | | | | Total current liabilities | $102,451 | $87,065 | $15,386 | 17.7% | | Total liabilities | $124,779 | $109,987 | $14,792 | 13.4% | | Equity | | | | | | Total stockholders' equity | $306,910 | $308,274 | $(1,364) | -0.4% | - Cash and cash equivalents increased by $17.245 million from December 31, 2022, to March 31, 2023, reaching $76.120 million - Deferred revenue significantly increased by $7.382 million (133.1%) from $5.544 million to $12.926 million, indicating increased payments received in advance of services Condensed Consolidated Statements of Operations (unaudited) The statements of operations reflect a significant revenue increase and reduced net loss for Q1 2023 compared to Q1 2022 Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Revenue | $41,120 | $27,824 | $13,296 | 47.8% | | Total costs and expenses | $48,284 | $40,403 | $7,881 | 19.5% | | Loss from operations | $(7,164) | $(12,579) | $5,415 | -43.0% | | Total other income (expense), net | $2,823 | $4,444 | $(1,621) | -36.5% | | Net loss | $(4,656) | $(8,146) | $3,490 | -42.8% | | Net loss per share, basic and diluted | $(0.03) | $(0.05) | $0.02 | -40.0% | - Interest income increased substantially from $0.139 million in Q1 2022 to $2.423 million in Q1 2023, a 1643% increase, driven by reallocation of cash to short-term investments and rising interest rates[30][226] - The change in fair value of derivative warrant liabilities was $0 in Q1 2023, compared to a $4.579 million gain in Q1 2022, as warrants were no longer outstanding after Q1 2022[30][230] Condensed Consolidated Statements of Comprehensive Loss (unaudited) The comprehensive loss significantly improved in Q1 2023, primarily due to unrealized gains on available-for-sale debt securities Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net loss | $(4,656) | $(8,146) | $3,490 | -42.8% | | Other comprehensive income (loss), net of tax | $651 | $(471) | $1,122 | -238.2% | | Comprehensive loss | $(4,005) | $(8,617) | $4,612 | -53.5% | - Other comprehensive income (loss) improved significantly, moving from a loss of $(0.471) million in Q1 2022 to an income of $0.651 million in Q1 2023, primarily due to unrealized gains on available-for-sale debt securities[33] Condensed Consolidated Statements of Stockholders' Equity (unaudited) Stockholders' equity saw minor changes in Q1 2023, including share repurchases and stock-based compensation adjustments Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Balance as of Dec 31, 2022 | Changes in Q1 2023 | Balance as of Mar 31, 2023 | | :-------------------- | :------------------------- | :----------------- | :------------------------- | | Common Stock (Shares) | 184,526 | 715 | 185,241 | | Common Stock (Amount) | $18 | $1 | $19 | | Additional Paid-In Capital | $651,659 | $5,696 | $657,355 | | Accumulated Other Comprehensive Loss | $(1,098) | $651 | $(447) |\ | Accumulated Deficit | $(342,305) | $(7,712) | $(350,017) | | Total Stockholders' Equity | $308,274 | $(1,364) | $306,910 | - The company repurchased and retired 632 thousand shares of common stock, resulting in a $3.056 million reduction in accumulated deficit during Q1 2023[36] - Stock-based compensation added $4.979 million to additional paid-in capital in Q1 2023[36] Condensed Consolidated Statements of Cash Flows (unaudited) Cash flows from investing activities significantly increased in Q1 2023, while operating and financing activities showed outflows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash used in operating activities | $(5,513) | $(1,112) | $(4,401) |\ | Net cash provided by (used in) investing activities | $25,062 | $(125,671) | $150,733 |\ | Net cash (used in) provided by financing activities | $(2,339) | $1,953 | $(4,292) |\ | Net increase (decrease) in cash and cash equivalents | $17,245 | $(124,854) | $142,099 | - Net cash provided by investing activities significantly increased by $150.7 million, primarily due to increased maturities and decreased purchases of available-for-sale securities in Q1 2023[42][265] - Net cash used in financing activities shifted from a $1.953 million inflow in Q1 2022 to a $2.339 million outflow in Q1 2023, driven by share repurchases and higher taxes paid for RSU vesting[42][268] Notes to Condensed Consolidated Financial Statements (unaudited) This section provides detailed disclosures on the company's accounting policies, investments, fair value measurements, and other financial statement components 1. Organization and Description of Business Rover Group, Inc. operates an online marketplace connecting pet parents and pet care providers, headquartered in Seattle with international offices. The company has an accumulated deficit of $350.0 million as of March 31, 2023, but believes current cash and investments are sufficient for at least the next 12 months. The COVID-19 pandemic continues to impact its business, particularly travel and working arrangements - Rover Group, Inc. provides an online marketplace for pet parents and pet care providers to find, communicate, and interact for pet care services[44] - As of March 31, 2023, the company had an accumulated deficit of $350.0 million[48] - Management believes current cash, cash equivalents, and investments ($76.1 million cash, $176.4 million short-term investments, $12.1 million long-term investments) will be sufficient to fund operations for at least the next 12 months[48] 2. Summary of Significant Accounting Policies This section details Rover's accounting policies, including principles of consolidation, GAAP compliance for interim financial information, and the use of estimates. The company operates as one reportable segment, with most long-lived assets and revenue