Pursuant to the Backstop Subscription Agreement, among other things, (i) the Backstop Investor agreed to subscribesubscribed for and purchase, andpurchased 2,338,352 shares of Legacy Grove agreed to issue and sell toCommon Stock (the “Backstop Tranche 1 Shares”) for aggregate proceeds of $27,500,000. The Company initially classified the Investor,Backstop Tranche 1 Shares as mezzanine (or temporary) equity on its balance sheet because the dateBackstop Tranche 1 Shares were contingently redeemable upon the occurrence of certain events not solely within the control of the Company that allow for the effective redemption of such shares in cash at the option of the holder. Upon Closing of the Business Combination, the Backstop Subscription Agreement, a number ofTranche 1 Shares were converted into 2,750,000 shares of Grove’s common stock equal toClass A Common Stock and the quotient of $27,500,000 and $11.70, for an aggregate purchase price of $27,500,000 (the “TrancheTranche 1 Shares”) and (ii)Share were no longer contingently redeemable. The Company has classified these shares in permanent equity on its balance sheet at June 30, 2022.
In addition, the Backstop Investor has agreed to subscribe for and purchase, on the closing date of the Business Combination, certain VGAC Classshares of New Grove class A Common Sharescommon stock at a purchase price of $10.00 per share (the “Tranche(“Backstop Tranche 2 Shares”), for aggregate gross proceeds in an amount equal to (x) $22,500,000$22.5 million minus (y) the amount of aggregate cash remaining in VGAC II’s trust account, after deducting any amounts paid to VGAC II shareholders who exercise their redemption rights in connection with the Business Combination. The Company issued to the Backstop Investor, as of immediately following the closing of the Mergers, 1,671,524 Backstop Tranche 2 Shares for aggregate proceeds of $16,715,240.
The Backstop Subscription Agreement also provides that the Company will issue additional shares of Class A common stock to the Backstop Investor for Backstop Tranche 1 Shares and Backstop Tranche 2 Shares if the volume weighted average price of Class A common stock is less than $10.00 during the 10 trading days commencing on the first trading date after the Company’s first quarterly earnings call for the fiscal quarter ended June 30, 2022 (“Additional Shares”).
As part of the Backstop Subscription Agreement, the Company issued to the Backstop Investor 3,875,028 warrants to purchase New Grove Class A Common Stock (each warrant exercisable to purchase one share of New Grove Class A Common Stock for $0.01) (such warrants, the “Backstop Warrants”). The Backstop Warrants are exercisable by the Backstop Investor at any time on or before June 16, 2027, and are on terms customary for warrants of such nature. The Backstop Warrants were recorded in equity on the Company’s balance sheet at June 30, 2022.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
4. Fair Value Measurements and Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Financial instruments consist of cash equivalents, accounts payable, accrued liabilities, debt and convertible preferred stock warrant liability, Additional Shares, Earn-Out Shares and Public and Private Placement Warrants. Cash equivalents, convertible preferred stock warrant liability, Additional Shares, Earn-Out Shares and Public and Private Placement Warrant are stated at fair value on a recurring basis. Accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short period time to the expected receipt or payment.The carrying amount of the Company’s outstanding debt approximates the fair value as the debt bears interest at a rate that approximates prevailing market rate.
The Public Warrants are classified as Level 1 due to the use of an observable market quote in an active market. Private Placement Warrants are classified as Level 2 as the fair value approximates the fair value of the Public Warrants. The Private Placement Warrants are identical to the Public Warrants, with certain exception discussed in Note 9, Common Stock and Warrants. The Additional Shares and Earn-Out Shares are classified as Level 3 and their fair values were estimated using a Monte Carlo options pricing model utilizing assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimated the expected volatility assumption based on the implied common stock volatilities of a set of publicly traded peer companies. Changes in this assumption, including the selection of or quantities of companies with the peer company set, could materially affect the estimate of the fair value of these instruments and the related change in fair value of these instruments.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 129,171 | | | $ | — | | | $ | — | | | $ | 129,171 | |
Total | $ | 129,171 | | | $ | — | | | $ | — | | | $ | 129,171 | |
Financial Liabilities: | | | | | | | |
Additional Shares | $ | — | | | $ | — | | | $ | 17,355 | | | 17,355 | |
Earn-Out Shares | — | | | — | | | 53,136 | | | 53,136 | |
Public Warrants | 3,381 | | | — | | | — | | | 3,381 | |
Private Placement Warrants | — | | | 2,814 | | | — | | | 2,814 | |
Total | $ | 3,381 | | | $ | 2,814 | | | $ | 70,491 | | | $ | 76,686 | |
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 77,771 | | | $ | — | | | $ | — | | | $ | 77,771 | |
Total | $ | 77,771 | | | $ | — | | | $ | — | | | $ | 77,771 | |
Financial Liabilities: | | | | | | | |
Convertible preferred stock warrant liability | $ | — | | | $ | — | | | $ | 4,787 | | | $ | 4,787 | |
Total | $ | — | | | $ | — | | | $ | 4,787 | | | $ | 4,787 | |
There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 during the periods presented.
Additional Shares
At closing of the Mergers, the Company recorded a liability of $15.3 million related to the potential issuance of the Additional Shares related to the Backstop Subscription Agreement. Subsequent changes in fair value of the Additional Shares liability until settlement is recognized in the statements of operations.
The following table provides a summary of changes in the estimated fair value of the Additional Shares liability (in thousands):
| | | | | |
Balance at December 31, 2021 | $ | — | |
Assumption of Additional Shares liability | 15,340 | |
Change in fair value | 2,015 | |
Balance at June 30, 2022 | $ | 17,355 | |
Earn-Out Shares
At Closing of the Mergers, certain Earn-Out Shares were accounted for as a liability totaling $70.5 million.Subsequent changes in fair value, until settlement or until equity classification is met, is recognized in the statements of operations.
The following table provides a summary of changes in the estimated fair value of the Earn-Out liability (in thousands):
| | | | | |
Balance at December 31, 2021 | $ | — | |
Assumption of Earn-Out liability | 70,481 | |
Change in fair value | (17,345) | |
Balance at June 30, 2022 | $ | 53,136 | |
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Private Placement and Public Warrant Liabilities
As of June 30, 2022, the Company has Private Placement and Public Warrants defined and discussed in Note 9, Common Stock and Warrants. Such warrants are measured at fair value on a recurring basis.
The following table provides a summary of changes in the estimated fair value of the Private Placement Warrants and Public Warrants (in thousands):
| | | | | | | | | | | |
| Private Placement Warrants | | Public Warrants |
Balance at December 31, 2021 | $ | — | | | $ | — | |
Assumption of Private Placement and Public Warrants | 3,350 | | | 4,025 | |
Changes in fair value | (536) | | | (644) | |
Balance at June 30, 2022 | $ | 2,814 | | | $ | 3,381 | |
Convertible Preferred Stock Warrant Liability
The fair value of the preferred stock warrant liability is determined using the Black-Scholes option pricing model, which involve inherent uncertainties and the application of management’s judgment. The following table provides a summary of changes in the estimated fair value of the preferred stock warrant liability (in thousands):
| | | | | |
Balance at December 31, 2021 | $ | 4,787 | |
Change in fair value | (1,616) | |
Net exercise of preferred stock warrants | (989) | |
Balance before reclassification at June 30, 2022 | 2,182 | |
Reclassification to additional paid-in capital | (2,182) | |
Balance at June 30, 2022 | $ | — | |
The Company recorded a loss on remeasurement of preferred stock warrant liability of $0.3 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and a gain of $1.6 million and a loss of $1.3 million on remeasurement of preferred stock warrant liability for the six months ended June 30, 2022 and 2021, respectively. With the closing of the Business Combination, unexercised preferred stock warrants are converted into warrants of the Company to purchase shares of common stock and the preferred stock warrant liability is reclassified to additional paid-in capital.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
5. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Inventory purchases | $ | 3,468 | | | $ | 4,659 | |
Compensation and benefits | 1,744 | | | 2,072 | |
Advertising costs | 3,527 | | | 2,363 | |
Fulfillment costs | 1,147 | | | 1,120 | |
Sales taxes | 1,537 | | | 1,812 | |
Transaction costs | 21,399 | | | 1,846 | |
Other accrued expenses | 8,008 | | | 6,779 | |
Total accrued expenses | $ | 40,830 | | | $ | 20,651 | |
6. Debt
The Company’s outstanding debt, net of debt discounts, consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Silicon Valley Bank Loan Revolver | $ | 5,947 | | | $ | 5,947 | |
Silicon Valley Bank and Hercules Mezzanine Term Loan | 59,263 | | | 59,237 | |
Atel Loan Facility Draw 3 | 1,009 | | | 1,489 | |
Atel Loan Facility Draw 4 | 183 | | | 260 | |
Total debt | 66,402 | | | 66,933 | |
Less: debt, current | (22,708) | | | (10,750) | |
Total debt, noncurrent | $ | 43,694 | | | $ | 56,183 | |
Silicon Valley Bank Loan Facility
In December 2016, the Company entered into a loan and security agreement (the “SVB Loan Facility”) with Silicon Valley Bank (“SVB”). The terms of the SVB Loan Facility, as amended and restated, provided for: (i) a revolving line of credit not to exceed $25.0 million (“Loan Revolver”), (ii) growth capital advance (“Term Loan”) of $3.9 million and (iii) a letter of credit sublimit of $6.0 million. The Term Loan had a maturity date in December 2022 and bore interest at Prime Rate per annum, payable monthly. The Loan Revolver borrowing capacity was limited to 60% of eligible inventory balances.
In April 2021, the Company entered into an amendment to the SVB Loan Facility, which incurs a facility fee of 0.20% per annum assessed on the daily average undrawn portion of revolving line of credit. In addition, the Loan Revolver letter of credit sublimit increased to $10.0 million and the Loan Revolver borrowing capacity increased to 65% of eligible inventory balances. The Loan Revolver borrowing capacity is reduced by outstanding letters of credit and credit available to the Company from certain credit card facilities, which amounted to $3.1 million and $1.5 million, respectively as of June 30, 2022. The amended Loan Revolver bears an interest rate equal to the greater of prime rate or 3.25% per annum and matures on March 31, 2023. Interest on the Loan Revolver is payable monthly in arrears.
In April 2021, all of the Company’s outstanding amounts under the SVB Term Loan were refinanced directly through the SVB and Hercules Loan Facility (see below). The Company determined the refinance represented an extinguishment of the SVB Term Loan and recorded a loss on extinguishment of $1.0 million during the three months ended June 30, 2021.
The SVB Loan Facility is collateralized by substantially all of the Company’s assets on a first priority basis and contains customary events of default. The SVB Loan Facility includes affirmative, negative, and financial covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, other than permitted
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
indebtedness, enter into mergers or acquisitions, sell or otherwise dispose of assets, pay dividends, or repurchase stock, subject to customary exceptions. The SVB Loan Facility contains certain financial covenants which requires the Company to maintain minimum liquidity of $45.0 million. Minimum liquidity is defined as the sum of the aggregate amount of unrestricted and unencumbered cash deposited with SVB plus amounts available to be drawn under the loan revolver, as adjusted for any outstanding standby letters of credit issued by SVB.
