Wag! (PET) - 2022 Q4 - Annual Report

Part I Item 1 Business Wag! Group Co. operates a holistic pet care platform, expanding through acquisitions and technology, achieving significant revenue growth while focusing on market acceleration and subscription expansion in a competitive industry - Wag! Group Co., founded in 2014, expanded into pet wellness through acquisitions of Compare Pet Insurance Services, Inc. (August 2021) and Furmacy, Inc. (Q4 2022), and into pet food/treats with Dog Food Advisor (Q1 2023)[15][17][18] - The company experienced strong growth, increasing annual revenue by over 170% from 2021 to 2022[17] - Wag! derived 2022 revenue from service fees, Wag! Premium subscription fees, Pet Caregiver registration fees, and wellness revenue (affiliate fees, prescription/OTC sales), with additional revenue from pet food/treat affiliate fees expected in 2023[23] - Key strategies include accelerating growth in existing markets (95% U.S. population access, 434,234 transacting participants in Q4 2022), expanding Wag! Premium subscriptions, platform expansion (Petted.com, Furmacy), and opportunistic M&A (Dog Food Advisor)[28][29] - The total U.S. pet spending market was $123.6 billion in 2021, a 19% increase from the prior year, with Wag! operating in three of four main categories (Pet Food & Treats, Supplies/OTC Medicine, Vet Care/Product Sales, Other Services)[30] - The platform offers dog walking, drop-in visits, boarding, sitting, and training, with 24/7 customer service and up to $1 million property damage protection, approving over 450,000 Pet Caregivers through 2022 and receiving over 96% five-star reviews from 11 million Pet Parent reviews[19][20][34] - Wag! Wellness includes Vet Chat (24/7 licensed pet expert advice), wellness plans, pet insurance comparison (Petted.com), and prescription Rx delivery (Furmacy)[37] - As of December 31, 2022, the company had 82 employees operating with a remote-first hybrid workplace strategy, emphasizing DEI values through donations and diversity events[58][59] - Wag! is subject to evolving laws and regulations concerning worker classification (e.g., California AB-5, DOL proposed rule), insurance producer licensing, consumer protection, and data privacy (e.g., CPRA)[73][75][76][80] - The company relies on trademarks and trade secrets for intellectual property protection, holding 7 registered U.S. trademarks as of December 31, 2022, and is involved in an ongoing trademark infringement lawsuit with Wag Hotels, Inc[85][86][88] Item 1A. Risk Factors Wag! faces diverse risks including pandemic impacts, sustained net losses, intense competition, operational challenges, regulatory compliance, financial obligations, cybersecurity threats, and public company complexities - The COVID-19 pandemic has materially adversely impacted and will continue to impact Wag!'s business, operating results, and financial condition, leading to a hybrid workplace setup[95][96] Net Losses (2020-2022) | Year | Net Loss (in millions) | | :--- | :--------------------- | | 2020 | $18.8 | | 2021 | $6.3 | | 2022 | $39.0 | - Wag! is substantially dependent on revenues from a small number of customers utilizing Wag! Wellness services and products; in 2022, two customers accounted for an aggregate of 27% of total consolidated revenues[103] - The company faces increasing competition from family/friends/neighbors, local independent professionals, large commercial providers (kennels, daycares), online aggregators (Google, Yelp), and other digital marketplaces (Rover, Care.com)[118] - There is a risk that Pet Caregivers could be reclassified as employees under applicable law, which would materially adversely affect the business through monetary exposure, claims for benefits, and significant alterations to the business model[151][153] - Wag! operates in regulated industries (e.g., insurance, pharmacy) requiring licenses, and revocation or suspension of these licenses could materially adversely affect the business[154][156] - The company is exposed to cybersecurity risks, including cyberattacks, data breaches, and unauthorized access to personal information, which could interrupt operations, harm its brand, and result in significant legal and financial exposure[194][197] - Wag! relies on third-party payment service providers and any disruption or increased fees from these