attributed to the U.S. Rover adopted ASU No. 2022-02 on January 1, 2023, with no material impact, and expects no material impact from ASU No. 2022-03 in 2024 - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC requirements for interim financial information[51] - The Company has one operating segment and one reportable segment, with substantially all long-lived assets and revenue attributed to the United States[55] - The Company adopted ASU No. 2022-02 (Credit Losses) on January 1, 2023, with no material impact, and does not expect ASU No. 2022-03 (Fair Value Measurement) to have a material impact upon adoption in 2024[80][81] 3. Revenue Recognition Rover primarily generates revenue from fixed percentage service fees charged to pet parents and pet care providers for bookings on its online marketplace. Revenue is recognized at a point-in-time when the pet care service begins, after any cancellation period. The company acts as an agent, recognizing revenue on a net basis. Provider onboarding fees are recognized on a gross basis upon completion of quality assurance reviews. Marketing promotions and refunds are generally treated as reductions to revenue - Revenue is derived principally from fixed percentage service fees for pet care services arranged on the platform, recognized at the start of the service[62][63][66] - The Company acts as an agent in marketplace transactions, recognizing revenue on a net basis[67] Deferred Revenue (in thousands) | Deferred Revenue (in thousands) | Amount | | :------------------------------ | :----- | | Balance at December 31, 2022 | $5,544 |\ | Bookings and other | $46,630 |\ | Revenue recognized | $(39,248) |\ | Balance at March 31, 2023 | $12,926 | 4. Investments Rover's investment portfolio includes available-for-sale marketable securities and convertible notes. As of March 31, 2023, total investments were $190.355 million, with marketable securities showing gross unrealized losses of $543 thousand, primarily due to interest rate changes. The company also holds $1.810 million in convertible notes from an early-stage pet service company, accounted for under the equity method, and recognized a $0.3 million loss from this investment in Q1 2023 Investment Type (in thousands) | Investment Type (in thousands) | Amortized Costs (Mar 31, 2023) | Fair Value (Mar 31, 2023) | Unrealized Losses (Mar 31, 2023) | | :----------------------------- | :----------------------------- | :------------------------ | :------------------------------- | | Commercial paper | $51,327 | $51,292 | $(35) |\ | Corporate securities | $19,841 | $19,757 | $(84) |\ | US Government securities | $103,780 | $103,398 | $(391) |\ | Asset-backed securities | $7,554 | $7,521 | $(33) |\ | Agency bonds | $6,560 | $6,577 | $0 |\ | Convertible notes | $1,810 | $1,810 | $0 |\ | Total Investments | $190,872 | $190,355 | $(543) | - The company invested $1.810 million in convertible notes in an early-stage pet service company (Investee), accounted for under the equity method, and recognized a $0.314 million loss from this investment in Q1 2023[90][91][93] - Unrealized losses on available-for-sale fixed-maturity securities were primarily caused by interest rate changes, not credit losses, and the company has the ability to hold them to maturity[89] 5. Fair Value This note presents the fair value hierarchy for Rover's assets and liabilities measured at fair value on a recurring basis. As of March 31, 2023, total assets measured at fair value were $253.265 million, with most marketable securities classified as Level 2. Convertible notes are classified as Level 3 due to reliance on unobservable inputs. The company also notes the reclassification of derivative warrant liabilities to stockholders' equity in Q1 2022, as no warrants were outstanding as of March 31, 2023 Fair Value Hierarchy (in thousands) | Fair Value Hierarchy (in thousands) | Level 1 (Mar 31, 2023) | Level 2 (Mar 31, 2023) | Level 3 (Mar 31, 2023) | Total (Mar 31, 2023) | | :---------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | Money market funds | $56,134 | — | — | $56,134 |\ | Commercial paper | — | $58,068 | — | $58,068 |\ | Corporate securities | — | $19,757 | — | $19,757 |\ | US Government securities | — | $103,398 | — | $103,398 |\ | Asset-backed securities | — | $7,521 | — | $7,521 |\ | Agency bonds | — | $6,577 | — | $6,577 |\ | Convertible notes | — | — | $1,810 | $1,810 |\ | Total assets measured at fair value | $56,134 | $195,321 | $1,810 | $253,265 | - Convertible notes are classified as Level 3 financial assets, with a fair value of $1.8 million as of March 31, 2023, based on the credit quality of the underlying business and potential future equity financing[99] - As of March 31, 2023, no warrant liabilities were outstanding, as the related carrying amount was reclassified to stockholders' equity during Q1 2022[102] 6. Balance Sheet Components This note provides a detailed breakdown of Rover's Property and Equipment, net, and Accrued Expenses and Other Current Liabilities. Capitalized internal-use software development costs increased to $2.5 million in Q1 2023. Accrued expenses include an $18.0 million legal settlement related to pet care provider classification, which was recorded in Q4 2022 and remains outstanding Property and Equipment, net (in thousands) | Property and Equipment, net (in thousands) | March 31, 2023 | December 31, 2022 | | :----------------------------------------- | :------------- | :---------------- | | Total property and equipment | $41,328 | $40,914 |\ | Less: Accumulated depreciation and amortization | $(21,919) | $(21,396) |\ | Total property and equipment, net | $19,409 | $19,518 | - The company capitalized $2.5 million of software development costs during Q1 2023, up from $1.9 million in Q1 2022[105] - Accrued legal settlements of $18.0 million were recorded as of March 31, 2023, related to a pet care provider classification lawsuit[106] 7. Goodwill and Intangible Assets Rover's intangible assets include pet parent relationships, shelter relationships, technologies, tradenames, and training curriculum, totaling $6.370 million net book value as of March 31, 2023. No impairment of goodwill or intangible assets was recognized during the periods presented. Amortization expense for acquired intangible assets decreased to $0.5 million in Q1 2023 from $0.7 million in Q1 2022, primarily due to certain DogVacay assets becoming fully amortized Intangible Asset (in thousands) | Intangible Asset (in thousands) | Net Book Value (Mar 31, 2023) | Weighted Average Amortization Period Remaining (Years) | | :------------------------------ | :---------------------------- | :--------------------------------------------------- | | Pet parent relationships | $2,919 | 3.6 |\ | Shelter relationships | $659 | 4.3 |\ | Technologies | $1,272 | 2.3 |\ | Tradenames | $1,107 | 4.3 |\ | Training curriculum | $413 | 2.3 |\ | Total | $6,370 | | - Amortization expense related to acquired intangible assets decreased from $0.7 million in Q1 2022 to $0.5 million in Q1 2023, mainly due to DogVacay intangible assets becoming fully amortized[109][225] - No impairment of goodwill or intangible assets was recognized during the periods presented[107][109] 8. Commitments and Contingencies Rover leases office spaces in Seattle, Spokane, and Barcelona, with lease agreements expiring between 2023 and 2030, and benefits from sublease income. The company is involved in various legal proceedings, most notably an $18.0 million settlement for a California PAGA lawsuit alleging misclassification of pet care providers. This settlement received preliminary court approval in March 2023 and is expected to be paid in 2023, contingent on final approval Lease Cost Component (in thousands) | Lease Cost Component (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $981 | $1,065 |\ | Short-term lease cost | $159 | — |\ | Sublease income | $(296) | $(304) |\ | Total lease cost | $844 | $761 | - The company entered into a binding settlement term sheet for $18.0 million in October 2022, related to a California PAGA lawsuit alleging misclassification of pet care providers. The settlement received preliminary approval on March 24, 2023[124] - The $18.0 million settlement payment is expected to be paid from existing cash and investments during 2023, contingent on final approval[124] 9. Stockholders' Equity This note details changes in Rover's stockholders' equity, including the reclassification of derivative warrant liabilities to equity in January 2022 following the cashless exercise and redemption of warrants. In February 2023, the company announced a $50.0 million share repurchase program, under which 720,097 shares were repurchased for $3.041 million by March 31, 2023 - In January 2022, 2,046,220 shares of Class A Common Stock were issued upon cashless exercise of warrants, and the related warrant liability was reclassified to stockholders' equity[130][131] - The board approved a $50.0 million share repurchase program in February 2023, with 720,097 shares repurchased for $3.041 million by March 31, 2023[132][134] - The Inflation Reduction Act of 2022 imposed a 1% excise tax on stock repurchases, which was immaterial for Q1 2023[134] 10. Stock-Based Compensation Rover's 2021 Equity Incentive Plan had 8.6 million shares of Class A Common Stock reserved for future issuance as of March 31, 2023. Stock-based compensation expense for Q1 2023 totaled $4.505 million, an increase from $4.310 million in Q1 2022. The company has significant unrecognized compensation costs for unvested stock options ($0.8 million) and RSUs ($73.4 million), to be recognized over weighted average periods of 0.9 and 3.2 years, respectively - As of March 31, 2023, 8.6 million shares of Class A Common Stock were reserved for future issuance under the 2021 Equity Incentive Plan[137] Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Operations and support | $428 | $348 |\ | Marketing | $263 | $251 |\ | Product development | $1,098 | $1,390 |\ | General and administrative | $2,716 | $2,321 |\ | Total stock-based compensation expense | $4,505 | $4,310 | - Total unrecognized compensation cost for unvested stock options was $0.8 million (0.9 years remaining service period) and for unvested RSUs was $73.4 million (3.2 years remaining service period) as of March 31, 2023[146] 11. Income Taxes Rover's effective tax rate for the three months ended March 31, 2023, was 0.0%, primarily due to a full valuation allowance against its U.S. deferred tax assets. Gross unrecognized tax benefits increased by $38,500 during the period, but these would not affect the effective tax rate if recognized - The effective tax rate for Q1 2023 was 0.0%, differing from the statutory rate of 21% primarily due to a full valuation allowance on U.S. deferred tax assets[147] - Gross unrecognized tax benefits increased by $38.5 thousand in Q1 2023, but would not affect the effective tax rate if recognized[149] 12. Net Loss Per Share Attributable to Common Stockholders For the three months ended March 31, 2023, Rover reported a basic and diluted net loss per share attributable to common stockholders of $(0.03). Potentially dilutive shares, including 29.186 million outstanding stock options and RSUs, and 492 thousand Sponsor earnout shares, were excluded from the diluted EPS calculation as their effect would have been anti-dilutive