# Bark, Inc. (BARK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Bark, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1819574/000181957422000049/bark-20220331.htm
Accession: 0001819574-22-000049
Filing date: 2022-05-31
Report date: 2022-03-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/BARK/
All MD&A years: /company/BARK/mda/
Next year: /company/BARK/mda/fy2023/ (FY 2023)

Overview

Founded in 2011, BARK is the world’s most dog-centric company, devoted to making dogs happy with the best products, services and content. Our dog-obsessed team applies its data-driven understanding of what makes each dog special by designing playstyle-specific toys, satisfying treats, personal meal plans with supplements, and dog-first experiences designed to foster health and happiness of dogs everywhere. We aim to foster lifelong relationships with our customers and their pups in order to drive strong customer retention and lifetime value. BARK loyally serves dogs with themed toys and treats subscriptions, BarkBox and BARK Super Chewer; custom product collections through retail partners, including Target and Amazon; high-quality, personalized nutrition and meal plans with BARK Food; and health and wellness products with BARK Bright. As a direct to consumer-first company, our growing data and machine-learning capabilities inform future product development and enable BARK to provide personalized experiences and product offerings for dog parents nationwide.

Factors Affecting Our Performance

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Annual Report on Form 10-K titled “Risk Factors.”

Acquisition of new subscriptions

Our ability to attract new subscriptions is a key factor for our future growth. To date we have successfully acquired new subscriptions through marketing and the development of our brands. As a result, revenue has increased each year since our launch. If we are unable to acquire sufficient new subscriptions in the future, our revenue might decline. New subscriptions could be negatively impacted if our marketing efforts are less effective in the future. Increases in advertising rates could also negatively impact our ability to acquire new subscriptions cost effectively. Consumer tastes, preferences, and sentiment for our brands may also change and result in decreased demand for our products and services.

Retention of existing subscribers

Our ability to retain subscribers is a key factor in our ability to generate revenue growth. Most of our current subscribers purchase products through subscription-based plans, where subscribers are billed and sent products on a recurring basis. The recurring nature of this revenue provides us with a certain amount of predictability for future revenue. If customer behavior changes, and customer retention decreases in the future, then future revenue will be negatively impacted.

Investments in growth

We expect to continue to focus on long-term growth through investments in product offerings and the dog and dog parent experience. We are working to enhance our offerings and expand the breadth of the products and

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offerings, including BARK Food and BARK Bright. We expect to make additional investments in marketing to acquire new subscribers and customers. Additionally, we intend to continue to invest in our fulfillment and operating capabilities. In the short term, we expect these investments to increase our operating expenses; however, in the long term, we anticipate that these investments will positively impact our results of operations.

Expansion of new offerings

We expect to continue to invest in the expansion of our new offerings, including BARK Food, BARK Bright and potential new offerings. By expanding our product lines we seek to attract new customers as well as increase sales to our existing customers. Continuing expansion into new categories, such as BARK Food and BARK Bright will require financial investments in additional headcount, marketing and customer acquisition expenses, and additional operational capabilities and may require the purchase of new inventory. If we are unable to generate sufficient demand for these new offerings, we may not recover the financial investments we make into new categories and revenue may not increase in the future.

Impact of COVID-19

The extent to which the COVID-19 pandemic will continue to impact our business will depend on future developments related to the geographic spread of the disease, the duration and severity of the outbreak, travel restrictions, required social distancing, governmental mandates, business closures or governmental or business disruptions, and the effectiveness of actions taken in the United States and other countries to prevent, contain and treat the virus and any additional government stimulus programs. These impacts are highly uncertain and cannot be predicted with certainty.

As this crisis unfolded, we monitored conditions closely and adapted our operations to meet federal, state and local standards, while continuing to meet the needs of the dogs and dog parents we serve and to ensure the safety and well-being of our team members. While conditions appear to be improving, we are still unable to predict the duration of the COVID-19 pandemic, including the emergence and spread of variants of COVID-19, and therefore the ultimate impact of the COVID-19 pandemic on our operating results, financial condition and cash flows. As such, risks still remain. In addition, the COVID-19 pandemic has had, and continues to have, an unprecedented and unexpected effect on the global economy, civil society, labor markets, and certain industries. As a result, it is difficult to predict the magnitude or scope of the impact these effects will or may have directly, or indirectly, on our business, operating results and financial condition.

We continued to experience increases in inbound freight costs due to the challenges in the current import market, as transpacific ships and trade lanes continue to be overburdened with volume and experience a significant shortage of equipment and capacity due to the COVID-19 pandemic. We also continued to experience supply chain disruptions, including increased demurrage fees related to freight, during the fiscal year ended March 31, 2022. We expect increased freight costs and supply chain disruptions to continue to impact our business, although we cannot predict the duration or magnitude of such impacts. Please refer to the “Special Note Regarding Forward-Looking Statements” and the “Risk Factors” in this Annual Report on Form 10-K.

Key Performance Indicators

We use the following key financial and operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. These key financial and operating metrics should be read in conjunction with the following discussion of our results

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of operations and financial condition together with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

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[[/GREPCENT_TABLE]]

Subscription Shipments

We define Subscription Shipments as the total number of subscription product shipments shipped in a given period. Subscription Shipments does not include gift subscriptions or one-time subscription shipments.