As of June 30, 2022, the Company was in compliance with all covenants and had $5.9 million outstanding under the revolving line of credit, with an effective interest rate of 5.00%.
Silicon Valley Bank and Hercules Loan Facility
In April 2021, the Company entered into a Mezzanine Loan and Security Agreement (“SVB and Hercules Loan Facility”) with SVB and Hercules Capital, Inc. (“Hercules”). The availability period runs from the effective date until June 30, 2022, provides for advances of up to $60.0 million. In April 2021, the Company drew $25.0 million, which it used to directly settle the amounts outstanding under the SVB Term Loan. In September and December 2021, the Company drew down the remaining additional borrowings of $25.0 million and $10.0 million, respectively. The SVB and Hercules Loan Facility bears an annual interest at the greater of 8.75% or prime plus 5.5%, payable monthly. The principal repayment period commences on November 1, 2022 and continues for 30 monthly installments with an additional final payment equal to 6.75% of the aggregate term loan advances. SVB and Hercules have committed to fund 51.0% and 49.0%, respectively, of all draws made under the SVB and Hercules Loan Facility.
In May 2022, as part of the Closing of the Business Combination, the Company entered into an amendment with SVB and Hercules Loan Facility which increased the final payment from 6.75% to 8.75% of the aggregate term loan advances.
The SVB and Hercules Loan Facility is collateralized on a second priority basis, subordinate to the SVB Loan Facility, by substantially all of the Company’s assets and contains affirmative and negative covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, other than permitted indebtedness, enter into mergers or acquisitions, sell or otherwise dispose of assets, pay dividends or repurchase stock, subject to customary exceptions. The SVB and Hercules Loan Facility does not include any financial covenants, but does contain a subjective acceleration clause in the event that lenders determine that a material adverse change has or will occur within the business, operations, or financial condition of the Company or a material impairment of the prospect of repaying any portion of this financial obligation. In accordance with the loan agreement, SVB and Hercules have been provided with the Company’s periodic financial statements and updated projections to facilitate their ongoing assessment of the Company. The Company believes the likelihood that SVB and Hercules would exercise the subjective acceleration clause is remote.
As of June 30, 2022, the Company had an aggregate of $60.0 million outstanding under the SVB and Hercules Loan Facility, excluding unamortized debt issuance cost, with effective interest rates ranging from 14.26% to 17.31%. As of June 30, 2022, the Company was in compliance with all covenants.
Atel Loan Facility
In July 2018, the Company entered into an equipment financing arrangement (the “Atel Loan Facility”) with Atel Ventures, Inc. (“Atel”) for funding of machinery and warehouse equipment that will become collateral. The loan agreement contains customary events of default.
As of June 30, 2022, the Company had $1.0 million outstanding on its third draw and $0.2 million outstanding on its fourth draw, which mature in April 2023 and May 2023, respectively. The effective interest rates on the loans are 19.23%. By the end of the equal monthly installments of principal and interest, the principal under each loan will be fully repaid.
7. Commitments and Contingencies
Merchandise Purchase Commitments
As of June 30, 2022 and December 31, 2021, the Company had obligations to purchase $27.0 million and $36.1 million, respectively, of merchandise.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Letters of Credit
The Company had irrevocable standby letters of credit in the amount of $3.1 million as of June 30, 2022 and December 31, 2021 related to the Company’s operating leases. The letters of credit have expiration dates through January 2029.
Contingencies
The Company records loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although the Company cannot predict with assurance the outcome of any litigation or non-income-based tax matters, the Company does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s financial position, operating results or cash flows.
8. Convertible Preferred Stock
The Company’s outstanding convertible preferred stock consisted of the following as of December 31, 2021 (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Original Issue Price | | Shares Authorized | | Shares Outstanding | | Net Carrying Value | | Liquidation Preference |
Series Seed | $ | 0.5245 | | | 9,693,116 | | | 9,693,115 | | | $ | 3,943 | | | $ | 5,084 | |
Series A | 0.5245 | | | 14,130,360 | | | 14,069,657 | | | 5,240 | | | 7,379 | |
Series B | 1.2450 | | | 12,689,363 | | | 12,563,418 | | | 15,545 | | | 15,642 | |
Series C | 2.4144 | | | 15,635,550 | | | 15,324,913 | | | 36,917 | | | 37,000 | |
Series C-1 | 3.1669 | | | 8,554,106 | | | 8,554,106 | | | 27,003 | | | 27,090 | |
Series D | 7.0135 | | | 20,196,682 | | | 19,961,423 | | | 136,618 | | | 140,000 | |
Series D-1 | 9.0731 | | | 5,314,209 | | | 5,314,209 | | | 48,146 | | | 48,216 | |
Series D-2 | 6.1850 | | | 14,551,371 | | | 14,551,370 | | | 89,638 | | | 90,000 | |
Series E | 8.4672 | | | 14,762,823 | | | 14,762,823 | | | 124,868 | | | 125,000 | |
Total | | | 115,527,580 | | | 114,795,034 | | | $ | 487,918 | | | $ | 495,411 | |
Conversion
At the closing of the Business Combination, all series of convertible preferred stock of Legacy Grove were converted on an as-converted basis to the Company’s Class B common stock at an exchange ratio of approximately 1.1760. As of June 30, 2022, no shares of convertible preferred stock were outstanding.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
9. Common Stock and Warrants
Prior to the Business Combination, Legacy Grove had one class of authorized common stock (Class B common stock). The outstanding shares of Legacy Grove common stock is presented on the consolidated balance sheet and on the statements of convertible preferred stock, contingently redeemable convertible common stock and stockholders’ deficit for the year ended December 31, 2021.
Merger Transaction
On the Closing Date and in accordance with the terms and subject to the conditions of the Business Combination, each common stock, par value $0.0001 per share (other than Backstop Tranche 1 Shares), preferred stock, outstanding options (whether vested or unvested), restricted stock units (whether vested or unvested) and warrants of Legacy Grove was canceled and converted into a comparable number of awards (i) that consisted of either the rights to receive or acquire shares of the Company’s Class B common stock, par value $0.0001 per share, as determined by the exchange ratio, and (ii) the right to receive a number of the Company’s Earn-Out shares. Each Backstop Tranche 1 Shares issued to the Backstop Investor pursuant to the Backstop Subscription Agreement was canceled and converted into the right to receive a number of shares of the Company’s Class B common stock equal to the exchange ratio, which were immediately exchanged on a one-for-one basis for shares of the Company’s Class A common stock). The exchange ratio is approximately 1.1760.
On June 16, 2022, in connection with the closing of the Business Combination, the Company amended and restated its certificate of incorporation to authorize 900,000,000 shares, consisting of (a) 800,000,000 shares of common stock, including (i) 600,000,000 shares of Class A common stock, and (ii) 200,000,000 shares of Class B common stock, and (b) 100,000,000 shares of preferred stock.
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to number of voting rights. Holders of Class A common stock are entitled to 1 vote per share and holders of Class B common stock are entitled to 10 votes per share. Each share of Class B common stock is convertible into 1 share of Class A common stock any time at the option of the holder, and is automatically converted into 1 share of Class A common stock upon transfer (except for certain permitted transfers). Once converted into Class A common stock, the Class B common stock will not be reissued. The Company’s Board of Directors has the authority to issue shares of the Preferred Stock in one or more series and to determine the voting rights, designations, powers, preferences, other rights and restrictions of each such series of shares. As of June 30, 2022, no shares of preferred stock were issued and outstanding.
Class A Common Stock Warrants
As the accounting acquirer, Grove Collaborative, Inc. is deemed to have assumed 6,700,000 Private Placement Warrants for Class A common stock that were held by Virgin Group Acquisition Sponsor II LLC (the “Sponsor”) at an exercise price of $11.50 and 8,050,000 Class A common stock Public Warrants that were held by VGAC II’s shareholders at an exercise price of $11.50. The warrants will expire on July 16, 2027, or earlier upon redemption or liquidation.
Subsequent to the Closing of the Business Combination, the Private Placement and Public Warrants for shares of Class A common stock meet liability classification requirements since the warrants may be required to be settled in cash under a tender offer. In addition, Private Placement warrants are potentially subject to a different settlement amount as a result of being held by the Sponsor which precludes the private placement warrants from being considered indexed to the entity's own stock. Therefore, these warrants are classified as liabilities on the condensed consolidated balance sheets and amounted to $76.7 million as of June 30, 2022.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As of June 30, 2022, the following Warrants were outstanding:
| | | | | | | | | | | | | | |
Warrant Type | | Shares | | Exercise Price |
Public Warrants | | 8,050,000 | | | $ | 11.50 | |
Private Placement Warrants | | 6,700,000 | | | $ | 11.50 | |
Public Warrants
The Public Warrants become exercisable into shares of Class A common stock commencing on July 16, 2022 and expire on July 16, 2027, or earlier upon redemption or liquidation. At closing, the Company assumed 8,050,000 public warrants. Each warrant entitles the holder to purchase 1 share of the Company’s Class A common stock at a price of $11.50 per share, subject to certain adjustments.
The Company may redeem, with 30 days written notice, each whole outstanding Public Warrant for cash at a price of $0.01 per warrant if the Reference Value equals or exceeds $18.00 per share, subject to certain adjustments. The warrant holders have the right to exercise their outstanding warrants prior to the scheduled redemption date during the Redemption Period at $11.50 per share, subject to certain adjustments. If the Company calls the Public Warrants for redemption, the Company will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis”, as described in the warrant agreement. For purposes of the redemption, “Reference Value” shall mean the last reported sales price of the Company’s Class A common stock for any twenty trading days within the thirty trading-day period ending on the third trading day prior to the date on which notice of the redemption is given.
Private Placement Warrants
The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, then such warrants will be redeemable by the Company and exercisable by the warrant holders on the same basis as the Public Warrants. At Closing, the Company assumed 6,700,000 Private Placement Warrants.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Reserved for Issuance
The Company has the following shares of common stock reserved for future issuance, on an as-if converted basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock |
Convertible preferred stock | — | | | — | | | — | | | 115,287,015 | |
Convertible preferred stock warrants | — | | | — | | | — | | | 735,760 | |
Private Placement Warrants | 6,700,000 | | | — | | | — | | | — | |
Public Warrants | 8,050,000 | | | — | | | — | | | — | |
Backstop Warrants | 3,875,028 | | | — | | | — | | | — | |
Common Stock Warrants | — | | | 923,857 | | | — | | | 688,349 | |
Outstanding Stock Options | 9,323,547 | | | 15,312,140 | | | — | | | 27,882,520 | |
Outstanding Restricted Stock Units | 4,517,208 | | | 1,184,158 | | | — | | | 1,777,183 | |
Remaining Shares available for issuance under 2016 Equity Incentive Plan | — | | | — | | | — | | | 1,070,974 | |
Remaining Shares available for issuance under 2022 Equity Incentive Plan | 24,544,031 | | | — | | | — | | | — | |
Shares available for issuance under 2022 Employee Stock Purchase Plan | 3,274,070 | | | — | | | — | | | — | |
Total shares of common stock reserved | 60,283,884 | | | 17,420,155 | | | — | | | 147,441,801 | |
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
10. Stock-Based Compensation
Equity Incentive Plan
In 2016, Legacy Grove adopted the 2016 Equity Incentive Plan (the “2016 Plan”). The Plan provides for the granting of stock-based awards to employees, directors and consultants under terms and provisions established by the Board of Directors. In April 2022, the Company’s Board of Directors authorized an increase in the number of shares available for issuance under the 2016 Plan by 3,500,000. In addition, all equity awards of Legacy Grove that were issued under the 2016 Plan were converted into comparable equity awards that are settled or exercisable for shares of the Company’s Class B common stock. As a result, each of Legacy Grove’s equity awards were converted into an option to purchase shares of the Company’s Class B common stock based on an exchange ratio of approximately 1.1760. As of the effective date of the 2022 Plan, no further stock awards have been or will be granted under the 2016 Plan.