Net Loss Per Share Attributable to Common Stockholders (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(4,656) | $(8,146) |\ | Weighted-average shares outstanding | 184,365 | 179,671 |\ | Net loss per share, basic and diluted | $(0.03) | $(0.05) | - Potentially dilutive shares totaling 29.678 million (including stock options, RSUs, and Sponsor earnout shares) were excluded from diluted EPS calculation as their effect was anti-dilutive[150] 13. Subsequent Events Subsequent to the first quarter of 2023 and through May 5, 2023, Rover Group, Inc. repurchased an additional 990,498 shares of its Class A Common Stock for a total cost of $4.3 million, excluding brokers' commissions and excise tax, at an average price of $4.38 per share - After March 31, 2023, and through May 5, 2023, Rover repurchased an additional 990,498 shares for $4.3 million, at an average price of $4.38 per share[152] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Rover's financial condition and operating results, discussing key trends, business metrics, and performance factors Overview Rover operates the world's largest online pet care marketplace, generating revenue from service fees and continuously investing in growth - Rover is the world's largest online marketplace for pet care, connecting over 4.3 million unique pet parents with over 920,000 pet care providers across North America, the UK, and Western Europe[157] - Revenue is primarily generated from fixed percentage service fees from pet parents and pet care providers, with additional income from provider onboarding fees, virtual pet training, affiliate fees, and product sales[158] - The company continues to invest in product enhancements, explore new service lines, and evaluate acquisition and investment opportunities to support growth[159] Impact of COVID-19 and Other Health Trends The COVID-19 pandemic continues to affect Rover's business, impacting travel and work arrangements, though Q1 2023 saw improved demand - The COVID-19 pandemic and other seasonal illnesses continue to impact Rover's business, particularly affecting travel and the return to offices, potentially leading to fewer bookings and higher cancellation rates[161][162] - Demand and cancellation rates improved in Q1 2023 compared to Q1 2022, but the year-over-year growth rates are not representative of long-term performance due to the adverse impact of the Omicron variant in the prior year[163] - The company believes a return to pre-pandemic travel levels and in-office work would be a positive factor for growth[164] Key Trends and Uncertainties Macroeconomic trends and the risk of pet care provider reclassification pose significant challenges, with an $18.0 million settlement impacting platform modifications - Macroeconomic and geopolitical trends (inflation, interest rates, consumer confidence, geopolitical conflicts) could adversely affect future business, operating results, and financial position[166] - The company faces ongoing risk of pet care providers being reclassified as employees, especially given evolving rules and restrictions in the 'gig economy'[166] - Rover entered into an $18.0 million settlement agreement for a California classification lawsuit, agreeing to modify its platform to bolster the independent contractor classification of pet care providers[166] Key Business Metrics Total bookings increased 27% to 1.476 million, and Gross Booking Value grew 36% to $209 million in Q1 2023, driven by international recovery Bookings (in thousands, except percentages) | Bookings (in thousands, except percentages) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Y/Y growth | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | | New bookings | 208 | 179 | 16% |\ | Repeat bookings | 1,268 | 984 | 29% |\ | Total bookings | 1,476 | 1,163 | 27% |\ | Repeat bookings as a % of total bookings | 86% | 85% | | - Gross Booking Value (GBV) increased by 36% year-over-year to $209 million for the three months ended March 31, 2023, driven by increased bookings and higher average booking values[173][174] - International markets contributed 9% of GBV in Q1 2023, up from 7% in Q1 2022, with a 68% increase in GBV in international markets year-over-year[174] Factors Affecting Our Performance Performance is driven by pet parent retention, provider network growth, service mix, and managing cancellation rates, which improved in Q1 2023 - Repeat bookings increased 29% year-over-year in Q1 2023, constituting 86% of total bookings, indicating strong retention of existing pet parents[177] - As of March 31, 2023, Rover had over 344,000 addressable pet care providers, a 50% increase from March 31, 2022[183] - Average Booking Value (ABV) was $142 in Q1 2023, up 7% from $132 in Q1 2022, primarily driven by increased pricing set by pet care providers[185] - In Q1 2023, overnight services accounted for 41% of total bookings and 69% of GBV, while daytime services made up 59% of bookings and 31% of GBV[187][188] - The cancellation rate improved to 11.6% of GBV in Q1 2023, down from 12.7% in Q1 2022, reflecting reduced impact from COVID-19[190] Components of Results of Operations This section defines revenue recognition, cost of revenue, operating expenses, and other income/expense items, outlining their impact on financial results - Revenue is derived from fees paid by pet care providers and pet parents, net of credits, coupons, discounts, cancellations, and refunds, recognized at the start of pet care services[191] - Cost of revenue includes payment processor fees, server hosting, internal-use software amortization, background check costs, and expenses related to the Rover Guarantee[192] - Operating expenses (Operations