Average Monthly Subscription Shipment Churn

Average Monthly Subscription Shipment Churn is calculated as the average number of subscription shipments that have been cancelled in the last three months, divided by the average monthly active subscription shipments in the last three months. The number of cancellations used to calculate Average Monthly Subscription Shipment Churn is net of the number of subscriptions reactivated during the last three months.

Active Subscriptions

Our ability to expand the number of Active Subscriptions is an indicator of our market penetration and growth. We define Active Subscriptions as the total number of unique product subscriptions with at least one shipment during the last 12 months. Active Subscriptions does not include gift subscriptions or one-time subscription purchases.

New Subscriptions

We define New Subscriptions as the number of unique subscriptions with their first shipment occurring in a period.

Customer Acquisition Cost

Customer Acquisition Cost (“CAC”) is a measure of the cost to acquire New Subscriptions in our Direct to Consumer business segment. This unit economic metric indicates how effective we are at acquiring each New Subscription. CAC is a monthly measure defined as media spend in our Direct to Consumer business segment in the period indicated, divided by total New Subscriptions in such period. Direct to Consumer media spend is primarily comprised of internet and social media advertising fees.

Lifetime Value

Lifetime Value ("LTV") is the dollar value of each subscription as measured by the cumulative Direct to Consumer Gross Profit for the average life of the subscription.

Average Order Value

Average Order Value (“AOV”) is Direct to Consumer revenue for the period divided by Subscription Shipments for the same period.

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Components of Our Results of Operations

We operate with two reportable segments: Direct to Consumer and Commerce, to reflect the way our Chief Executive Officer, who is our chief operating decision maker (“CODM”), reviews and assesses the performance of the business.

Revenue

Direct to Consumer

Direct to Consumer revenue consists of product sales through our monthly subscription boxes, as well as sales through our website, BarkShop.com (“BarkShop”):

Toys and Treats Subscriptions—Our principal revenue generating products consist of a tailored assortment of premium and highly durable toys and treats sold through our BarkBox and Super Chewer monthly subscriptions. BarkBox and Super Chewer subscription rates vary based on the type of subscription plan selected by the customer, with Super Chewer’s price point being slightly higher based on additional costs of the more durable product, but resulting in similar gross margins. Subscription plans are offered as monthly, six month or annual commitments. Subscription revenue is recognized at a point in time as control is transferred to the subscriber upon delivery of each monthly box.

On a monthly basis, toys and treats subscription customers have the option to purchase additional toys, treats, or essential products to add to their respective subscription boxes, through our add to box (“ATB”) offering. ATB revenue is recognized at a point in time as control is transferred to the customer upon delivery of goods to the subscriber.

BARK Bright—BARK Bright revenue consists of sales of our health and wellness solutions, with our initial product being a dental solution, sold primarily through monthly subscriptions. Subscription revenue is recognized at a point in time as control is transferred to the subscriber upon delivery of each monthly box. Revenue for BARK Bright sales to retailers and through marketplaces is recognized at a point in time upon delivery of goods.

BARK Food—BARK Food revenue consists of sales of personalized and nutritious meals for dogs sold at a meal per day price. Revenue is recognized at a point in time, as control is transferred to the customer upon delivery of goods.

BarkShop—BarkShop revenue consists of sales of individual toys, treats and other products through our website, BarkShop. Revenue relating to the sale of goods on BarkShop is recognized at a point in time as control is transferred to the customer upon delivery of goods.

Commerce

We also generate revenue from product sales to retailers and through marketplaces. See below for additional information on each offering.

Retail—Retail revenue consists of sales of individual BARK toys, treats, and BARK Bright health and wellness solutions, mainly through major retailers. Revenue is recognized upon delivery to retailer.

Online Marketplaces—Online marketplaces revenue consists of sales of toys, BARK Bright health and wellness solutions and BARK Home products sold through major marketplaces. BARK Home consists of an assortment of proprietary essential products for daily life, including dog beds, bowls, collars, harnesses and leashes. Online marketplaces revenue is recognized upon delivery of goods to the end customer.

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Cost of Revenue

Cost of revenue primarily consists of the purchase price of inventory sold, inbound freight costs associated with inventory, shipping supply costs, and inventory shrinkage costs.

Operating Expenses

Operating expenses consist of general and administrative and advertising and marketing expenses.

General and Administrative

General and administrative expenses consists primarily of compensation and benefit expenses, including stock-based compensation, fulfillment and shipping costs, which represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to receiving, inspecting, picking, packaging and preparing customer orders for shipment, outbound freight costs associated with shipping orders to customers, and responding to inquiries from customers. General and administrative expenses also includes fees charged by third parties that provide payment processing services, office expense, including rent, insurance, professional service fees, donations by us to dog-centered causes of goods-in-kind and other general overhead costs including those related to depreciation and amortization of fixed and intangible assets, account management support teams, commissions and donations.