In June 2022, the stockholders of the Company approved the Grove Collaborative Holdings, Inc. 2022 Stock Incentive Plan (the “2022 Plan”). The Plan provides for the granting of stock-based awards to eligible participants, specifically officers, other employees, non-employee directors, consultants, independent contractors under terms and provisions established by the Board of Directors.
The 2022 Plan authorizes the issuance of Class A common stock of up to 24,555,528.The number of shares available shall increase annually on the first day of each calendar year, beginning with calendar year ending December 31, 2023 and continuing until (and including) calendar year December 31 2032, with annual increases equal to lesser of (i) 5% of the number of shares of Class A and Class B common stock issued and outstanding on December 31 of the immediately preceding fiscal year, and (ii) an amount determined by the Board.
Stock option activity under the 2016 Plan is as follows (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding |
| Number of Options | | Weighted–Average Exercise Price | | Weighted-Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value |
Balance – December 31, 2021 | 23,708,957 | | | $ | 3.05 | | | 7.99 | | $ | 125,429 | |
Recapitalization | 4,173,563 | | | (0.46) | | | | | |
Balance – December 31, 2021 | 27,882,520 | | | 2.59 | | | 7.99 | | 125,429 | |
Exercised | (205,337) | | | 1.60 | | | | | |
Cancelled/forfeited | (3,041,496) | | | 3.44 | | | | | |
Balance – June 30, 2022 | 24,635,687 | | | 2.53 | | | 7.42 | | 54,818 | |
Options vested and exercisable – June 30, 2022 | 15,742,548 | | | $ | 1.81 | | | 6.87 | | $ | 44,349 | |
The weighted-average grant date fair value of options granted during the six months ended June 30, 2021 was $4.41 per share. No options were granted during the six months ended June 30, 2022. The total grant date fair value of options that vested during the six months ended June 30, 2022 and 2021 was $7.8 million and $6.0 million, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 was $1.1 million and $2.3 million, respectively. The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options.
Early Exercise of Employee Options
The Company allows certain employees to exercise options granted under the Plan prior to vesting in exchange for shares of restricted common stock. The unvested shares, upon termination of employment, are subject to repurchase by the Company at the original purchase price. The proceeds are recorded in other current liabilities in the consolidated balance sheets at the time of the early exercise of stock options and reclassified to common stock and additional paid-in capital as the Company’s repurchase right lapses (i.e., as the underlying stock options vest). No and 11,025 shares of common stock were issued due to early exercise of unvested stock options during the six months
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
ended June 30, 2022 and 2021. As of June 30, 2022 and December 31, 2021, the aggregate price of the restricted common stock subject to repurchase was 0 and $0.2 million, respectively. A summary of the restricted common stock is as follows:
| | | | | | | | | | | |
| Number of Options | | Weighted–Average Exercise Price |
Outstanding and unvested as of December 31, 2021 | 69,513 | | | $ | 2.25 | |
Recapitalization | 12,237 | | | (0.33) | |
Outstanding and unvested as of December 31, 2021 | 81,750 | | | 1.92 | |
Vested | (65,211) | | | 1.92 | |
Repurchase of early exercise | (16,539) | | | 1.92 | |
Outstanding and unvested as of June 30, 2022 | — | | | $ | — | |
Determination of Fair Value
The fair value of stock option awards granted to employees was estimated at the date of grant using the Black-Scholes option-pricing model, with the following assumptions:
| | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
Fair value of common stock | $5.86 – $6.45 | | $5.06 – $6.45 |
Expected term (in years) | 5.03 – 6.28 | | 5.00 – 6.28 |
Volatility | 62.33% – 63.66% | | 62.33% – 75.19% |
Risk-free interest rate | 0.81% – 1.16% | | 0.50% – 1.16% |
Dividend yield | — | | — |
Market-Based Stock Options
In February 2021, the Company granted 1,017,170 stock options with market and liquidity event-related performance-based vesting criteria with an exercise price of $3.77 per share. 100% of awards vest upon valuation of the Company’s stock at a stated price upon occurrence of specified transactions. Fair value was determined using the probability weighted expected term method (“PWERM”), which involves the estimation of future potential outcomes as well as values and probabilities associated with each potential outcome. Two potential scenarios were used in the PWERM that utilized 1) the value of the Company’s common equity, and 2) a Monte Carlo simulation to specifically value the award. The total grant date fair value of the award was determined to be $5.5 million. Since a liquidity event is not deemed probable until such event occurs, no compensation cost related to the performance condition was recognized prior to the Business Combination on June 16, 2022. Subsequently, the Company recorded stock-based compensation expense of $4.6 million for the six months ended June 30, 2022 which was principally related to service periods completed prior to the Business Combination. As of June 30, 2022, the market-based vesting criteria had not been met.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Performance-Based Restricted Stock Units
Performance-based restricted stock units activity under the 2016 Plan is as follows (in thousands, except share and per share amounts):
| | | | | | | | | | | |
| Number of shares | | Weighted–Average Grant Date Fair Value Per Share |
Unvested – December 31, 2021 | 1,511,191 | | | $ | 8.62 | |
Recapitalization | 265,992 | | | (1.29) | |
Unvested – December 31, 2021 | 1,777,183 | | | 7.33 | |
Granted | 4,748,063 | | | 6.98 | |
Vested | (593,971) | | | 6.93 | |
Cancelled/forfeited | (823,880) | | | 6.71 | |
Balance – June 30, 2022 | 5,107,395 | | | 6.71 | |
Vested but unissued – June 30, 2022 | 593,971 | | | $ | 6.93 | |
RSUs granted under the 2016 Plan contain vesting conditions based on continuous service and the occurrence of a specified liquidity event, which is considered a performance condition. The performance condition is satisfied upon the consummation of (i) an initial underwritten public offering of the Company’s common stock; (ii) a change in control event, or (iii) a merger, consolidation or similar transaction in which the Company’s common stock outstanding immediately preceding such transaction are converted or exchanged into securities that are publicly-traded on an established exchange (the “Liquidity Event”), provided that the Liquidity Event occurs prior to the fifth anniversary of the grant date and the recipient continues to provide service to the Company on such date. The Company satisfied the performance condition on June 16, 2022 with the Closing of the Business Combination. Accordingly, the Company started recognizing stock compensation expense in the three months ended June 30, 2022 using the accelerated attribution method from the grant date. The total cumulative catch up expense related to prior periods recognized for the RSUs was $11.9 million. The vested but unissued RSUs will be issued to the common stockholders in November 2022 upon the termination of the Lock-Up Period, as defined in Section 7.10 of the Company’s Bylaws. There are no other contingencies for the issuance of these RSUs other than passage of time. Equity Award Modifications
During the six months ended June 30, 2022, the Company modified options held by former and existing employees to extend the post termination exercise period of the awards from 60 days to 1, 2 or 10 years after termination, as well as accelerated the vesting of RSUs. The modifications resulted in modification expenses of $0.6 million and $1.7 million during the three and six months ended June 30, 2022, respectively.
Stock-Based Compensation Expense
For the three months ended June 30, 2022 and 2021, the Company recognized a total of $20.1 million and $3.8 million of stock-based compensation expense, respectively. For the six months ended June 30, 2022 and 2021, the Company recognized a total of $24.5 million and $7.3 million of stock-based compensation expense, respectively. Stock-based compensation expense was predominately recorded in selling, general and administrative expenses in the statements of operations for each period presented. As of June 30, 2022, the total unrecognized compensation expense related to unvested options and RSUs was $47.4 million, which the Company expects to recognize over an estimated weighted average period of 2.6 years.
Grove Collaborative Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
11. Net Loss Per Share Attributable to Common Stockholders
The following potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Convertible preferred stock | — | | | 115,287,015 | | | — | | | 115,287,015 | |
Contingently redeemable convertible common stock | — | | | — | | | — | | | — | |
Common stock options | 24,635,687 | | | 27,646,468 | | | 24,635,687 | | | 27,646,468 | |
Restricted stock units | 5,107,395 | | | — | | | 5,107,395 | | | — | |
Convertible preferred stock warrants | — | | | 735,760 | | | — | | | 735,760 | |
Common stock warrants | 923,857 | | | 974,350 | | | 923,857 | | | 974,350 | |
Private and Public Placement Warrants | 14,750,000 | | | — | | | 14,750,000 | | | — | |
Earn-Out Shares | 13,999,960 | | | — | | | 13,999,960 | | | — | |
Shares subject to repurchase | — | | | 320,589 | | | — | | | 320,589 | |
Total Net loss per share attributable to common stockholders, basic and diluted | 59,416,899 | | | 144,964,182 | | | 59,416,899 | | | 144,964,182 | |
12. Subsequent Events
On July 18, 2022, Grove entered into a Standby Equity Purchase Agreement (the “Purchase Agreement”) with an affiliate of Yorkville Advisors Global, LP (“Yorkville”), enabling the Company to sell up to $100 million of shares of Class A common stock to Yorkville at the Company’s request during the 36 months following the execution of the Purchase Agreement, subject to certain conditions. As of August 11, 2022, the conditions precedent allowing the Company to sell shares under the Purchase Agreement have not yet been met.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Registration Statement filed on May 17, 2022, including the audited financial statements of Grove Collaborative, Inc. (referred to as “Legacy Grove” herein) as of December 31, 2019, 2020 and 2021 and Management's Discussion and Analysis of Financial Condition and Results of Operations included therein, as well as the accompanying unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q.
In addition to historical information, this discussion and analysis contains forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those discussed in the section titled “Risk Factors” of this Form 10-Q, that could cause actual results to differ materially from historical results or anticipated results. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to the "Grove," “we,” “us,” and “our” refer to Grove Collaborative Holding, Inc., a Delaware corporation formerly known as Virgin Group Acquisition Corp. II., and its consolidated subsidiary. References to Virgin Group Acquisition Corp. II. or "VGAC II" refer to the Company prior to the consummation of the Business Combination.
OVERVIEW
Grove Collaborative Holdings, Inc., formally Virgin Group Acquisition Corp. II is a digital-first, sustainability-oriented consumer products innovator. We use our connection with consumers to create and curate authentic, disruptive brands and products. Grove builds natural products that perform as well as or better than many leading CPG brands (both conventional and natural), while being healthier for consumers and the planet.
Our omnichannel distribution strategy enables us to reach consumers where they want to shop. We operate an online direct-to-consumer website and mobile application (“DTC platform”) where we both sell our Grove-owned brands (“Grove Brands”) and partner with other leading natural and mission-based CPG brands, providing consumers the best selection of curated products across many categories and brands.