and Support, Marketing, Product Development, General and Administrative) are expected to increase in absolute dollars but decrease as a percentage of revenue over the longer term due to scale and leverage[195][196][200][203] - Other income (expense), net includes interest income (primarily from cash and investments), interest expense, changes in fair value of other investments (like convertible notes), and foreign currency gains/losses[205][206][207][209] Results of Operations Rover's Q1 2023 results show significant improvement, with revenue increasing 48% year-over-year to $41.120 million. Net loss decreased by 42.8% to $(4.656) million, and loss from operations improved by 43.0% to $(7.164) million. This was driven by increased bookings, higher average booking values, and lower cancellation rates. Interest income saw a substantial 1643% increase due to investment reallocation and rising interest rates, while the absence of warrant liabilities contributed to changes in other income/expense Results of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Revenue | $41,120 | $27,824 | $13,296 | 48% |\ | Loss from operations | $(7,164) | $(12,579) | $5,415 | -43% |\ | Net loss | $(4,656) | $(8,146) | $3,490 | -43% |\ | Interest income | $2,423 | $139 | $2,284 | 1643% | - Revenue increase was primarily due to a 27% increase in bookings, a 7% increase in Average Booking Value (ABV), a decrease in cancellation rates from 12.7% to 11.6%, and a 94% increase in provider onboarding revenue[217] - Cost of revenue increased by 37% to $10.780 million, driven by a 48% increase in revenue, including higher merchant fees, provider onboarding costs, and customer claim costs related to the Rover Guarantee[218][219] - General and administrative expenses increased by 7% to $12.362 million, due to higher personnel costs, stock-based compensation, software costs, and occupancy expenses, partially offset by decreased professional fees and insurance expense[223][224] Non-GAAP Financial Measures Rover utilizes non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDA margin, Contribution, and Contribution margin, to provide supplemental insights into its business performance beyond GAAP results. For Q1 2023, Adjusted EBITDA significantly improved to $0.575 million (1% margin) from a loss of $(4.761) million (-17% margin) in Q1 2022. Non-GAAP Contribution margin remained stable at 78% for both periods - Adjusted EBITDA for Q1 2023 was $0.575 million, a significant improvement from $(4.761) million in Q1 2022[241] Non-GAAP Metric (in thousands, except percentages) | Non-GAAP Metric (in thousands, except percentages) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $41,120 | $27,824 |\ | Net loss | $(4,656) | $(8,146) |\ | Adjusted EBITDA | $575 | $(4,761) |\ | Adjusted EBITDA margin | 1% | -17% |\ | Non-GAAP Contribution | $32,096 | $21,708 |\ | Non-GAAP Contribution margin | 78% | 78% | - Non-GAAP Contribution margin remained consistent at 78% for both Q1 2023 and Q1 2022[245] Liquidity and Capital Resources Rover's liquidity is primarily supported by $76.1 million in cash and cash equivalents, $176.4 million in short-term investments, and $12.1 million in long-term investments as of March 31, 2023, plus $68.2 million held by payment processors. Management believes these resources, combined with operating cash flows, will be sufficient for at least the next 12 months, despite ongoing operating losses. Material cash requirements include lease obligations, RSU tax withholdings (with $0.8 million spent in March 2023), and the $50.0 million share repurchase program ($7.4 million repurchased by May 3, 2023). The company also expects to pay an $18.0 million legal settlement in 2023 - As of March 31, 2023, Rover had $76.1 million in cash and cash equivalents, $176.4 million in short-term investments, and $12.1 million in long-term investments, plus $68.2 million held by payment processors[249] - Management believes current liquidity is sufficient to fund operations for at least the next 12 months, despite incurring operating losses of $7.2 million and negative operating cash flows of $5.5 million in Q1 2023[251][252] - Material cash requirements include lease obligations, non-cancelable commitments for network/cloud services ($11.3 million), RSU tax withholding obligations (approx. $0.8 million spent in March 2023), and the $50.0 million share repurchase program ($7.4 million repurchased by May 3, 2023)[254][255][256] - The $18.0 million legal settlement payment is expected to be paid from existing cash and investments during 2023, contingent on final approval[259] Critical Accounting Policies and Estimates This section states that there have been no material changes in Rover's critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes in critical accounting policies and estimates from the Form 10-K for the fiscal year ended December 31, 2022[273] Recent Accounting Pronouncements This section refers to Note 2—Summary of Significant Accounting Policies for details on recently issued accounting pronouncements, their adoption timing, and Rover's assessment of their potential impact on its financial condition and results of operations - Refer to Note 2—Summary of Significant Accounting Policies for information on recently issued accounting pronouncements, their adoption timing, and potential impact[274] JOBS Act Accounting Election Rover is an 'emerging growth company' under the JOBS Act but has elected not to use the extended transition period for complying with new or revised financial accounting standards. The company intends to rely on other exemptions and reduced reporting requirements provided by the JOBS Act - Rover is an 