We expect to incur additional general and administrative expenses as a result of becoming a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses, and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

Advertising and Marketing

Advertising and marketing expense consists primarily of internet advertising, promotional items, agency fees, other marketing costs and compensation and benefits expenses, including stock-based compensation expense, for employees engaged in advertising and marketing.

Interest Expense

Interest expense primarily consists of interest incurred under our line of credit, term loan and convertible promissory notes agreements, and amortization of debt issuance costs.

Other Income (Expense), Net

Other income (expense), net, primarily consists of changes in the fair value of our warrant liabilities and loss on extinguishment of debt.

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Results of Operations

We operate in two reportable segments to reflect the way our CODM reviews and assesses the performance of the business. See Note 2, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements for the fiscal years ended March 31, 2022, 2021, and 2020 included elsewhere in this Annual Report on Form 10-K.

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[[/GREPCENT_TABLE]]

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Comparison of the Fiscal Years Ended March 31, 2022 and March 31, 2021

Revenue

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,"],["","2022","","2021","","$ Change","","% Change"],["","( in thousands)"],["Revenue"],["Direct to Consumer","$","448,074","","","$","333,970","","","$","114,104","","","34.2","%"],["Commerce","59,332","","","44,634","","","14,698","","","32.9","%"],["Total revenue","$","507,406","","","$","378,604","","","$","128,802","","","34.0","%"],["Percentage of Revenue"],["Direct to Consumer","88.3","%","","88.2","%"],["Commerce","11.7","%","","11.8","%"]]
[[/GREPCENT_TABLE]]

Direct to Consumer revenue increased by $114.1 million, or 34.2%, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. This increase was primarily driven by a 3.3 million, or 28.3%, increase in Subscription Shipments, in addition to a 4.6% increase in average order value during the period.

Commerce revenue increased by $14.7 million, or 32.9%, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. This increase was driven by an increase in revenue from existing and new retail partners.

Gross Profit

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,"],["","2022","","2021","","$ Change","","% Change"],["","( in thousands)"],["Gross Profit"],["Direct to Consumer","$","260,083","","","$","205,926","","","$","54,157","","","26.3","%"],["Commerce","22,023","","","20,014","","","2,009","","","10.0","%"],["Total gross profit","$","282,106","","","$","225,940","","","$","56,166","","","24.9","%"],["Percentage of revenue","55.6","%","","59.7","%"]]
[[/GREPCENT_TABLE]]

Direct to Consumer and Commerce gross profit increased by $54.2 million and $2.0 million, respectively, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021, driven by the $128.8 million increase in revenue during the period.

Gross profit as a percentage of revenue decreased to 55.6% for the fiscal year ended March 31, 2022 compared to 59.7% for the fiscal year ended March 31, 2021. The decrease is primarily due to charges to make certain adjustments to inventory for shrinkage and slow moving items and, an inventory write-down we made related to a strategic narrowing of focus on products we intend to sell, as well as an increase in costs for inbound freight.

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Operating Expenses

General and Administrative Expense

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[[/GREPCENT_TABLE]]

General and administrative expense increased by $122.4 million, or 68.2%, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. This increase during the period was primarily due to increased fulfillment and shipping costs of $60.9 million attributable to the 28.3% increase in Subscription Shipments and increased third-party shipping rates; increased compensation expense of $32.5 million attributable to an increase in employee headcount, including stock-based compensation expense of $10.8 million; increased audit, professional, and legal fees of $13.4 million primarily related to growth of operations and requirements as a new publicly traded company; and increase in other general and administrative expenses of $6.1 million.

Other general and administrative expense increased by $6.1 million, or 105%, for the fiscal year ended March 31, 2022. The increase during the period is primarily attributable to a donation of dog beds in the fourth quarter which resulted in a $2.0 million increase in donation expense. From time to time, we make voluntary contributions of inventory items to dog-centered causes. This is a strategic initiative that supports our mission to make all dogs happy, promotes our corporate social responsibility credentials, and elevates our brand in the process. The increase is further attributable to an increase in insurance expense of $1.8 million related to requirements as a new publicly traded company, increased freight and transfer expense of $1.3 million, increased fees and penalties of $0.6 million related to shipping charges; and increased bad debt expense of $0.3 million related to retail accounts receivable.

Advertising and Marketing

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Advertising and marketing expense increased by $7.4 million, or 11.0%, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021.The increase during the period was primarily due to increased media advertising spend of $3.7 million, increased marketing costs of $0.4 million and increased employment costs of $3.0 million due to headcount growth. The remaining increase was attributable to increased production costs of $0.2 million.

Interest Expense

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[[/GREPCENT_TABLE]]

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Interest expense decreased by $5.5 million, or 50.0%, for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. This decrease was primarily attributable to reduced levels of debt in the fiscal year ended March 31, 2022.

Other Income (Expense), Net

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[[/GREPCENT_TABLE]]

Other income (expense), net increased by $31.2 million for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. This increase in other income (expense), net, was primarily due to the $33.2 million of income related to the changes in fair value of our warrant liabilities during the period.

