UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from January 5, 2021 (inception) through fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-40682
Nogin, Inc.
(Exact name of registrant as specified in its charter)
Delaware | ||||
(State or other jurisdiction of incorporation or organization) | File Number) | 86-1370703 (I.R.S. Employer Identification Number) |
1775 Flight WaySTE 400
Tustin, California92782
(949) 222-0209
(Address, including zip code, and telephone number, including area code: (310)991-4982
Securities registered pursuant to Section 12(b) of the Act:
Title of | Trading | Name of | ||
Common stock, par value $0.0001 per share | NOGN | The Nasdaq Stock Market LLC | ||
Warrants, each whole warrant exercisable for one share of Common | NOGNW | The Nasdaq Stock Market LLC | ||
Class A Common Stock for $11.50 per share |
Indicate by check mark if the registrant is a well-knownwell‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T(§ S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerateddefinitionthe definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2
Large accelerated filer ☐ | Accelerated filer | ☐ | ||||
Non‑accelerated filer ☒ | ||||||
Smaller reporting company | ☒ | |||||
Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)7(a)(2)(B) of the ExchangeSecurities Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes‑Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2.: Yes ☐ No☒ No ☐
The registrant’s units, each consisting of one share of Class A common stock, $0.0001 paraggregate market value andone-halfof one redeemable warrant, began trading on The Nasdaq Stock Market LLC on July 28, 2021. Commencing September 20, 2021, holders of the units were permittedvoting and non‑voting common equity of the registrant held by non‑affiliates, computed by reference to elect to separately trade the Class A stock and warrants included inprice at which the units.
As of March 15, 2022,
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Class B common stock, par value $0.0001 per share (the “Class B common stock”), were issued and outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKINGFORWARD‑LOOKING STATEMENTS
This Annual Report including, without limitation,on Form 10‑K (this “Report”) contains forward‑looking statements. We intend such forward‑looking statements underto be covered by the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-lookingsafe harbor provisions for forward‑looking statements within the meaning ofcontained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Report, including statements concerning possible or assumed future actions, business strategies, events or results of operations, and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward‑looking statements. These forward-looking statements caninvolve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be identifiedmaterially different from any future results, performance or achievements expressed or implied by the useforward‑looking statements.
In some cases, you can identify forward‑looking statements by terms such as “may,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of forward-looking terminology,these terms or other similar expressions. The forward‑looking statements in this Report are only predictions. We have based these forward‑looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward‑looking statements speak only as of the date of this Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward‑looking statements, including the words “anticipate,risks, uncertainties and assumptions described under Part I, Item 1A. “Risk Factors.” “believe,These forward‑looking statements are subject to numerous risks, including, without limitation, the following:
Because forward‑looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward‑looking statements as predictions of future events. The events and circumstances reflected in our forward‑looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward‑looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward‑looking statements in this Report will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward‑looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
You should read this Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward‑looking statements by these cautionary statements.
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TABLE OF CONTENTS
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PART I
Item 1. Business
Unless the context otherwise requires, references in this subsection to “we,” “continue,“us,” “could,“our,” “estimate,the “Company,” “expect,“Registrant,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would,”and “Nogin” refer to the consolidated operations of Nogin, Inc. and its subsidiaries. References to “SWAG” refer to the Company prior to the consummation of the Business Combination and references to “Legacy Nogin” refer to Branded Online, Inc. dba Nogin prior to the consummation of the Business Combination.
Our purpose-built platform has been developed to offer full-stack enterprise-level capabilities to online retailers. Using our Intelligent Commerce Platform, we enable brands in this market to build direct relationships with their end customers, in competition with big retailers.
As brands sell more online and therefore grow in the amount of gross merchandise value (“GMV”) generated through their business, they soon realize that they need more than just a simple online storefront and encounter complexities in terms of customer management, order optimization, returns, and fulfillment that need to be managed and coordinated. There are now a large number of brands that need to utilize an extended set of capabilities—Nogin provides this technology. In addition, there are established brands that have traditionally sold through retailers that now see an opportunity to go direct to the end customer and establish the direct customer relationship using Nogin’s software solution.
Nogin's Intelligent Commerce platform provides a full suite of capabilities including storefront, order management, catalog maintenance, fulfillment, returns management, customer data analytics and marketing optimization tailored for online brands and all consolidated within a single software solution. Furthermore, our clients utilize Nogin’s technology to help accelerate the growth of their GMV, improve their customer engagement and reduce costs.
We cater to a market that is currently underserved and growing fast. We are mission-critical to helping our clients manage their front-to-back-end operations while driving increased revenue and profitability. Our platform integrates seamlessly into point-of-sale (“POS”) or inventory software systems on the back end and offers simple tools for creative website development and content management on the front end. Nogin enables brands and retailers to focus on their core strengths of product development and branding by reducing the complexity associated with scaling an online business. Our software solution delivers best-in-class commerce experiences for our clients that they may not have the time, budget, or expertise to deliver on their own. We make commerce simple and easy to operate.
As digital channels grow in significance in relation to consumer spending behavior, we help brands and retailers optimize their digital commerce presence. According to eMarketer Inc., worldwide e-commerce sales are projected to reach $6.4 trillion by 2024 with the e-commerce software market expected to expand from $6.1 billion in 2021 to $20.4 billion in 2028.
The sophistication of our Intelligent Commerce Platform means we have a data lake of over 1 billion consumer interactions which our software leverages to create smart algorithms around discounts and mark downs, free shipping, traffic and conversions, payment processing, media, fulfillment and returns, freight, and customer service that our brands can use across their entire ecosystem, driving ROI outside of the online storefront. By testing, tracking and tagging, our software can determine the impact of implementing new strategies for our clients. This allows clients to gain insights into what is impacting margins and uncover areas of focus to improve on.
The success of the brands who utilize our platform is our success, and we develop relationships as such that we become their trusted partner for growth. The more GMV our brands are able to efficiently drive to their online store, the greater our own revenue, growth, and profitability. We believe this alignment of interests with our clients is a core tenant to our sustainable, long-term success. This is evidenced by our net revenue retention rate, which has been 105% in 2020 and 2021 and 102% in 2022 and consistently over 100% in the preceding years. These retention
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rates demonstrate both the strong retention we achieve from our existing brands and their strong growth in GMV by using Nogin's Intelligent Commerce platform.
Since launching our platform in 2013, our business has experienced rapid growth. Our revenues were $101.3 million and $94.5 million in the years ended December 31, 2021 and 2022, respectively. Our net losses were $0.1 million and $52.7 million in the years ended December 31, 2021 and December 31, 2022, respectively. Our GMV amounted to $277.6 million and $255.5 million in the years ended December 31, 2021 and 2022, respectively, representing a decrease of 8% from 2021 to 2022. In 2021, we began acquiring inventory to assist our clients supply chain issues through the COVID-19 pandemic. As such, we had product revenue in 2021 that we do not anticipate continuing in 2023 after finding a buyer for the inventory.
Recent Developments
Business Combination
On February 14, 2022, the Company entered into an Agreement and Plan of Merger (as amended on April 19, 2022 and August 26, 2022, the “Merger Agreement”), with Nuevo Merger Sub, Inc., a wholly owned subsidiary of SWAG (“Merger Sub”), and Legacy Nogin, pursuant to which Merger Sub would merge with and into Legacy Nogin, with Legacy Nogin surviving the merger as a wholly owned subsidiary of the Company (the “Business Combination” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”).
On April 19, 2022, the Company, certain guarantors named therein (the “Notes Guarantors”) and certain investors named therein (each, a “Subscriber” and collectively, the “Subscribers”), entered into subscription agreements (each, a “PIPE Subscription Agreement” and collectively, the “PIPE Subscription Agreements”) pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of $75.0 million of 7.00% Convertible Senior Notes due 2026 (the “Convertible Notes”) at the par value of the notes and (ii) up to an aggregate of 1.5 million warrants (the “PIPE Warrants”) with each case, their negative orwhole PIPE Warrant entitling the holder thereof to purchase one share of common stock.
On August 26, 2022, the Company and a subscriber (the “Equity Subscriber”) entered into a subscription agreement (the “Equity PIPE Subscription Agreement”) pursuant to which the Company agreed to issue and sell to the Equity Subscriber, immediately prior to the closing of the Business Combination, 517,079 shares of common stock (the “PIPE Shares”) at a price per PIPE Share equal to $10.17 (the “Equity PIPE” and, together with the transactions described in clauses (i) and (ii) above, the “PIPE Investment”).
On August 26, 2022, immediately prior to the Closing (as defined below), the Company issued (i) 517,079 shares of common stock to the Equity Subscriber in accordance with the terms of the Equity PIPE Subscription Agreement, (ii) $65.5 million aggregate principal amount of Convertible Notes to the Subscribers in accordance with the terms of the PIPE Subscription Agreements and (iii) 1,396,419 PIPE Warrants to the Subscribers in accordance with the terms of the PIPE Subscription Agreements.
On August 26, 2022 (the “Closing Date”), pursuant to the Merger Agreement, Merger Sub merged with and into Legacy Nogin, with Legacy Nogin surviving the merger as a wholly owned subsidiary of the Company (the “Closing”).
In connection with Closing, we changed our name to Nogin, Inc. While we are the legal acquirer of Legacy Nogin in the Business Combination, Legacy Nogin is deemed to be the accounting acquirer, and the historical financial statements of Legacy Nogin became the historical financial statements of the Company upon the closing of the Transactions.
Joint Ventures
On April 6, 2021, the Company and Tiger Capital Group, LLC (“Tiger Capital”) formed a joint venture, Modcloth LLC (“ModCloth”). The Company and Tiger Capital each contributed $1.5 million into ModCloth and Nogin owns 50% of the outstanding membership units. Tiger Capital provides the financing for the inventory, while Nogin
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entered into a Master Services Agreement (“MSA”) with ModCloth to provide the Intelligent Commerce Platform and eCommerce services. The Company accounts for its investment in ModCloth under the fair value option of accounting. As of December 31, 2021, the investment balance related to ModCloth was$6.4 million and was included in investment in unconsolidated affiliates on the consolidated balance sheets. For the year ended December 31, 2021, the Company recorded a fair value adjustment related to its ModCloth investment of $4.9 million included in changes in fair value of unconsolidated affiliates on the consolidated statements of operations. On December 1, 2022, Tiger Capital assigned its interest in Modcloth to the Company for $1.5 million, at which point Modcloth became a wholly owned subsidiary of the Company.
On December 31, 2021, the Company and CFL Delaware, Inc. (“CFL”) formed a joint venture, IPCO Holdings, LLC (“IPCO”), whereby the Company contributed certain assets acquired from the BTB (ABC), LLC (“Betabrand”) acquisition and entered into a MSA with IPCO to provide certain eCommerce services, marketing, photography, customer service and merchant credit card monitor fraud services; and CFL entered into a Master Supply Agreement with IPCO and agreed to procure the supply of inventory to IPCO, provide manufacturing, fulfillment, logistics and warehousing services for the inventory. The Company accounts for its investment in IPCO under the fair value option of accounting. As of December 31, 2022, the investment balance related to IPCO was $7.4 million and was included in investment in unconsolidated affiliates on the consolidated balance sheets.
The Company has determined that it does not have the ability to direct the most significant activities of the joint ventures. The Company’s maximum exposure to loss as a result of its investments in the joint ventures is equal to its carrying value of the investment. The Company has recorded its 50% equity interest in the joint ventures as investments in unconsolidated affiliates under the fair value option of accounting. Changes in the fair value of the joint ventures, which are inclusive of equity in income, are recorded as changes in fair value of unconsolidated affiliates in the consolidated statements of operations during the periods such changes occur.
Notice of Non-Compliance from Nasdaq
On December 2, 2022, we received a written notice (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying us that, based on the closing bid price of our common stock for the 30 consecutive trading days preceding the notice, the Company no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Global Market. Nasdaq Listing Rule 5450(a)(1) requires listed securities to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”), and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the Minimum Bid Price Requirement exists if the deficiency continues for a period of 30 consecutive trading days.
We have been provided an initial compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive trading days prior to May 31, 2023, and we must otherwise satisfy The Nasdaq Global Market’s requirements for listing.
If we do not regain compliance by May 31, 2023, we may be eligible for an additional 180 calendar day compliance period if we elect (and meet the listing standards) to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, we would be required, among other variations or comparable terminology.things, to meet the continued listing requirement for market value of publicly held shares as well as all other standards for initial listing on The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and would need to provide written notice of our intention to cure the bid price deficiency during the second compliance period. If we do not regain compliance within the compliance period(s), including any extensions that may be granted by Nasdaq, our securities will be subject to delisting.
We intend to monitor the bid price of the common stock and consider available options to resolve the noncompliance with the Minimum Bid Price Requirement. There can be no assurance that actualwe will be able to regain compliance with The Nasdaq Global Market’s continued listing requirements or that Nasdaq will grant the Company a further extension of time to regain compliance, if applicable.
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Updates to Management and Board of Directors
On January 27, 2023, Jan-Christopher Nugent, Co-Chief Executive Officer and Chairman of the board of directors (the “Board”) of the Company, resigned as the Company’s Co-Chief Executive Officer and as a member and Chairman of the Board, effective as of January 27, 2023 (the “Resignation Effective Date”). Jonathan S. Huberman, the Company’s other Co-Chief Executive Officer, began serving as the sole Chief Executive Officer of the Company and as Chairman of the Board as of the Resignation Effective Date.
On February 13, 2023, the Board, upon the recommendation of the Nominating and Corporate Governance Committee (the “Nominating Committee”), appointed Andrew Pancer to fill the vacancy on the Board created by the resignation of Jan-Christopher Nugent. Mr. Pancer will serve as a Class I director of the Board for a term ending at the 2023 annual meeting of stockholders of the Company, with such appointment effective as of February 13, 2023. In approving the appointment, the Board concluded that Mr. Pancer satisfies the independence requirements of the Nasdaq Stock Market and the Company’s Corporate Governance Guidelines and the Securities and Exchange Commission rules regarding audit committee membership. Mr. Pancer was appointed to serve as a member of the Nominating Committee and as a member of the Audit Committee of the Board. In connection with Mr. Pancer’s appointment as a Class I director, the Board reassigned Hussain Baig from Class I to Class III in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Company’s Second Amended and Restated Certificate of Incorporation (the “Charter”).
On February 13, 2023, Deborah Weinswig, a Class I director of the Board and chair of the Nominating Committee, resigned from the Board, effective as of February 13, 2023. In connection with Ms. Weinswig’s resignation, the Board reassigned Geoffrey Van Haeren from Class II to Class I in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Company’s Charter.
Missed Interest Payment
The Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023 as required pursuant to Section 2.05 of the Indenture, resulting in a default. Pursuant to Section 7.01(A)(ii) of the Indenture, a default for thirty (30) consecutive days in the payment when due of interest on any Convertible Note constitutes an Event of Default (as defined in the Indenture). In the event the Company does not make the interest payment on or prior to March 31, 2023 and no agreement is otherwise reached with the holders of the Convertible Notes, the trustee or holders of at least 25% in principal amount of the Convertible Notes may declare the principal and any interest immediately due and payable. Although the Company is in active negotiations with the holders of the Convertible Notes to resolve the default, there can be no assurances that an agreement will be reached on terms that are acceptable to us or at all.
In 2021, US consumers were expected to spend $933.0 billion on e-commerce, representing 15.3% of total retail sales, and by 2025, US consumers are projected to spend $1.64 trillion on e-commerce representing 23.6% of total retail sales. The growth in e-commerce sales as a proportion of total retail sales has been accelerated by brands selling directly to consumers, increased use of social media for both marketing and as a method for transacting, growing number of and reach of e-commerce platforms that allow retailers to situate themselves online, and larger number of digital marketplaces directly connecting sellers and consumers.
Retailers are increasingly utilizing data to segment customers, understand their purchasing behaviors, and create a more personalized shopping experience for each shopper. Audience data is also being used to generate and provide ads that are more relevant online by targeting specific consumers with content that is most likely to entice them into taking further purchasing action.
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Digital brands and retailers are now prioritizing providing customers with a unified retail experience, which includes the combination of emerging technologies, merchandise planning and execution, digital workplace experiences, and unified commerce execution. International Data Corporation (“IDC”) predicts that by 2023, digital transformation and innovation will account for more than 50% of all IT spending, as compared to 36% of IT spending in 2018. As retailers’ IT functions continue to play a larger role from a strategic standpoint, companies are committed to investing and developing resources that help expand their digital footprint within their respective target markets. While increased IT spending can help with marketing and outreach, investments in IT also serve to facilitate more efficient supply chain processes and unique customer experiences.
Brands and retailers are offering different methods for consumers to buy and receive items through their stores. Click-and-collect, where a consumer orders online and picks up the item at a physical store is expected to continue gaining popularity with spending projected to grow from $72.5 billion in 2020 to $141.0 billion in 2024.
Mobile purchases are also taking on more significance across the retail industry with 67% of consumers making a purchase on their mobile device at least once a month.
With the vast amount of product information available online and continuous engagement through social channels, consumers have gained increasing amounts of leverage in terms of buying power. Retailers must now react to keep up with changing preferences of consumers, of which 30-40% will switch brands or retailers in order to support companies who provide greater value, are purpose-driven, and provide strong product quality.
Due to the impact of COVID-19, more consumers have been working from home with few opportunities to spend time outside of the home to make purchases. This has resulted in additional spending through online channels and is a trend expected to continue in the medium term. Consumers have turned to searching for products online with 42% searching for items on online marketplaces and 40.5% making purchases directly through retailers’ websites.
Digital native brands offer their products directly to consumers and therefore, must focus their efforts both on product development as well as distribution. The growth of these brands often hinges on their ability to develop communities through branding and consumer awareness. These vertically integrated companies often need support across a spectrum of capabilities including online storefronts, fulfillment and distribution, marketing and analytics, and payments.
E-commerce brands today face the expectation that they will deliver e-commerce experiences similar to large retailers. In order to that, they face these challenges:
Retailers face the decision of which e-commerce platform to utilize, typically deciding between a basic storefront application and an enterprise SaaS solution. Despite their basic functionality, storefront applications can take between 4-6 months to implement with initial setup costs ranging between $80 thousand to $450 thousand while enterprise SaaS applications take between 12-24 months to ramp up with costs in the $500 thousand to $5 million range. We have a proven track record of implementing our software within 1-3 months with a zero-cost implementation fee.
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When transitioning to online retail, brands traditionally have had to decide whether to manage their e-commerce operations in-house or to outsource them. Managing in-house can be costly as retailers need to hire experts to run the storefront website, understand analytics related to marketing spend and channels, and coordinate fulfillment and delivery operations. We offer a software solution that consolidates a retailer’s entire/e-commerce operational workflow into one platform, encouraging growth and increased GMV rather than limiting it.
Because of retailers’ need to stay updated with technology, marketing tactics, and trends within the industry in which they operate, they often are stretched in terms of budget and experience lower profitability. Our company takes on the responsibility of keeping up with the latest technologies and any R&D burden allowing our clients to focus on their core business and staying profitable.
Clients can take advantage of discounted shipping and marketing rates from vendors due to the high volume of spend that our platform funnels to them. Our clients benefit from the lower costs as well as the convenience of being relatively hands-off in processes that they may not have the time or expertise to focus on.
Basic storefront applications typically offer a SaaS solution with a limited number of features. Additional capabilities including network and third-party application integrations need to be added separately. In addition to increased and unforeseen costs, retailers often are unaware of which applications would best complement their business and current e-commerce infrastructure. Traditional enterprise SaaS solutions are often not customizable and undergo a limited number of updates. Additionally, they can be difficult to integrate third-party applications with, leading to a limited ability for the retailer to add further functionality. We provide a single solution to help clients manage their entire e-commerce operations allowing them to focus their time and efforts on product development and branding.
Retailers utilizing a basic storefront application must integrate with third party applications if they want to add additional functionality to their e-commerce operations. Traditional enterprise SaaS solutions typically offer a limited amount of innovation beyond their baseline software, and even if they do, the costs are often too high for an online brand to upgrade. Our clients’ storefronts and marketing budgets are continuously optimized using AI and machine learning, ensuring that they have the best and most up-to-date infrastructure powering their e-commerce store.