Grove is a public benefit corporation and a Certified B Corporation, meaning we adhere to third party standards for prioritizing social, environmental, and community wellbeing. We have a history of doing well by doing good, which is supported by our flywheel: as we have grown, our product development capabilities and data have improved. Over the long term, we believe that improved innovation grows both topline and expands margins as our innovation tends to be both market expanding and margin accretive. Since inception, we have grown rapidly and invested heavily in building out both our ecommerce platform and Grove Brands, and over this period we have operated at a loss and have an accumulated deficit of $572.8 million as of June 30, 2022. We anticipate that we will continue to incur losses in the future as we continue to invest in advertising and other strategic initiatives planned for future growth and as a result, we will need additional capital resources to fund our operations. Refer to Liquidity, Capital Resources and Requirements below for more information.
Reorganization
In March 2022, due to the ongoing impact of the pandemic, current market headwinds, and the steadfast commitment to building a sustainable business, we implemented a company-wide reorganization which included a reduction in our workforce of approximately 17% of corporate employees to reduce operating expenses and strengthen key strategic areas across the business. In connection with the reorganization, we recorded charges totaling $1.6 million in the six months ended June 30, 2022.
Business Combination
On June 16, 2022 (the “Closing Date”), we consummated the previously-announced transactions contemplated by the Agreement and Plan of Merger, dated December 7, 2021, amended and restated on March 31, 2022 (the “Merger Agreement”), among Virgin Group Acquisition Corp. II (“VGAC II”), Treehouse Merger Sub, Inc. (“VGAC II Merger Sub I”), Treehouse Merger Sub II, LLC (“VGAC II Merger Sub II”), and Grove Collaborative, Inc. (“Legacy Grove”) (“the Merger”). In connection with the Merger, VGAC II changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware and changed its name to Grove Collaborative Holdings, Inc (the “Domestication”), a public benefit corporation. On the Closing Date, VGAC Merger Sub II merged with and into Legacy Grove with Legacy Grove being the surviving corporation and a wholly-owned subsidiary of the Company (the “Initial Merger”), and, immediately following
the Initial Merger, and as part of the same overall transaction as the Initial Merger, Legacy Grove merged with and into VGAC Merger Sub II, the separate corporate existence of Legacy Grove ceased, and Merger Sub II continued as the surviving company and a wholly-owned subsidiary of the Company and changed its name to Grove Collaborative, Inc. (together with the Merger and the Domestication, the “Business Combination”).
On December 7, 2021, concurrently with the execution of the Merger Agreement, VGAC II entered into subscription agreements with certain investors (the “PIPE Investors”) to which such investors collectively subscribed for an aggregate of 8,707,500 shares of Class A Common Stock at $10.00 per share for aggregate gross proceeds of $87,075,000 (the “PIPE Investment”). 8,607,500 shares of Class A Common Stock has been issued for aggregate proceeds of $86,075,000, which consummated concurrently with the closing to the Business Combination.
On March 31, 2022, VGAC II entered into the a Subscription Agreement with Corvina Holdings Limited (the “Backstop Investor”), where the Backstop Investor agreed to purchase, on the closing date of the Business Combination, certain shares of Class A Common Stock at a purchase price of $10.00 per share (“Backstop Tranche 2 Shares”) for aggregate gross proceeds in an amount equal to (x) $22.5 million minus (y) the amount of aggregate cash remaining in VGAC II’s trust account, after deducting any amounts paid to VGAC II shareholders who exercise their redemption rights in connection with the Business Combination.
We completed the Business Combination and PIPE Investment on June 16, 2022, pursuant to which we received total gross proceeds of $97.1 million, including proceeds from the issuance of Backstop Tranche 2 Shares.
Key Factors Affecting Our Operating Performance
We believe that the growth of our business and our future success are dependent on many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our operations while staying true to our mission, including those discussed below and in the section entitled “Risk Factors”.
Ability To Grow our Brand Awareness
Our brand is integral to the growth of our business and is essential to our ability to engage with our community. Our performance will depend on our ability to attract new customers and encourage consumer spending across our product portfolio. We believe the core elements of continuing to grow our awareness, and thus increase our penetration, are highlighting our products’ qualities of being natural, sustainable and effective, the efficacy of our marketing efforts and the success of our continued retail rollout. Beyond preserving the integrity of our brand, our performance will depend on our ability to augment our reach and increase the number of consumers aware of Grove and our product portfolio.
Ability to Continue to Innovate in Products and Packaging
Our continued product innovation is integral to our future growth. We have successfully developed and launched over 500 individual products in recent years. The research, development, testing and improvement has been led by our R&D team, which includes experienced chemists and formulators, who work closely with our Sustainability team. These new and innovative products, as well as our focus on environmentally responsible packaging, have been key drivers of our value proposition to date. An important element of our product development strategy is our ability to engage directly with customers through our DTC platform to assess demand and market preferences. To the extent our customers increasingly access our products through retail channels, we will need to innovate our modalities of customer engagement to maintain this important feedback loop. Our continued success in research and development and ability to assess customer needs and develop sustainable and effective products will be central to attracting and retaining consumers in the future and to growing our market penetration and our impact on human and environmental health.
Ability to Expand our Retail Distribution
We have a significant opportunity to expand our distribution in retail channels, both broadening our partner reach and introducing our products across more doors, as well as deepening our retail distribution in terms of the number of individual products. Our success and speed of doing so will impact our financial performance. We will pursue partnerships with a wide variety of retailers, including big-box retailers, online retailers, grocery stores, drugstores and specialty retailers. Our ability to execute this strategy will depend on a number of factors, such as retailers’ satisfaction with the sales and profitability of our products. In the near-term, retail expansion will require partnerships with retailers on launches and we may choose to invest in promotions to drive sales and awareness over time. To the extent we are successful in retail expansion over the next several years, we expect to see potential negative effects on gross margins resulting from the retail
cost structure to be approximately offset by savings in fulfillment costs driven by bulk shipping to retailers versus individualized fulfillment to consumers, through our fulfillment centers.
Cost-Efficient Acquisition of New Customers and Retention of Existing Customers on our DTC Platform
Our ability to attract new customers is a key factor for our future growth. To date we have successfully acquired new customers through many online and offline marketing channels. As a result, revenue has increased each year since our launch through fiscal 2021. In recent periods, changes in the algorithms used for targeting and purchasing online advertising, changes to privacy and online tracking, supply and demand dynamics in the market, and other factors have caused the cost of marketing on these channels to increase consistently. Failure to effectively adapt to changes in online marketing dynamics or otherwise to attract customers on a cost- efficient basis would adversely impact our path to profitability and operating results. We have several initiatives underway that we believe may lower marketing and customer acquisition cost, but these may not be successful and our inability to drive success in new marketing initiatives would adversely impact our profitability and operating results.
In 2020, new customer acquisition, customer acquisition cost, average order value, promotion rates, and growth in order volume by cohort were favorably impacted to a substantial degree by the onset of the COVID-19 pandemic. This was driven both by the increasing use of DTC platform by customers sheltering in place and by substantially higher demand for many of our product categories, especially personal care and household paper and cleaning products. After several years of annual revenue growth, our revenues in the three months and six months ended June 30, 2022 were approximately 20% and 16%, lower than in the prior year comparative periods, respectively, reflecting the challenges that the industry faces as a result of customers buying behaviors reverting to pre-pandemic levels. While we continue to believe that there are long term growth trends in the zero-waste industry and that we will be able to continue to grow our business in the long run, post-pandemic consumer behavior patterns and macro-economic factors will continue to be a risk to our business and will adversely impact our financial performance.
The future activity level and profitability of our DTC customer base will depend on our ability to continue to offer a compelling value proposition to consumers including strong selection, pricing, customer service, smooth and compelling web and mobile app experience, fast and reliable fulfillment, and curation within natural and sustainable products. Our success is also dependent on our ability to maintain relevance with our consumers on a regular basis through high performing products and a consumer-friendly refill and fulfillment process, and most importantly to provide consumers with products that consistently outperform their expectations. Our ability to execute on these key value-driving areas for consumers, and to remain competitive and compelling in a post-pandemic landscape, are necessary for our future growth. Failure to achieve these things would materially impact our operating results and financial performance.
Ability to Drive Operating Efficiency and Leverage as We Scale
We believe we are in the early stages of realizing a substantial opportunity to transform the consumer products industry into a force for human and environmental good by relentlessly creating and curating planet- first, high-performance brands and products. We have made substantial operating and capital expenditures to build our operations for this opportunity and believe that realization will require sustained levels of investment for the foreseeable future. To achieve profitability over the longer term, we will need to leverage economies of scale in sourcing our products, generating brand awareness, acquiring customers, creating operating leverage over headcount and other overhead, and fulfilling orders. Our retail strategy is designed, in part, to help accelerate achievement of this scale, as we leverage the retail presence of our partners and minimize the fulfillment costs associated with our DTC platform and create new revenue streams for our product development efforts. However, we believe that maintaining our DTC presence will remain a key driver of our product innovation and customer satisfaction strategies and serves the need of an important and growing group of consumers that wants to shop online. If we are unable to achieve sufficient operating leverage in our business, we may need to curtail our expenditures, which would in turn compromise our prospects for growth and or negatively impact our ability to operate profitably.
Impact of COVID-19
The global COVID-19 pandemic has impacted and will continue to impact our operating results, financial condition and cash flows.
We have implemented a number of measures to protect the health and safety of our workforce. These measures include substantial modifications to employee travel, employee work locations, and virtualization or cancellation of in-person meetings, among other modifications. In our fulfillment centers, as well as for the staff employees who work in our
offices, we are following the guidance from public health officials and applicable government agencies, including implementation of enhanced cleaning measures, social distancing guidelines and the wearing of masks.
During the height of the COVID-19 outbreak in Q2 and Q3 2020, we perceived a marked increase in the attention and demand for our products, especially personal care and household paper and cleaning products. At the same time, the pandemic caused significant uncertainty in the overall business environment, including risks to business continuity in our fulfillment centers, as well as in inbound freight and inventory supply disruptions. We navigated this situation by significantly reducing our expenses for paid customer acquisition, while investing in the health and safety of our employees.
The inventory supply challenges adversely affected revenue due to an above-average out-of-stock rate. We responded to this and the ongoing challenges in global logistics by temporarily building up an increased level of inventory that can absorb more unpredictability within our inbound freight procurement processes. We continue to work with our existing manufacturing, logistics and other supply chain partners to ensure our ability to service our customers. We recognize that the COVID-19 pandemic may impact the global supply chain in ways that negatively impact our ability to source our products and the cost at which we are able to source products. While we have a number of efforts in place to ensure we maintain strong service levels for our consumers, if we are unable to navigate cost inflation and supply chain disruptions it will have a material impact on our operating results and financial performance.
We believe that the COVID-19 pandemic led to an increase in revenue and profitability leading to better operating results in 2020. The positive drivers were the increase in unpaid new customer acquisition, in general a more favorable customer marketing environment with lower advertising cost, a reduced need for promotion, and a higher activity level of our existing customer base. These factors drove up both revenue and profitability and more than offset the operational and inventory challenges which we successfully navigated. As COVID restrictions were lifted and to the extent the pandemic continues to subside, the rate of growth experienced in 2020 did not continue into 2021, and in the six months ended June 30, 2022, our revenues were approximately 16% lower than the prior year comparative period.