'emerging growth company' as defined in the JOBS Act[275] - The company has elected not to use the extended transition period for complying with new or revised accounting standards[275] - Rover intends to rely on other exemptions and reduced reporting requirements provided by the JOBS Act[276] Item 3. Quantitative and Qualitative Disclosures About Market Risk Rover is exposed to various market risks, including interest rate risk, investment risk, foreign currency risk, and inflation risk. Its investment portfolio, primarily short-term fixed income securities, is less sensitive to interest rate changes. Foreign currency fluctuations impact international revenue and costs, while inflation could lead to higher operating costs, increased pet care provider prices, and reduced demand for services - Rover is exposed to interest rate risk, investment risk, foreign currency translation and transaction risk, and inflation risk[278] - The investment portfolio consists of short-term fixed income securities, making it less materially affected by hypothetical 100 basis point changes in interest rates[280][282] - Foreign currency risk arises from international revenue and costs denominated in foreign currencies (British Pound, Euro, Canadian dollar), with a weakening U.S. dollar benefiting net revenue[284][286] - Inflation risk could increase operating costs, lead to higher pet care provider prices (potentially reducing demand), and decrease demand for pet care services if travel costs rise significantly[288] Item 4. Controls and Procedures Rover's CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to identified material weaknesses in internal control over financial reporting. These weaknesses include an insufficient complement of personnel, inadequate formal procedures for financial reporting and segregation of duties, issues with identifying and accounting for complex transactions (like warrant instruments), and ineffective IT general controls. Remediation efforts are ongoing, involving hiring personnel, designing new controls, and engaging external advisors, but the material weaknesses are not yet remediated - As of March 31, 2023, Rover's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[290] - Identified material weaknesses include an insufficient complement of personnel, inadequate formal procedures for financial reporting and segregation of duties, and ineffective controls over non-routine/complex transactions (e.g., warrant instruments)[293][294] - An additional material weakness was identified in IT general controls, specifically regarding program change management, user access, computer operations, and program development controls[296] - Remediation efforts are ongoing, including hiring finance/accounting personnel, designing new controls, and engaging external advisors, but the material weaknesses are not yet remediated as of March 31, 2023[297][299] Part II - Other Information This section provides additional information on legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings This section refers to Note 8—Commitments and Contingencies in Part I, Item 1 of this report for detailed information regarding the legal proceedings in which Rover Group, Inc. is involved, particularly the $18.0 million settlement for the pet care provider misclassification lawsuit in California - For information regarding legal proceedings, refer to Note 8—Commitments and Contingencies in the financial statements[303] Item 1A. Risk Factors This section details various risks related to Rover's business, industry, regulation, technology, intellectual property, operations, and financial reporting Risks Related to Our Business and Industry Rover faces risks from economic downturns, competition, marketing effectiveness, and the ongoing impact of the COVID-19 pandemic on its pet care marketplace - Declines or disruptions in travel and pet care services industries, or economic downturns (pandemics, inflation, rising interest rates, geopolitical instability), could materially adversely affect the business[306][307][308] - Rover has incurred net losses since inception and may not achieve or sustain annual profitability, due to significant investments in growth and operating as a public company[309][310] - The COVID-19 pandemic continues to negatively impact demand, new pet parent acquisition, repeat bookings, and GBV, with cancellation rates remaining elevated compared to pre-pandemic levels[311][312] - Revenue and Adjusted EBITDA growth may slow or reverse due to various factors, including softening demand, changes in average booking values, and increased operating expenses[316][317][318] - The success of the platform relies on effective marketing efforts, but these may become increasingly expensive or less effective, especially with changes in tracking technologies[321][322][323] - Off-platform bookings and payments by pet parents and pet care providers have and may continue to materially adversely affect revenue and financial condition[324] - Failure to retain existing pet care providers or attract new ones, or if providers fail to offer high-quality services, would materially adversely affect the business[325][326] - The business operates in a highly competitive environment, facing competition from personal networks, local operators, commercial providers, and other digital marketplaces[338] Risks Related to Regulation and Taxation Rover faces significant regulatory risks, particularly the potential reclassification of pet care providers as employees, which could fundamentally alter its business model and incur substantial costs, as highlighted by the $18.0 million California PAGA settlement. The company is also subject