Typical e-commerce software vendors do not offer R&D capabilities to their clients, which can range between 12%-20% of a retailer’s total GMV. The expenses related to constantly experimenting and updating a retailer’s online store can be prohibitive to the company’s ability to invest in new products and marketing, leading to diminished growth. We employ software and data analytics experts who continuously work on optimizing clients’ engagement and conversion rates and can push out updates automatically to improve a store’s metrics. Our R&D capabilities are highly scalable as we can optimize a single client’s storefront and push the optimization out to all of our clients’ storefronts at one time, reducing the need to increase our analytics headcount as we expand our client base.
Our clients often engage us as a result of the constraints and difficulties of their existing online platform. Those platforms often limit scale and restrict future growth, in part because companies cannot afford the research and development expenditures and the costs of upgrades that are required to compete in today’s online marketplace. Those capacity limitations, in turn, reduce the margins companies may realize through online sales. Furthermore, the
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platforms often create administrative burdens on company management as they require the supervision of numerous agencies and vendors providing additional services for the platform.
We provide a solution that transforms consumer behavior by applying AI, making technology and innovation accessible to all brands and retailers. Our full-stack, Intelligent Commerce Platform creates differentiated benefits for both shoppers and retailers. Our platform increases traffic and conversions for brands by removing much of the complexity associated with optimized enterprise commerce. Nogin's Intelligent Commerce platform also facilitates increased margins and decreased shipping and return costs by leveraging proprietary AI and optimization capabilities to deliver targeted customer experiences.
As shopper demands evolve, Nogin delivers a full stack platform that bundles AI, optimization, R&D, and social commerce to enable brands and retailers to be best-of-breed without having to maintain the budgets and resources for those capabilities in-house. Brands can then focus on their customers, products, and branding while we provide the technology that they need.
Nogin is an enterprise software solution used by brands and retailers from a wide variety of industry verticals to operate and scale their e-commerce business initiatives. We have pioneered a new operating model called Commerce-as-a-Service (“CaaS”) that provides retail clients with a technology platform that helps improve key aspects of their e-commerce business.
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We consider the following categories of services and solutions to be our primary and direct competition:
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As a comprehensive provider of a technology platform, we deliver a market-leading combination of effective and unique functionality, scalability, and ease-of-use to facilitate the growth of clients’ digital commerce businesses.
A large, growing addressable market. Our clients comprise well-known retailers and brands globally. We provide a curated platform that offers functionality that surpasses that of self-service e-commerce storefront platforms while maintaining a level of continuous innovation, customizability, and ease-of-use that differentiates our platform from typical enterprise-level digital commerce platforms.
Market-leading efficiency with quick, low-cost implementations. We provide a world-class platform with pre-built e-commerce capabilities and pre-integrated third parties, best practice implementation strategies, data pumps and other migration technology capabilities. All e-commerce storefronts require the addition of numerous software applications and add-ons, while we provide the entire stack out of the box. This reduces launch timelines to months vs. years.
Reduced need for re-platforming. Because we provide an always up-to-date e-commerce platform, our customers do not need to re-platform; customers are always on the latest version. Strategies and tactics are constantly tested and deployed to our customer base.
Unified customer architecture for simultaneous optimization. The ability to optimize and test tactics that can be deployed across all clients provides significant scale. Many smaller clients can take advantage of our larger statistical sample size to get benefits much more quickly. In addition, our software leverages machine learning models to assess customer profiles and develop personas with marketing strategies to optimize lifetime customer value, revenue and overall return on spend investments.
We are excited to expand our footprint, and we plan to implement the following strategies to accelerate our growth.
Offer additional products and solutions to existing clients. Existing clients benefit from our unified customer architecture. As new features are developed and tested on various clients, those capabilities can be deployed to all of our clients simultaneously. Our features are highly configurable and can be turned on and off at our discretion. The storefront tools within intelligent commerce allows clients to have a unique brand experience while still maintaining features and functions that drive revenue and maintain margin and profitability. Our machine learning models and algorithms are similarly built and tested on certain clients and then deployed to all of our clients simultaneously.
Expand our product line. We continue to build and innovate new features into our intelligent commerce suite of products. These include such things as new machine learning models, new smart algorithms, and advancements to storefront capabilities.
Engage in strategic M&A activity to acquire certain technological capabilities and expand our customer base. Our platform includes a number of pre-integrated third parties, some of whom might make a good addition to our technology stack. There are also complementary technologies that can provide an incremental client base for us to expand into by upselling our CaaS products and capabilities.
Continue to pursue customers in already established verticals such as apparel, accessories and Consumer Packaged Goods (CPG) and expand across additional verticals. The Ideal Customer Profile (“ICP”) are brands that have evolved to reach more than $5 million in GMV. We intend to pursue online brands in the fashion, apparel, and accessories, health, beauty, wellness, and CPG verticals while expanding into new verticals such as electronics.
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Expand geographically. We expect to expand into Europe in the future as we already support shipments throughout Europe from warehouses in the UK and the Netherlands. We are integrated into a worldwide fulfillment network that gives us scale and access to many markets beyond North America.
Our platform is built to perform across a range of industry verticals in apparel, accessories, consumer goods, and beauty / wellness, which make up a significant portion of online sales. These verticals all utilize the same core capabilities of the platform, delivering a high-quality, high-touch experience to the end-customer. We enable customers to sell on a global basis taking into account all the complexities of cross border sales.
Client A (Footwear)—This footwear retailer had incurred significantly higher costs as a result of contracting multiple agencies/vendors to operate their e-commerce site. They were in need of digital marketing tools and a centralized and experienced team to integrate them. Our platform coordinated capabilities across technology, marketing, strategy, and planning teams to drive greater efficiencies and dramatically improve our client’s e-commerce site metrics (some of which are listed below). Additionally, our software helped to revamp the client’s shopping funnel from all sources including optimizing its storefront for every device and was instrumental in helping the client launch a new SMS and loyalty program to reach and retain a larger number of customers.
Client B (Apparel)—An apparel retailer engaged us after closing all of their retail locations and making the strategic decision to be a strictly direct-to-consumer brand. We implemented our full-stack solution which provided a new storefront within 60 days, full integrating with their legacy system. We also utilized AI/ML to
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maximize the company’s return on stacked promotions and free shipping offers, leading to improved margins. Additionally, the client utilized our loyalty program platform functionality to boost their customer lifetime value (LTV).
Client C (Diversified)—Nogin was hired to implement our Intelligent Commerce Platform across the client’s e-commerce workflow which consisted of a multilingual/multi-currency platform. Our platform improved their holiday revenues and overall YoY revenue growth by syndicating the client’s entire multi-brand catalog to ten (10) different marketplaces, enabling real-time responses to improve drop-shipping operations, and consolidating all of the client’s e-commerce data under a single architecture to propagate actionable insights to the company’s regional stores.
The Nogin brand was launched in early 2021, having previously operated as Branded Online. Historically, the company has relied on relationships, industry connections, and reputation as its primary growth engines to attract new brands to the platform. Significant investments were made throughout 2021 and 2022 under the new Nogin brand to increase our sales and marketing resources to establish a more effective pipeline moving forward into the next calendar year.
Traditionally, we have relied heavily on our public relations agency, thought-leadership articles, awards, and new customer acquisitions to attract potential customers into our in-bound sales pipeline. We are working to expand those efforts with an effective, paid lead-generation in-bound program. In addition, we will be expanding our content production model to include new opportunities for thought-leadership, video usage, industry articles, podcasts, and other content suitable for an aggressive social media outreach program.
Our sales and marketing teams are also working to establish identifiers and segmentation for an ongoing effective out-bound sales program. We have hired additional support to further supplement the internal sales team specifically for new business acquisition. Our marketing team will be supporting this out-bound effort and integrating content, ads, and outreach while working hand in hand with our sales team to achieve measurable results.
Our goal is to continue to have Nogin recognized in the e-commerce industry as a trusted, reliable, and experienced CaaS brand. Our marketing is primarily focused on inbound activities while supporting the outbound efforts of the sales team. Our marketing team uses advanced marketing techniques and digital technologies, and creates original and engaging content to keep the brand top of mind with prospects, customers, and the media. These tools include marketing automation, remarketing and a selection of social media tools. Activities vary from development of educational and promotional material in the form of blogs, webinars, whitepapers, eBooks, datasheets and sales support tools. These materials educate, engage, and guide prospects as they move along the purchasing funnel converting them into customers and brand loyalists.
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We implemented a direct B2B enterprise solution sales model staffed with experienced industry and e-commerce savvy sales executives. Our sales executives research brands to identify the best potential prospects that fit our ICP. Each sale engages with ICP prospects in an initial meeting with a goal to identify whether the company has any of the three critical business issues that Nogin Intelligent Commerce confidently solves with speed to market that leverages experienced global e-commerce technology, processes, and people.
Historically, enterprise sales executives have generated opportunities by leveraging their existing industry relationships, industry referrals, and direct prospecting and sales engagement with brands and retailers. Marketing investments supported new account-based lead generation efforts at fashion and apparel industry-centric account-based events. These events have been an effective forum for allowing sales executives to establish themselves as industry experts brands and retailers can trust with e-commerce and fashion knowledge.
We have launched a scalable demand generation strategy to rapidly move our coordinated outbound and inbound marketing and sales programs forward. Efforts include building out a demand generation engine with a small inside sales team to qualify inbound leads and make outbound appointment setting sales calls. Key to our success will be an accelerated and continued investment and focus on delivering content that maps across Nogin’s B2B marketing funnel:
We are a trusted e-commerce partner to some of the world’s leading lifestyle brands in the apparel, wellness, electronics and CPG industry verticals. More recently, we expanded our strategic industry focus to include online brands in the following industry groups: Home & Garden, Outdoors, Sports, Household, Cleaning Supplies, Housewares, Toys, Kids & Baby, Beauty, Health, Personal Care, and Pet Supplies. Our sales and marketing focus is on identifying potential brands and retailers that are good fit prospects for our offerings.
The ICP for our Intelligent Commerce Platform includes brands selling finished products to consumers via a multi-channel (webstore/DTC, Marketplaces, company-owned physical stores or other retailers/wholesale) and selling on their company owned online store for more than two years with annual GMV greater than $5 million (unless well-funded). Prospective clients must own the intellectual property and trademarks for their products. Prospective clients will have a strong brand focus with a premium buyer experience (i.e. not materially differdiscounted brands) and be challenged to compete with Big Retail’s (Amazon, Wayfair, Walmart, eBay, Target, and others) sales tactics such as free shipping and returns as well as R&D investments.
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We provide a sophisticated technology platform that empowers brand success. Our Nogin Intelligent Commerce Platform, enterprise CaaS platform includes:
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(1) AI that supercharges growth. Nogin AI processes hundreds of millions of interactions and analyzes across clients’ entire operational workflow, acting on it real-time to unlock growth and identify sources of lost revenue.
(2) Benchmarks, Best Practices, and Behavioral Data. Our platform utilizes data from expectations. Such statementsall of our brands simultaneously to identify trends, opportunities, and best practices to drive improvements in customer acquisition and retention.
(3) Flexible, Intelligent Platform. We continuously pursue additional R&D opportunities with dedicated developers tweaking the platform to generate value and performance. With Nogin, clients’ e-commerce platform is always updated eliminating the need for manual updates or re-platforming.
(4) CDP. Nogin’s proprietary customer data platform. It is a unified customer data architecture where data is pulled from multiple sources (marketing, web, call center, loyalty, reviews, returns, etc...), cleaned and combined to create a single customer profile. Customer profiles are then segmented in cohorts with personas using machine learning models. These models can be client specific or be applied to all clients. Marketers can then use the data to
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target various activations for the available marketing channels (such as Facebook, email and SMS) or target the customer user journey by delivering a personalized web experience.
Our Intelligent Commerce platform is in the market today. The Intelligent Commerce platform is a proprietary open-source enterprise class end to end headless e-commerce platform that includes research and development, a customer data platform and an artificial intelligence data pool across all endpoints for superior customer knowledge and future predictive commerce.
We have designed our platform with high levels of functionality and customizability, convenience, and scalability as top priorities. Core contributors to our strengths in these areas include:
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We have invested a significant amount of time and expense into R&D to develop our Intelligent Commerce Platform. Our R&D activities are largely conducted at our headquarters in Tustin, California. As of December 31, 2022, we had approximately 58 full-time or equivalent employees engaged in R&D activities.
Our intellectual property is an important component of our business, and our business depends, in part, on our ability to develop and maintain the proprietary aspects of its core technology. To establish and protect our proprietary rights, we rely on a combination of trademarks, copyrights, domain names, know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other intellectual property and contractual rights.
We have been issued a federal registration for our “Face Off Fashion” trademark and have three published but pending trademarks, including “NOGIN”, as well as multiple pending trademarks. We also hold rights to various domain names.
We are subject to various laws and regulations in the United States and internationally, which may expose us to liability, increase costs or have other adverse effects that could harm our business. These laws and regulations include but are not limited to any statements relatingdata privacy and data localization, copyright or similar laws, anti-spam, consumer protection, employment, and taxation. Compliance with such laws can require changes to our business practices and significant management time and effort. Additionally, as we continue to develop and improve consumer-facing products and services, and as those offerings grow in popularity, the risk that additional laws and regulations will impact our business will continue to increase.
All states have adopted laws requiring notice to consumers of a security breach involving their personal information. In the event of a security breach, these laws may subject us to incident response, notice and remediation costs. Failure to safeguard data adequately or to destroy data securely could subject us to regulatory investigations or enforcement actions under federal, state, or foreign data privacy data security, unfair practices, or consumer protection laws. The scope and interpretation of these laws could change, and the associated burdens and compliance costs could increase in the future.
Privacy laws and regulations, cross-border data transfer restrictions, data localization requirements, and other domestic or foreign laws or regulations may expose us to liability, or otherwise adversely affect our business. Laws and regulations related to data privacy and the collection, disclosure, and other processing of personal information are constantly evolving. Laws that have significant implications are the European Union’s General Data Protection Regulation (“EU GDPR”), the United Kingdom General Data Protection Regulation and Data Protection Act 2018 (collectively, the "UK GDPR") (together the EU GDPR and UK GDPR shall be referred to as the "GDPR") as well as the California Consumer Privacy Act, as amended by the California Privacy Rights Act (“CCPA”). These laws contain detailed requirements regarding the collection, sharing, disclosure, transfer and processing personal information and impose certain requirements regarding how such information may be used, (including a principal of accountability and the obligation to demonstrate compliance through policies, procedures, training and audit), the length for which it may be stored, with whom it may be shared, and the effectiveness of consent. Such laws and regulations could restrict our ability to consummate any acquisition or other business combinationstore and any other statements that are not statements of current or historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:
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costs by using certain vendors or service providers in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination;
Our actual or perceived failure to comply with these privacy laws or regulations could expose us to significant fines and penalties imposed by regulators and has in the past and could in the future expose us to legal claims by buyers, or other relevant stakeholders. Some of these laws, such as the CCPA, permit individual or class action claims for certain alleged data security violations, increasing the likelihood of such legal claims. Similarly, many of these laws require us to maintain an initial business combination dueonline privacy policy, terms of service, and other informational pages that disclose our practices regarding the collection, processing, and disclosure of personal information. If these disclosures contain any information that a court or regulator finds to be inaccurate, we could also be exposed to legal or regulatory liability. Penalties for certain breaches of the GDPR are up to the uncertainty resultinggreater of €20 million (£17.5 million) or 4% of global annual turnover. In addition to fines, a breach of the GDPR may result in regulatory investigations, reputational damage, orders to cease or change our data processing activities, enforcement notices, assessment notices for a compulsory audit and/or civil claims (including class actions). Any such proceedings or violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability or demanding injunctive relief, divert management’s time and attention, increase our costs of doing business, and materially adversely affect our reputation.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”). The FCPA prohibits corporations and individuals from engaging in improper activities to obtain or retain business or to influence a person working in an official capacity. It prohibits, among other things, providing, directly or indirectly, anything of value to any foreign government official, or any political party or official thereof, or candidate for political office to improperly influence such person. Similar laws exist in other countries, such as the recentUK, that restrict improper payments to persons in the public or private sector. Many countries have laws prohibiting these types of payments within the respective country. Historically, technology companies have been the target of FCPA and other anti-corruption investigations and penalties.
In addition, we are subject to U.S. and foreign laws and regulations that restrict our activities in certain countries and with certain persons. These include the economic sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control and the export control laws administered by the U.S. Commerce Department’s Bureau of Industry and Security.
Our corporate headquarters are located in Tustin, California. The headquarters cover 89,468 square feet pursuant to an operating lease that expires in 2029. We believe our current facility is suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe suitable additional or substitute space will be available as needed to accommodate any such expansion of our officersoperations.
We lease three warehouse facilities, one in Fontana, California, one in Rancho Dominguez, California and directorsone in Pittsburgh, Pennsylvania. The warehouse in Fontana is 102,100 square feet and its lease expires in 2026. The warehouse in Rancho Dominguez is 115,814 square feet and its lease expires in May 2023. The warehouse in Pittsburgh is 253,478 square feet and its lease expires in 2027.
Our culture is driven by the following corporate values:
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Together, our values and culture creates an environment that allows us to generate a numbersuccessfully recruit and retain team members that are passionate and talented. As of potential business combination opportunities;December 31, 2022, we had approximately 213 full-time employees, all of whom are based in the United States.
We have won awards related to our workplace culture including Comparably’s Best Places to Work and Best Company Perks and Benefits in Los Angeles 2021 based on anonymous rankings submitted by then-current employees. Employers who won these awards were assessed based on nearly 20 different categories that included compensation, leadership, professional development opportunities, perks and benefits.
Our internet website address for our securities;
Item 1A. Risk Factors
The following is a summary of some of the principal risks described belowand uncertainties that could materially adversely affect our business, financial condition and results of operations. You should read this summary together with the more detailed risk factors contained below.
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Risks Related to our Common Stock and Warrants
Risks Related to our Convertible Notes
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We have not yet achieved profitability. We incurred operating losses of approximately $52.7 million, $0.1 million and $2.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $77.8 million. While we have experienced significant revenue growth over recent periods, we may not be able to sustain or increase our growth or achieve profitability in the future. We intend to continue to invest heavily in sales and marketing efforts. In addition, we expect to incur significant additional legal, accounting, and other expenses related to our being a public company as compared to when we were a private company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed.
We have experienced strong growth in recent years. In future periods, we may not be able to sustain revenue growth consistent with recent history, or at all. We believe our revenue growth depends on Forma number of factors, including our ability to:
We may not accomplish any of these objectives and, as a result, it is difficult for us to forecast our future revenue or revenue growth. If our assumptions are incorrect or change in reaction to changes in our market, or if we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our revenue for any prior periods as any indication of our future revenue or revenue growth.
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In order to continue to grow our business, we must continue to acquire new customers to purchase and use our CaaS platform. Our success in adding new customers depends on numerous factors, including our ability to: (1) offer a compelling e-commerce platform, (2) execute our sales and marketing strategy, (3) attract, effectively train and retain new sales, marketing, professional services, and support personnel in the markets we pursue, (4) develop or expand relationships with partners, payment providers, systems integrators, and resellers, (5) expand into new geographies and market segments, and (6) efficiently onboard new customers to our CaaS platform.
Our ability to increase revenue also depends, in part, on our ability to retain existing customers and to sell additional functionality and adjacent services to our existing and new customers. Our customers have no obligation to renew their contracts with our solutions after the expiration of their initial subscription period. In order for us to maintain or improve our results of operations, it is important that our customers renew their contracts with us on the same or more favorable terms to us. Our ability to increase sales to existing customers depends on several factors, including their experience with implementing and using our CaaS platform, their ability to integrate our CaaS platform with other technologies, and our pricing model.
Our ability to generate revenue may be inconsistent across small and midsize businesses, mid-market, and large enterprise customers. If we experience limited or inconsistent growth in any of these customer sets, particularly our large enterprise customers, our business, financial condition, and operating results could be adversely affected.
Our future growth, profitability and cash flows depend upon our ability to successfully implement our growth strategy, which, in turn, is dependent upon a number of factors, including our ability to:
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Further, achieving these objectives will require investments which may result in short-term costs without generating any current revenue and therefore may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.