The COVID-19 pandemic may have other adverse effects on our business, operations, and financial results and condition, including, among other things, adverse impacts on labor availability, our fulfillment center operations, supply chain and logistics disruptions, consumer behaviors, and on the overall economy, including recent high inflation levels impacting consumer spending. While most areas of the United States have reduced most or all COVID-19 restrictions, as the pandemic continues and if new outbreaks emerge, there remains uncertainty regarding the magnitude and duration of the economic and social effects of the COVID-19 pandemic, and therefore we cannot predict the full extent of the positive or negative impacts the pandemic will have on our business, operations, and financial results and condition in future periods. In particular, the positive trends on our operating results relating to changes in consumer behaviors relating to the pandemic that we have generally seen in 2020 did not continue into all of 2021, started declining in the later part of 2021, and could continue to decline in future periods.
Even after the COVID-19 pandemic subsides, we may experience materially adverse impacts to our business as a result of its economic impact. For additional discussion of COVID-19-related risks, see section entitled “Risk Factors”.
Key Operating and Financial Metrics
In addition to our financial statements, included elsewhere in this Form 10-Q, we assess the performance of our overall business based on the following metrics and measures, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies and monitoring our business.
Over the coming years, we expect to grow our omnichannel presence both in core assortment, adjacent categories and channels.
We believe that the future of CPG brand building and consumer demand is omnichannel. Our DTC platform remains a core part of our strategy and customer value proposition in addition to providing key data and customer feedback driving our innovation process. We kicked off our expansion into brick and mortar retail in April 2021 with the launch of a curated assortment of Grove Co. products at Target, and recently announced entry into Kohl’s, Meijer, and Giant Eagle. As we aim to continue our leadership in both omnichannel and sustainability, we will aggressively expand our presence into physical retail over the next few years to reach more consumers no matter where they shop.
Our current operating metrics reflect our core strategic focus on growing our Grove Brands omnichannel presence and revenue, as well as our key DTC platform metrics.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except DTC Net Revenue Per Order and percentages) | 2022 | | 2021 | | 2022 | | 2021 |
Financial and Operating Data | | | | | | | |
Grove Brands % Net Revenue | 48 | % | | 48 | % | | 50 | % | | 50 | % |
DTC Total Orders | 1,315 | | | 1,694 | | | 2,874 | | | 3,480 | |
DTC Active Customers | 1,564 | | | 1,733 | | | 1,564 | | | 1,733 | |
DTC Net Revenue Per Order | $ | 58 | | | $ | 56 | | | $ | 57 | | | $ | 56 | |
Grove Brands % Net Revenue
We define Grove Brands % Net Revenue as total net revenue across all channels attributable to Grove Brands, including: Grove Co., Honu, Peach, Rooted Beauty, Grove Co. Paper (“previously named Seedling”) and Superbloom divided by our total net revenue. On our DTC Platform, our total net revenue includes revenue from both Grove Brands and third-party brands that we carry, whereas for our retail sales total net revenues is comprised exclusively of revenue from Grove Brand products. We view Grove Brands % Net Revenue as a key indicator of the success of our product innovation and growth strategy, and customers’ acceptance of our products.
DTC Total Orders
We determine our number of DTC Total Orders by counting the number of customer orders submitted through our website and mobile applications that have been shipped within the period. The metric includes orders that have been refunded, excludes reshipments of customer orders for any reason including damaged and missing products, and excludes retail orders. Refunded orders are included in DTC Total Orders as we believe this provides more meaningful order management performance metrics, including fulfillment cost efficacy and refund rates. Changes in DTC Total Orders in a reporting period capture both the inflow of new customers, changes in order frequency of existing customers and customer attrition. We view the number of Total DTC Orders as a key indicator of trends in our DTC platform, and our future success in this channel will depend in part on our ability to drive growth through new customer acquisition and by increasing existing customer engagement. In the three and six months ended June 30, 2022, DTC Total Orders declined due to softness in retention as the economy continues to emerge from the COVID-19 pandemic and due to our reduction in advertising spend. We expect this trend to continue at least into 2023.
DTC Active Customers
As of the last day of each reporting period, we determine our number of DTC Active Customers by counting the number of individual customers who submitted orders through our DTC platform, and for whom an order has shipped, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as one of the key indicators of our growth of our DTC channel. In the three and six months ended June 30, 2022, DTC Active Customers declined due to continued softness in retention as the economy continues to emerge from the COVID-19 pandemic and due to our reduction in advertising spend.
DTC Net Revenue Per Order
We define DTC Net Revenue Per Order as our DTC Total Net Revenue in a given reporting period, divided by the DTC Total Orders in that period. We view DTC Net Revenue per Order as a key indicator of the performance of our DTC business. DTC Net Revenue Per Order increased slightly in the three and six months ended June 30, 2022 compared to the prior year comparative periods.
Non-GAAP Financial Measures: Adjusted EBITDA and Adjusted EBITDA Margin
We prepare and present our financial statements in accordance with U.S. GAAP (“GAAP”). In addition, we believe that Adjusted EBITDA, 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. For these reasons, management uses Adjusted EBITDA in evaluating our
operating performance and resource allocation and forecasting. As such, we believe Adjusted EBITDA provides investors with additional useful information in evaluating our performance.
We calculate adjusted EBITDA as net loss, adjusted to exclude: (1) stock-based compensation expense; (2) depreciation and amortization; (3) remeasurement of convertible preferred stock warrant liability; (4) changes in fair values of Additional Shares, Earn-out Shares and Public and Private Placement Warrant liabilities; (5) transaction costs allocated to derivative liabilities upon Business Combination; (6) interest expense; (7) provision for income taxes, (8) restructuring expenses and (9) loss on extinguishment on debt. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue. Because Adjusted EBITDA excludes these elements that are otherwise included in our GAAP financial results, this measure has limitations when compared to net loss determined in accordance with GAAP. Further, Adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. For these reasons, investors should not consider Adjusted EBITDA in isolation from, or as a substitute for, net loss determined in accordance with GAAP.
The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA, for each of the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Reconciliation of Net Loss to Adjusted EBITDA | (in thousands) |
Net loss | $ | (35,310) | | | $ | (28,516) | | | $ | (82,694) | | | $ | (66,411) | |
Stock-based compensation | 20,074 | | | 3,809 | | | 24,534 | | | 7,269 | |
Depreciation and amortization | 1,454 | | | 1,209 | | | 2,864 | | | 2,337 | |
Remeasurement of convertible preferred stock warrant liability | 270 | | | 376 | | | (1,616) | | | 1,308 | |
Change in fair value of Additional Shares liability | 2,015 | | | — | | | 2,015 | | | — | |
Change in fair value of Earn-Out liability | (17,345) | | | — | | | (17,345) | | | — | |
Change in fair value of Public and Private Placement Warrants liability | (1,180) | | | — | | | (1,180) | | | — | |
Transaction costs allocated to derivative liabilities upon Business Combination | 6,673 | | | — | | | 6,673 | | | — | |
Interest expense | 2,285 | | | 1,096 | | | 4,372 | | | 2,059 | |
Restructuring expenses | — | | | — | | | 1,636 | | | — | |
Loss on extinguishment on debt | — | | | 1,027 | | | — | | | 1,027 | |
Provision for income taxes | 2 | | | 16 | | | 25 | | | 28 | |
Total Adjusted EBITDA | $ | (21,062) | | | $ | (20,983) | | | $ | (60,716) | | | $ | (52,383) | |
Net loss margin | (44.5) | % | | (28.8) | % | | (48.7) | % | | (33.0) | % |
Adjusted EBITDA margin | (26.6) | % | | (21.2) | % | | (35.8) | % | | (26.0) | % |
Components of Results of Operations
Revenue, Net
We generate revenue primarily from the sale of both third-party and our Grove Brands products through our DTC platform. Customers purchase products through the website or mobile application through a combination of directly selecting items from the catalog, items that are suggested by our recurring shipment recommendation engine, and featured products that appear in marketing on-site, in emails and on our mobile app. Most customers purchase a combination of products recommended by us based on previous purchases and new products discovered through marketing or catalog browsing. Customers can have orders auto-shipped to them on a specified date or shipped immediately through an option available on the website and mobile application. We also generate revenue from the sale of our Grove Brands products to the retail channel.
We recognize revenue from the sale of our products through our DTC platform net of discounts, sales tax, customer service credits and estimated refunds. Sales tax collected from customers is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities.
Cost of Goods Sold
Cost of goods sold consists of the product costs of merchandise, inbound freight costs, vendor allowances, costs associated with inventory shrinkage and damages and inventory write-offs and related reserves.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of goods sold. Gross margin is gross profit expressed as a percentage of revenue. We generally record higher gross margins associated with sales of Grove Brands products compared to sales of third-party products. To help induce first-time customers to purchase on our DTC platform, we generally offer higher discounts and free product offerings, and as a result our overall margins can be adversely affected in periods of rapid new customer acquisition. Our gross margin also fluctuates from period to period based on promotional activity, product and channel mix, the timing of promotions and launches, and in-bound transportation rates, among other factors. Our gross profit and gross margin may not be comparable with that of other retailers because we include certain fulfillment related costs in selling, general, and administrative expenses while other retailers may include these expenses in cost of merchandise sold.
Operating Expenses
Our operating expenses consist of advertising, product development, and selling, general and administrative expenses.
Advertising
Advertising expenses are expensed as incurred and consist primarily of our customer acquisition costs associated with online advertising, as well as advertising on television, direct mail campaigns and other media. Costs associated with the production of advertising are expensed when the first advertisement is shown. We expect advertising costs to decrease from the 2021 fiscal year as a result of cash flow and customer acquisition cost management.
Product Development
Product development expenses relate to the product and packaging innovation in our Grove Brands product lines and costs related to the ongoing support and maintenance of the Company’s proprietary technology, including the Company’s DTC platform, as well as amortization of capitalized internally developed software. Product development expenses consist primarily of personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expense. Product development costs also include allocated facilities, equipment, depreciation and overhead costs. We expect product development costs to be consistent from 2021 as a percentage of revenue as we balance our investments in the expansion of our product line, innovative packaging and product improvements with revenue growth.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation and benefit costs for personnel involved in general corporate functions, including stock-based compensation expense, and certain fulfillment costs, as further outlined below. Selling, general and administrative expenses also include the allocated facilities, equipment, depreciation and overhead costs, marketing costs including qualified cost of credits issued through our referral program, costs associated with our customer service operation, costs of environmental offsets. While selling, general and administrative expenses have increased in recent periods as a result of activities related to the Business Combination and becoming a public company, we expect selling, general and administrative expense to decrease in the future, as we scale our fulfillment costs by adjusting capacity to changes in order volumes and our selling and administrative infrastructure, which will offset additional costs associated with operating as a public company.
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment centers, including costs attributable to receiving, inspecting and warehousing inventories, picking, packing and preparing customer orders for shipment (“Fulfillment Labor”), shipping and handling expenses, packing materials costs and payment processing and related transaction costs. These costs are included within selling, general and administrative expenses in the statements of operations. We expect fulfillment costs to increase in the future on a per order basis primarily from shipping rate increases from our carriers.
Interest and Other Expense (Income), Net
Interest expense consists primarily of interest expense associated with our debt financing arrangements.