Comparison of the Fiscal Years Ended March 31, 2021 and March 31, 2020

Revenue

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Direct to Consumer revenue increased by $129.8 million, or 63.6%, for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This increase was primarily due to the 52.5% or 4.0 million increase in Subscription Shipments. Additionally, ATB revenue increased by $15.1 million during the period, from $2.4 million to $17.5 million for the fiscal years ended March 31, 2020 and 2021, respectively.

Commerce revenue increased by $24.5 million for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This increase was primarily due to volume increases amongst existing retail partners, as well as the addition of new retail partners since March 31, 2020.

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Gross Profit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Direct to Consumer gross profit increased by $81.0 million for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020.

Commerce gross profit increased by $9.6 million for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020.

Gross profit as a percentage of revenue decreased for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This decrease was primarily due to increased costs related to inbound freight and royalty fees related to strategic license partnerships entered into during the period to enhance our customers’ experience by creating timely and relevant toys.

Operating Expenses

General and Administrative Expense

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[[/GREPCENT_TABLE]]

General and administrative expense increased by $63.6 million, or 54.9%, for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This increase was primarily due to an increase of $41.8 million in fulfillment and shipping costs due to the increase in Active Subscriptions in the period, increased compensation expense of $17.0 million, as a result of higher employee headcount, consultant fees and stock-based compensation expense, increased payment processing fees of $2.7 million, increased marketplace sellers fees of $1.7 million, increased other operating expenses of $1.3 million, increased professional and legal expenses of $1.4 million, increased software expenses of $1.3 million and increased depreciation and amortization expense of $1.0 million. These increases were partially offset by a decrease of $3.4 million in sales and use tax, which was driven by a significant adjustment recorded during the fiscal year ended March 31, 2020 related to the U.S. Supreme Court ruling allowing states to enforce a sales and use tax collection obligation on remote vendors. In addition, there were decreases of $0.8 million in travel and entertainment and office expenses due to the travel restrictions and employees

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working remotely due to the COVID-19 pandemic. We do not expect travel and entertainment and office expenses to remain at these decreased levels.

Advertising and Marketing

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Advertising and marketing expense increased by $20.9 million, or 45.3%, for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This increase was primarily due to media advertising spend which increased from $37.9 million for the fiscal year ended March 31, 2020 to $59.8 million for the fiscal year ended March 31, 2021, or $21.9 million. The increase in media spend was incurred to drive the increase in New Subscriptions.

Of the $59.8 million of media spend during the fiscal year ended March 31, 2021, $57.1 million related to Direct to Consumer and $2.7 million related to Commerce. Of the $37.9 million of media spend during the fiscal year ended March 31, 2020, $34.8 million related to Direct to Consumer and $3.1 million related to Commerce.

Interest Expense

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Interest expense increased by $5.5 million, or 101.5%, for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This increase was due primarily to non-cash interest in connection with our convertible promissory notes.

Other Income (Expense), Net

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[[/GREPCENT_TABLE]]

Other income decreased by $0.5 million, or 80.7%, for the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31, 2020. This decrease in Other income was due to increased expense of $1.0 million related changes in fair value of our derivative liabilities and decreased rental income from our subleases of $0.3 million, offset by $0.8 million of other income related to a settlement agreement payment received during the period.

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Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, management believes that Adjusted Net Income (Loss), Adjusted Net Income (Loss) Margin, Adjusted Net Income (Loss) Per Common Share, Adjusted EBITDA and Adjusted EBITDA Margin, all non-GAAP financial measures (together the “Non-GAAP Measures”), provide investors with additional useful information in evaluating our performance.

We calculate Adjusted Net Income (Loss) as net income (loss), adjusted to exclude: (1) stock-based compensation expense, (2) change in fair value of warrants and derivatives, (3) sales and use tax expense, (4) one-time transaction costs associated with the financing and merger, (5) demurrage fees related to freight and (6) other one-time items.

We calculate Adjusted Net Income (Loss) Margin by dividing Adjusted Net Income (Loss) for the period by Revenue for the period.

We calculate Adjusted Net Income (Loss) Per Common Share by dividing Adjusted Net Income (Loss) for the period by weighted average common shares used to compute net loss per share attributable to common stockholders for the period.

We calculate Adjusted EBITDA as net income (loss), adjusted to exclude: (1) interest expense, (2) depreciation and amortization, (3) stock-based compensation expense, (4) change in fair value of warrants and derivatives, (5) sales and use tax expense, (6) one-time transaction costs associated with the financing and merger, (7) demurrage fees related to freight and (8) other one-time items.

We calculate Adjusted EBITDA Margin by dividing Adjusted EBITDA for the period by revenue for the period.

The Non-GAAP Measures are financial measures that are not required by, or presented in accordance with GAAP. We believe that the Non-GAAP Measures, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of the Non-GAAP Measures are helpful to our investors as they are measures used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.