Our ability to increase our customer base and achieve broader market acceptance of our CaaS platform will depend on our ability to expand our marketing and sales operations. We plan to continue increasing the size of our sales force. We also plan to dedicate significant resources to sales and marketing programs, including search engine and other online advertising. The effectiveness of our online advertising may vary due to competition for key search
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terms, changes in search engine use and changes in search algorithms used by major search engines and other digital marketing platforms. Our business and operating results will be harmed if our sales and marketing efforts do not generate a corresponding increase in revenue. We may not achieve anticipated revenue growth from increasing the size of our sales force if we are unable to hire, develop, and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and marketing programs are not effective.
If the cost of marketing our CaaS platform over search engines or other digital marketing platforms increases, our business and operating results could be adversely affected. Competitors also may bid on the search terms that we use to drive traffic to our website. Such actions could increase our marketing costs and result in decreased traffic to our website.
Furthermore, search engines and digital marketing platforms may change their advertising policies from time to time. If these policies delay or prevent us from advertising through these channels, it could result in reduced traffic to our website and subscriptions to our CaaS platform. New search engines and other digital marketing platforms may develop, particularly in specific jurisdictions, that reduce traffic on existing search engines and digital marketing platforms. If we are not able to achieve prominence through advertising or otherwise, we may not achieve significant traffic to our website through these new platforms and our business and operating results could be adversely affected.
Given these factors, it is difficult to predict whether and when a sale will be completed, and when revenue from a sale will be recognized. Consequently, a shortfall in demand for our CaaS platform and services or a decline in new or renewed contracts in a given period may not significantly reduce our revenue for that period but could negatively affect our revenue in future periods.
We believe maintaining and growing the Nogin brand is important to supporting continued acceptance of our existing and future solutions, attracting new customers to our CaaS platform, and retaining existing customers. We also believe that the risks describedimportance of brand recognition will increase as competition in our market increases. Successfully maintaining our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide a reliable and useful CaaS platform to meet the needs of our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new functionality and solutions, and our ability to successfully differentiate our CaaS platform. Brand promotion activities may not generate customer awareness or yield increased revenue. Even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to realize a sufficient return on our brand-building efforts, and our business could suffer.
Our customers rely on our personnel for support related to our subscription and customer solutions. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers, particularly large enterprise customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation with existing or potential customers could be harmed.
The markets in which we compete are characterized by constant change and innovation and we expect them to continue to evolve rapidly. Our success has been based on our ability to identify and anticipate the needs of our customers and design platforms that provide them with the breadth of tools they need to operate and grow their businesses. Our ability to attract new customers, retain revenue from existing customers and increase sales to both
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new and existing customers will depend in large part on our ability to continue to improve and enhance the functionality, performance, reliability, design, security and scalability of our CaaS platform and to innovate and introduce new solutions.
We expect that new services and technologies applicable to the industries in which we operate will continue to emerge and evolve, including developments in POS, e-commerce and payments technology. Other potential changes are on the horizon as well, notably in the “Risk Factors” sectionpayments space, such as developments in real-time payments, blockchain, crypto-currencies and in tokenization, which replaces sensitive data (e.g., payment card information) with symbols (tokens) to keep data safe in the event of a breach. Similarly, there is rapid innovation in the provision of other products and services to businesses, including tailored financial solutions and marketing services. These new services and technologies may be superior to, impair, or render obsolete the products and services we currently offer or the technologies we currently use to provide them. We have in the past, and may experience in the future, difficulties with software development that could delay or prevent the development, introduction or implementation of new solutions and enhancements. Software development involves a significant amount of time for our research and development team, as it can take our developers months to update, code and test new and upgraded solutions and integrate them into our CaaS platform. We must also continually update, test and enhance our software platforms. For example, our design team spends a significant amount of time and resources incorporating various design enhancements, such as customized colors, fonts, content and other features, into our CaaS platform. The continual improvement and enhancement of our CaaS platform requires significant investment and we may not have the resources to make such investment. Our improvements and enhancements may not result in our ability to recoup our investments in a timely manner, or at all. We may make significant investments in new solutions or enhancements that may not achieve expected returns. The success of any enhancement or new solution depends on several factors, including the timely completion and market acceptance of the enhancement or new solution. Our ability to develop new enhancements or solutions may also be inhibited by industry-wide standards, payment card networks, laws and regulations, resistance to change by customers, difficulties relating to integration or compatibility with third-party software or hardware, or third parties’ intellectual property rights.
Any new solution we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue. Improving and enhancing the functionality, performance, reliability, design, security and scalability of our CaaS platform is expensive, time-consuming and complex, and to the extent we are materialnot able to investors, butdo so in a manner that responds to our customers’ evolving needs, our business, operating results and financial condition will be adversely affected.
We are required by our payment processors to comply with payment card network operating rules and we have agreed to reimburse our payment processors for any fees or fines that are assessed by payment card networks as a result of any rule violations by us or our customers. The payment card networks set and interpret the payment card industry rules, certification requirements and rules governing electronic funds transfer, any of which could change or be reinterpreted to make it more difficult for us to comply. We face the risk that one or more payment card networks or other processors may, at any time, assess penalties against us, against our customers, or terminate our ability to accept credit card payments or other forms of online payments from shoppers. This would have an adverse effect on our business, financial condition, and operating results.
If we fail to comply with the payment card network rules, including the Payment Card Industry Data Security Standard (“PCI-DSS”) and those of each of the credit card brands, we would breach our contractual obligations to our payment processors, financial institutions, partners, and customers. Such a failure may subject us to fines, penalties, damages, higher transaction fees, and civil liability. It could prevent us from processing or accepting payment cards or lead to a loss of payment processor partners, even if customer or shopper information has not presently knownbeen compromised.
Our terms of service prohibit our customers from using our CaaS platform to engage in illegal activities and our terms of service permit us to take down a customer’s shop if we become aware of illegal use. Customers may
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nonetheless engage in prohibited or illegal activities or upload store content in violation of applicable laws, which could subject us to liability. Our partners may engage in prohibited or illegal activities, which could subject us to liability. Furthermore, our brand may be negatively impacted by the actions of customers or partners that are deemed to be hostile, offensive, inappropriate, or illegal. We do not proactively monitor or review the appropriateness of the content of our customers’ stores or our partners’ activities. Our safeguards may not be sufficient for us to avoid liability or avoid harm to our brand. Hostile, offensive, inappropriate, or illegal use could adversely affect our business and financial results.
In many jurisdictions, laws relating to the liability of providers of online services for activities of their shoppers and other third parties are being tested by actions based on defamation, invasion of privacy, unfair competition, copyright and trademark infringement, and other theories. Any court ruling or other governmental regulation or action that imposes liability on customers of online services in connection with the activities of their shoppers could harm our business. We could also be subject to liability under applicable law, which may not be fully mitigated by our terms of service. Any liability attributed to us could adversely affect our brand, reputation, ability to expand our subscriber base, and financial results.
Our success depends upon the general public’s ability to access the internet, including through mobile devices, and its continued willingness to use the internet to pay for purchases, communicate, access social media, research and conduct commercial transactions. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the internet, including changes to laws or regulations impacting internet neutrality, could decrease the demand for our CaaS platform, increase our operating costs, or otherwise adversely affect our business. Given uncertainty around these rules, we could experience discriminatory or anti-competitive practices that could impede both our and our customers’ growth, increase our costs or adversely affect our business. In the future, providers of internet browsers could introduce new features that would make it difficult for customers to use our CaaS platform. In addition, internet browsers for desktop, tablets or mobile devices could introduce new features, or change existing browser specifications, such that they would be incompatible with our CaaS platform. If customers become unable, unwilling or less willing to use the internet for commerce for any reason, including lack of access to high-speed communications equipment, congestion of traffic on the internet, internet outages or delays, disruptions or other damage to customers’ computers, increases in the cost of accessing the internet and security and privacy risks or the perception of such risks, our business could be adversely affected.
We rely heavily on our network infrastructure and IT systems for our business operations. An online attack, damage as a result of civil unrest, earthquake, fire, terrorist attack, power loss, global pandemics (such as the COVID-19 pandemic), telecommunications failure, or other similar catastrophic event could cause system interruptions, delays in accessing our service, reputational harm, and loss of critical data. Such events could prevent us from providing our CaaS platform to our customers. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or IT systems, including any errors, defects, or failures in third-party hardware, could affect our ability to conduct normal business operations, and adversely affect our operating results.
In addition, as computer malware, viruses, computer hacking, fraudulent use attempts, and phishing attacks have become more prevalent, we face increased risk from these activities. These activities threaten the performance, reliability, security, and availability of our CaaS platform. Any computer malware, viruses, computer hacking, fraudulent use attempts, phishing attacks, or other data security breaches to our systems could, among other things, harm our reputation and our ability to retain existing customers and attract new customers. Many companies that provide cloud-based services have reported a significant increase in cyberattack activity since the beginning of the COVID-19 pandemic.
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We may continue to experience rapid growth and organizational change, which may continue to place significant demands on our management and our operational and financial resources. We have also experienced growth in the number of customers, the amount of transactions we process, and the amount of data that our hosting infrastructure supports. Our success will depend in part on our ability to manage this growth effectively. We will require significant capital expenditures and valuable management resources to grow without undermining our culture of innovation, teamwork, and attention to customer success, which has been central to our growth so far. If we fail to manage our anticipated growth and change in a manner that preserves our corporate culture, it could negatively affect our reputation and ability to retain and attract customers and employees.
We intend to expand our international operations in the future. Our expansion will continue to place a significant strain on our managerial, administrative, financial, and other resources. If we are unable to manage our growth successfully, our business and results of operations could suffer.
It is important that we maintain a high level of customer service and satisfaction as we expand our business. As our customer base continues to grow, we will need to expand our account management, customer service, and other personnel. Failure to manage growth could result in difficulty or delays in launching our CaaS platform, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features, or other operational difficulties. Any of these could adversely impact our business performance and results of operations.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products, and other assets in the future. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of the acquired companies. Key personnel of the acquired companies may choose not to work for us, their software may not be easily adapted to work with ours, or we may have difficulty retaining the customers of any acquired business due to changes in ownership, management, or otherwise. We may also experience difficulties integrating personnel of the acquired company into our business and culture. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. The anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown risks or liabilities.
Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:
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The market for e-commerce solutions is evolving and highly competitive. We expect competition to increase in the future from established competitors and new market entrants. With the introduction of new technologies and the entry of new companies into the market, we expect competition to persist and intensify in the future. This could harm our ability to increase sales, maintain or increase renewals, and maintain our prices. We face intense competition from other software companies that may offer related e-commerce platform software solutions and services. Our competitors include larger companies that have acquired e-commerce platform solution providers in recent years. We also compete with custom software internally developed within e-commerce businesses. In addition, we face competition from niche companies that offer point products that attempt to address certain of the problems that our CaaS platform solves.
Merger and acquisition activity in the technology industry could increase the likelihood that we compete with other large technology companies. Many of our existing competitors have, and our potential competitors could have, substantial competitive advantages such as greater name recognition, longer operating histories, larger sales and marketing budgets and resources, greater customer support resources, lower labor and development costs, larger and more mature intellectual property portfolios, and substantially greater financial, technical and other resources.
Some of our larger competitors also have substantially broader product lines and market focus and will therefore not be as susceptible to downturns in a particular market. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors, or continuing market consolidation. New start-up companies that innovate, and large companies that are making significant investments in research and development, may invent similar or superior products and technologies that compete with our CaaS platform. In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with agency partners, technology and application providers in complementary categories, or other parties. Furthermore, e-commerce on large marketplaces, such as Amazon, could increase as a percentage of all e-commerce activity, thereby reducing customer traffic to individual customer websites. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure, a loss of market share, or a smaller addressable share of the market. It could also result in a competitor with greater financial, technical, marketing, service, and other resources, all of which could harm our ability to compete.
We price our platform, which is provided as a revenue-sharing model, based on a combination of GMV and services. We expect that we may need to change our pricing from time to time. As new or existing competitors introduce products that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers. We also must determine the appropriate price to enable us to compete effectively internationally. Large enterprise customers may demand substantial price discounts as part of the negotiation of sales contracts. As a result, we may be required or choose to reduce our prices or otherwise change our pricing model, which could adversely affect our business, objective.operating results, and financial condition.
The software industry is subject to rapid technological change, evolving industry standards and practices, and changing customer needs and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. We may introduce significant changes to our CaaS platform or develop and introduce new and unproven services, including using technologies with which we have little or no prior development or operating experience. If we are unable to develop and sell new technology, features, and functionality for our CaaS platform that satisfy our customers and that keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. If new technologies emerge that deliver competitive solutions at lower prices, more efficiently, more conveniently, or more securely, it could adversely impact our ability to compete.
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Our CaaS platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies. We need to continuously modify and enhance our CaaS platform to adapt to changes and innovation in these technologies. If businesses widely adopt new e-commerce technologies, we would have to develop new functionality for our CaaS platform to work with those new technologies. This development effort may require significant engineering, marketing and sales resources, all of which would affect our business and operating results. Any failure of our CaaS platform to operate effectively with future technologies could reduce the demand for our CaaS platform. If we are unable to respond to these changes in a cost-effective manner, our CaaS platform may become less marketable and less competitive or obsolete, and our operating results may be negatively affected.
Our business has experienced strong growth and is complex. We expect this growth to continue and for our operations to become increasingly complex. To manage this growth, we continue to make substantial investments to improve our operational, financial, and management controls as well as our reporting systems and procedures. We may not be able to implement and scale improvements to our systems and processes in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or individually negotiated provisions as the number of transactions continues to grow. Our systems and processes may not prevent or detect all errors, omissions, or fraud. We may have difficulty managing improvements to our systems, processes and controls or in connection with third-party software. This could impair our ability to provide our CaaS platform to our customers, causing us to lose customers, limiting our CaaS platform to less significant updates, or increasing our technical support costs. If we are unable to manage this complexity, our business, operations, operating results and financial condition may suffer.
As our customer base continues to grow, we will need to expand our services and other personnel, and maintain and enhance our partnerships, to provide a high level of customer service. Extended stay-at-home, business closure, and other restrictive orders may impact our ability to identify, hire, and train new personnel. We also will need to manage our sales processes as our sales personnel and partner network continue to grow and become more complex, and as we continue to expand into new geographies and market segments. If we do not effectively manage this increasing complexity, the quality of our CaaS platform and customer service could suffer, and we may not be able to adequately address competitive challenges. These factors could impair our ability to attract and retain customers and expand our customers’ use of our CaaS platform.
The loss of one or more key employees or an inability to attract and retain highly skilled employees may adversely affect our business.
From time to time, our executive management team may change from the hiring or departure of executives, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period; therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or key employees could have a serious adverse effect on our business.
To execute our growth plan, we also must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for experienced software engineers and senior sales executives. If we are unable to attract such personnel in cities where we are located, we may need to hire in other locations, which may add to the complexity and costs of our business operations. We expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and retain highly skilled employees.
If we fail to attract new personnel or fail to retain and motivate our current personnel, it could adversely affect our business and future growth prospects.
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Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. Our ability to identify, hire, develop, motivate and retain qualified personnel will directly affect our ability to maintain and grow our business, and such efforts will require significant time, expense and attention. The inability to attract or retain qualified personnel or delays in hiring required personnel may seriously harm our business, financial condition and operating results. Our ability to continue to attract and retain highly skilled personnel, specifically employees with technical and engineering skills and employees with high levels of experience in designing and developing software and internet-related services, will be indicativecritical to our future success. The continued existence of a remote working environment may negatively impact our ability to hire, retain and motivate talent. Competition for highly skilled personnel in the geographic areas in which we operate can be intense due in part to the more limited pool of qualified personnel as compared to other places in the world. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or have divulged proprietary or other confidential information. While we have in the past and intend to continue to issue options or other equity awards as key components of our overall compensation and employee attraction and retention efforts, we are required under GAAP to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs which may increase the pressure to limit stock-based compensation.
We believe a portion of our success has been our corporate culture. We have invested substantial time and resources in building our team. As we grow and develop our infrastructure as a public company, our operations may become increasingly complex. We may find it difficult to maintain these important aspects of our corporate culture. If we are required to maintain work-from-home arrangements for a significant period of time, it may impact our ability to preserve our corporate culture. Any failure to preserve our culture could negatively affect our future performance of an investment in us.
E-commerce transacted over mobile devices continues to grow more rapidly than desktop transactions. We are dependent on the interoperability of our CaaS platform with third-party mobile devices and mobile operating systems as well as web browsers that are out of our control. Changes in such devices, systems, or web browsers that degrade the functionality of our CaaS platform or give preferential treatment to competitive services could adversely affect usage of our CaaS platform. Mobile e-commerce is a key element in our strategy and effective mobile functionality is integral to our long-term development and growth strategy. If our customers and their shoppers have difficulty accessing and using our CaaS platform on mobile devices, our business and operating results could be adversely affected.
Software such as ours often contains errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct, particularly when first introduced or when new versions or enhancements are released. Despite internal testing, our CaaS platform may contain serious errors or defects, security vulnerabilities or software bugs that we may be unable to successfully correct in a timely manner or at all, which could result in lost revenue, significant expenditures of capital, a delay or loss in market acceptance and damage to our reputation and brand, any of which could have an opportunity to voteadverse effect on our proposed initial business, combination,financial condition and results of operations. Furthermore, our CaaS platform is a multi-tenant cloud-based system that allow us to deploy new versions and enhancements to all of our customers simultaneously. To the extent we deploy new versions or enhancements that contain errors, defects, security vulnerabilities or software bugs to all of our customers of a single platform simultaneously, the consequences would be more severe than if such versions or enhancements were only deployed to a smaller number
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of our customers. Additionally, our hardware products may have defects in design, manufacture, or associated software. Such defects could exposes us to product liability claims, litigation or regulatory action.
Since our customers use our services for processes that are critical to their businesses, errors, defects, security vulnerabilities, service interruptions or software bugs in our CaaS platform could result in losses to our customers. Our customers may seek significant compensation from us for any losses they suffer or cease conducting business with us altogether. Further, a customer could share information about bad experiences on social media, which meanscould result in damage to our reputation and loss of future sales. There can be no assurance that provisions typically included in our agreements with our customers that attempt to limit our exposure to claims would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. Even if not successful, a claim brought against us by any of our customers would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.
We collect, transmit, use, disclose, store and otherwise process personal information and other confidential information of our initialcustomers’ shoppers or end-users. Third-party applications available on our CaaS platform and mobile applications may also process personal information, credit card information, and other confidential information. We generally cannot and do not proactively monitor the content that our customers’ shoppers or end-users upload or the information provided to us through the applications integrated with our e-commerce platform; therefore, we do not control the substance of the content on our servers, which may include personal information.
We use third-party service providers and subprocessors to help us deliver services to our customers’ shoppers or end-users. These service providers and subprocessors may also collect, transmit, use, disclose, store and process personal information, credit card information and/or other confidential information. Such information, and the information technology systems that store such information, may be the target of unauthorized access or subject to security breaches and other incidents, including as a result of third-party action, employee or contractor error, nation state malfeasance, malware, phishing, computer hackers, system error, software bugs or defects, process failure or otherwise. Many companies that provide these services have reported a significant increase in cyberattack activity since the beginning of the COVID-19 pandemic and generally as a result in the increase of remote working. Any of these could (a) result in the loss of information, litigation, indemnity obligations, damage to our reputation and other liability, or (b) have a material adverse effect on our business, combination even thoughfinancial condition, and results of operations.
Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Even if such a data breach did not arise out of our action or inaction, or if it were to affect one or more of our competitors or our customers’ competitors, rather than us, the resulting concern could negatively affect our customers, our customers’ shoppers or end-users, and our business. Concerns regarding data privacy and security may cause some of our customers or our customers’ shoppers or end-users to stop using our CaaS platform and fail to renew their subscriptions. In addition, failures to meet our customers’ or shoppers’ or end-users’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers, and grow our business.
Our failure to comply with legal, contractual, or standards-based requirements around the security of personal information or confidential information could lead to significant fines and penalties, as well as claims by our customers, their shoppers or end-users, or other stakeholders. These proceedings or violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability or injunctive relief, divert management’s time and attention, increase our costs of doing business, and materially adversely affect our reputation and the demand for our CaaS platform.