Other expense (income), net consists primarily of losses or gains on remeasurement of our convertible preferred stock warrant liabilities, changes in fair values of Additional Shares, Earn-Out Shares and Public and Private Placement Warrant liabilities, and transaction costs allocated to derivative liabilities upon Business Combination. These changes in fair value may fluctuate significantly in future periods primarily due to fluctuations in the fair value of our common stock.
Provision for Income Taxes
We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We recognize the benefits of tax-return positions in the financial statements when they are more likely than not to be sustained by the taxing authority, based on the technical merits at the reporting date. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and which may not accurately forecast actual outcomes. We recognize interest and penalties related to unrecognized tax benefits, if any, as income tax expense.
Results of Operations
The following table sets forth our results of operations for each period presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in thousands) |
Revenue, net | $ | 79,279 | | | $ | 99,023 | | | $ | 169,758 | | | $ | 201,243 | |
Cost of goods sold | 40,322 | | | 49,957 | | | 88,064 | | | 99,985 | |
Gross profit | 38,957 | | | 49,066 | | | 81,694 | | | 101,258 | |
Operating expenses: | | | | | | | |
Advertising | 17,898 | | | 22,516 | | | 50,691 | | | 58,152 | |
Product development | 5,922 | | | 5,688 | | | 12,162 | | | 10,850 | |
Selling, general and administrative | 57,895 | | | 46,971 | | | 108,865 | | | 94,509 | |
Operating loss | (42,758) | | | (26,109) | | | (90,024) | | | (62,253) | |
Interest expense | 2,285 | | | 1,096 | | | 4,372 | | | 2,059 | |
Loss on extinguishment on debt | — | | | 1,027 | | | — | | | 1,027 | |
Change in fair value of Additional Shares liability | 2,015 | | | — | | | 2,015 | | | — | |
Change in fair value of Earn-Out liability | (17,345) | | | — | | | (17,345) | | | — | |
Change in fair value of Public and Private Placement Warrants liability | (1,180) | | | — | | | (1,180) | | | — | |
Other expense, net | 6,775 | | | 268 | | | 4,783 | | | 1,044 | |
Interest and other expense (income), net | (7,450) | | | 2,391 | | | (7,355) | | | 4,130 | |
Loss before provision for income taxes | (35,308) | | | (28,500) | | | (82,669) | | | (66,383) | |
Provision for income taxes | 2 | | | 16 | | | 25 | | | 28 | |
Net loss | $ | (35,310) | | | $ | (28,516) | | | $ | (82,694) | | | $ | (66,411) | |
The following table sets forth our statements of operations data expressed as a percentage of revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (as a percentage of revenue) |
Revenue, net | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Cost of goods sold | 51 | | | 50 | | | 52 | | | 50 | |
Gross profit | 49 | | | 50 | | | 48 | | | 50 | |
Operating expenses: | | | | | | | |
Advertising | 23 | | | 23 | | | 30 | | | 29 | |
Product development | 7 | | | 6 | | | 7 | | | 5 | |
Selling, general and administrative | 73 | | | 47 | | | 64 | | | 47 | |
Operating loss | (54) | | | (26) | | | (53) | | | (31) | |
Interest expense | 3 | | | 1 | | | 3 | | | 1 | |
Loss on extinguishment on debt | — | | | 1 | | | — | | | 1 | |
Change in fair value of Additional Shares liability | 3 | | | — | | | 1 | | | — | |
Change in fair value of Earn-Out liability | (22) | | | — | | | (10) | | | — | |
Change in fair value of Public and Private Placement Warrants liability | (1) | | | — | | | (1) | | | — | |
Other expense, net | 9 | | | — | | | 3 | | | 1 | |
Interest and other expense (income), net | (9) | | | 2 | | | (4) | | | 2 | |
Loss before provision for income taxes | (45) | | | (29) | | | (49) | | | (33) | |
Provision for income taxes | — | | | — | | | — | | | — | |
Net loss | (45) | % | | (29) | % | | (49) | % | | (33) | % |
| | | | | | | |
Comparisons of the Three Months and Six Months Ended June 30, 2022 and June 30, 2021
Revenue, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Revenue, net: | | | | | | | | | | | | | | | |
Grove Brand | $ | 38,216 | | | $ | 47,469 | | | $ | (9,253) | | | (19) | % | | $ | 85,064 | | | $ | 99,754 | | | $ | (14,690) | | | (15) | % |
Third-party product | 41,063 | | | 51,554 | | | (10,491) | | | (20) | % | | 84,694 | | | 101,489 | | | (16,795) | | | (17) | % |
Total revenue, net | $ | 79,279 | | | $ | 99,023 | | | $ | (19,744) | | | (20) | % | | $ | 169,758 | | | $ | 201,243 | | | $ | (31,485) | | | (16) | % |
Revenue decreased by $19.7 million, or 20%, and $31.5 million, or 16% for the three and six months ended June 30, 2022, respectively, as compared to the three and six months ended June 30, 2021, primarily driven by a decrease in DTC Total Orders caused by a reduction in DTC Active Customers. We believe the decline in 2022 is due to continued softness in retention as the economy continues to emerge from the COVID-19 pandemic and due to our reduction in advertising spend, partially offset by increases in DTC Net Revenue Per Order.
Cost of Goods Sold and Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Cost of goods sold | $ | 40,322 | | | $ | 49,957 | | | $ | (9,635) | | | (19) | % | | $ | 88,064 | | | $ | 99,985 | | | $ | (11,921) | | | (12) | % |
Gross profit | 38,957 | | | 49,066 | | | (10,109) | | | (21) | % | | 81,694 | | | 101,258 | | | (19,564) | | | (19) | % |
Gross margin | 49 | % | | 50 | % | | | | (1) | % | | 48 | % | | 50 | % | | | | (2) | % |
Cost of goods sold decreased by $9.6 million, or 19%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, and decreased by $11.9 million, or 12%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to an overall decrease in DTC Total Orders.
Gross margin in the three months and six months ended June 30, 2022 decreased by 40 and 219 basis points, respectively, compared to the three months and six months ended June 30, 2021 primarily due to higher discounts offered to new and existing customers due to a less favorable environment as the COVID-19 pandemic subsides and an increase in in-bound freight costs.
Operating Expenses
Advertising Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Advertising | $ | 17,898 | | | $ | 22,516 | | | $ | (4,618) | | | (21) | % | | $ | 50,691 | | | $ | 58,152 | | | $ | (7,461) | | | (13) | % |
Advertising expenses decreased by $4.6 million, or 21%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to our cash flow and customer acquisition cost management. Online advertising expenses decreased by $9.5 million. This was offset by an increase of $1.1 million in costs associated with the
production of advertising and $2.3 million in other advertising campaigns, including advertising focused specifically to attract retail consumers for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Advertising expenses decreased by $7.5 million, or 13%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to our cash flow and customer acquisition cost management. Online advertising expenses decreased by $18.3 million. This was offset by an increase of $3.2 million in costs associated with the production of advertising, $1.5 million increase in television advertising expenses, and $5.5 million in other advertising campaigns, including advertising focused specifically to attract retail consumers for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.
Product Development Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Product development | $ | 5,922 | | | $ | 5,688 | | | $ | 234 | | | 4 | % | | $ | 12,162 | | | $ | 10,850 | | | $ | 1,312 | | | 12 | % |
Product development expenses increased by $0.2 million, or 4% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to $1.0 million catch up of stock based compensation related expense due to the Company going public thereby meeting the performance vesting condition and $0.3 million increase in amortization of internally developed software, offset by $1.0 million decrease in salaries primarily from a reduction in headcount as a result of the company-wide reorganization that occurred in March 2022.
Product development expenses increased by $1.3 million, or 12% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to $1.0 million catch up of stock based compensation related expense due to the Company going public thereby meeting the performance vesting condition, $0.6 million increase in restructuring related expenses as a result of the company-wide reorganization and $0.5 million increase in amortization of internally developed software, offset by $0.5 million decrease in salaries and benefit primarily from a reduction in headcount as a result of the company-wide reorganization that occurred in March 2022.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Selling, general and administrative | $ | 57,895 | | | $ | 46,971 | | | $ | 10,924 | | | 23 | % | | $ | 108,865 | | | $ | 94,509 | | | $ | 14,356 | | | 15 | % |
Selling, general and administrative expenses increased by $10.9 million, or 23% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was primarily driven by an increase of $14.6 million in stock based compensation due to catch up of expense for the Company’s restricted stock units and certain stock options as a result of meeting the performance vesting condition when the Company went public, including $0.6 million related to equity award modification expenses. Fulfillment costs decreased by $3.3 million, including $1.0 million decrease in shipping and handling expenses and a $1.3 million decrease in Fulfillment Labor. The decrease in shipping and handling expenses was driven by a decrease in the volume of orders partially offset by an increase in carrier rates. The decrease in Fulfillment Labor was due to decrease in the volume of orders and efficiencies gained, partially offset by expanded investments in wages and benefits for fulfillment members. Facilities expenses and other general and administrative expenses, excluding stock-based compensation, decreased by $0.4 million, primarily due to decrease in corporate salaries and benefits primarily from a reduction in headcount as a result of the company-wide reorganization, partially offset by an increase in costs related to being a public company.
Selling, general and administrative expenses increased by $14.4 million, or 15% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was primarily driven by an increase of $15.7
million in stock based compensation partially due to catch up of expense for the Company’s restricted stock units and certain stock options as a result of meeting the performance vesting condition when the Company went public, including $1.7 million related to equity award modification expenses as a result of the company-wide reorganization. Fulfillment costs decreased by $4.1 million, including $1.8 million decrease in shipping and handling expenses and a $1.0 million decrease in Fulfillment Labor. The decrease in shipping and handling expenses was driven by a decrease in the volume of orders partially offset by an increase in carrier rates. The decrease in Fulfillment Labor was due to decrease in the volume of orders, offset by expanded investments in wages and benefits for fulfillment members and efficiencies gained. In addition, facilities expenses and other general and administrative expenses, excluding stock-based compensation, increased by $2.8 million, primarily due to increased corporate salaries and benefits, including $1.0 million in restructuring related expenses as a result of the company-wide reorganization, and an increase in costs related to being a public company.
Interest expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Interest expense | $ | 2,285 | | | $ | 1,096 | | | $ | 1,189 | | | 108 | % | | $ | 4,372 | | | $ | 2,059 | | | $ | 2,313 | | | 112 | % |
Interest expense increased by $1.2 million, or 108% and $2.3 million, or 112% for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 primarily due to draws under the SVB and Hercules Term Loan in the second half of 2021. See the section titled “Liquidity and Capital Resources — Loan Facilities” below for further details.
Loss on extinguishment of debt
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Loss on extinguishment of debt | $ | — | | | $ | 1,027 | | | $ | 1,027 | | | * | | $ | — | | | $ | 1,027 | | | $ | 1,027 | | | * |
______________
* Percentage change not meaningful.
Loss on extinguishment of debt resulted from refinancing of certain of our loan facilities during the six months ended June 30, 2021. See the section titled “Liquidity and Capital Resources—Loan Facilities” below for further details.