The Non-GAAP Measures are presented for supplemental informational purposes only, have limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of the limitations of the Non-GAAP Measures include that (1) the measures do not properly reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect these capital expenditures, (3) Adjusted EBITDA and Adjusted EBITDA Margin do not consider the impact of stock-based compensation expense, which is an ongoing expense for our company and (4) Adjusted EBITDA and Adjusted EBITDA Margin do not reflect other non-operating expenses, including interest expense. In addition, our use of the Non-GAAP Measures may not be comparable to similarly titled measures of other companies because they may not calculate the Non-GAAP Measures in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider the Non-GAAP Measures alongside other financial measures, including our net income (loss) and other results stated in accordance with GAAP.

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The following table presents a reconciliation of Adjusted Net Loss to net loss, the most directly comparable financial measure stated in accordance with GAAP, and the calculation of net loss margin, Adjusted Net Loss Margin and Adjusted Net Loss Per Common Share for the periods presented:

Adjusted Net Loss

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2022","","2021","","2020"],["Net loss","","$","(68,299)","","","$","(31,391)","","","$","(31,368)"],["Stock-based compensation expense","","17,861","","","6,522","","","1,817"],["Change in fair value of warrants and derivatives","","(33,196)","","","931","","","(96)"],["Sales and use tax expense (1)","","648","","","1,211","","","5,023"],["Transaction costs (2)","","6,053","","","1,545","","","\u2014"],["Demurrage fees (3)","","2,610","","","\u2014","","","\u2014"],["Other one-time items (4)","","6,653","","","\u2014","","","\u2014"],["Adjusted net loss","","$","(67,669)","","","$","(21,182)","","","$","(24,624)"],["Net loss margin","","(13.46)","%","","(8.29)","%","","(13.98)","%"],["Adjusted net loss margin","","(13.34)","%","","(5.59)","%","","(10.98)","%"],["Adjusted net loss per common share - basic and diluted","","$","(0.43)","","","$","(0.46)","","","$","(0.55)"],["Weighted average common shares used to compute adjusted net loss per share attributable to common stockholders - basic and diluted","","156,201,601","","46,297,847","","45,110,365"]]
[[/GREPCENT_TABLE]]

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The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP, and the calculation of net loss margin and Adjusted EBITDA margin for the periods presented:

Adjusted EBITDA

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31"],["","","2022","","2021","","2020"],["","","(in thousands)"],["Net loss","","$","(68,299)","","","$","(31,391)","","","$","(31,368)"],["Interest expense","","5,464","","","10,923","","","5,421"],["Depreciation and amortization expense","","4,403","","","2,405","","","1,397"],["Stock-based compensation expense","","17,861","","","6,522","","","1,817"],["Change in fair value of warrants and derivatives","","(33,196)","","","931","","","(96)"],["Sales and use tax expense (1)","","648","","","1,211","","","5,023"],["Transaction costs (2)","","6,053","","","1,545","","","\u2014"],["Demurrage fees (3)","","2,610","","","\u2014","","","\u2014"],["Other one-time items (4)","","6,653","","","\u2014","","","\u2014"],["Adjusted EBITDA","","$","(57,802)","","","$","(7,854)","","","$","(17,806)"],["Net loss margin","","(13.46)","%","","(8.29)","%","","(13.98)","%"],["Adjusted EBITDA margin","","(11.39)","%","","(2.07)","%","","(7.94)","%"]]
[[/GREPCENT_TABLE]]

(1) Sales and use tax expense relates to recording a liability for sales and use tax we did not collect from our customers. Historically, we had collected state or local sales, use, or other similar taxes in certain jurisdictions in which we only had physical presence. On June 21, 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc. that state and local jurisdictions may, at least in certain circumstances, enforce a sales and use tax collection obligation on remote vendors that have no physical presence in such jurisdiction. A number of states have positioned themselves to require sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state and accordingly, we recorded a liability in those periods in which we created economic nexus based on each state’s requirements. Accordingly, we now collect, remit, and report sales tax in all states that impose a sales tax.

(2)Transactions costs represent non-recurring consulting and advisory costs with respect to the merger agreement entered into with Northern Star Acquisition Corp. on December 16, 2020.

(3)Demurrage fees are raised when the full container is not moved out of the port/terminal for unpacking within the allowed free days offered by the shipping line. The charge is levied by the shipping line to the importer.

(4)For fiscal year ended March 31, 2022, other one-time items is comprised of loss on extinguishment of debt of $2.0 million, executive transition costs, including recruiting, bonus and relocation related expenses of $1.9 million, costs related to unrealized business ventures of $1.8 million, SOX implementation fees of $0.7 million, loss on exercise of warrants of $0.1 million and restructuring related expenses of $0.1 million.

Liquidity and Capital Resources

As of March 31, 2022, we had cash and cash equivalents of approximately $199.4 million. We expect that our cash and cash equivalents, together with cash provided by our operating activities and proceeds from borrowings (as defined below), will be sufficient to fund our operations for at least the next 12 months. We are required to comply with certain financial and non-financial covenants related to our borrowing agreements, which we are in compliance with as of March 31, 2022 and expect to be in compliance with during the next 12 months.

We have restricted cash of $2.3 million as of March 31, 2022 to secure a letter of credit for two of our leases, which is expected to be maintained as a security deposit for the duration of the lease.

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Our material cash requirements include our facility lease arrangements for corporate offices, warehouses and certain equipment . As of March 31, 2022, we had fixed lease payment obligations of $36.4 million, with $5.7 million payable within 12 months.