Further, our insurance coverage, including coverage for errors and omissions and cyber liability, may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more
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large claims. Our insurers could deny coverage as to any future claim and our cyber liability coverage may not adequately protect us against any losses, liabilities and costs that we may incur. The successful assertion of one or more large claims against us, or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition, and results of operations.
We are also subject to federal, state, and foreign laws regarding cybersecurity and the protection of data. Many jurisdictions have enacted laws requiring companies to notify individuals of security breaches involving certain types of personal information. Our agreements with certain customers and partners require us to notify them of certain security incidents. Some jurisdictions and customers require us to safeguard personal information or confidential information using specific measures. If we actually fail to observe, or perceived to have failed these requirements, our business, operating results, and financial condition could be adversely affected.
Cybersecurity threats, privacy breaches, insider threats or other incidents and malicious internet-based activity continue to increase, evolve in nature and become more sophisticated. Information security risks for companies such as ours have significantly increased in recent years in part because of the proliferation of new technologies, the use of internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, as well as nation-state and nation-state-supported actors.
Many companies that provide services similar to ours have also reported a significant increase in cyberattack activity since the beginning of the COVID-19 pandemic. In addition, in the past, some of our customers have been subject to distributed denial of service attacks (“DDoS”), a technique used by hackers to take an internet service offline by overloading its servers. Our CaaS platform may be subject to similar DDoS attacks in the future. In addition, because we leverage third-party partners and service providers, including cloud, software, data center and other critical technology vendors to deliver our solutions, we rely heavily on the data security practices and policies adopted by these third-party service providers. Our ability to monitor our third-party service providers’ data security is limited. A vulnerability in our third-party service providers’ software or systems, a failure of our third-party service providers’ safeguards, policies or procedures, or a breach of a third-party service provider’s software or systems could result in the compromise of the confidentiality, integrity or availability of our systems or the data housed in our third-party solutions. In addition, in the event our third-party service providers and subprocessors are subject to security breaches, privacy breaches or other cybersecurity threats, our business may be impacted. We cannot guarantee that such incidents may not occur and could adversely affect our operations. We and our third-party service providers and partners may be unable to anticipate or prevent techniques used in the future to obtain unauthorized access or to sabotage systems and cannot guarantee that applicable recovery systems, security protocols, network protection mechanisms and other procedures are or will be adequate to prevent network and service interruption, system failure or data loss. Since techniques used to obtain unauthorized access change frequently and the sophistication and size of DDoS and other cybersecurity attacks is increasing, we may be unable to implement adequate preventative measures or stop the attacks while they are occurring. Any actual or perceived DDoS attack or other security breach or incident could delay or interrupt service to our customers and their customers, could result in loss, compromise, corruption or disclosure of confidential information, intellectual property and sensitive and personal information or data we rely on to provide our solutions, may deter consumers from visiting our customers’ shops, damage our reputation and brand, expose us to a risk of litigation, indemnity obligations and damages for breach of contract, cause us to incur significant liability and financial loss and be subject to regulatory scrutiny, investigations, proceedings and penalties, and require us to expend significant capital and other resources to alleviate problems caused by any such DDoS attack or other security breach or incident and implement additional security measures.
Data security breaches could also expose us to liability under various laws and regulations across jurisdictions and increase the risk of litigation and governmental or regulatory investigation. Due to concerns about data security and integrity, a growing number of legislative and regulatory bodies have adopted breach notification and other requirements in the event that information subject to such laws is accessed by unauthorized persons. We may need to notify governmental authorities and affected individuals with respect to such incidents. For example,
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some jurisdictions, including the EU, UK, Brazil and all 50 states in the United States, have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal information, and our agreements with certain customers require us to notify them in the event of a security incident. Complying with such numerous and complex regulations in the event of a data security breach would be expensive and difficult, and failure to comply with these regulations could subject us to regulatory scrutiny and additional liability. Such mandatory disclosures could lead to negative publicity and may cause our customers to lose confidence in the effectiveness of our data security measures and data handling. Moreover, if a high-profile security breach occurs with respect to another SaaS provider, customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones. In addition, if our security measures fail to protect information adequately, we could be liable to our business partners, our customers, their end-consumers and consumers with whom we have a direct relationship. We could be subject to fines and higher transaction fees, we could face regulatory or other legal action, and our customers could end their relationships with us. The limitations of liability in our contracts may not be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim.
We currently do maintain cybersecurity insurance, and in the event we were to seek to obtain such insurance coverage, it may not be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims in connection with cybersecurity liabilities. Insurers could also deny coverage as to any future claim.
We are also subject to federal, state and foreign laws regarding cybersecurity and the protection of data. See the risk factor entitled “—Evolving global laws, regulations and standards, privacy regulations, cross-border data transfer restrictions, and data localization requirements may limit the use and adoption of our services, expose us to liability, or otherwise adversely affect our business.”
We currently serve the majority of our shareholders doCaaS platform functions from third-party data center hosting facilities operated by Amazon Web Services, located in Virginia. Our CaaS platform is deployed to multiple data centers within this geography, with additional geographies available for disaster recovery. Our operations depend, in part, on our third-party providers’ protection of these facilities from natural disasters, power or telecommunications failures, criminal acts, or similar events (such as the COVID-19 pandemic). If any third-party facility’s arrangement is terminated, or its service lapses, we could experience interruptions in our CaaS platform, latency, as well as delays and additional expenses in arranging new facilities and services.
A significant portion of our operating cost is from our third-party data hosting and transmission services. If the costs for such services increase due to vendor consolidation, regulation, contract renegotiation or otherwise, we may not support suchbe able to increase the fees for our e-commerce platform or professional services to cover the changes. As a combination.
Our customers often draw many shoppers over short periods of time, including from new product releases, holiday shopping seasons and flash sales. These events significantly increase the exercisetraffic on our servers and the volume of your righttransactions processed on our CaaS platform. Despite precautions taken at our data centers, spikes in usage volume, or a natural disaster, an act of terrorism, vandalism or sabotage, closure of a facility without adequate notice, or other unanticipated problems (such as the COVID-19 pandemic) could result in lengthy interruptions or performance degradation of our CaaS platform. Any damage to, redeem your shares fromor failure of, the systems of our third-party providers could result in interruptions to our CaaS platform. Even with current and planned disaster recovery arrangements, our business could be harmed. If we experience damage or interruption, our insurance policies may not adequately compensate us for cash.or protect us against any losses, liabilities and costs that we may incur. These factors in turn could further reduce our revenue, subject us to liability, cause us to issue credits, or cause customers to terminate their subscriptions, any of which could materially adversely affect our business.
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Some of our initialofferings include software or other intellectual property licensed from third parties. It may be necessary in the future to renew licenses relating to various aspects of these applications or to seek new licenses for existing or new applications. Necessary licenses may not be available on acceptable terms or under open-source licenses permitting redistribution in commercial offerings, if at all. Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms could result in delays in product releases until equivalent technology can be identified, licensed or developed, if at all, and integrated into our CaaS platform, which therefore may have a material adverse effect on our business, combination,results of operations and financial condition. In addition, third parties may allege that additional licenses are required for our initial shareholders have agreed, pursuantuse of their software or intellectual property. We may be unable to obtain such licenses on commercially reasonable terms, or at all. The inclusion in our offerings of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to differentiate our offerings from those of our competitors. To the letter agreement entered into withextent that our CaaS platform depends upon the successful operation of third-party software, any undetected errors, bugs, defects or failures in such third-party software could impair the functionality of our CaaS platform, delay new feature introductions, result in a failure of our CaaS platform, which could adversely affect our business, results of operations and financial condition.
A portion of our public shareholdersCaaS platform incorporates and is dependent on the use of open-source software, and we expect to redeem their sharesincorporate open-source software into other offerings or solutions in the future. Pursuant to such open-source licenses, we may be subject to certain conditions, including requirements that we offer our proprietary software that incorporates the open-source software for cash mayno cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that uses or distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our financial condition unattractivesolutions that contained or are dependent upon the open source software and required to potential business combination targets,comply with the foregoing conditions, which may make it difficultcould disrupt the distribution and sale of some of our solutions. Litigation could be costly for us to enterdefend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our platform. The terms of many open-source licenses to which we are subject have not been interpreted by U.S. or foreign courts. As there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, the potential impact of these terms on our business is unknown and may result in unanticipated obligations regarding our technologies. Any requirement to disclose our proprietary source code termination of open-source license rights or payments of damages for breach of contract could be harmful to our business, and could provide an advantage to our competitors or other entrants to the market, allow them to create similar products with lower development effort and time, and ultimately result in a loss of sales for us.
We rely on computer hardware, purchased or leased, and software licensed from and services rendered by third parties in order to run our business, which we have incorporated into our products. Third-party hardware, software and services may not continue to be available on commercially reasonable terms, or at all. Some of our agreements with our licensors may be terminated by them for convenience, or otherwise provide for a limited term. Any loss of the right to use or any failures of third-party hardware, software or services could result in delays in our ability to run our business combinationuntil equivalent hardware, software or services are developed by us or, if available, identified, obtained and integrated, which could be costly and time-consuming and may not result in an equivalent solution, any of which could cause an adverse effect on our business and operating results. Further, customers could assert claims against us in connection with service disruptions or cease conducting business with us altogether. Even
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if not successful, a target.claim brought against us by any of our customers would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.
We anticipate that the growth of our business will continue to depend on third-party relationships, including strategic partnerships and relationships with our service providers and suppliers, consultants, app developers, theme designers, referral sources, resellers, payments processors, installation partners and other partners. In addition to growing our third-party partner ecosystem, we have entered into agreements with, and intend to pursue additional relationships with, other third parties, such as shipping partners and technology and content providers. Identifying, negotiating and documenting relationships with third parties requires significant time and resources as does integrating third-party technology and content. Some of the third parties that sell our services have direct contractual relationships with the customers, and in these circumstances, we risk the loss of such customers if those third parties fail to perform their contractual obligations, including in the event of any such third party’s business failure. Our agreements with providers of cloud hosting, technology, content and consulting services are typically non-exclusive and do not prohibit such service providers from working with our competitors or from offering competing services. In particular, we have limited providers of cloud hosting services. These third-party providers may choose to terminate their relationship with us or to make material changes to their businesses, products or services in a manner that is adverse to us.
The success of our CaaS platform depends, in part, on our ability to integrate third-party applications, themes and other offerings into our third-party ecosystem. Third-party developers may also change the features of their offering of applications and themes or alter the terms governing the use of their offerings in a manner that is adverse to us. If third-party applications and themes change such that we do not or cannot maintain the compatibility of our CaaS platform with these applications and themes, or if we fail to provide third-party applications and themes that our customers desire to add to their businesses, demand for our CaaS platform could decline. If we are unable to maintain technical interoperation, our customers may not be able to effectively integrate our CaaS platform with other systems and services they use. We may also be unable to maintain our relationships with certain third-party vendors if we are unable to integrate our CaaS platform with their offerings. In addition, third-party developers may refuse to partner with us or limit or restrict our access to their offerings.
Partners may also impose additional restrictions on the ability of third parties like us and our public shareholderscustomers to exercise redemption rightsaccess or use data from their consumers. Such changes could functionally limit or terminate our ability to use these third-party offerings with respectour CaaS platform, which could negatively impact our solution offerings and harm our business. If we fail to integrate our CaaS platform with new third-party offerings that our customers need for their businesses, or to adapt to the data transfer requirements of such third-party offerings, we may not be able to offer the functionality that our customers and their clients expect, which would negatively impact our offerings and, as a result, harm our business.
Further, our competitors may effectively incentivize third-party developers to favor our competitors’ products or services, which could diminish our prospects for collaborations with third-parties and reduce subscriptions to our CaaS platform. In addition, providers of third-party offerings may not perform as expected under our agreements or under their agreements with our customers, and we or our customers may in the future have disagreements or disputes with such providers. If any such disagreements or disputes cause us to lose access to products or services from a particular supplier, or lead us to experience a significant disruption in the supply of products or services from a current supplier, especially a single-source supplier, they could have an adverse effect on our business and operating results.
The software, computer hardware and robotics industries are characterized by the existence of a large number of our shares could increasepatents and frequent claims and related litigation regarding patents and other intellectual property rights. Third parties have in the probabilitypast asserted, and may in the future assert, that our initialplatform, hardware, solutions, technology, methods or practices infringe, misappropriate or otherwise violate their intellectual property or other proprietary rights. Such claims may be made by our competitors seeking to obtain a competitive advantage or by other parties. Additionally, non-practicing entities purchasing intellectual property assets for the purpose of making
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claims of infringement may attempt to extract settlements from us. The risk of claims may increase as the number of solutions that we offer and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility and market exposure, we face a higher risk of being the subject of intellectual property infringement claims.
Any such claims, regardless of merit, that result in litigation could result in substantial expenses, divert the attention of management, cause significant delays in introducing new or enhanced services or technology, materially disrupt the conduct of our business and have a material and adverse effect on our brand, business, financial condition and results of operations. Although we do not believe that our proprietary technology, processes and methods have been patented by any third party, it is possible that patents have been issued to third parties that cover all or a portion of our business. As a consequence of any patent or other intellectual property claims, we could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling or marketing some or all of our solutions, re-brand our solutions, or to end our relationship with certain customers or partners. We may also be obligated to indemnify our customers or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. If it appears necessary, we may seek to secure license rights to intellectual property that we are alleged to infringe at a significant cost, potentially even if we believe such claims to be without merit. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Litigation is inherently uncertain and can cause us to expend significant money, time and attention to it, even if we are ultimately successful. Any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses for alternative technologies from third parties, prevent us from offering all or a portion of our solutions, end our relationship with certain customers or partners, and otherwise negatively affect our business and operating results.
We may also become subject to claims, lawsuits (including class action or individual lawsuits), government or regulatory investigations, inquiries or audits, and other proceedings. The number and significance of legal disputes have increased as we have grown larger, as our business has expanded in scope and geographic reach, and as our platform and solutions have increased in complexity, and we expect we will continue to face additional legal disputes. Such investigations and legal proceedings may have a material and adverse impact on us due to their costs, diversion of our resources, and other factors.
Our success is dependent, in part, upon protecting our proprietary technology. We rely on our confidentiality, non-compete, non-solicitation and nondisclosure agreements and a combination of trade secret laws, contractual provisions, trademarks, service marks and copyrights in an effort to establish and protect our proprietary rights. We make business decisions about when to seek intellectual property protection for a particular technology and when to rely upon trade secret protection. However, the approach we select may ultimately prove to be inadequate.
Intellectual property protections issued to us in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Any of our trademarks or other intellectual property rights may be challenged or circumvented by others or invalidated through administrative process or litigation. Others may independently develop similar products, duplicate any of our solutions or design around our patents, or adopt similar or identical brands for competing platforms. Legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our CaaS platform and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions restricting unauthorized use, copying, transfer, and disclosure of our intellectual property may be unenforceable under the laws of jurisdictions outside the United States.
To the extent we expand our international activities, our exposure to unauthorized copying and use of our CaaS platform and proprietary information may increase. Moreover, effective trademark, copyright, patent, and trade secret protection may not be available or commercially feasible in every country in which we conduct our
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business. Further, intellectual property law, including statutory and case law, particularly in the United States, is constantly developing. Changes in the law could make it harder for us to enforce our rights.
We enter into confidentiality and invention assignment agreements with our employees, consultants and third parties to protect our proprietary technologies and competitive advantage, all of which offer only limited protection. We enter into confidentiality agreements with strategic and business partners. No assurance can be given that these agreements will be effective in securing ownership of our intellectual property or controlling access to our proprietary information and trade secrets. The confidentiality agreements on which we rely to protect certain technologies may be breached and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets or proprietary technology. As such, these agreements may not be effective in controlling access to and distribution of our proprietary information since they do not prevent our competitors or partners from independently developing technologies that are equivalent or superior to our CaaS platform.
We may be required to spend significant resources to monitor, protect, and enforce our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management. Such litigation could result in the impairment or loss of portions of our intellectual property. Enforcement of our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly. An adverse determination could risk the issuance or cancellation of pending patent and trademark filings. Because of the substantial discovery required in connection with intellectual property litigation, our confidential or sensitive information could be compromised by disclosure in litigation. Litigation could result in public disclosure of results of hearings, motions, or other interim developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Common Stock.
In addition, our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our CaaS platform, impair the functionality of our CaaS platform, delay introductions of new functionality to our CaaS platform, result in the substitution of inferior or more costly technologies into our CaaS platform, or injure our reputation. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Policing unauthorized use or misappropriate of our technologies, trade secrets, and intellectual property may be difficult, expensive, and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop services with the same or similar functionality as our platform. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, operating results, and financial condition could be adversely affected.
We generally enter into confidentiality and invention assignment agreements with our employees, consultants and third parties upon their commencement of a relationship with us. However, we may not enter into such agreements with all employees, consultants and third parties who have contributed to the development of our intellectual property. In addition, these agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may not exist if unauthorized use or disclosure were to occur. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition and results of operations. In particular, a failure to protect our proprietary rights may allow competitors to copy our technology, which could adversely affect our pricing and market share. Further, other parties may independently develop or acquire substantially equivalent know-how and technology.
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In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be unsuccessfuldifficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed or acquired by others in a manner that could prevent legal recourse by us. We also have agreements with our employees, consultants and third parties that obligate them to assign their inventions to us, however these agreements may not be self-executing, not all employees or consultants may enter into such agreements, or employees or consultants may breach or violate the terms of these agreements, and we may not have adequate remedies for any such breach or violation. If any of our intellectual property or confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects.
Federal, state, or foreign governmental bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting the use of the internet as a commercial medium. These laws and regulations could impact taxation, internet neutrality, tariffs, content, copyrights, distribution, electronic contracts and other communications, consumer protection, and the characteristics and quality of services. Legislators and regulators may make legal and regulatory changes, or apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These laws and regulations and resulting increased costs could materially harm our business, results of operations, and financial condition.
Our products and services rely heavily on the collection and use of information, including personal information. Because we store, use, and otherwise process data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy and data protection. Both in the United States and abroad, these laws and regulations governing data privacy are constantly evolving. In the United States, in addition to certain regulations at the federal level, each state has its own statutory approach to privacy regulation, and recently states such as California have been very active in pursuing new regulations that are typically more restrictive than other jurisdictions. The application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Continually implementing up-to-date data security tools and procedures and maintaining privacy standards that comply with ever-changing privacy regulations in multiple jurisdictions is challenging. If we are found or perceived to have breached any privacy or data protection laws or regulations in any such market, we may be subject to enforcement actions that require us to change our business practices in a manner which may negatively impact our revenue, as well as expose ourselves to litigation, fines, civil and/or criminal penalties and adverse publicity that could cause our business partners and end customers to lose trust in us, negatively impacting our reputation and business in a manner that harms our financial position.
In recent years, there has been an increase in attention to and regulation of data protection and data privacy across the globe, including the Federal Trade Commission (“FTC”)’s increasingly active approach to enforcing privacy and data protection in the United States, as well as the enactment of the European Union’s General Data Protection Regulation (“EU GDPR”), the United Kingdom General Data Protection Regulation and Data Protection Act 2018 (collectively, the "UK GDPR") (together the EU GDPR and UK GDPR shall be referred to as the "GDPR"), and the California Consumer Privacy Act, as amended by the California Privacy Rights Act (“CCPA”).
In the United States, the CCPA, contains detailed requirements regarding the collection and processing of personal information, restrictions on the use and storage of such information, and effectiveness of consent. Further,
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the CCPA requires covered companies to provide disclosures to California residents, provide such residents ways to opt-out of certain sales or shares of personal information, and allow for a private right of action for certain data breaches (which is expected to increase data breach litigation). Such laws could restrict our customers’ ability to run their businesses; for example, by limiting their ability to effectively market to interested shoppers. This could reduce our revenue and the general demand for our services. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply. Like California, Virginia signed into law the Virginia Consumer Data Protection Act, which also contains detailed requirements, on covered companies, relating to the access to, deletion of, and disclosures of personal data collected by covered businesses about Virginia residents. Further, Connecticut, Utah, and Colorado have also enacted new privacy regulations set to come into effect in 2023. Similar laws have been proposed in other states, at the federal level, and in other countries, reflecting a global trend toward more stringent privacy. These laws and regulations could restrict our ability to store and process personal data (in particular, our ability to use certain data for purposes such as risk or fraud avoidance, marketing or advertising), to control our costs by using certain vendors or service providers, and to offer certain services in certain jurisdictions. Such laws and regulations could also restrict our customers' ability to run their businesses, which in turn, impact our business operations.