providers could materially adversely affect its business[211] - The company identified material weaknesses in its internal control over financial reporting related to insufficient resources for risk assessment, technical accounting, and IT general controls, which may result in material misstatements[269][274] - As an 'emerging growth company,' Wag! may choose reduced reporting and disclosure requirements, potentially making its common stock less attractive to investors[277][280] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 2. Properties Wag! Group Co. leases its corporate headquarters in San Francisco until 2026 and additional office/warehouse spaces in Phoenix and El Dorado Hills until 2023, owning no real property - Wag! does not own real property; it leases its corporate headquarters in San Francisco (lease expires 2026) and additional office/warehouse space in Phoenix and El Dorado Hills (leases expire 2023)[325] Item 3. Legal Proceedings Information regarding the Company's legal proceedings is detailed in Note 9 – Commitments and Contingencies of the Notes to consolidated financial statements - Legal proceedings are discussed in Note 9 - Commitments and Contingencies of the Notes to consolidated financial statements[326] Item 4. Mine Safety Disclosures This item is not applicable to Wag! Group Co Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Wag! Group Co.'s common stock and public warrants trade on Nasdaq, with the company repurchasing 1.4 million shares in November 2022, and it plans to retain future earnings without paying dividends - Wag!'s common stock (PET) and public warrants (PETWW) began trading on The Nasdaq Global Market on August 10, 2022[330] Share Repurchases (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----------------------------- | :----------------------------- | :--------------------------- | | November 1, 2022 - November 30, 2022 | 1,438,378 | $10.30 | - As of March 24, 2023, there were 153 holders of common stock and 6 holders of record of Public Warrants[331] - Wag! has never declared or paid any dividends on its common stock and anticipates retaining all future earnings for operations and expansion[332] - In December 2022, Wag! filed a registration statement for shares under the 2022 Omnibus Incentive Plan, and in October 2022, approximately 90,000 shares were issued for the acquisition of Furmacy, Inc. prior to the registration statement's effective date[333][334] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Wag! Group Co. achieved significant revenue growth in 2022, driven by Wellness and services, while incurring net losses due to increased operating expenses and public company costs, though maintaining sufficient liquidity - Wag! Group Co. was founded in 2015 and became a public company through a reverse recapitalization with CHW Acquisition Corporation on August 9, 2022[340][365] - The company's mission is to be the 1 partner to busy Pet Parents, offering a holistic pet care platform including services, wellness options, and pet food/treats[339] - Wag! achieved its highest quarterly revenues in Q4 2022, exceeding $17 million, and saw significant outperformance in Pet Parent activity for cohorts joining since 2020 compared to earlier cohorts[344] - Key strategies include accelerating growth in existing markets (e.g., Wag! Neighborhood Network), expanding subscription offerings (Wag! Premium accounts for over 50% of monthly active users), platform expansion (Petted.com, Furmacy), and investing in new markets and M&A (e.g., Dog Food Advisor acquisition in 2023)[346][347][348][349][351] - Pet ownership trends, including increased adoptions during the pandemic and return-to-office policies, are driving demand for high-quality, personalized pet care and pet insurance, with 97% of U.S. pets remaining uninsured[352][353] Consolidated Operations Data (Years Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | $ Change (in thousands) | % Change | | :-------------------- | :-------- | :-------- | :-------- | :------- | | Revenues | $54,865 | $20,082 | $34,783 | 173% | | Cost of revenues | $4,024 | $2,777 | $1,247 | 45% | | Platform operations & support | $13,825 | $10,265 | $3,560 | 35% | | Sales and marketing | $35,156 | $10,221 | $24,935 | 244% | | General and administrative | $32,415 | $6,956 | $25,459 | 366% | | Depreciation & amortization | $571 | $388 | $183 | 47% | | Total costs & expenses | $85,991 | $30,607 | $55,384 | 181% | | Change in fair value of derivatives | $(4,958) | — | $(4,958) | NM | | Gain on PPP loan forgiveness | — | $3,482 | $(3,482) | NM | | Interest expense, net | $(2,470) | $(61) | $(2,409) | 3949% | | Loss before income taxes | $(38,554) | $(7,104) | $(31,450) | 443% | | Income tax benefit (expense) | $(13) | $793 | $(806) | NM | | Net income (loss) | $(38,567) | $(6,311) | $(32,256) | 511% | - Revenue increased by $34.8 million (173%) in 2022, primarily due to a $27.9 million increase in Wellness revenue and a $6.9 million increase in Service revenue[381] - Sales and marketing expenses surged by $24.9 million (245%) in 2022, driven by increased partnerships, advertising, and personnel costs[384][385] - General and administrative expenses increased by $25.5 million (366%), largely due to $19.2 million in stock compensation expense related to Earnout Shares and public company operating costs[386] Cash Flows (Years Ended December 31, 2022 vs. 2021) | Cash Flow Type | 2022 (in thousands) | 2021 (in thousands) | | :---------------------------- | :-------- | :-------- | | Net cash flows used in operating activities | $(2,803) | $(12,256) | | Net cash flows (used in) provided by investing activities | $1,835 | $8,087 | | Net cash flows provided by financing activities | $37,089 | $(51) | | Net change in cash, cash equivalents, and restricted cash | $36,121 | $(4,220) | - Net cash used in operating activities decreased by $9.5 million in 2022, primarily due to increased accounts payable and improved net loss (excluding non-cash items)[397][398] - Net cash provided by financing activities increased by $37 million in 2022, driven by proceeds from Forward Share Purchase Agreement expiration, Trust Account release, PIPE and Backstop Investors, and the Blue Torch Credit Facility[401] Adjusted EBITDA (Years Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :-------------------- | :-------- | :-------- | | Net income (loss) | $(38,567) | $(6,311) | | Adjusted EBITDA | $(3,872) | $(9,915) | | Adjusted EBITDA Margin | (7.1)% | (49.4)% | - Adjusted EBITDA improved from $(9.9) million in 2021 to $(3.9) million in 2022, reflecting better operating performance when excluding non-cash and non-recurring items[409][410] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Wag! is exposed to market risks primarily related to interest rates and market price sensitivity on financial obligations, specifically the Blue Torch Credit Facility, Earnout Shares, and Management Earnout Shares, which bear variable interest rates or are subject to equity price fluctuations - Wag! is exposed to market risks from interest rates and market price sensitivity on financial obligations, including the Blue Torch Credit Facility, Earnout Shares, and Management Earnout Shares[425] Item 8. Financial Statements and Supplementary Data This section presents Wag! Group Co.'s audited consolidated financial statements for 2022 and 2021, including balance sheets, statements of operations, cash flows, and comprehensive notes on accounting policies, business combinations, and debt - The consolidated financial statements for Wag! Group Co. as of and for the years ended December 31, 2022 and 2021 are presented, audited by BDO USA, LLP[427] Consolidated Balance Sheets (as of December 31, in thousands) | Asset/Liability Category | 2022 (in thousands) | 2021 (in thousands) | | :----------------------- | :-------- | :-------- | | Assets: | | | | Cash and cash equivalents | $38,966 | $2,845 | | Total current assets | $47,423 | $12,010 | | Total assets | $52,311 | $16,462 | | Liabilities: | | | | Total current liabilities | $16,491 | $9,980 | | Notes Payable – non-current portion | $24,970 | $1,200 | | Total liabilities | $42,389 | $12,310 | | Equity: | | | | Total stockholders' equity (deficit) | $9,922 | $(106,113) | Consolidated Statements of Operations (Years Ended December 31, in thousands) | Item | 2022 (in thousands) | 2021 (in thousands) | | :---------------------- | :-------- | :-------- | | Revenues | $54,865 | $20,082 | | Total costs and expenses | $85,991 | $30,607 | | Net income (loss) | $(38,567) | $(6,311) | | Net loss per share, basic and diluted | $(2.07) | $(1.10) | Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :---------------------- | :-------- | :-------- | | Net cash flows used in operating activities | $(2,803) | $(12,256) | | Net cash provided by investing activities | $1,835 | $8,087 | | Net cash provided by financing activities | $37,089 | $(51) | | Net change in cash, cash equivalents, and restricted cash | $36,121 | $(4,220) | - The Business Combination with CHW Acquisition Corporation on August 9, 2022, was accounted for as a reverse recapitalization, with Wag! Labs, Inc. as the accounting acquirer[445][516] - Wag! acquired Furmacy, Inc. in October 2022 for $283 thousand in stock and Dog Food Advisor assets in January 2023 for $9.0 million in cash, expanding its wellness and pet food offerings[334][447][538][625] Revenue Disaggregation by Offering (Years Ended December 31, in thousands) | Offering | 2022 (in thousands) | 2021 (in thousands) | | :-------------- | :-------- | :-------- | | Services revenue | $21,823 | $14,951 | | Wellness revenue | $33,042 | $5,131 | | Total revenues | $54,865 | $20,082 | - The company's contract liabilities (unredeemed gift cards, Wag! Premium prepayments, consumer credits) were $2.2 million in 2022 and $1.9 million in 2021[540] - Wag! settled its Forward Share Purchase Agreements (FPAs) derivative liability in November 2022, repurchasing 1.4 million shares for $14.8 million and recognizing a $7.8 million gain on the unexercised portion[544][545][546] Goodwill (in thousands) | Date | Amount (in thousands) | | :--------------- | :----- | | December 31, 2020 | $0 | | CPI Acquisition | $1,427 | | December 31, 2021 | $1,427 | | Furmacy Acquisition | $24 | | December 31, 2022 | $1,451 | Intangible Assets, Net (as of December 31, 2022, in thousands) | Category | Gross Book Value (in thousands) | Accumulated Amortization (in thousands) | Net Book Value (in thousands) | | :--------------------------- | :--------------- | :----------------------- | :------------- | | Developed technology | $783 | $(226) | $557 | | Customer relationships and licenses | $2,166 | $(422) | $1,744 | | Trademarks | $291 | $(56) | $235 | | Pharmacy board licenses | $5 | — | $5 | | Total Finite Life Intangibles | $3,245 | $(704) | $2,541 | | Total Indefinite Life Intangible Assets | $49 | — | $49 | - Wag! is involved in legal proceedings related to Pet Caregiver classification, including a $248 thousand liability for unemployment insurance contributions in New York and a challenged $1.3 million assessment in California[566][569][570] - The company received a $5.1 million PPP Loan in August 2020, with $3.5 million forgiven in September 2021, leaving an outstanding principal balance of $1.2 million as of December 31, 2022[572][573] - On August 9, 2022, Legacy Wag! entered into a $32.17 million senior secured term loan Credit Facility with Blue Torch Finance, LLC, secured by substantially all company assets, with an outstanding principal balance of $26.2 million as of December 31, 2022[574][579] - Blue Torch also received 1,896,177 Lender Warrants to acquire common stock at $11.50 per share, classified as equity[580][583] Future Minimum Debt Payments (as of December 31, 2022, in thousands) | Year | Amounts (in thousands) | | :--- | :------ | | 2023 | $1,264 | | 2024 | $1,751 | | 2025 | $30,227 | | Total principal amount | $33,242 | - Wag! had U.S. federal and state net operating loss carryforwards of approximately $209 million and $178 million, respectively, as of December 31, 2022, with a full valuation allowance recorded[619] Anti-Dilutive Securities Excluded from EPS (Years Ended December 31) | Security Type | 2022 (Number of Shares) | 2021 (Number of Shares) | | :---------------------------- | :----------- | :----------- | | Series Seed convertible preferred shares | — | 4,376,930 | | Series A convertible preferred shares | — | 5,902,952 | | Series B convertible preferred shares | — | 6,506,794 | | Series C convertible preferred shares | — | 7,072,149 | | Series P convertible preferred shares | — | — | | Earnout Shares | 15,000,000 | — | | Options and RSUs issued and outstanding | 11,388,842 | 7,537,744 | | Warrants issued and outstanding | 18,291,741 | 88,756 | | Total | 44,680,583 | 31,485,325 | - The Lock-Up Period for certain stockholders, related to the Business Combination, expired on February 5, 2023, removing transfer