Western Alliance Bank—Line of Credit and Term Loan

In October 2017, the Company entered into a loan and security agreement (the “Western Alliance Agreement”) and issued a warrant to purchase preferred stock (“Initial Western Alliance Warrant”) to Western Alliance Bank (“Western Alliance”), which provided for a secured revolving line of credit (the “Credit Facility”) in an aggregate principal amount of up to $35.0 million with a maturity date of October 12, 2020.

On December 7, 2018, the Company amended the Western Alliance Agreement, which included the issuance of a warrant to purchase common stock (“Subsequent Western Alliance Warrant”) to Western Alliance. The modification to the Western Alliance Agreement provided for an additional term loan of $10.0 million at issuance and an incremental seasonal loan of $5.0 million. The seasonal loan matured and was repaid on March 31, 2020. The term loan had a maturity date of December 31, 2021.

On July 31, 2020, the Company amended the Western Alliance Agreement and extended the expiration of the warrants to July 31, 2030. The modification to the Western Alliance Agreement amended the maturity date of the Credit Facility to August 12, 2021.

On November 27, 2020, the Company repaid the outstanding $10.0 million principal of the term loan with Western Alliance Bank, as well as $0.2 million of early repayment fees, using proceeds from the issuance of the 2025 Convertible Notes (the “2025 Convertible Notes”). See further discussion of the 2025 Convertible Notes issuance below.

In conjunction with the 2025 Convertible Notes issuance, the Company amended the Western Alliance Agreement to extend the Credit Facility repayment date from August 12, 2021 to December 31, 2021.

On January 22, 2021, the Company amended the Western Alliance Agreement to extend the Credit Facility maturity date to May 31, 2022.

On October 29, 2021, the Company and Western Alliance entered into the eleventh loan and security modification agreement, which increased the sublimit for foreign exchange services and export, import, and standby letters of credit under the Company’s existing loan and security agreement with Western Alliance to $2.7 million.

On May 27, 2022, the Company and Western Alliance entered into the twelfth loan and security modification agreement, which extended the Credit Facility maturity date to June 30, 2022.

As of March 31, 2022, there were no borrowings under the Credit Facility.

The interest rate for borrowings under the Credit Facility, as amended, is equal to (i) the greater of the prime rate that is published in the Money Rates section of The Wall Street Journal from time to time (the “Prime Rate”) and 5.25%, plus (ii) half of one percent (0.50%), per annum. As of March 31, 2021 and 2020 the weighted-average interest rate for the Western Alliance Credit Facility and term loans was 5.75% and 6.09%, respectively.

The Credit Facility has a borrowing base subject to an amount equal to eighty percent (80%) of our trailing three months of subscription revenue. Western Alliance has a first lien perfected security interest in substantially all of our assets, including our rights to our intellectual property.

Under the terms of this Credit Facility, we are required to comply with certain financial and nonfinancial covenants, including covenants to maintain certain liquidity amounts, as defined in the Western Alliance Agreement, as amended.

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Convertible Promissory Notes

On December 19, 2019, we entered into a note purchase agreement and issued individual convertible promissory notes thereunder, with an option for subsequent closings through May 1, 2020 for up to $10.0 million in aggregate principal. We received gross proceeds of $3.9 million in two December 2019 closings. The notes bore interest at a rate of 7% per year, capitalized quarterly, and payable in kind. The notes have a maturity date of December 19, 2024, unless previously converted into equity securities pursuant to the terms of the note purchase agreement.

On March 31, 2020, we entered into a note purchase agreement and issued individual convertible promissory notes thereunder, with an option for subsequent closings through May 1, 2020 for up to $10.0 million in aggregate principal. We received gross proceeds of $1.5 million from the initial closing of the note purchase agreement on March 31, 2020 with employees, founders, and existing investors, representing a related party transaction. The agreement consisted of both Pro Rata Notes and Super Pro Rata Notes. Pro-Rata Notes are defined as one or more promissory notes issued to each lender with respect to the amount of the lender’s consideration, up to the lender’s pro rata amount as set forth in the note purchase agreement. Super Pro-Rata Notes are defined as one or more promissory notes issued to each lender with respect to the lender’s amount of consideration paid in excess of their pro rata amount. The Super Pro Rata Notes bore interest at a rate of 10% per year, capitalized quarterly, and payable in kind, while the Pro Rata Notes bear interest at a rate of 8% per year, capitalized quarterly, and payable in kind. Both the Pro Rata and Super Pro Rata notes have a maturity date of March 30, 2023, unless previously converted into equity securities pursuant to the terms of the note purchase agreement.

On May 1, 2020, we received gross proceeds of $1.0 million from the second closing of the March 31, 2020 note purchase agreement with existing investors.

On June 18, 2020, we amended a previously existing term loan agreement, which extended the initial principal repayment period. In consideration of the modification, we issued to the lender convertible promissory notes under the March 31, 2020 note purchase agreement of $0.8 million from the third closing of the March 31, 2020 note purchase agreement.