Such laws and regulations are often inconsistent and may be subject to amendment or re-interpretation, which may cause us to incur significant costs and expend significant effort to ensure compliance. Use of data transfer mechanisms now involves additional compliance steps and in the event any court blocks personal data transfers to or from a particular jurisdiction on the basis that certain or all such transfer mechanisms are not legally adequate, this could give rise to operational interruption in the performance of services for customers and internal processing of employee information, greater costs to implement alternative data transfer mechanisms that are still permitted, regulatory liabilities, or reputational harm. Our response to these requirements globally may not meet the expectations of individual customers, their shoppers, or other stakeholders, which could reduce the demand for our services. Some customers or other service providers may respond to these evolving laws and regulations by asking us to make certain privacy or data-related contractual commitments that we are unable or unwilling to make. This could lead to the loss of current or prospective customers or other business relationships.
In Europe and the UK, we are subject to the EU GDPR and UK GDPR respectively which impose comprehensive data privacy compliance obligations in relation to our collection, processing, sharing, disclosure, transfer and other use of personal information, including a principal of accountability and the obligation to demonstrate compliance through policies, procedures, training and audit. The GDPR also regulates cross-border transfers of personal information out of the European Economic Area (“EEA”) and the UK. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data to the United States. On July 16, 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-US Privacy Shield Framework, or Privacy Shield, under which personal information could be transferred from the EEA (and the UK) to relevant self-certified U.S. entities. The CJEU further noted that reliance on the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield) alone may not necessarily be sufficient in all circumstances and that you wouldtransfers must be assessed on a case-by-case basis. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020 have taken a restrictive approach to international data transfers. We currently rely on the standard contractual clauses to transfer personal information outside the EEA and the UK, including to the United States. As the enforcement landscape further develops, and supervisory authorities issue further guidance on international data transfers, we could suffer additional costs, complaints and/or regulatory investigations or fines; we may have to waitstop using certain tools and vendors and make other operational changes; we may have to implement revised standard contractual clauses for liquidationexisting arrangements within required time frames; and/or it could otherwise affect the manner in which we provide our services, and could adversely affect our business, operations and financial condition. More broadly, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with such laws even in jurisdictions where we have no local entity, employees or infrastructure. Some of these laws include strict localization provisions that require certain data to be stored within a particular region or jurisdiction. We rely on a globally distributed infrastructure in order to redeem your shares.
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Failure to comply with the proceduresGDPR could result in penalties for tendering its shares,noncompliance. Since we are subject to the supervision of relevant data protection authorities under both the EU GDPR and the UK GDPR, we could be fined under each of those regimes independently in respect of the same breach. Penalties for certain breaches are up to the greater of €20 million (£17.5 million) or 4% of global annual turnover. In addition to fines, a breach of the GDPR may result in regulatory investigations, reputational damage, orders to cease or change our data processing activities, enforcement notices, assessment notices (for a compulsory audit) and/or civil claims (including class actions).
Our failure to comply with these and additional laws or regulations could expose us to significant fines and penalties imposed by regulators, as well as legal claims by our customers, or their shoppers, or other relevant stakeholders. Similarly, many of these laws require us to maintain an online privacy policy and terms of service that disclose our practices regarding the collection, processing, and disclosure of personal information. We make public statements about our use and disclosure of personal information through our data privacy policies that are posted on our website. If the publication of our privacy policies and other statements that provide promises and assurances about data privacy and security or otherwise describe our data processing contain any information that a court or regulator finds to be deceptive, unfair, inaccurate, inadequate or misrepresentative of our actual practices, we could also be exposed to legal or regulatory liability. Any such shares may not be redeemed.
We are also subject to liquidate your investment, you may be forcedevolving EU and UK privacy laws on cookies, tracking technologies and e-marketing. Recent European court and regulator decisions are driving increased attention to sell your public shares or warrants, potentially at a loss.
Our CaaS platform is subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control. We incorporate encryption technology into our CaaS platform. These encryption products and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. embargoes or sanctions. The current administration has been critical of existing trade agreements and may impose more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. While we take precautions to prevent our CaaS platform from being exported in violation of these laws, including obtaining authorizations for our CaaS platform, performing geolocation IP blocking and screenings against U.S. and other lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.
If our partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences, including government investigations and penalties. We presently incorporate export control compliance requirements into our strategic partner agreements; however, no assurance can be given that our partners will comply with such requirements.
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Various countries regulate the import and export of certain encryption and other technology, including import and export licensing requirements. Some countries have enacted laws that could limit our ability to distribute our CaaS platform or could limit our customers’ ability to implement our CaaS platform in those countries. Changes in our CaaS platform or future changes in export and import regulations may create delays in the introduction of our CaaS platform in international markets, prevent our customers with international operations from launching our CaaS platform globally or, in some cases, prevent the export or import of our CaaS platform to certain countries, governments, or persons altogether. Various governmental agencies have proposed additional regulation of encryption technology, including the escrow and government recovery of private encryption keys. Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could limit our ability to export or sell our CaaS platform to existing or potential customers with international operations. Any decreased use of our CaaS platform or limitation on our ability to export or sell our CaaS platform would adversely affect our business, operating results, and prospects.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the UK Bribery Act of 2010, the UK Proceeds of Crime Act 2002, and other anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years. These laws are interpreted broadly to prohibit companies and their employees and third-party intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. As we increase our international sales and business and sales to the public sector, we may engage with partners and third-party intermediaries to market our services and to obtain necessary permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.
While we have policies and procedures to address compliance with such laws, our employees and agents could violate our policies and applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.
Noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be materially harmed. Responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financial condition.
We operate in an industry that is prone to cyber-attacks. Failure to prevent or mitigate security breaches and improper access to or disclosure of our data, customer data, or the data of their consumers, could result in the loss or misuse of such data, which could harm our business and reputation. The security measures we have integrated into our internal networks and platforms, which are designed to prevent or minimize security breaches, may not function as expected or may not be sufficient to protect our internal networks and platforms against certain attacks. In addition, techniques used to sabotage or to obtain unauthorized access to networks in which data is stored or through which data is transmitted change frequently. As a result, we may be unable to anticipate these techniques or implement adequate preventative measures to prevent an electronic intrusion into our networks. While we have
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established a cyber-attack remediation plan to enable us to assess and respond to such attacks, there can be no assurance that the measures set forth under such plan will be adequate in all circumstances nor that they will be effective in mitigating, or allowing us to recover from, the effects of such attacks. In addition, we have insurance coverage, but this coverage may be insufficient to compensate us for all liabilities that we may incur.
Our customers’ storage and use of data concerning their stores and restaurants and their consumers is essential to their use of our CaaS platform, which stores, transmits and processes our customers’ proprietary information and personal information relating to them and their clients. If a security breach were to occur, as a result of third-party action, employee error, breakdown of our internal security processes and procedures, malfeasance or otherwise, and the confidentiality, integrity or availability of our customers’ data was disrupted, we could incur significant liability to our customers and to individuals whose information was being stored by our customers, and our CaaS platform may be perceived as less desirable, which could negatively affect our business and damage our reputation.
Our CaaS platform and third-party applications available on, or that interface with, our CaaS platform may be subject to DDoS, a technique used by hackers to take an internet service offline by overloading its servers, and we cannot guarantee that applicable recovery systems, security protocols, network protection mechanisms and other procedures are or will be adequate to prevent network and service interruption, system failure or data loss. In addition, computer malware, viruses, and hacking and phishing attacks by third parties are prevalent in our industry. We have experienced such attacks in the past and may experience such attacks in the future. As a result of our increased visibility, we believe that we are increasingly a target for such breaches and attacks.
Moreover, our CaaS platform and third-party applications available on, or that interface with, our CaaS platform could be breached if vulnerabilities in our CaaS platform or third-party applications are exploited by unauthorized third parties or due to employee error, breakdown of our internal security processes and procedures, malfeasance, or otherwise. Further, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords or other information or otherwise compromise the security of our internal networks, electronic systems and/or physical facilities in order to gain access to our data or our customers’ data. Since techniques used to obtain unauthorized access change frequently and the size and severity of DDoS attacks and security breaches are increasing, we may be unable to implement adequate preventative measures or stop DDoS attacks or security breaches while they are occurring. In addition to our own platforms and applications, some of the third parties we work with may receive information provided by us, by our customers, or by our customers’ clients through web or mobile applications integrated with US. If these third parties fail to adhere to adequate data security practices, or in the event of a breach of their networks, our own and our customers’ data may be improperly accessed, used or disclosed.
Any actual or perceived DDoS attack or security breach could damage our reputation and brand, expose us to a risk of litigation and possible liability and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the DDoS attack or security breach. Some jurisdictions have enacted laws requiring companies to notify individuals and authorities of data security breaches involving certain types of personal or other data and our agreements with certain customers and partners require us to notify them in the event of a security incident. Similarly, if our suppliers experience data breaches and do not notify us or honor their notification obligations to authorities or users, we could be held liable for the breach. We may not be in a position to assess whether a data breach at one of our suppliers would trigger an obligation or liability on our part. Such mandatory disclosures are costly, could lead to negative publicity, and may cause our customers to lose confidence in the effectiveness of our data security measures. Moreover, if a high-profile security breach occurs with respect to another SaaS provider, customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain revenue from existing customers or attract new customers. Similarly, if a high-profile security breach occurs with respect to a retailer, commerce as a service or e-commerce platform, customers may lose trust in e-commerce more generally, which could adversely impact our customers’ businesses. Any of these events could harm our reputation or subject us to significant liability, and materially and adversely affect our business and financial results.
Our customer subscription and partner and services contracts are primarily denominated in U.S. dollars, and therefore substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the
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U.S. dollar could increase the real cost of our CaaS platform to our customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.
We generally renew our insurance policies annually. If the cost of coverage becomes too high or if we believe certain coverage becomes inapplicable, we may need to reduce our policy limits, increase retention amounts or agree to certain exclusions from our coverage to reduce the premiums to an acceptable amount or to otherwise reduce coverage for certain occurrences. On the other hand, we may determine that we either do not have certain coverage that would be prudent for our business and the risks associated with our business or that our current coverages are too low to adequately cover such risks. In either event, we may incur additional or higher premiums for such coverage than in prior years.
Among other factors, national security concerns, catastrophic events, pandemics such as the COVID-19 pandemic, or any changes in any applicable statutory requirement binding insurance carriers to offer certain types of coverage could also adversely affect available insurance coverage and result in, among other things, increased premiums on available coverage (which may cause us to elect to reduce our policy limits or not renew our coverage) and additional exclusions from coverage. As cyber incidents and threats continue to evolve, we may be required to expend additional, perhaps significant, resources to continue to update, modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Although we maintain and monitor our information technology systems and we have insurance coverage for protecting against cyber security risks, such systems and insurance coverage may not be sufficient to protect against or cover all the losses we may experience as a result of any cyber-attacks.
We may suffer damage due to a casualty loss (such as fire, natural disasters, pandemics and acts of war or terrorism) or other losses, such as those related to labor, professional liability or certain actions or inactions by our management, directors, employees or others, that could severely disrupt its business or subject us to claims by third parties who are injured or harmed. Although we maintain insurance that we believe to be adequate, such insurance may be inadequate or unavailable to cover all the risks to which our business and assets may be exposed, including risks related to certain litigation. Should an uninsured loss (including a loss that is less than the applicable deductible or that is not covered by insurance) or loss in excess of insured limits occur, it could have a significant adverse impact on our business, results of operations or financial condition.
As of December 31, 2022, we had approximately $11.2 million of U.S. federal and $6.2 million of state net operating losses, respectively. Certain of our U.S. federal and state net operating loss carryforwards may be carried forward indefinitely, while other of these loss carryforwards are subject to expiration (beginning in 2032). It is possible that we will not generate taxable income in time to use these net operating loss carryforwards before their expiration (or that we will not generate taxable income at all). Under legislative changes made in December 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in March 2020, U.S. federal net operating loss carryforwards generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such net operating loss carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to these federal tax laws.
In addition, the federal and state net operating loss carryforwards and certain tax credits may be subject to significant limitations under Section 382 and Section 383 of the Code, respectively, and similar provisions of state law, including limitations that may result from the consummation of the Business Combination. Under those sections of the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income or tax may be limited. In general, an “ownership change” will occur if there is a
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cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We have not yet determined whether the Business Combination will give rise to an “ownership change” for purposes of Section 382 and Section 383 of the Code. Furthermore, we may have experienced ownership changes in the past and may experience ownership changes in the future as a result of subsequent shifts in our stock ownership (some of which shifts are outside our control). As a result, our ability to use our pre-change federal NOLs and other tax attributes to offset future taxable income and taxes could be subject to limitations. For these reasons, we may be unable to use a material portion of our NOLs and other tax attributes, which could adversely affect our future net income and cash flows.
Nogin is a U.S. corporation and thus is subject to U.S. corporate income tax on its worldwide income. Further, since our operations and customers are located throughout the United States, we are subject to various U.S. state and local taxes. U.S. federal, state, local and non-U.S. tax laws, policies, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us and may have an adverse effect on our business and future profitability. For example, several tax proposals have been set forth that would, if enacted, make significant changes to U.S. tax laws. Such proposals include an increase in the U.S. income tax rate applicable to corporations (such as Nogin). Congress may consider, and could include, some or all of these proposals in connection with tax reform that may be undertaken (including with retroactive effect). We are unable to predict whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals and other similar changes in U.S. federal income tax laws could adversely affect our business and future profitability.
State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added, and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our e-commerce platform in various jurisdictions is unclear. These jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, jurisdictions in which we have not historically collected or accrued sales, use, value added, or other taxes could assert our liability for such taxes. Our liability for these taxes and associated penalties could exceed our original estimates. This could result in substantial tax liabilities and related penalties for past sales. It could also discourage customers from using our SaaS platform or otherwise harm our business and operating results.
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Pursuant to the Sarbanes-Oxley Act and the rules and regulations promulgated by the SEC, we doare required to furnish in our annual report our management’s report regarding the effectiveness of our internal control over financial reporting. The report will include, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not conduct redemptionsour internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. While we believe our internal control over financial reporting is currently effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions. Establishing, testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of our management and our finance staff, may require additional staffing and infrastructure investments and would increase our costs of doing business.
In addition, under the federal securities laws, our auditors may in the future be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if, in the future, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. In addition, we could become subject to investigations by the applicable stock exchange, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.
From time to time in the future, we may issue additional shares of our Common Stock, warrants or other securities convertible into Common Stock pursuant to a variety of transactions, including acquisitions. Additional shares of our Common Stock may also be issued upon exercise of outstanding stock options and warrants. The issuance by us of additional shares of our Common Stock, warrants or other securities convertible into our Common Stock would dilute your ownership interest in us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our Common Stock and warrants. Subject to the satisfaction of vesting conditions and the expiration of our lock-up, shares issuable upon exercise of options will be available for resale immediately in the public market without restriction.
In the future, we expect to obtain financing or to further increase our capital resources by issuing additional shares of our capital stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. Issuing additional shares of our capital stock, other equity securities, or securities convertible into equity may dilute the economic and voting rights of our existing stockholders, reduce the market price of our Common Stock and warrants, or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Common Stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing
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or nature of our future offerings. As a result, holders of our Common Stock and warrants bear the risk that our future offerings may reduce the market price of our Common Stock and warrants and dilute their percentage ownership.
The sale of substantial amounts of shares of our Common Stock or warrants in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Common Stock and warrants. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In addition, the shares of our Common Stock reserved for future issuance under the Nogin, Inc. 2022 Incentive Award Plan (the “2022 Incentive Plan”) will become eligible for sale in the public market once those shares are issued, subject to provisions relating to various vesting agreements, lock-up provisions and, in some cases, limitations on volume and manner of sale applicable to affiliates under Rule 144, as applicable. The number of shares reserved for future issuance under the 2022 Incentive Plan is equal to (i) 5,102,948 shares plus (ii) an annual increase for ten years on the first day of each calendar year beginning on January 1, 2023, equal to the lesser of (A) 15% of the aggregate number of shares of our Common Stock outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares as is determined by our board of directors. The maximum number of shares of Common Stock that may be issued pursuant to the tender offerexercise of incentive stock options to purchase shares of our Common Stock (“ISOs”) granted under the 2022 Incentive Plan is equal to 56,132,428 shares. We expect to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Common Stock or securities convertible into or exchangeable for shares of our Common Stock issued pursuant to our equity incentive plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.
As a public company, we are subject to laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and the requirements of Nasdaq, which we were not required to comply as a private company. As a newly public company, complying with these statutes, regulations and requirements occupies a significant amount of time of our board of directors and management and significantly increases our costs and expenses. For example, we have had to institute a more comprehensive compliance function, comply with rules promulgated by Nasdaq, prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws, establish new internal policies, such as those relating to insider trading. We have also had to retain and rely on outside counsel and accountants to a greater degree in these activities. In addition, being subject to these rules and if youregulations has made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a “group” of shareholders are deemed to hold in excess of 15% of our Class A ordinary shares, you will lose the ability to redeem all such shares in excess of 15% of our Class A ordinary shares.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such,an emerging growth company, we may follow reduced disclosure requirements and do not have to make all of the disclosures that public companies that are not emerging growth companies do. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of the initial public offering of SWAG; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are eligibledeemed to take advantagebe a large accelerated filer under the rules of certainthe SEC, which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th.
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For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from various reportingcertain disclosure requirements that are applicable to other public companies that are not “emergingemerging growth companies” including, but not limited to, companies. These exemptions include:
In addition, Section 107 of the JOBS Act also provides that an “emergingemerging growth company”company can take advantage of thean extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words,This allows an “emergingemerging growth company” cancompany to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intendhave elected to use the extended transition period for complying with new or revised accounting standards; and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
We may choose to take advantage of the benefits of this extended transition period.
Our certificate of incorporation, our bylaws and Delaware law each contain provisions that could have the caseeffect of rendering more difficult, delaying, or preventing an initial business combination funded with assets other than the trust account assets, our proxy materials or tender offer documents disclosing the initial business combination would disclose the terms of the financing and, only if required by law, we would seek stockholder approval of such financing. There are no prohibitions on our ability to raise funds privately or through loans in connection with our initial business combination. At this time, we are not a party to any arrangement or understanding with any third party with respect to raising any additional funds through the sale of securities or otherwise.
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These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the DGCL, which prevents interested stockholders, such as certain stockholders holding more than 15% of our initialoutstanding Common Stock, from engaging in certain business combination (including with the assistance of financial advisors), we will obtain an opinion from an independent investment banking firm or another independent entity that commonly renders valuation opinions with respectcombinations unless (i) prior to the satisfaction oftime such criteria. While we consider it unlikely that ourstockholder became an interested stockholder, the board of directors will not be able to makeapproved the transaction that resulted in such stockholder becoming an independent determinationinterested stockholder, (ii) upon consummation of the fair market valuetransaction that resulted in such stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our initialCommon Stock, or (iii) following board approval, such business combination it may be unable to do so if it is less familiar or experienced withreceives the business of a particular target or if there is a significant amount of uncertainty as to the value of a target’s assets or prospects. Additionally, pursuant to Nasdaq rules, any initial business combination must be approved by a majority of our independent directors.
Any costs incurred with respect to the identification and evaluation of, and negotiation with, a prospective target business with which our initial business combination is not ultimately completed will result in our incurring losses and will reduce the funds we can use to complete another business combination.