Other expense (income), net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2022 | | 2021 | | Amount | | % | | 2022 | | 2021 | | Amount | | % |
| | | | | | | | | | | | | | | |
| (in thousands) |
Change in fair value of Additional Shares liability | $ | 2,015 | | | $ | — | | | $ | 2,015 | | | * | | $ | 2,015 | | | $ | — | | | $ | 2,015 | | | * |
Change in fair value of Earn-Out liability | (17,345) | | | — | | | (17,345) | | | * | | (17,345) | | | — | | | (17,345) | | | * |
Change in fair value of Public and Private Placement Warrants liability | (1,180) | | | — | | | (1,180) | | | * | | (1,180) | | | — | | | (1,180) | | | * |
Other expense, net | $ | 6,775 | | | $ | 268 | | | $ | 6,507 | | | * | | $ | 4,783 | | | $ | 1,044 | | | $ | 3,739 | | | * |
______________
* Percentage change not meaningful.
The change in the fair value of Additional Shares liability, Earn-Out liability and Public and Private Placement Warrants liability for the three and six months ended June 30, 2022 was driven by the decrease in our stock price from the Closing of the Business Combination to June 30, 2022.
Other expense, net increased by $6.5 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily due to a $6.7 million expense related to transaction costs that were allocated to liability classified derivative liabilities as a result of the Company going public.
Other expense, net increased by $3.7 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a $6.7 million expense related to transaction costs that were allocated to liability classified derivative liabilities as a result of the Company going public partially offset by a $2.9 million gain on remeasurement of preferred stock warrant liability.
Liquidity, Capital Resources and Requirements
As of June 30, 2022, we had $132.4 million of cash and cash equivalents, an accumulated deficit of approximately $572.8 million, working capital of $94.9 million and incurred negative cash flows from operating activities of $66.1 million for the six months ended June 30, 2022. To date, we have funded our operations principally through convertible preferred stock and contingently redeemable convertible common stock financings, the incurrence of debt and the Closing of the Business Combination. We received cash proceeds, net of transaction costs from the Closing of the Business Combination on June 16, 2022 of $80.0 million. We have total outstanding indebtedness of $66.4 million as of June 30, 2022. On July 18, 2022, we entered into the Purchase Agreement, whereby we have the right, but not the obligation, to sell to the Selling Holder up to $100.0 million of our shares of common stock at our request until July 18, 2025, subject to certain conditions.
Management believes that currently available resources will provide sufficient funds to enable the Company to meet its obligations for at least one year past the date these condensed consolidated financial statements are available to be issued. We anticipate that we will continue to incur operating losses and generate negative cash flows from operations in the future as we continue to invest in advertising and other strategic incentives planned for future growth. Cash from operations could also be affected by our customers and other risks detailed in the section of our titled “Risk Factors.” As a result, we will need additional capital resources to execute strategic initiatives and fund our operations, prior to achieving break even or positive operating cashflow. We expect to continue to opportunistically seek access to additional funds by utilizing the Purchase Agreement, through additional public or private equity offerings or debt financings, through partnering or other strategic arrangements, through the exercise of certain of our warrants, or a combination of the foregoing. There can be no assurance that such additional debt or equity financing will be available on terms acceptable to the Company, or at all.
Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide, including the trading price of common stock. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. Debt financing arrangements may require us to pledge certain assets or enter into covenants that could restrict our operations or our ability to pay dividends or other distributions on our common stock or incur further indebtedness. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. In addition, our Class A Common Stock trading price may not exceed the respective exercise prices of our Public Warrants, Private Placement Warrants and/or our Legacy Grove Warrants before the respective warrants expire, and therefore we may not receive any proceeds from the exercise of warrants to fund our operations. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.
Contractual Obligations and Other Commitments
Our most significant contractual obligations relate to our loan facilities, purchase commitments on inventory and operating lease obligations on our fulfillment centers and corporate offices. As of June 30, 2022, we had $27.0 million of enforceable and legally binding inventory purchase commitments predominantly due within one year. For information on our contractual obligations for operating leases, please see “Leases” in Note 7 of the Notes to our audited financial statements as of and for the years ended December 31, 2019, 2020 and 2021 included in the proxy statement/consent solicitation statement/prospectus filed with the SEC on May 16, 2022.
Loan Facilities
Silicon Valley Bank Loan Facilities
In December 2016, we entered into a loan and security agreement (the “SVB Loan Facility”) with Silicon Valley Bank (“SVB”). The terms of the SVB Loan Facility, as amended and restated, provided for: (i) a revolving line of credit not to exceed $25.0 million (“Loan Revolver”), (ii) growth capital advance (“Term Loan”) of $3.9 million and (iii) a letter of credit sublimit of $6.0 million. The Term Loan had a maturity date in December 2022 and bore interest at Prime Rate, payable monthly. The Loan Revolver borrowing capacity was limited to 60% of eligible inventory balances.
In April 2021, we entered into an amendment to the SVB Loan Facility. The terms of the amendment provided for the Loan Revolver letter of credit sublimit to increase to $10.0 million and an increased borrowing capacity to 65% of eligible inventory balances. The Loan Revolver borrowing capacity is reduced by outstanding letters of credit and credit available to the Company from certain credit card facilities, which amounted to $3.1 million and $1.5 million, respectively, as of December 31, 2021. The Loan Revolver incurs a facility fee of 0.20% per annum assessed on the daily average undrawn portion of revolving line of credit. The amended Loan Revolver bears an interest rate equal to the greater of prime rate or 3.25% and matures on March 31, 2023. Interests on the Loan Revolver is payable monthly in arrears. In April 2021, all of our outstanding borrowings under the SVB Term Loan were refinanced directly through the SVB and Hercules Loan Facility (see below).
The SVB Loan Facility is collateralized by substantially all of our assets on a first priority basis and contains customary events of default and covenants that restrict our ability to, among other things, incur additional indebtedness, other than permitted indebtedness, enter into mergers or acquisitions, sell or otherwise dispose of assets, pay dividends, or repurchase stock, subject to customary exceptions. The SVB Loan Facility contains a financial covenant which requires us to maintain minimum liquidity of $45.0 million. Minimum liquidity is defined as the sum of the aggregate amount of unrestricted and unencumbered cash deposited with SVB plus amounts available to be drawn under the loan revolver, as adjusted for any outstanding standby letters of credit issued by SVB.
As of June 30, 2022, we were in compliance with all covenants and had $5.9 million outstanding under the Loan Revolver. The effective interest rate is 5.00% on the revolving line of credit.
Silicon Valley Bank and Hercules Loan Facility
In April 2021, we entered into a Mezzanine Loan and Security Agreement (“SVB and Hercules Loan Facility”) with SVB and Hercules Capital, Inc. (“Hercules”). The SVB and Hercules Loan Facility provides for a draw period, which runs from the effective date until March 31, 2022, for advances of up to $60.0 million. In April 2021, we drew $25.0 million, which was used to directly settle the amounts outstanding under the SVB Term Loan and the Triplepoint Loan Facility (see below). In September and December 2021, we drew down the remaining additional borrowings of $25.0 and $10.0 million, respectively, on the SVB and Hercules Loan Facility. The SVB and Hercules Loan Facility bears interest at the greater of 8.75% or prime plus 5.5%, payable monthly. The principal repayment period commences on November 1, 2022 and continues for 30 monthly installments with an additional final payment equal to 6.75% of the aggregate term loan advances. SVB and Hercules have committed to fund 51.0% and 49.0%, respectively, of all draws made under the SVB and Hercules Loan Facility.
In May 2022, as part of the Closing of the Business Combination, the Company entered into an amendment with SVB and Hercules Loan Facility to increase the final payment from 6.75% to 8.75% of the aggregate term loan advances. Total fees paid for the amendment, including bank legal fees was $0.2 million.
The SVB and Hercules Loan Facility is collateralized on a second priority basis, subordinate to the SVB Loan Facility, by substantially all of our assets and contains restrictive covenants that are substantially similar to the SVB Loan Facility. The SVB and Hercules Loan Facility does not include any financial covenants, but does contain a subjective acceleration clause in the event that lenders determine that a material adverse change has or will occur within the business,
operations, or financial condition of the Company or a material impairment of the prospect of repaying any portion of this financial obligation. In accordance with the loan agreement, we have provided SVB and Hercules with periodic financial statements and projections to facilitate their ongoing assessment company performance. We believe the likelihood that SVB and Hercules would exercise the subjective acceleration clause is remote.
As of June 30, 2022, we owe an aggregate of $60.0 million outstanding under the SVB and Hercules Loan Facility with effective interest rates ranging from 14.26% to 17.31%. As of June 30, 2022, we were in compliance with all covenants under the SVB and Hercules Loan Facility.
Atel Loan Facility
In July 2018, we entered into an equipment financing arrangement (the “Atel Loan Facility”) with Atel Ventures, Inc. (“Atel”) to fund purchases of machinery and warehouse equipment that are held as collateral under the Atel Loan Facility.
As of June 30, 2022, we had an aggregate of $1.2 million outstanding borrowing under the Atel Loan Facility through two separate loan draws that will be fully repaid in April 2023, and May 2023, respectively. As of June 30, 2022, we were in compliance with all of our covenants under the Atel Loan Facility.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
| (in thousands) |
Net cash used in operating activities | $ | (66,138) | | | $ | (61,799) | |
Net cash used in investing activities | (2,610) | | | (2,845) | |
Net cash provided by financing activities | 122,765 | | | 849 | |
Net increase (decrease) in cash and cash equivalents | $ | 54,017 | | | $ | (63,795) | |
Operating Activities
Net cash used in operating activities increased by $4.3 million for the six months ended June 30, 2022 compared to June 30, 2021, primarily attributable to an increase in net loss of $16.3 million. The increase in net loss was primarily driven by a decrease in net revenue resulting from decreased DTC Total Orders and DTC Active Customers. This was offset by a cash inflow related to changes in operating assets and liabilities of $8.2 million, from decreases in inventory and prepaids and other assets, offset by increase in accrued expenses due to timing of invoices from and payments to our vendors and suppliers and a $3.7 million increase in non-cash charges including an increase of stock based compensation expense of $17.3 million offset by a decrease in fair value of derivative liabilities of $16.5 million.
Investing Activities
Net cash used in investing activities of $2.6 million and $2.8 million for the six months ended June 30, 2022 and 2021, respectively was due to purchases of property and equipment.
Financing Activities
Net cash provided by financing activities of $122.8 million for the six months ended June 30, 2022 primarily consisted of proceeds of $97.1 million from issuance of common stock upon the Closing of the Business Combination, including proceeds from PIPE financing, and proceeds from issuance of contingently redeemable convertible common stock of $27.5 million, partially offset by $1.3 million payment of transaction issuance costs.
Net cash provided by financing activities of $0.8 million for the six months ended June 30, 2021 primarily consisted of proceeds from issuance of debt of $25.0 million, offset by repayment of debt of $21.2 million, payment of debt extinguishment of $2.5 million, payment of debt issuance costs of $0.4 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 Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that can have a significant impact on the amounts reported in those financial statements and accompanying notes. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are described in Note 2 to our audited financial statements as of and for the years ended December 31, 2019, 2020 and 2021 included in the proxy statement/consent solicitation statement/prospectus filed with the SEC on May 16, 2022, with the addition of Earn-Out Share Liability and Additional Share Liability below.