On December 16, 2020, in connection with the execution of the Merger Agreement, we amended the note purchase agreements associated with the convertible notes issued in 2019 and 2020 to amend the conversion terms of the notes.

On June 1, 2021, in connection with the closing of the Merger, the outstanding principal and interest of the 2019 Notes and 2020 Notes were converted to 1,135,713 shares of our common stock, with a fair value of $12.8 million. The conversion of the notes resulted in a loss on extinguishment of $2.0 million recorded to other expense included in other income, net on the consolidated statement of operations and comprehensive loss, as well as a capital contribution of $0.5 million recorded to additional paid-in-capital on the consolidated balance sheet for the portion of the loss associated with the 2020 Notes which were with related parties.

Paycheck Protection Program

On April 24, 2020, we received funds of $5.2 million under the Paycheck Protection Program (“PPP”), a part of the CARES Act. The loan was serviced by Western Alliance Bank, and the application for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support ongoing operations. On June 11, 2021, we voluntarily repaid the outstanding principal and interest amounts outstanding of the PPP loan.

2025 Convertible Notes

On November 27, 2020, we issued $75.0 million aggregate principal amount of 2025 Convertible Notes to Magnetar Capital, LLC (“Magnetar”). We received net proceeds of approximately $74.7 million from the sale of the 2025 Convertible Notes, after deducting fees and expenses of approximately $0.3 million.

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We used approximately $27.6 million of the net proceeds from the sale of the 2025 Convertible Notes to repay the outstanding term loans with Western Alliance Bank and Pinnacle Ventures, LLC (“Pinnacle”), which included $2.0 million of early repayment fees related to the Pinnacle loan.

The 2025 Convertible Notes are governed by an indenture, dated as of November 27, 2020, between us and U.S. Bank National Association, as trustee and collateral agent. The 2025 Convertible Notes will bear interest at the annual rate of 5.50%, payable annually on December 1st commencing December 1, 2021, compounded annually. The 2025 Convertible Notes will mature on December 1, 2025, unless earlier converted, redeemed or repurchased.

Cash Flows

Comparison of the Fiscal Years Ended March 31, 2022, 2021 and 2020.

The following table summarizes our cash flows for the fiscal years ended March 31, 2022, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31"],["","2022","","2021","","2020"],["","(in thousands)"],["Net cash used in operating activities","$","(172,338)","","","$","(19,618)","","","$","(19,666)"],["Net cash used in investing activities","(21,172)","","","(4,825)","","","(4,677)"],["Net cash provided by financing activities","355,458","","","54,498","","","22,678"],["Net increase (decrease) in cash and restricted cash","$","161,948","","","$","30,055","","","$","(1,665)"]]
[[/GREPCENT_TABLE]]

Cash flows used in Operating Activities

Net cash flows in operating activities represent the cash receipts and disbursements related to our activities other than investing and financing activities.

Net cash flows used in operating activities is derived by adjusting our net loss for:

•non-cash operating items such as depreciation and amortization, stock-based compensation and other non-cash income or expenses;

•changes in operating assets and liabilities reflect timing differences between the receipt and payment of cash associated with transactions.

For the fiscal year ended March 31, 2022, net cash used in operating activities was $172.3 million. The $172.3 million of net cash used in operating activities consisted of net loss of $68.3 million adjusted for non-cash charges totaling $7.6 million and a net decrease of $111.6 million in our net operating assets and liabilities. The non-cash charges primarily consisted of $33.2 million for changes in fair value of warrants, $17.9 million for stock based compensation, $2.0 million loss on extinguishment of debt and $4.4 million for depreciation and amortization. The decrease in our net operating assets and liabilities was driven by the changes in inventory of $82.9 million to support current demand, accounts payable and accrued expenses of $13.5 million related to increased expenditures to support general business growth, as well as the timing of payments, other liabilities of $12.6 million, prepaid expenses and other current assets of $1.1 million, and accounts receivable of $1.1 million. The decrease in our net operating assets and liabilities was partially offset by the change in deferred revenue of $4.4 million.

For the fiscal year ended March 31, 2021, net cash used in operating activities was $19.6 million. The $19.6 million of net cash provided by operating activities consisted of net loss of $31.4 million adjusted for non-cash charges totaling $13.4 million and a net increase of $1.6 million in our net operating assets and liabilities. The non-cash charges primarily consisted of $6.5 million for stock-based compensation, $3.5 million for amortization of deferred financing fees and debt discount, $2.4 million for depreciation and amortization and $0.9 million for changes in fair value of warrant and derivative liabilities. The increase in our net operating assets and liabilities was driven by the changes in accounts payable and accrued expenses of $16.5 million related to increased expenditures

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to support general business growth, as well as the timing of payments, and other liabilities of $13.3 million, and deferred revenue of $13.9 million, due to growth in our prepaid subscription sales. The increase in our net operating assets and liabilities was partially offset by the change in inventories of $37.8 million, accounts receivable of $5.0 million and prepaid expenses and other current assets of $2.2 million.