Stockholder Approval is Required | ||
Our certificate of incorporation and our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the (a) Court of Chancery (the “Chancery Court”) of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) shall, to the fullest extent permitted by applicable law, be the sole and exclusive forum for: (i) any derivative action, suit or proceeding brought on our behalf; (ii) any action, suit or proceeding asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or substantial stockholders (as defined by Nasdaq rules) hasto us or to our stockholders; (iii) any action, suit or proceeding asserting a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the target business or assets to be acquired or otherwise and the present or potential issuance of common stock could result in an increase in outstanding common shares or voting power of 5% or more; or
Additionally, Section 22 of the two methods listedSecurities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, is contained in provisions of our amended and restated certificate of incorporation and applies whether or not we maintain our registrationbylaws provide that the federal district courts of the United States shall have jurisdiction over any action arising under the Exchange Act or our listing on the Nasdaq. Such provisions may be amended if approved by holders of 65% of our common stock entitled to vote thereon.
The pro rata portion of our trust account distributed to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination before February 2, 2023 (or such later date as approved by the vote of a majority of the votes cast by holders of Class A common stock and Class B common stock, voting as a single class) may be considered a liquidating distribution under Delaware law. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a60-daynotice period during which any third-party claims can be brought against the corporation, a90-dayperiod during which the corporation may reject any claims brought, and an additional150-daywaiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
Connection with Our Initial Business Combination | Purchases of Public Shares by us or our Affiliates | Fail to Complete an Initial Business Combination | ||||
The market price of our Common Stock and Warrants is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your shares at an attractive price due diligence onto a target business with which we combine, we cannot assure you thatnumber of factors such as those listed in this diligence will identify all material issues that may be present within a particular target business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outsidesection and the following:
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These broad market and industry factors may materially reduce the monies held in the trust account, our management will consider whether competitive alternatives are reasonably available to us, and will only enter into an agreement with such third party if our management believes that such third party’s engagement would be in our best interests under the circumstances. Marcum LLP, our independent registered public accounting firm, and the underwritersmarket price of our initial public offering, will not execute agreements with us waiving such claims to the monies held in the trust account.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of management from our business regardless of the outcome of such claims were successfully made againstlitigation.
We are reduced below the lesser of (i) $10.15 per share and (ii) the actual amount per share held in the trust account as of the date of the liquidation of the trust account if less than $10.15 per share due to reductions in the value of the trust assets, in each case net of the interest, which may be withdrawn to pay taxes, and our sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against our sponsor to enforce its indemnification obligations.
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to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination before February 2, 2023 (or such later date as approved by the vote of a majority of the votes cast by holders of Class A common stock and Class B common stock, votinginternal control over financial reporting. Reporting obligations as a single class) may be consideredpublic company are likely to place a liquidating distribution under Delaware law. If a corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a60-daynotice period during which any third-party claims can be brought against the corporation, a90-dayperiod during which the corporation may reject any claims brought, and an additional150-daywaiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it isconsiderable strain on our intention to redeem our public shares as soon as reasonably possible following the February 2, 2023 in the event we do not complete our initial business combination and, therefore, we do not intend to comply with the foregoing procedures.
In addition, as a public company, we are required to document and costs of completing an initial business combination.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of the Sarbanes-Oxley Act particularly burdensomebusiness, and therefore, do not anticipate declaring or paying any cash dividends on us as comparedCommon Stock in the foreseeable future. Any future determination related to other public companies because a target company with which we seek to complete our initialdividend policy will be made at the discretion of our board of directors after considering our business combination may not beprospects, results of operations, financial condition, cash requirements and availability, debt repayment obligations, capital expenditure needs, contractual restrictions, covenants in compliance withthe agreements governing current and future indebtedness, industry trends, the provisions of Delaware law affecting the Sarbanes-Oxley Act regarding adequacypayment of its internal controls. The developmentdividends and distributions to stockholders and any other factors or considerations the board of the internal control of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such business combination.
The trading market for our Common Stock and restated certificate of incorporation does not provide a specified maximum redemption threshold, exceptWarrants depends, in part, on the research and reports that we will only redeem our public shares so long as (after such redemption) our net tangible assets will be at least $5,000,001 either immediately prior to or upon consummation of our initial business combination and after payment of deferred underwriters’ fees and commissions (such that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement that may be contained in the agreement relating to our initial business combination. As a result, we may be able to complete our initial business combination even though a substantial majority of our public stockholders do not agree with the transaction and have redeemed their shares or, if we seek stockholder approval of our initial business combination and do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, have entered into privately-negotiated agreements to sell their shares to our sponsor, officers, directors, advisors or their affiliates. In the event the aggregate cash consideration we would be required to pay for all shares of Class A common stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed initial business combination exceed the aggregate amount of cash available tothird-party securities analysts publish about us we will not complete the initial business combination or redeem any shares, all shares of Class A common stock submitted for redemption will be returned to the holders thereof, and we instead may search for an alternate business combination.
We intend to a variety ofcontinue to make investments to support our business and may require additional risks that may negatively impact our operations.
You may be less than $10.15 per share.
The Warrant Agreement provides that in the following circumstances theholders of Public Warrants who seek to exercise of the public warrants maytheir Public Warrants will not be permitted to do for cash and will, instead, be required or permitted to be madedo so on a cashless basis: (i) If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of our initial business combination, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a “cashless basis”basis in accordance with Section 3(a)(9) of the Securities Act or another exemption; (ii)Act: (i) if our common stock is at
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Warrant Agreement; and in the event(ii) if we have so elect, we will not be required to file or maintain in effect a registration statement;elected and in the event we do not so elect, we will use our best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available; and (iii) if we call the public warrantsPublic Warrants for redemption under certain circumstances described in the warrant agreement. In the event of anredemption. If you exercise your Public Warrants on a cashless basis, a holderyou would pay the applicable warrant exercise price by surrendering the warrantsapplicable Warrants for that number of shares of Class A common stock calculated underCommon Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Common Stock underlying the Warrants, multiplied by the difference between the Warrant Price and the “Fair Market Value” (defined below) by (y) the Fair Market Value. The “Fair Market Value” is the volume weighted average price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of exercise is received by the applicable provision inWarrant agent or on which the warrant agreement.notice of redemption is sent to the holders of Warrants, as applicable. As a result, you would receive fewer shares of Class A common stockCommon Stock from such exercise than if you were to exercise such warrantsapplicable Warrants for cash.
We may amend the terms of the warrantsPublic Warrants in a manner that may behave an adverse toeffect on holders of public warrantsPublic Warrants with the approval by the holders of at least a majority50% of the then outstanding public warrants.Public Warrants. As a result, the exercise price of your warrantsPublic Warrants could be increased, the exercise period could be shortened and the number of shares of our Class A common stockCommon Stock purchasable upon exercise of a warrantPublic Warrant could be decreased, all without your approval.
Our warrants arePublic Warrantswere issued in registered form under a warrant agreementWarrant Agreement between Continental Stock Transfer & Trust Company, as warrantWarrant agent, and us. The warrant agreementWarrant Agreement provides that the terms of the warrants Public Warrantsmay be amended without the consent of any holder to curefor the purpose of (i) curing any ambiguity corrector curing, correcting or supplementing any defective provision or correct(ii) adding or changing any mistake includingprovisions with respect to conformmatters or questions arising under the warrant agreementWarrant Agreement as the parties to the terms thereof described therein, but requiresWarrant Agreement may deem necessary or desirable and that the parties deem to not adversely affect the rights of the registered holders of the Public Warrants, provided that the approval by the holders of at least a majority50% of the then outstanding public warrantsthen-outstanding Public Warrants is required to make any change that materially adversely affects the interestsrights of the registered holders of public warrants. Furthermore, our warrant agreement provides that an amendment to remove our right to redeem the warrants under certain circumstances will be deemed, for the avoidance of doubt, not to materially adversely affect the interests of the registered holders of public warrants. Such amendment could be effected if the Company believed that such amendment would result in the warrants being classified for accounting purposes as equity. Public Warrants.
Accordingly, we may amend the terms of the public
Our warrant agreementWarrant Agreement designates the courts of the State of New York or the United StatesU.S. District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of our warrants,the Warrants, which could limit the ability of warrantWarrant holders to obtain a favorable judicial forum for disputes with our company.
Our warrant agreementWarrant Agreement provides that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating in any way to the warrant agreement,Warrant Agreement, including under the Securities Act, will be brought and enforced in the courts of the State of New York or the United StatesU.S. District Court for the Southern District of New York, and (ii) that we irrevocably submit to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. We will waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum.
Notwithstanding the foregoing, these provisions of the warrant agreementWarrant Agreement will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in any of our warrants Public Warrantsshall be deemed to have notice of and to have consented to the forum provisions in our warrant agreement.Warrant Agreement. If any action, the subject matter of which is within the scope the forum provisions of the warrant agreement,Warrant Agreement, is filed in a court other than a court of the State of New York or the United StatesU.S. District Court for the Southern District of New York (a “foreign action”) in the name of any holder of our warrants,Public Warrants, such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an “enforcement action”), and (y) having service of process made upon such warrantPublic Warrant holder in any such enforcement action by service upon such warrantPublic Warrant holder’s counsel in the foreign action as agent for such warrantPublic Warrant holder.
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ThiswarrantPublic Warrant holder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with our company,us, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our warrant agreementWarrant Agreement inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.
We may redeem your unexpired warrantsPublic Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrantsPublic Warrants worthless.
We have the ability to redeem outstanding warrantsPublic Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant;Warrant, provided that the reported closing price of our Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like)Common Stock for any 20 trading days within a 30warrantWarrant holders equals or exceeds $18.00 per share (as adjusted for share splits, share dividends, rights issuances, subdivisions, reorganizations, recapitalizations and the like) and provided certain other conditions are met. If and when the warrantsWarrants become redeemable by us, we may not exercise our redemption right even if the issuance of shares of common stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws or we are unable to effect such registration or qualification. We will use our best efforts to register or qualify such shares of common stockthe underlying securities for sale under the blue sky laws of theall applicable state of residence in those states in which the warrants were initially offered by us in our initial public offering.securities laws. Redemption of the outstanding warrantsWarrants could force you to (i) to exercise your warrantsWarrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrantsWarrants at the then-current market price when you might otherwise wish to hold your warrantsWarrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrantsWarrants are called for redemption, is likely to be substantially less than the market value of your warrants.
On December 2, 2022, we received a written notice (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying us that, based on the closing bid price of our common stock for the 30 consecutive trading days preceding the notice, the Company no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Global Market. Nasdaq Listing Rule 5450(a)(1) requires listed securities to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”), and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the Minimum Bid Price Requirement exists if the deficiency continues for a period of 30 consecutive trading days after we have been notified.
We have been provided an initial compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive trading days prior to May 31, 2023, and we must otherwise satisfy The Nasdaq Global Market’s requirements for listing.
If we do not regain compliance by May 31, 2023, we may be eligible for an additional 180 calendar day compliance period if we elect (and meet the listing standards) to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, we would be required, among other things, to meet the continued listing requirement for market value of publicly held shares as well as all other standards for initial listing on The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and would need to provide written notice of our intention to cure the bid price deficiency during the second compliance period. If we do not regain compliance within the compliance period(s), including any extensions that may be granted by Nasdaq, our securities will not be redeemablesubject to delisting.
Such a delisting would likely have a negative effect on the price of the securities and would impair your ability to sell or purchase the securities when you wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us (ii) they (includingto restore compliance with listing requirements would allow our securities to become listed again, stabilize the Class Amarket price or improve the liquidity of our securities. Additionally, if our securities become delisted from Nasdaq for any reason, the liquidity and price of our securities may be more limited
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than if our securities were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.
The conversion of our outstanding Convertible Notes, issued on August 26, 2022, could result in the issuance of a significant number of shares of our common stock. Currently, the $65.5 million principal amount of convertible notes is convertible at a price of $11.50 per share, which would result in the issuance of 5,695,651 shares of our common stock upon exercisethe conversion of the Convertible Notes in full. In addition, the conversion price is subject to adjustments set forth in the indenture, including conversion rate resets (x) on September 26, 2023 and September 26, 2024 and (y) following the consummation of certain equity and equity-linked offerings by Nogin and sales of certain equity and equity-linked securities by certain stockholders of Nogin.
Due to the variable nature of the adjustments of the conversion price and the formula that sets certain conversion prices of these warrants)securities based on a discount to the then-current market price, we could issue a significant number of shares of our common stock upon conversion of the Convertible Notes, which may result in significant dilution to our stockholders and could negatively impact the trading price of our common stock.
Our obligations under our outstanding Convertible Notes, issued on August 26, 2022, are secured by a security interest in substantially all of our assets. As a result, if we default on our obligations under such Convertible Notes, the collateral agent on behalf of the holders of the Convertible Notes could foreclose on the security interests and liquidate some or all of our assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations and you may lose all or part of your investment. Events of default under the convertible notes include: (i) failure by us to pay principal when due; (ii) failure by us to pay interest when due (if not subjectcured within thirty (30) days); (iii) uncured conversion failure; (iv) failure to deliver a fundamental change notice when due; (v) a default in our successor obligations; (vi) a default pursuant to our covenant obligations (that is not cured within thirty (30) days); (vii) a default pursuant to certain limited exceptions, be transferred, assigned or sold by our sponsor until 30 days afterother obligations (that is not cured within sixty (60) days); (viii) the completionoccurrence of our initial business combination, (iii) they may be exercised by the holders on a cashless basis and (iv) the holders thereof (includingcertain defaults with respect to shares of Class A common stock issuable upon exercise of such warrants) are entitled to registration rights.
The Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023 as required pursuant to Section 2.05 of the Indenture, resulting in a default. Pursuant to Section 7.01(A)(ii) of the Indenture, a default for breach of fiduciary duty and certain other actions may be brought onlythirty (30) consecutive days in the Courtpayment when due of Chanceryinterest on any Convertible Note constitutes an Event of Default (as defined in the StateIndenture). In the event the Company does not make the interest payment on or prior to March 31, 2023 and no agreement is otherwise reached with the holders of Delawarethe Convertible Notes, the trustee or holders of at least 25% in principal amount of the Convertible Notes may
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declare the principal and if brought outsideany interest immediately due and payable. Although the Company is in active negotiations with the holders of Delaware, the stockholder bringingConvertible Notes to resolve the suitdefault, there can be no assurances that an agreement will subjectbe reached on terms that are acceptable to certain exceptions, be deemedus or at all.
The Company currently funds its operations through cash flow from operations. The Company has sustained recurring losses and negative cash flows from operations. As of December 31, 2022, the Company has an accumulated deficit of $82.3 million, negative working capital and a judicial forum that it finds favorable for disputes with us or anycash balance of our directors, officers,$15.4 million, which consists of amounts held as bank deposits. These factors and other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Our independent registered public accounting firm has included an explanatory paragraph in its opinion on the Company’s consolidated financial statements with respect to the substantial doubt about the Company’s ability to continue as a going concern.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing and entering into additional cost reduction and performance improvement measures. However, the Company may be unable to access equity financing when needed or implement other strategies to obtain additional funding. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The consolidated financial statements included in this Report do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters are located in Tustin, California. The headquarters cover 89,468 square feet pursuant to an operating lease that expires in 2029. We believe our current facility is suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
We lease three warehouse facilities, one in Fontana, California, one in Rancho Dominguez, California and one in Pittsburgh, Pennsylvania. The warehouse in Fontana is 102,100 square feet and its lease expires in 2026, the warehouse in Rancho Dominguez is 115,814 square feet and its lease expires in May 2023, and the warehouse in Pittsburgh is 253,478 square feet and its lease expires in 2027.
We believe that our facilities are adequate to meet our needs for the immediate future and that suitable additional space will be available to accommodate any expansion of our operations as needed.
Item 3. Legal Proceedings
We are and may become, from time to time, involved in legal actions in the ordinary course of business, including governmental and administrative investigations, inquiries and proceedings concerning employment, labor, environmental, safety and efficacy of our products and other claims as well as claims or legal actions to assert our rights, including intellectual property rights. Although management is unable to predict with certainty the eventual
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outcome of any legal action, management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at December 31, 2022, will not materially affect the Company’s consolidated results of operations, financial position or cash flows. Any of these claims could subject us to costly litigation, and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our policy limits may be inadequate to fully satisfy any damage awards or settlements. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material adverse effect on our business, financial condition and results of operations. Additionally, any such claims, whether or not successful, could damage our reputation and business.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Nogin’s common stock and warrants are listed and traded on the Nasdaq Stock Market LLC (“Nasdaq”) under the ticker symbols “NOGN” and “NOGNW,” respectively. Nogin’s common stock and warrants have been listed and traded on Nasdaq since August 30, 2022. Prior to August 30, 2022, and before the completion of the Business Combination with SWAG, the units, common stock and warrants of SWAG traded on the Nasdaq under the ticker symbols “SWAGU,” “SWAG” and “SWAGW,” respectively.
As of March 20, 2023, we had 66,694,295 shares of common stock outstanding held by approximately 67 record holders, excluding stockholders for whom shares are held in “nominee” or “street” name. The actual number of stockholders of our common stock is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares of common stock are held in street name by banks, brokers and other nominees.
We have not declared dividends on our common stock to date, and we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our business prospects, results of operations, financial condition, cash requirements and availability, certain restrictions related to our indebtedness, industry trends and other factors that our board of directors may deem relevant.
The following table presents the securities authorized for issuance under our equity compensation plans (as adjusted for the Exchange Ratio) as of December 31, 2022. See Note 13, Stock Compensation Plan, in Part II, Item 8. “Financial Statements” for additional information about our equity compensation plans.
Plan Category |
| (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights |
| (b) Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights |
| (c) Number of Securities Remaining Available for Issuance Under Equity Compensation Plans (Excluding Securities Reflected in column (a)) |
|
Equity Compensation Plans Approved by Security Holders: |
|
|
|
|
|
|
|
Nogin, Inc. 2022 Incentive Award Plan |
| 5,102,948 | (1) | — |
| 2,948 | (2) |
Equity Compensation Plans Not Approved by Security Holders: |
|
|
|
|
|
|
|
Branded Online, Inc. 2013 Stock Incentive Plan |
| 1,474,821 |
| $ 2.94 |
| — | (3) |
Total |
| 6,577,769 |
|
|
| 2,948 |
|
57
None.
Other than with respect to the PIPE Investment as described in the Company’s Current Report on Form 8-K filed with the SEC on September 1, 2022, we sold no securities during the twelve months ended December 31, 2022 that were not registered under the Securities Act.
Item 6. Selected Financial Data
Not applicable.
58
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes of Nogin, Inc. and its subsidiaries included elsewhere in this Report. Some of the information contained in this discussion and analysis contains forward‑looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A. “Risk Factors,” actual results may differ materially from those anticipated in these forward‑looking statements. Unless the context otherwise requires, references in this subsection to “we,” “our,” “Nogin” and the “Company” refer to the business and operations of Branded Online, Inc. dba Nogin and its consolidated subsidiaries prior to the Business Combination and to Nogin, Inc. (formerly known as Software Acquisition Group Inc. III) and its consolidated subsidiaries following the consummation of the Business Combination.
For a comparison of our results of operations for the years ended December 31, 2021 and December 31, 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our prospectus filed with the SEC on November 14, 2022.
Company Overview
Nogin is an e-commerce, technology platform provider in the apparel and ancillary industry’s multichannel retailing, business-to-consumer and business-to-business domains. Nogin’s CaaS platform delivers full-stack enterprise-level capabilities to our clients enabling them to compete with large retailers. As clients grow their brand, they require additional capabilities beyond a simple online storefront. We provide the technology for these growing brands to manage complexities related to customer management, order optimization, returns, and fulfillment. The platform’s tools provide clients with capabilities around website development, photography, content management, customer service, marketing, warehousing, and fulfillment. The Company’s business model is based on providing a total e-commerce software solution to its partners on a revenue-sharing basis. The Company’s platform is used by online businesses whose needs are too complex for low cost SaaS e-commerce platforms, yet require more flexibility and economic viability than provided by enterprise solutions.
Our platform helps brands develop relationships directly with their customers leading to accelerated revenue growth, improved customer engagement, and reduced costs related to re-platforming and third-party integrations.
Recent Developments
Business Combination
On February 14, 2022, the Company entered into the Merger Agreement with Merger Sub and Legacy Nogin, pursuant to which Merger Sub would merge with and into Legacy Nogin, with Legacy Nogin surviving the merger as a wholly owned subsidiary of the Company.
On April 19, 2022, the Company, the Notes Guarantors and the Subscribers entered into the PIPE Subscription Agreements pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of $75.0 million of Convertible Notes at the par value of the notes and (ii) up to an aggregate of 1.5 million PIPE Warrants with each whole PIPE Warrant entitling the holder thereof to purchase one share of common stock.