to a complex and evolving landscape of laws and regulations concerning online marketplaces, money transmission, anti-corruption, and various indirect taxes, with potential for increased operational costs, liabilities, and reputational damage. Changes in tax reporting requirements, such as the reduced IRS threshold for payment processors, and the risk of assets held at financial institutions exceeding insurance coverage (e.g., SVBB) further complicate the regulatory environment - Pet care providers may be reclassified as employees under applicable law, or new laws may be passed adopting employment-like restrictions, which would materially adversely affect Rover's business[365][368][371] - Rover entered into an $18.0 million settlement for a California PAGA lawsuit alleging misclassification of pet care providers, agreeing to platform modifications to bolster independent contractor status[366][370] - The business is subject to a variety of unsettled and developing laws and regulations, including worker classification, online payments, anti-discrimination, and data protection, with non-compliance potentially leading to claims, fines, and business disruption[372][373][374][376] - Changes in tax information reporting requirements, such as the reduced IRS threshold for payment processors to $600, could increase operational costs and negatively impact the user experience[331][332] - Rover may have exposure to greater than anticipated tax liabilities due to changes in tax laws (e.g., Tax Cuts and Jobs Act, Inflation Reduction Act) and potential audits by tax authorities[395][397] - The company expects to use a significant amount of cash to satisfy tax withholding obligations in connection with RSU vesting, which could adversely affect financial condition[401] - Assets held at financial institutions, including SVBB, may exceed FDIC insurance coverage, posing a risk of loss or delays in access to funds during a bank failure or liquidity crisis[402][403] Risks Related to Privacy and Technology Rover faces constant threats from cybersecurity attacks, data breaches, and fraudulent activities, which could interrupt operations, harm its brand, and lead to significant costs and liabilities. The increasing adoption of remote work and sophisticated attacks amplify these risks. Evolving privacy and data protection laws, such as GDPR, UK GDPR, CCPA, and CPRA, impose stringent compliance requirements and risks for cross-border data transfers. System defects, reliance on Amazon Web Services (AWS), third-party payment service providers, and mobile operating systems/application marketplaces also pose operational and financial risks, as disruptions or policy changes could adversely affect the business - Cybersecurity attacks, security incidents, or privacy/data protection breaches could interrupt operations, harm brand/reputation, and adversely affect business, financial condition, and operating results[404][409] - Changes in laws or regulations relating to privacy and data protection (e.g., GDPR, CCPA, CPRA) impose significant compliance burdens, costs, and risks for cross-border data transfers[412][413][414][415][418][419] - Systems defects and failures, including interruptions in the availability of the website or mobile applications, could adversely affect business, financial condition, and operating results[422][424] - Reliance on Amazon Web Services (AWS) for hosting and third-party payment service providers for processing payments exposes Rover to risks of disruption, service failure, or increased fees[425][427][429] - Dependence on mobile operating systems and application marketplaces means policy changes or unfavorable placements could decline usage or brand recognition[432][433] - The use of third-party open source software components carries risks, as failure to comply with licenses could restrict the ability to provide the platform or require source code disclosure[435][436][438] Risks Related to Our Intellectual Property Rover's business relies heavily on protecting its intellectual property, including trademarks, copyrights, trade secrets, and patents. Failure to adequately protect these assets from unauthorized use, copying, or infringement could harm the business. The company also faces risks from intellectual property infringement assertions by third parties, which could lead to costly litigation, substantial damages, or the need to license technologies. Additionally, the inability to maintain or prevent infringement of its domain names could adversely affect its brand and operations - Failure to adequately protect intellectual property (trademarks, copyrights, trade secrets, patents) could adversely affect business, financial condition, and operating results due to unauthorized use or disclosure[439][440][441] - Intellectual property infringement assertions by third parties could result in significant costs, costly litigation, diversion of resources, and potential damages or licensing fees[442][443] - Inability to continue using current domain names or prevent third parties from acquiring similar ones could harm the brand and business[444][445] Risks Related to Our Operations Rover's operational success depends on attracting, retaining, and motivating highly skilled employees, especially in a competitive job market, and maintaining its company culture during growth. The quality of its support function, including reliance on third-party providers and background check services, is critical. The company faces risks from insufficient insurance coverage, difficulties in expanding into new local and international markets with varying regulatory and cultural dynamics, and potential disruptions from catastrophic