For the fiscal year ended March 31, 2020, $19.7 million of net cash used in operating activities consisted of a net loss of $31.4 million adjusted for non-cash charges of $4.7 million and a net increase of $7.0 million in our net operating assets and liabilities. The non-cash charges primarily consisted of $1.8 million for stock-based compensation, $1.4 million for depreciation and amortization and $1.3 million for amortization of deferred financing fees and debt discount. The increase in our net operating assets and liabilities was driven by the changes in accounts payable and accrued expenses of $11.9 million related to increased expenditures to support general business growth, as well as the timing of payments, other liabilities of $10.4 million and deferred revenue of $1.1 million, due to growth in our prepaid subscription sales. The increase in our net operating assets and liabilities was partially offset by the change in inventories for $13.0 million, accounts receivable of $2.4 million and prepaid expenses and other current assets of $1.0 million.

Cash flows used in Investing Activities

For the fiscal years ended March 31, 2022, 2021, and 2020, net cash used in investing activities was $21.2 million, $4.8 million, and $4.7 million respectively, primarily due to capital expenditures for warehouse machinery, leasehold improvements and equipment.

Cash flows provided by Financing Activities

For the fiscal year ended March 31, 2022, net cash provided by financing activities was $355.5 million, primarily due to proceeds of $227.1 million proceeds from the Merger and proceeds from the PIPE of $200.0 million. The increase in cash provided by financing activities was partially offset by the repayments of outstanding borrowings on our line of credit of $34.3 million, payments of transaction costs of $25.2 million, payment of deferred underwriting fees $8.9 million, and repayment of the outstanding PPP loan of $5.2 million.

For the fiscal year ended March 31, 2021, net cash provided by financing activities was $54.5 million, primarily due to proceeds of $75.8 million from the issuance of convertible notes and proceeds of $5.2 million from the loan issued under the PPP. The increase in cash provided by financing activities was partially offset by payments of long-term debt of $25.3 million and payments of transaction costs of $1.3 million.

For the fiscal year ended March 31, 2020, net cash provided by financing activities was $22.7 million, primarily due to proceeds from the Western Alliance term loan of $10.0 million, Pinnacle term loan of $7.6 million, and convertible notes issuances of $5.4 million.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operation is based upon our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimate and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on revenue generated and reported expenses incurred during the reporting periods, Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not

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readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are described in greater details in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.

Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our audited consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.

Revenue Recognition

Our primary source of revenue is from of our toys and treats subscriptions and sales of good through retailers, third parties or our website. We recognize revenue upon delivery of products and services to our subscriber or customer, as applicable. The recognition of revenue is determined through application of the following five-step model:

•Identification of the contract(s) with subscribers or customers, as applicable;

•Identification of the performance obligation(s) in the contract;

•Determination of the transaction price;

•Allocation of the transaction price to the performance obligation(s) in the contract; and

•Recognition of revenue when or as the performance obligation(s) are satisfied.

Discounts are considered fixed consideration and represent a fixed reduction to revenue for each performance obligation. The sales returns and chargebacks allowance is considered to be contingent and represents a component of variable consideration. The estimated consideration reflects potential sales returns and chargebacks as a reduction in the transaction price. We have determined that the expected value method will provide the best predictor for a refund liability associated with sales returns and chargebacks. The expected value method estimates variable consideration based on the range of possible outcomes and the probabilities of each outcome and is most appropriate when an entity has a large number of contracts that have similar characteristics. The estimate is recorded in total for sales transactions recorded in the current period and, in effect, represents a reduction in the transaction price at the time of sale.

Our contract liability represents cash collections from its customers prior to delivery of subscription products, which is recorded as deferred revenue on the consolidated balance sheets. Deferred revenue is recognized as revenue upon the delivery of the box or product.

Inventories

Inventories consist principally of finished goods, and represent products available for sale and are accounted for using the first-in, first-out (“FIFO”) method and valued at the lower of cost or net realizable value. Inventory costs consist of product and inbound shipping and handling costs. We assess the valuation of inventory and periodically write down the value for estimated excess and obsolete inventory based upon estimates of future demand and market conditions. Inventory valuation requires us to make judgments, based on information available at each reporting period. Inventory valuation losses are recorded as cost of revenues.

We review current business trends and forecasts, and inventory aging to determine adjustments which we estimate will be needed to liquidate existing excess inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market, as applicable. We believe that all inventory write-downs required at March 31, 2022, have been recorded. Our historical estimates of inventory reserves have not differed materially from actual results. If market conditions were to change, including as a result of the current conflict in Ukraine and its broader macroeconomic implications or the COVID-19 pandemic and the supply chain and logistics disruptions globally, it is possible that the required level of inventory reserves may need to be adjusted.

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Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 in our audited consolidated financial statements contained in this Annual Report on Form 10-K.

JOBS Act Accounting Election

We were an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). However, based on the market value of our common stock held by non-affiliates as of September 30, 2021, we became a large accelerated filer and thus ceased to be an emerging growth company on March 31, 2022. As a result, we were required to adopt new or revised accounting standards as required by public companies, including those standards which we had previously deferred pursuant to the JOBS Act. Additionally, we are no longer able to take advantage of the reduced regulatory and reporting requirements of emerging growth companies.

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