On August 26, 2022, the Company and the “Equity Subscriber” entered into the Equity PIPE Subscription Agreement pursuant to which the Company agreed to issue and sell to the Equity Subscriber, immediately prior to the closing of the Business Combination, 517,079 PIPE Shares at a price per PIPE Share equal to $10.17.
On August 26, 2022, immediately prior to the Closing, the Company issued (i) 517,079 shares of common stock to the Equity Subscriber in accordance with the terms of the Equity PIPE Subscription Agreement, (ii) $65.5 million aggregate principal amount of Convertible Notes to the Subscribers in accordance with the terms of the PIPE Subscription Agreements and (iii) 1,396,419 PIPE Warrants to the Subscribers in accordance with the terms of the PIPE Subscription Agreements.
On August 26, 2022, pursuant to the Merger Agreement, Merger Sub merged with and into Legacy Nogin, with Legacy Nogin surviving the merger as a wholly owned subsidiary of the Company.
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In connection with Closing, we changed our name to Nogin, Inc. While we are the legal acquirer of Legacy Nogin in the Business Combination, Legacy Nogin is deemed to be the accounting acquirer, and the historical financial statements of Legacy Nogin became the historical financial statements of the Company upon the closing of the Transactions.
Notice of Non-Compliance from Nasdaq
On December 2, 2022, we received a written notice (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying us that, based on the closing bid price of our common stock for the 30 consecutive trading days preceding the notice, the Company no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Global Market. Nasdaq Listing Rule 5450(a)(1) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the Minimum Bid Price Requirement exists if the deficiency continues for a period of 30 consecutive trading days.
We have been provided an initial compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive trading days prior to May 31, 2023, and we must otherwise satisfy The Nasdaq Global Market’s requirements for listing.
If we do not regain compliance by May 31, 2023, we may be eligible for an additional 180 calendar day compliance period if we elect (and meet the listing standards) to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, we would be required, among other things, to meet the continued listing requirement for market value of publicly held shares as well as all other standards for initial listing on The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and would need to provide written notice of our intention to cure the bid price deficiency during the second compliance period. If we do not regain compliance within the compliance period(s), including any extensions that may be granted by Nasdaq, our securities will be subject to delisting.
We intend to monitor the bid price of the common stock and consider available options to resolve the noncompliance with the Minimum Bid Price Requirement. There can be no assurance that we will be able to regain compliance with The Nasdaq Global Market’s continued listing requirements or that Nasdaq will grant the Company a further extension of time to regain compliance, if applicable.
Updates to Management and Board of Directors
On January 27, 2023, Jan-Christopher Nugent, Co-Chief Executive Officer and Chairman of the Board, resigned as the Company’s Co-Chief Executive Officer and as a member and Chairman of the Board, effective as of January 27, 2023. Jonathan S. Huberman, the Company’s other Co-Chief Executive Officer, began serving as the sole Chief Executive Officer of the Company and as Chairman of the Board as of the Resignation Effective Date.
On February 13, 2023, the Board, upon the recommendation of the Nominating Committee, appointed Andrew Pancer to fill the vacancy on the Board created by the resignation of Jan-Christopher Nugent. Mr. Pancer will serve as a Class I director of the Board for a term ending at the 2023 annual meeting of stockholders of the Company, with such appointment effective as of February 13, 2023. In approving the appointment, the Board concluded that Mr. Pancer satisfies the independence requirements of the Nasdaq Stock Market and the Company’s Corporate Governance Guidelines and the Securities and Exchange Commission rules regarding audit committee membership. Mr. Pancer was appointed to serve as a member of the Nominating Committee and as a member of the Audit Committee of the Board. In connection with Mr. Pancer’s appointment as a Class I director, the Board reassigned Hussain Baig from Class I to Class III in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Charter.
On February 13, 2023, Deborah Weinswig, a Class I director of the Board and chair of the Nominating Committee, resigned from the Board, effective as of February 13, 2023. In connection with Ms. Weinswig’s resignation, the Board reassigned Geoffrey Van Haeren from Class II to Class I in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Company’s Charter.
Impact of COVID-19 pandemic and its variants
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The worldwide spread of COVID-19 and its variants had resulted in a global slowdown of economic activity which altered demand for a
60
broad variety of goods and services, including those provided by our clients, while also disrupting sales channels and advertising and marketing activities until economic activity normalized. Our historical revenue growth and results of operations have been resilient despite the headwinds created by the COVID-19 pandemic and its variants. The extent to which ongoing and future developments related to the global impact of the COVID-19 pandemic and relatedvaccination measures designed to curb its spread continue to impact our business, financial condition, and results of operations, all of which cannot be predicted with certainty. Many of these ongoing and future developments are beyond our control, including the speed of contagion, the development, distribution and implementation of effective preventative or treatment measures, including vaccines (and vaccination rates), the scope of governmental and other restrictions on travel, discretionary services and other activity, and the public reactions and receptiveness to these developments. See the section entitled “Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic and its variants on our business.
At the onset of COVID-19, the Company anticipated an impact to the business, its financial conditions and results of operations. The Company applied for and was granted a Paycheck Protection Plan (“PPP”) loan. In addition, the Company had taken a number of actions to mitigate the impacts of the COVID-19 pandemic and its variants on its business. The Company witnessed a large shift in consumer spending from retail stores to online stores, and as a result, there were no significant declines in the periods presented. However, the impacts of the COVID-19 pandemic and its variants will depend on future developments, including the duration and spread of the pandemic. These developments and the impacts of the COVID-19 pandemic on the financial markets and overall economy are highly uncertain and cannot be predicted.
Components of Our Results of Operations
Revenue
The Company’s sources of revenue are summarized as follows:
61
The Company recognizes revenue when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps:
A performance obligation is a promise in a contract to transfer a distinct product. Performance obligations promised in a contract are identified based on the goods that will be transferred that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. Performance obligations include establishing and maintaining customer online stores, providing access to the Company’s e-commerce platform, customer service support, photography services, warehousing, and fulfillment. Most of the contracts of the Company with customers contain multiple promises, which may result in multiple performance obligations, while others are combined into one performance obligation. For contracts with customers, the Company accounts for individual promises separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors.
The Company has concluded the sale of goods and related shipping and handling on behalf of our customers are accounted for as a single performance obligation, while the expenses incurred for actual shipping charges are included in cost of sales.
The Company’s revenue is mainly commission fees derived from contractually committed gross revenue processed by customers on the Company's e-commerce platform. The Company is acting as an agent in these arrangements and customers do not have the contractual right to take possession of the Company's software. Revenue is recognized in an amount that reflects the consideration that the Company expects to ultimately receive in exchange for those promised goods, net of expected discounts for sales promotions and customary allowances.
CaaS Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged primarily in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers' inventory or any credit risks related to the products sold.
Variable consideration is included in revenue for potential product returns. The Company uses an estimate to constrain revenue for the expected variable consideration at each period end. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and expected levels of returns. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. The estimated reserve for returns is included on the balance sheet in accrued expenses with changes to the reserve in revenue on the accompanying statement of operations.
In most cases the Company acts as the merchant of record, resulting in a due to client liability (discussed below). However, in some instances, the Company may perform services without being the merchant of record in which case there is a receivable from the customer.
Payment terms and conditions are generally consistent for customers, including credit terms to customers ranging from seven days to 60 days, and the Company’s contracts do not include any significant financing component. The
62
Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net revenue in the consolidated statements of operations.
Operating Expenses
We classify our operating expenses into the following categories:
Interest Expense
Interest expense primarily consists of interest incurred under our line of credit, promissory notes and Convertible Notes. The line of credit and promissory notes were fully repaid at the closing of the Transactions.
Change in Fair Value of Unconsolidated Affiliates
Change in fair value of unconsolidated affiliates represents the fair value adjustments associated with the Company’s joint venture investments for which the Company elected to use the fair value option of accounting.
Other Income (Expense)
Other income (expense) is mainly related to debt issuance cost expensed under the fair value option, offset by sublease rental income derived from the sublease of property by the Company as well as gain from settlement of deferred revenue and PPP loan forgiveness.
Provision (Benefit) for Income Taxes
The provision (benefit) for income taxes consist primarily of U.S. federal, state, and foreign income taxes. Deferred tax assets and liabilities are recognized with respect to the tax consequences attributable to differences between the financial statement carrying values and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred tax assets if it is more likely than not that some portion or all the deferred tax assets will not be realized.
Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, assessment of going concern considerationstax credits and utilization of net operating loss carryforwards during the year.
63
Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented (in thousands):
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net service revenue |
| $ | 40,855 |
|
| $ | 41,866 |
|
Net product revenue |
|
| 41,540 |
|
|
| 51,346 |
|
Net revenue from related parties |
|
| 12,076 |
|
|
| 8,136 |
|
Total net revenue |
|
| 94,471 |
|
|
| 101,348 |
|
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 26,706 |
|
|
| 24,174 |
|
Cost of product revenue (1) |
|
| 28,754 |
|
|
| 20,431 |
|
Sales and marketing |
|
| 2,672 |
|
|
| 1,772 |
|
Research and development |
|
| 5,330 |
|
|
| 5,361 |
|
General and administrative |
|
| 70,289 |
|
|
| 55,369 |
|
Depreciation and amortization |
|
| 808 |
|
|
| 520 |
|
Total operating costs and expenses |
|
| 134,559 |
|
|
| 107,627 |
|
Operating loss |
|
| (40,088 | ) |
|
| (6,279 | ) |
Interest expense |
|
| (6,328 | ) |
|
| (926 | ) |
Change in fair value of promissory notes |
|
| (4,561 | ) |
|
| — |
|
Change in fair value of derivative instruments |
|
| 1,117 |
|
|
| — |
|
Change in fair value of unconsolidated affiliates |
|
| (4,245 | ) |
|
| 4,937 |
|
Change in fair value of convertible notes |
|
| 4,271 |
|
|
| — |
|
Debt extinguishment loss |
|
| (1,885 | ) |
|
| — |
|
Other (loss) income, net |
|
| (1,787 | ) |
|
| 3,378 |
|
(Loss) Income before income taxes |
|
| (53,506 | ) |
|
| 1,110 |
|
(Benefit) Provision for income taxes |
|
| (780 | ) |
|
| 1,175 |
|
Net loss |
| $ | (52,726 | ) |
| $ | (65 | ) |
|
| Twelve Months Ended December 31, |
| |||||
(as a percentage of total revenue*) |
| 2022 |
|
| 2021 |
| ||
Net service revenue |
|
| 43.2 | % |
|
| 41.3 | % |
Net product revenue |
|
| 44.0 | % |
|
| 50.7 | % |
Net revenue from related parties |
|
| 12.8 | % |
|
| 8.0 | % |
Total net revenue |
|
| 100.0 | % |
|
| 100.0 | % |
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 28.3 | % |
|
| 23.9 | % |
Cost of product revenue (1) |
|
| 30.4 | % |
|
| 20.2 | % |
Sales and marketing |
|
| 2.8 | % |
|
| 1.7 | % |
Research and development |
|
| 5.6 | % |
|
| 5.3 | % |
General and administrative |
|
| 74.4 | % |
|
| 54.6 | % |
Depreciation and amortization |
|
| 0.9 | % |
|
| 0.5 | % |
Total operating costs and expenses |
|
| 142.4 | % |
|
| 106.2 | % |
Operating loss |
|
| -42.4 | % |
|
| -6.2 | % |
Interest expense |
|
| -6.7 | % |
|
| -0.9 | % |
Change in fair value of promissory notes |
|
| -4.8 | % |
|
| 0.0 | % |
Change in fair value of derivative instruments |
|
| 1.2 | % |
|
| 0.0 | % |
Change in fair value of unconsolidated affiliates |
|
| -4.5 | % |
|
| 4.9 | % |
Change in fair value of convertible notes |
|
| 4.5 | % |
|
| 0.0 | % |
Debt extinguishment loss |
|
| -2.0 | % |
|
| 0.0 | % |
Other (loss) income, net |
|
| -1.9 | % |
|
| 3.3 | % |
(Loss) Income before income taxes |
|
| -56.6 | % |
|
| 1.1 | % |
(Benefit) Provision for income taxes |
|
| -0.8 | % |
|
| 1.2 | % |
Net loss |
|
| -55.8 | % |
|
| -0.1 | % |
* Percentages may not sum due to rounding
(1) Exclusive of depreciation and amortization shown separately.
64
Comparison of the Twelve Months Ended December 31, 2022 and 2021
Net service revenue
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net service revenue |
| $ | 40,855 |
|
| $ | 41,866 |
|
| $ | (1,011 | ) |
|
| (2.4 | )% |
Percent of total revenue |
|
| 43.2 | % |
|
| 41.3 | % |
|
|
|
|
|
| ||
Net service revenue decreased by $1.0 million, or 2.4%, to $40.9 million for the twelve months ended December 31, 2022 as compared to $41.9 million for the twelve months ended December 31, 2021. The Company historically recognizes net revenue as a percentage of service sales. The decrease is primarily due to a brand for whom the Company purchased inventory in the late third quarter of 2021, and therefore commenced recognizing product revenue instead of service revenue. Net service revenue as a percentage of total revenue was 43.2% for the twelve months ended December 31, 2022 compared to 41.3% for the twelve months ended December 31, 2021.
Net product revenue
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net product revenue |
| $ | 41,540 |
|
| $ | 51,346 |
|
| $ | (9,806 | ) |
|
| (19.1 | )% |
Percent of total revenue |
|
| 44.0 | % |
|
| 50.7 | % |
|
|
|
|
|
| ||
Net product revenue decreased by $9.8 million, or 19.1%, to $41.5 million for the twelve months ended December 31, 2022 as compared to $51.3 million for the twelve months ended December 31, 2021. Starting in the second quarter of 2021, the Company added product revenue, which was generated from purchased inventory from select clients, to assist those clients with managing inventory through the pandemic in order to continue marketing and selling their particular brand of products. The Company sourced the products from vendors approved by licensees, and the products were received into the Company’s leased distribution centers and orders by end-customers were then fulfilled. As a result, the Company recognized the gross revenue for the sale of the inventory-owned products, and the corresponding cost of product revenue in the period the order was fulfilled. The Company does not anticipate continuing the practice of purchasing inventory after finding a buyer to distribute the inventory. The decrease in product revenue is primarily due to inventory supply chain issues resulting in less inventory being received and lower sales volume. Net product revenue as a percentage of total revenue was 44.0% for the twelve months ended December 31, 2022 compared to 50.7% for the twelve months ended December 31, 2021.
Net revenue from related parties
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net revenue from related parties |
| $ | 12,076 |
|
| $ | 8,136 |
|
| $ | 3,940 |
|
|
| 48.4 | % |
Percent of total revenue |
|
| 12.8 | % |
|
| 8.0 | % |
|
|
|
|
|
| ||
Net revenue from related parties increased by $3.9 million, or 48.4%, to $12.1 million for the twelve months ended December 31, 2022 as compared to $8.1 million for the twelve months ended December 31, 2021. The Company provides services to its joint ventures under Master Services agreements that are classified as related party revenue. The increase is primarily due to the addition of a second joint venture added in the fourth quarter of 2021, and revenue for the second joint venture was included for the twelve months ended December 31, 2022. In the fourth quarter of 2022, the Company acquired the remaining 50% interest in one of the joint ventures at which point such joint venture became a wholly owned subsidiary. The Company will record such revenue into the consolidated results of the Company, which will cause revenue from related parties to decrease in future periods. Net service revenue from related parties as a percentage of total revenue was 12.8% for the twelve months ended December 31, 2022 compared to 8.0% for the twelve months ended December 31, 2021.
65
Cost of services
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Cost of services |
| $ | 26,706 |
|
| $ | 24,174 |
|
| $ | 2,532 |
|
|
| 10.5 | % |
Percent of total revenue |
|
| 28.3 | % |
|
| 23.9 | % |
|
|
|
|
|
| ||
Cost of services increased by $2.5 million, or 10.5%, to $26.7 million for the twelve months ended December 31, 2022 as compared to $24.2 million for the twelve months ended December 31 2021. The increase in cost of services in 2022 was related to higher shipping costs. Cost of services as a percentage of total revenue was 28.3% for the twelve months ended December 31 2022 compared to 23.9% for the twelve months ended December 31, 2021.
Cost of product revenue
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Cost of product revenue |
| $ | 28,754 |
|
| $ | 20,431 |
|
| $ | 8,323 |
|
|
| 40.7 | % |
Percent of total revenue |
|
| 30.4 | % |
|
| 20.2 | % |
|
|
|
|
|
| ||
Cost of product revenue increased by $8.3 million, or 40.7%, to $28.8 million for the twelve months ended December 31, 2022 as compared to $20.4 million for the twelve months ended December 31, 2021. The increase was primarily related to marketing efforts to drive sales through discounted pricing in fiscal year 2022 to generate cash through the Closing of the Transactions. In addition, product sales for one brand began in the third quarter of fiscal year 2021, compared to the full year of sales in fiscal year 2022. Cost of product revenue as a percentage of total revenue was 30.4% for the twelve months ended December 31, 2022, compared to 20.2% for the twelve months ended December 31, 2021.
Sales and Marketing
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Sales and marketing |
| $ | 2,672 |
|
| $ | 1,772 |
|
| $ | 900 |
|
|
| 50.8 | % |
Percent of total revenue |
|
| 2.8 | % |
|
| 1.7 | % |
|
|
|
|
|
| ||
Sales and marketing expense increased by $0.9 million, or 50.8%, to $2.7 million for the twelve months ended December 31, 2022 as compared to $1.8 million for the twelve months ended December 31, 2021. The increase in sales and marketing expense in 2022 was primarily due to an increase in headcount in the sales and marketing department to drive additional sales.
Research and development
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Research and development |
| $ | 5,330 |
|
| $ | 5,361 |
|
| $ | (31 | ) |
|
| (0.6 | )% |
Percent of total revenue |
|
| 5.6 | % |
|
| 5.3 | % |
|
|
|
|
|
| ||
Research and development expense slightly decreased by $31 thousand to $5.3 million for the twelve months ended December 31, 2022 as compared to $5.4 million for the twelve months ended December 31, 2021.
General and administrative
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
General and administrative |
| $ | 70,289 |
|
| $ | 55,369 |
|
| $ | 14,920 |
|
|
| 26.9 | % |
Percent of total revenue |
|
| 74.4 | % |
|
| 54.6 | % |
|
|
|
|
|
| ||
66
General and administrative expense increased by $14.9 million, or 26.9%, to $70.3 million for the twelve months ended December 31, 2022 as compared to $55.4 million for the twelve months ended December 31 2021. The increase in general and administrative expense in 2022 was primarily due to additional headcount and operating expense to support the Company through the Business Combination and on-going strategic initiatives.
Depreciation and amortization
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Depreciation and amortization |
| $ | 808 |
|
| $ | 520 |
|
| $ | 288 |
|
|
| 55.4 | % |
Percent of total revenue |
|
| 0.9 | % |
|
| 0.5 | % |
|
|
|
|
|
| ||
Depreciation and amortization expense increased by $0.3 million, or 55.4%, to $0.8 million for the twelve months ended December 31, 2022 as compared to $0.5 million for the twelve months ended December 31, 2021. The increase in depreciation and amortization in 2022 was primarily due to the purchase of new hardware and equipment and additional amortization related to the acquired capitalized software.
Interest expense
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Interest expense |
| $ | 6,328 |
|
| $ | 926 |
|
| $ | 5,402 |
|
|
| 583.4 | % |
Percent of total revenue |
|
| 6.7 | % |
|
| 0.9 | % |
|
|
|
|
|
| ||
Interest expense increased by $5.4 million, or 583.4%, to $6.3 million for the twelve months ended December 31, 2022 as compared to $0.9 million for the twelve months ended December 31, 2021. The increase in interest expense in 2022 was primarily due to interest on the Convertible Notes, along with the Company’s notes payable issued in the third and fourth quarters of 2021 and the third quarter of 2022 and investor notes issued in the second quarter of 2022. The notes payable and investor notes were fully repaid at closing of the Business Combination.