Earn-Out Share Liability
At the closing of the Business Combination, certain Legacy Grove shareholders were issued an aggregate of 13,999,960 shares of Grove Class B Common Stock (“Earn-Out Shares”). Such shares are subject to vesting and forfeitures based upon certain triggering events that can occur during a period of ten years following the closing of the Business Combination (the “Earn-Out Period”). The triggering events that will result in the vesting of the Grove Earn-Out Shares during the Earn-Out Period are the following:
• 7,000,173 shares will vest if the share price of New Grove Class A Common Stock is greater than or equal to $12.50 over any 20 trading days within any consecutive 30 trading day period during the Earn-Out Period;
• 6,999,787 shares will vest, including the shares subject to the $12.50 threshold if not previously vested, if the share price of New Grove Class A Common Stock is greater than or equal to $15.00 over any 20 trading days within any 30 consecutive trading day period during the Earn-Out Period; and
• If, during the Earn-Out Period, there is a Change of Control Transaction (as defined in the Merger Agreement), then all remaining triggering events that have not previously occurred and the related vesting conditions shall be deemed to have occurred.
If, at any time prior to the expiration of the Earn-Out Period, any holder of Grove Earn-Out Shares forfeits all or any portion of such holder’s Grove options and restricted stock units, all unvested Grove Earn-Out Shares issued to such holder with respect to any such awards shall be automatically forfeited to the Company and distributed to the other holders of Legacy Grove securities as of immediately prior to the closing of the Business Combination on a pro rata basis.
Earn-Out shares which are subject to be released froma service condition are accounted for under ASC 718. See Note 3—Recapitalization and Note 4— Fair Value Measurements and Fair Value of Financial Instruments.
Earn-Out Shares which are not subject to service conditions were accounted for as liability classified instruments in accordance with ASC 815-40, as such shares were not solely indexed to the Trust Account (after giving effect to all payments to be made as a resultcommon stock of the exerciseCompany and the events that determine the number of all Redemption Rights) (the “Available Cash”).Earn-Out Shares required to vest include events that are not solely indexed to the fair value of common stock of the Company. Such Earn-Out Shares will be measured at fair value at each reporting date until they are settled or meet the criteria for equity classification, and changes in the fair value will be recorded in the unaudited condensed consolidated statements of operations. The fair value of the Earn-Out Shares liability is estimated using the Monte Carlo simulation of the stock prices based on historical and implied market volatility of a peer group of public companies.
The purchase price per share forCompany has historically been a private company and has limited company-specific historical and implied volatility information. Accordingly, the Tranche 1 Shares wasvolatility assumption used in the model is subjective and requires significant management judgment. Management estimated the expected volatility assumption based on anthe implied common stock volatilities of a set of publicly traded peer companies. Changes in this assumption, including the selection of or quantities of companies with the peer company set, could materially affect the estimate of the Exchange Ratio,fair value of these instruments and eachthe related change in fair value of these instruments that will be recorded in the Backstop Investor and Grove have agreed to adjust the numberCompany’s unaudited condensed consolidated statements of Tranche 1operations.
Additional Shares held by the Backstop Investor immediately prior to theLiability
At closing of the Business Combination and in connection with the Backstop Subscription Agreement, Legacy Grove committed to reflect the final Exchange Ratio calculated pursuant to the termsissue additional shares of the Amended and Restated Merger Agreement such that at the closing of the Business Combination the Tranche 1 Shares will convert into VGAC Class B Common Shares (which will immediately be exchanged for VGACGrove Class A Common Shares) at a ratio that reflects a purchase price of $10.00 for each VGAC Class B Common Share. In addition, immediately priorStock to the closing of the Business Combination, to the extent the Available Cash exceeds $22,500,000, the Backstop Investor shall have the right to redeem all or a portion of the Tranche 1 Shares in cash for a purchase price per share equal to (x) the final Exchange Ratio calculated pursuant to the terms of the Amended and Restated Merger Agreement multiplied by (y) $10.00.
In addition, if the volume weighted average price of
VGACGrove Class A Common
SharesStock is less than $10.00 during the 10
trading days commencing on the first trading day after the Company’sNew Grove’s first quarterly earnings call for athe fiscal quarter that ends following the closing of the Business Combination (the “Measurement Period VWAP”ending June 30, 2022 (“Additional Shares”), then the. The Backstop Investor shall be entitled to receive a number of additional VGACGrove Class A Common Shares equal to the lesser of (i) the product of (x) the sum of (1) the shares of common stock of VGAC IIGrove Class B Common Shares issued to the InvestorSubscriber at the closing of the Business Combination Closing pursuant to the Amended and Restated MergerBusiness Combination Agreement (as defined below) as consideration for the Tranche 1 Shares and (2) the Tranche 2 Shares (collectively, the “Post-Combination VGAC Shares”) multiplied by (y) a fraction, (A) the numerator of which is $10.00 (as adjusted for any stock split, reverse stock split or similar adjustment following the closing of the Business Combination)Combination Closing) minus the Measurement Period VWAP, and (B) the denominator of which is the Measurement Period VWAP and (ii) the number of Post-Combination VGAC Shares outstanding as of immediately following the closingBusiness Combination Closing.
The Additional Shares are accounted for as a liability classified instrument under ASC 480 as the fair value of the Business Combination (the “Additional Shares”).
Immediately followingobligation to issue the closingAdditional Shares varies inversely to the fair value of the Business Combination,Company’s common stock. The Additional Shares liability will be measured at each reporting date until settled. Change in the fair value will be recorded in the unaudited condensed consolidated statements of operations.
The Company shall issuehas historically been a private company and has limited company-specific historical and implied volatility information. Accordingly, the volatility assumption used in the model is subjective and requires significant management judgment. Management estimated the expected volatility assumption based on the implied common stock volatilities of a set of publicly traded peer companies. Changes in this assumption, including the selection of or quantities of companies with the peer company set, could materially affect the estimate of the fair value of these instruments and the related change in fair value of these instruments that will be recorded in the Company’s unaudited condensed consolidated statements of operations.
Inventories
Inventory is recorded at the lower of weighted average cost and net realizable value. The cost of inventory consists of merchandise costs and in-bound freight, net of any vendor allowances. Inventory valuation requires us to make judgments, based on currently available information, about the Backstop Investorlikely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. We record inventory reserves based on the excess of the carrying value or average cost over the amount we expect to realize from the ultimate sale of the inventory.
Stock-Based Compensation
We recognize the cost of share-based awards granted to employees and non-employees based on the estimated grant-date fair value of the awards.
For stock option awards with service only vesting conditions, we recognize expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. We estimate the grant-date fair value of the stock option awards with service only vesting conditions using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model utilizes inputs and assumptions which involve inherent uncertainties and generally require significant judgment. As a result, if factors or expected outcomes change and significantly different assumptions or estimates are used, our stock-based compensation could be materially different. Significant inputs and assumptions include:
Fair value of Common Stock – As our common stock is not currently publicly traded, the fair value of our underlying common stock was determined by our board of directors based upon a number of warrantsobjective and subjective factors, as described in the section titled “—Common Stock Valuation” below.
Expected Term – Our expected term represents the period that our stock-based awards are expected to purchase VGAC Class A Common Shares (each warrant exercisablebe outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
Expected Volatility – Because we are privately held and there is no active trading market for our common stock, the expected volatility was estimated based on the average volatility for publicly traded companies that we consider to
purchase one VGAC Class A Common Share for $0.01) (the “Penny Warrants”). Such warrants will be exercisable by the Backstop Investor at any time forcomparable, over a period of five years from the date of issuance and otherwise be on terms customary for warrants of such nature.
In the event that the Amended and Restated Merger Agreement is terminated, then (a) upon such termination, Grove shall issueequal to the Backstop Investor certain warrantsexpected term of the stock option grants.
Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
Expected Dividend – We have never paid dividends on our common stock and has no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
For restricted stock unit (“RSU”) awards with performance vesting conditions, we evaluate the probability of achieving the performance vesting condition at each reporting date. We begin to recognize expense for RSUs with performance vesting conditions using an accelerated attribution method on June 16, 2022 when the performance condition was met. The fair value of RSU awards is determined using the price of our common stock on the grant date, as determined by our board of directors.
For awards with both market and service vesting conditions, we recognize expense over the derived service period using an accelerated attribution method. The fair value of stock option awards with both market and performance conditions is estimated using multifactor Monte Carlo simulations. The Monte Carlo simulation model incorporates the probability of satisfying a market condition and utilizes inputs and assumptions which involve inherent uncertainties and
generally require significant judgment, including our stock price, contractual terms, maturity and risk-free interest rates, as well as volatility.
Common Stock Valuation
Given the absence of a public market of our common stock, and in accordance with the American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercises significant judgment and considers numerous factors to determine the best estimate of fair value of our common stock, including the following:
•independent third-party valuations of our common stock;
•the rights, preferences and privileges of our redeemable convertible preferred stock relative to our common stock;
•our operating results, financial position and capital resources;
•our stage of development and current business conditions and projections, including the introduction of new products;
•the lack of marketability of our common stock;
•the hiring of key personnel and the experience of our management;
•the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given the prevailing market conditions;
•and the nature and history of our business;
•industry trends and competitive environment;
•trends in consumer spending, including consumer confidence; and
•the overall economic, regulatory and capital market conditions.
For common stock valuations performed prior to March 31, 2022, we performed valuations of our common stock that took into account the factors described above. We primarily used a combination of the market and income approach to determine the equity value of our business. The income approach estimates equity value based on the expectation of future cash flows that a company will generate. These future cash flows, and an assumed terminal value, are discounted to their present values using a discount rate based on a weighted-average cost of capital that reflects the risks inherent in the cash flows. The market approach estimates equity value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial forecasts to estimate the value of the subject company. The resulting common stock value is then discounted by a non-marketability factor. Public company trading revenue multiple comparisons provide a quantitative analysis that our board of directors’ reviews in addition to the qualitative factors described above in order to determine the fair value of our common stock.
Application of these approaches involves the use of estimates, judgment, and assumptions that are exercisable for shareshighly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of Grove’scomparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
For the common stock (b) the Tranche 1 Shares will automatically convert, in certain circumstances, into Grove’s preferred stock and (c) Grove will be subject to certain repurchase obligations with respect to the Tranche 1 Shares, in each case,valuation performed as set forth in the Backstop Subscription Agreement.
In connection with the foregoing, Grove has agreed to waive the available cash condition, effective upon (a) the payment of the purchase price for the Tranche 1 Shares by the Backstop Investor and (b) if the conditions to the Backstop Investor’s obligation to purchase the Tranche 2 Shares underMarch 31, 2022, we used the Backstop Subscription Agreement are satisfied,as an initial indication of value of our common stock, as this was an arms-length length transaction with a sophisticated investor. Our common share value was modified and iterated so that the paymentaggregate value of each component of the purchase pricetransactions contemplated by the Backstop Subscription Agreement summed to the total consideration paid by the investor. When determining the value of each component, we assumed maximum redemptions of common stock prior to the Mergers, based on redemption rates of companies that have recently become a public company through a SPAC transaction (i.e. Inspirato Incorporated and Sonder Holdings Inc.). We also assumed 100% probability that the Mergers would occur because, in connection with the execution with the Backstop Subscription Agreement, we waived the condition to the consummation of the Tranche 2 Shares.Mergers requiring that the aggregate cash proceeds from VGAC II’s trust account, together with the proceeds from the issuance and sale of an aggregate of 8,707,500 shares of New Grove Class A Common Stock at a price