restrictions[628][629] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures There is no information to report regarding changes in or disagreements with accountants on accounting and financial disclosures, as previously reported in the Current Report on Form 8-K filed on August 9, 2022 - No information to report regarding changes in or disagreements with accountants, as previously reported on Form 8-K filed August 9, 2022[631] Item 9A. Controls and Procedures Wag! Group Co.'s disclosure controls and procedures were ineffective as of December 31, 2022, due to material weaknesses in internal control over financial reporting, which the company is actively remediating - As of December 31, 2022, Wag!'s disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[633] - Material weaknesses identified include insufficient resources for internal control risk assessment, evaluation of technical accounting for material transactions, and effective design/implementation of process-level controls[634] - Additional material weaknesses relate to the risk assessment process for IT general controls, logical access, segregation of duties, program change controls, and process-level controls impacting financial reporting[634] - The company is implementing remedial measures, including technology, hiring personnel, and engaging external resources, to address these material weaknesses[635] - Post-Business Combination, the design of internal controls over financial reporting requires significant time and resources, as the predecessor's controls are no longer applicable[636] Item 9B. Other Information This item contains no additional information Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevents Inspections This item is not applicable to Wag! Group Co Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance, including the Code of Ethics and Business Conduct, will be incorporated by reference from the definitive proxy statement for the 2023 annual meeting of stockholders - Information on directors, executive officers, and corporate governance will be incorporated by reference from the 2023 annual meeting proxy statement[641] - Wag! has adopted a Code of Ethics for Senior Financial Officers, Corporate Governance Guidelines, and a Code of Business Conduct, available on its investor relations website[642] Item 11. Executive Compensation Information regarding executive compensation will be incorporated by reference from the definitive proxy statement for the 2023 annual meeting of shareholders - Executive compensation information will be incorporated by reference from the 2023 annual meeting proxy statement[644] Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, will be incorporated by reference from the definitive proxy statement for the 2023 annual meeting of shareholders - Security ownership information will be incorporated by reference from the 2023 annual meeting proxy statement[645] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be incorporated by reference from the definitive proxy statement for the 2023 annual meeting of shareholders - Information on related transactions and director independence will be incorporated by reference from the 2023 annual meeting proxy statement[646] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services will be incorporated by reference from the definitive proxy statement for the 2023 annual meeting of shareholders - Principal accounting fees and services information will be incorporated by reference from the 2023 annual meeting proxy statement[647] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed, including key agreements such as the Business Combination Agreement, Certificate of Incorporation, and Financing Agreement - The section lists various exhibits filed, including the Business Combination Agreement, Certificate of Incorporation, Bylaws, Warrant Agreement, Lock-Up Agreement, and Financing Agreement[650][651] Item 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided Signatures This section contains the signatures of Wag! Group Co.'s Chief Executive Officer, Chief Financial Officer, General Counsel, and Directors, affirming the filing of the registration statement on March 30, 2023 - The registration statement was signed on behalf of Wag! Group Co. by its Chief Executive Officer, Garrett Smallwood, and other key officers and directors on March 30, 2023[657][662]