events. Additionally, strategic acquisitions carry integration risks, and the company may require additional capital for growth, with potential dilution for stockholders - Dependence on highly skilled employees, including senior management, and the ability to hire, retain, manage, and motivate them is critical for growth, especially in a competitive talent market[446][447][448][449] - Maintaining and evolving company culture is crucial for success, facing challenges from workforce growth, competitive pressures, and remote work policies[450][451] - The support function is critical, and any failure to provide high-quality service, especially with reliance on third-party providers, could adversely affect retention of pet care providers and pet parents[452][454][455][456] - Reliance on third-party background check and identification providers means failure to provide accurate information or maintain relationships could materially adversely affect the business[457][458] - Insufficient insurance coverage for operations-related risks, or failure of insurance providers, could prevent mitigation of business risks[459][460][461] - Expansion into new local and international markets subjects Rover to additional costs and risks, including varying regulatory dynamics, cultural norms, and competition[462][464][465][466] - Failure to successfully execute and integrate acquisitions could materially adversely affect business, operating results, and financial condition due to numerous risks like integration difficulties and failure to realize anticipated benefits[467][468][470] - The company may require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all, leading to potential dilution for stockholders[471][472] Risks Related to Our Financial Reporting and Disclosure Rover's revenue recognition upon service start means bookings upticks or downturns are not immediately reflected in operating results. The company relies on internal systems for operational metrics, which may contain inaccuracies. Management has limited public company experience, and activist stockholders could attempt to influence strategies. Critically, material weaknesses in internal control over financial reporting have been identified, requiring ongoing remediation and posing risks of material misstatements, failure to meet reporting obligations, and potential litigation - Upticks or downturns in bookings are not immediately reflected in operating results because revenue is recognized upon the start of a booked service, not at booking[477] - Operational metrics tracked with internal systems are not independently verified and are subject to inherent measurement challenges, which could lead to inaccuracies and adversely affect the business and reputation[478][479] - Management has limited experience in operating a public company, which could lead to increased time devoted to regulatory oversight and higher operating costs[480] - Activist stockholders may attempt to effect changes or acquire control, potentially diverting management attention and adversely affecting results of operations and financial condition[481][482] - Material weaknesses in internal control over financial reporting have been identified, including insufficient personnel, inadequate procedures, issues with complex transactions, and ineffective IT general controls, which could result in material misstatements or failure to meet reporting obligations[483][484][486] - Litigation and other risks may arise from the material weakness in the internal control over financial reporting of Caravel, Rover's legal predecessor[489][490] Risks Related to Ownership of Class A Common Stock The market price of Rover's Class A Common Stock has been and may continue to be volatile due to macroeconomic conditions, company performance, competition, and other factors. Insiders currently possess substantial influence, potentially limiting other investors' ability to affect key transactions. No cash dividends are planned for the foreseeable future, meaning returns depend on stock price appreciation. Future equity issuances, including earnout shares and equity awards, could lead to significant dilution. The share repurchase program may not fully materialize or enhance long-term stockholder value, and anti-takeover provisions in corporate documents could delay or prevent a change in control - The market price of Class A Common Stock has been and may continue to be volatile, influenced by macroeconomic conditions, company performance, competition, and other factors, potentially leading to significant declines[491][492][493][494] - Insiders (executive officers, directors, and affiliates) beneficially owned approximately 36.5% of Class A Common Stock as of May 5, 2023, giving them substantial influence over company management and stockholder-approved matters[496][498] - There are no current plans to pay cash dividends on Class A Common Stock for the foreseeable future; investors' return on investment depends on selling shares at a price greater than purchase price[500] - Stockholders may experience significant dilution in the future due to equity issuances for acquisitions, capital market transactions, or equity awards granted to employees and directors, including potential Earnout Shares[501][502] - The share repurchase program may not be utilized to its full value or enhance long-term stockholder value, and the 1% excise tax increases associated costs[503][504][505] - Delaware or Washington law and provisions in the certificate of incorporation and bylaws might delay, discourage, or prevent a change in control or changes in management[506][507] [General Risk Factors](index=103&type=section&id=General%20Risk%20