Change in fair value of promissory notes
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of promissory notes |
| $ | 4,561 |
|
| $ | — |
|
| $ | 4,561 |
|
|
| 100.0 | % |
Percent of total revenue |
|
| 4.8 | % |
|
| — | % |
|
|
|
|
|
| ||
Change in fair value of promissory notes was $4.6 million for the twelve months ended December 31, 2022. The Company recognized a loss of $4.6 million for the twelve months ended December 31, 2022 that were related to the Promissory Notes issued in the second and third quarter of 2022, which were based on the estimated cash payment needed to repay the Promissory Notes at closing of the Business Combination.
Change in fair value of derivatives
|
| Twelve Months Ended December 31, | ||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change | |||
|
| (in thousands, except percentages) | ||||||||||||
Change in fair value of derivatives |
| $ | (1,117 | ) |
| $ | — |
|
| $ | (1,117 | ) |
| 100.0% |
Percent of total revenue |
|
| -1.2 | % |
|
| — | % |
|
|
|
|
| |
Change in fair value of derivatives notes was a gain of $1.1 million for the twelve months ended December 31, 2022. The Company recognized a change in fair value of derivate notes in connection with the Standby Agreement.
67
Change in fair value of unconsolidated affiliate
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of unconsolidated affiliates |
| $ | 4,245 |
|
| $ | (4,937 | ) |
| $ | 9,182 |
|
|
| (186.0 | )% |
Percent of total revenue |
|
| 4.5 | % |
|
| (4.9 | )% |
|
|
|
|
|
| ||
Change in fair value of unconsolidated affiliates decreased by $9.2 million, or 186.0%, to a loss of $4.2 million for the twelve months ended December 31, 2022 as compared to a gain of $4.9 million for the twelve months ended December 31, 2021. The decrease is attributable to the Company’s investment in ModCloth, which was formed in April 2021, and IPCO, which was formed in December 2021. The Company elected to apply the fair value option of accounting to the joint ventures. The Company engaged a third-party valuation specialist to assist with the fair value assessment. As a result, the Company recorded a fair value adjustment for the investment in connection with its 50% interest during the twelve months ended December 31, 2022 and December 31, 2021. In the fourth quarter of 2022, the Company acquired the remaining interest in Modcloth at which point Modcloth became a wholly owned subsidiary and operations were consolidated with the results of the Company.
Change in fair value of convertible notes
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of convertible notes |
| $ | (4,271 | ) |
| $ | — |
|
| $ | (4,271 | ) |
|
| 100.0 | % |
Percent of total revenue |
|
| (4.5 | )% |
|
| — | % |
|
|
|
|
|
| ||
Change in fair value of convertible notes was $9.9 million for the twelve months ended December 31, 2022. The change is attributable to fair value of the convertible notes, which the Company engaged a third-party valuation specialist to assist with the fair value assessment.
Debt Extinguishment Loss
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Debt extinguishment loss |
| $ | 1,885 |
|
| $ | — |
|
| $ | 1,885 |
|
|
| 100.0 | % |
Percent of total revenue |
|
| 2.0 | % |
|
| — | % |
|
|
|
|
|
| ||
Debt Extinguishment loss was $1.9 million for the twelve months ended December 31, 2022. The Company recognized a loss of $1.9 million for the extinguishment of debt as part of the closing of the Business Combination.
Other (loss) income
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Other (loss) income |
| $ | (1,787 | ) |
| $ | 3,378 |
|
| $ | (5,165 | ) |
|
| (152.9 | )% |
Percent of total revenue |
|
| (1.9 | )% |
|
| 3.3 | % |
|
|
|
|
|
| ||
Other (loss) income decreased by $5.2 million, or 152.9%, to $(1.8) million for the twelve months ended December 31, 2022 as compared to $3.4 million for the twelve months ended December 31, 2021. The decrease was primarily related to the settlement of deferred revenue of $1.6 million related to sale of finished inventory to IPCO in the first quarter of 2022 and forgiveness of the PPP loan of $2.6 million in the third quarter of 2021.
68
Provision for income tax
|
| Twelve Months Ended December 31, |
| ||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Change |
| % Change |
| ||||
|
| (in thousands, except percentages) |
| ||||||||||||
Provision for income tax |
| $ | (780 | ) |
| $ | 1,175 |
|
| $ | (1,955 | ) |
| -166.4 | % |
Percent of total revenue |
|
| (0.8 | )% |
|
| 1.2 | % |
|
|
|
|
| ||
The provision for income tax was a benefit of $0.8 million for the twelve months ended December 31, 2022 as compared to $1.2 million of income tax expense for the twelve months ended December 31, 2021. The decrease was primarily due to a full valuation allowance for differences related to GAAP and tax income related to the Company’s joint ventures due to election of accounting for the joint ventures using the equity method fair value option.
Non-GAAP Financial Measures
We prepare and present our consolidated financial statements in accordance with Financial Accounting Standard Board’s Accounting Standards Update 2014-15, “DisclosuresU.S. GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance, as these measures are regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. This non-GAAP measure is not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of Uncertainties aboutperformance of other companies in other industries or within the same industry.
We calculate and define Adjusted EBITDA as net loss, adjusted to exclude: (1) interest expense, (2) income tax expense and (3) depreciation and amortization.
Adjusted EBITDA is a financial measure that is not required by or presented in accordance with U.S. GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with U.S. GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations, or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an Entity’s Ability to Continueanalytical tool and should not be considered in isolation or as a Going Concern,”substitute for financial information presented in accordance with U.S. GAAP. Some of the limitations of Adjusted EBITDA include that (1) it does not reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures, (3) it does not reflect tax payments that may represent a reduction in cash available to us and (4) does not include certain non-recurring cash expenses that we do not believe are representative of our business on a steady-state basis. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net loss and other results stated in accordance with U.S. GAAP.
The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with U.S. GAAP, to Adjusted EBITDA, for each of the periods presented (in thousands):
|
| For the Twelve Months |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net (loss) income |
| $ | (52,726 | ) |
| $ | (65 | ) |
| $ | (1,140 | ) |
Interest expense |
|
| 6,328 |
|
|
| 926 |
|
|
| 225 |
|
Provision for income taxes |
|
| (780 | ) |
|
| 1,175 |
|
|
| 190 |
|
Depreciation and amortization |
|
| 808 |
|
|
| 520 |
|
|
| 415 |
|
Adjusted EBITDA |
| $ | (46,370 | ) |
| $ | 2,556 |
|
| $ | (310 | ) |
69
Liquidity and Capital Resources
Our primary requirements for short-term liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Our future capital requirements will depend on many factors, including our levels of revenue, the expansion of sales and marketing activities, successful customer acquisitions, the results of business initiatives, the timing of new product introductions and overall economic conditions.
Prior to the Business Combination, the Company’s available liquidity and operations were financed through equity contributions, a line of credit, promissory notes and cash flow from operations. Moving forward, the Company expects to fund operations through equity contributions and cash flow from operations.
Because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has determinedsustained recurring losses and negative cash flows from operations. As of December 31, 2022, the Company has an accumulated deficit of $82.3 million, negative working capital and a cash balance of $15.4 million, which consists of amounts held as bank deposits.
These factors and other uncertainties, including compliance with the covenants included in the Indenture governing our Convertible Notes, raise substantial doubt about our ability to continue as a going concern for at least twelve months from the date that these consolidated financial statements were issued. We are currently executing on various strategies to improve available cash balances, liquidity and cash generated from operations to alleviate these conditions, including a comprehensive cost reduction and performance improvement program, reduced headcount and elimination of certain discretionary and general and administrative expenses. We are also in the process of alleviating the inventory supply chain challenges that began in 2021, leading to lower revenue and cash flows, and are taking steps to improve the operational efficiency of our fulfillment center. Further, we expect to seek additional funds through potential securities financings. However, our failure to obtain financing as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, many of which are beyond our control.
Indebtedness
Convertible Notes and Indenture
On April 19, 2022, the Company, the Notes Guarantors and the Subscribers entered into the PIPE Subscription Agreements pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of $75.0 million of Convertible Notes at the par value of the notes and (ii) up to an aggregate of 1.5 million PIPE Warrants with each whole PIPE Warrant entitling the holder thereof to purchase one share of Common Stock.
On August 26, 2022, immediately prior to the Closing, the Company issued $65.5 million aggregate principal amount of Convertible Notes and, as contemplated by the PIPE Subscription Agreements, the Company, the Note Guarantors and U.S. Bank Trust Company, National Association, as trustee, entered into the Indenture. The Convertible Notes were offered in a private placement under the Securities Act, pursuant to the PIPE Subscription Agreements. The Convertible Notes will mature on September 1, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms, and will accrue interest at a rate of 7.00% per annum, payable in cash. The Convertible Notes may be converted at any time (in whole or in part) into shares of Common Stock, at the option of the holder of such Convertible Note, based on the applicable conversion rate at such time. The initial conversion price is approximately $11.50 per share of Common Stock, based on an initial conversion rate of 86.9565 shares of
70
Common Stock per $1,000 principal amount of Convertible Notes. For conversions with a conversion date on or after the first anniversary of the closing of the Transactions and prior to the regular record date immediately preceding the Maturity Date, the conversion consideration will also include an interest make-whole payment equal to the remaining scheduled payments of interest on the Convertible Note being converted through the Maturity Date. The Company will be able to elect to make such interest make-whole payment in cash or in Common Stock, subject to certain conditions. The conversion rate is subject to adjustments set forth in the Indenture, including conversion rate resets (x) on August 27, 2023, September 26, 2023 and September 26, 2024 and (y) following the consummation of certain equity and equity-linked offerings by the Company and sales of certain equity and equity-linked securities by certain shareholders of the Company. Each holder of a Convertible Note will have the right to cause the Post-Combination Company to repurchase for cash all or a portion of the Convertible Notes held by such holder upon the occurrence of a “Fundamental Change” (as defined in the Indenture) at a price equal to (i) on or before September 26, 2023, 100% of the original principal amount of such Convertible Note, and (ii) from and after September 26, 2023, 100% of the accreted principal amount applicable at such time pursuant to the terms of the Indenture, in each case, plus accrued and unpaid interest.
The Indenture includes restrictive covenants that, among other things, require the Company to maintain a minimum level of liquidity on a consolidated basis and limit the ability of the Company and its subsidiaries to incur indebtedness above certain thresholds or to issue preferred stock, to make certain restricted payments, to dispose of certain material assets and engage in other asset sales, subject to reinvestment rights, to pay certain advisory fees in connection to the Transactions and the transactions contemplated by the PIPE Subscription Agreements above a certain threshold, and other customary covenants with respect to the collateral securing the obligations created by the Convertible Notes and the Indenture, including the entry into security documents (in each case, subject to certain exceptions set forth in the Indenture); provided that the covenants with respect to (i) the making of restricted payments, (ii) the incurrence of indebtedness, (iii) the disposition of certain material assets and asset sales, (iv) liquidity, (v) the payment of advisory fees and (vi) the collateral securing the obligations created by the Convertible Notes and the Indenture shall terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The liquidity covenant would terminate if the Company achieves $175 million in consolidated revenue in the preceding four fiscal quarters. Certain of the Company’s subsidiaries will serve as Notes Guarantors that jointly and severally, fully and unconditionally guarantee the obligations under the Convertible Notes and the Indenture. The Indenture also requires certain future subsidiaries of the Post-Combination Company, if any, to become Notes Guarantors. This covenant will terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The Indenture also includes customary events of default and related provisions for potential acceleration of the Convertible Notes.
The Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023 as required pursuant to Section 2.05 of the Indenture, resulting in a default. Pursuant to Section 7.01(A)(ii) of the Indenture, a default for thirty (30) consecutive days in the payment when due of interest on any Convertible Note constitutes an Event of Default (as defined in the Indenture). In the event the Company does not make the interest payment on or prior to March 31, 2023 and no agreement is unableotherwise reached with the holders of the Convertible Notes, the trustee or holders of at least 25% in principal amount of the Convertible Notes may declare the principal and any interest immediately due and payable. Although the Company is in active negotiations with the holders of the Convertible Notes to completeresolve the default, there can be no assurances that an agreement will be reached on terms that are acceptable to us or at all.
Line of credit
Effective January 14, 2015, the Company entered into a Revolving Credit Agreement with a financial institution that provided maximum borrowing under a revolving loan commitment of up to $2 million, bearing an interest rate of 2% plus prime rate as published by the Wall Street Journal. Effective July 3, 2020, the Company renewed the line of credit with the financial institution through May 31, 2021 that provided maximum borrowing under a revolving loan commitment of up to $5 million. In May 2021 the maturity date was extended to June 30, 2021 and then further extended to July 31, 2021. The line was then renewed on July 21, 2021 with an expanded credit limit of $8 million, a new maturity date of June 30, 2023 and an amended per annum interest rate of the greater of 2.25% plus prime rate as published by the Wall Street Journal or 5.50%. The line of credit was repaid at the closing of the Business Combination.
Notes Payable
71
On August 11, 2021, the Company entered into a loan and security agreement (the “Note Agreement”) with a financial institution that provided for a borrowing commitment of $15 million in the form of promissory notes. In August 2021, the Company borrowed $10 million under the first tranche (“First Tranche Notes”). The Note Agreement had a commitment for additional second tranche borrowings of $5 million through June 30, 2022 (“Second Tranche Notes”). In October 2021 the Company borrowed the remaining $5 million committed under the Note Agreement. The borrowings under the Note Agreement were secured by substantially all assets of the Company.
The First Tranche Notes and Second Tranche Notes were due to mature on September 1, 2026 and November 1, 2026, respectively, and bore interest at a rate per annum of 6.25% plus the greater of 3.25% or the prime rate as published by the Wall Street Journal. The Company was required to make interest-only payments on the first of each month beginning October 1, 2021 and December 1, 2021, respectively. Beginning October 1, 2023 and December 1, 2023, respectively, the Company would have been required to make principal payments of $278 thousand and $139 thousand, respectively, plus accrued interest on the first of each month through maturity. Upon payment in full of the First Tranche Notes and Second Tranche Notes, the Company was required to pay exit fees of $600 thousand and $300 thousand, respectively.
In December 2021, the Company borrowed an additional $1 million from the same financial institution, which was repaid in full on December 31, 2021. In addition, the Company borrowed an additional $5 million (“Third Tranche Notes”) that bore interest at a rate per annum of 6.25% plus the greater of 3.25% or the prime rate as published by the Wall Street Journal. The Company was required to make interest-only payments on the first of each month beginning February 1, 2022, with the full principal amount due on July 1, 2023. Upon payment in full, the Company was required to pay exit fees of $50 thousand.
In connection with the Note Agreement, the Company issued warrants to purchase up to 33,357 shares of common stock of the Company (the “Legacy Liability Warrants”) at an exercise price of $0.01 per share (Note 8). On the date of issuance, the Company recorded the fair value of the Legacy Liability Warrants as a discount to the First Tranche Notes which was being amortized into interest expense over the term of the First Tranche Notes using the effective interest method. The issuance costs were deferred over the repayment term of the debt. Deferred issuance costs relate to the Company’s debt instruments, the short-term and long-term portions are reflected as a deduction from the carrying amount of the related debt.
In addition, the Company issued additional notes payable in July 2022 for proceeds of $3.0 million. Such notes payable matured on the earlier of (a) December 31, 2022 or (b) the close of the Business Combination. The amount due at maturity was $4.5 million. The Company elected to account for the additional notes payable under the fair value option of accounting.
The notes payable were repaid at the closing of the Business Combination.
Promissory Notes
During the second quarter of 2022, the Company entered into promissory notes with various individuals (the “Promissory Notes”), including current investors, members of management and other unrelated parties in exchange for cash in an amount equal to $7.0 million (the “Promissory Notes”). The Promissory Notes were due to mature on the earlier of (a) one year from issuance or (b) the closing of the Business Combination (Note 1) and bore per annum interest at the rate of 7.75% plus the greater of 3.50% or the prime rate as published by February 2, 2023, thenthe Wall Street Journal. The Company was required to make nine interest-only payments, followed by three principal and interest payments. In connection with the Promissory Notes, the Company will cease allissued warrants (“Promissory Note Warrants”) to purchase up to 31,024 shares of common stock of the Company at an exercise price of $0.01 per share (Note 7). Upon payment in full of the Promissory Notes, the Company was required to make an additional final payment (“Final Payment”) of $3.5 million.
The Company elected to account for the Promissory Notes under the fair value option of accounting upon issuance of each of the Promissory Notes. At issuance the Company recognized the fair value of the Promissory Notes of $6.3 million with the remaining $0.7 million of proceeds received allocated to the Promissory Note Warrants.
The Promissory Notes were repaid at the closing of the Business Combination.
Paycheck Protection Program Loan
72
On April 14, 2020, the Company received loan proceeds of $2.3 million pursuant to the Paycheck Protection Program (the “PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The PPP Loan had a maturity date of April 22, 2022 and bore interest at a rate of 1% per annum. The balance as of December 31, 2020 of $2.3 million is included in Paycheck Protection Program loan payable on the consolidated balance sheets. On September 17, 2021, the PPP Loan was forgiven in full including accrued interest thereon. As such, the Company recorded a gain on loan forgiveness during the twelve months ended December 31, 2021 of $2.3 million included in other income in the consolidated statement of operations.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
| For the Twelve Months |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash flow used in operating activities |
| $ | (26,588 | ) |
| $ | (21,373 | ) |
| $ | 1,579 |
|
Cash flow used in investing activities |
|
| (2,385 | ) |
|
| (10,422 | ) |
|
| (1,578 | ) |
Cash flow provided by financing activities |
|
| 39,787 |
|
|
| 20,198 |
|
|
| 2,266 |
|
Operating Activities
Our cash flows from operating activities are primarily driven by the activities associated with our CaaS revenue stream, offset by the cash cost of operations, exceptand are significantly influenced by the timing of and fluctuations in receipts from buyers and related payments to our clients. We typically receive cash from the end users of products sold prior to remitting back to our clients. Our collection and payment cycles can vary from period to period. In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year.
During the twelve months ended December 31, 2022, net cash used in operating activities increased by $5.2 million to $26.6 million, compared to net cash used in operating activities of $21.4 million during the twelve months ended December 31, 2021. The primary driver of the change was the increase in net loss and the sale of existing inventory.
During the year ended December 31, 2021, net cash used in operating activities was $21.4 million, compared to net cash provided by operating activities of $1.6 million during the year ended December 31, 2020. The primary driver of the change was a result of the timing of payments due to our clients and purchase of inventory in 2021.
Investing Activities
Our primary investing activities have consisted of purchases of property and equipment and software.
During the twelve months ended December 31, 2022, net cash used in investing activities decreased by $8.0 million to $2.4 million compared to net cash used in investing activities of $10.4 million during the twelve months ended December 31, 2021. The primary drivers of the decrease was cash used to purchase the remaining equity in an affiliate, compared to cash used in the prior year for the two joint venture investments.
During the year ended December 31, 2021, net cash used in investing activities was $10.4 million compared to net cash used in investing activities of $1.6 million during the year ended December 31, 2020. The increase in cash used in investing activities is primarily related to the equity contribution as part of the formation of joint ventures in 2021.
Financing Activities
Our financing activities consisted primarily of borrowings and repayments of debt as well as activity related to the Business Combination.
During the twelve months ended December 31, 2022, net cash provided by financing activities increased by $19.6 million to $39.8 million, compared to net cash provided by financing activities of $20.2 million for the twelve months ended December 31, 2021. The change was primarily driven by the activity related to the Business Combination.
During the year ended December 31, 2021, net cash provided by financing activities was $20.2 million compared to net cash provided by financing activities of $2.3 million for the year ended December 31, 2020. The change was primarily driven by the Company’s borrowing of $20 million under its Note Agreement during the year ended
73
December 31, 2021, which was offset by borrowings of $2.3 million under the PPP Loan during the year ended December 31, 2020.
Off-Balance Sheet Arrangements
We do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of liquidating.facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements as of December 31, 2022 or 2021.
Contractual Obligations and Known Future Cash Requirements
Our principal commitments consist of operating lease for the office and warehouses located in California and Pennsylvania. Our five monthly lease commitment payments range from approximately $24 thousand to approximately $189 thousand. Each of our five lease commitments expire at various times through November 2028. Some of the leases contain renewal options.
As of December 31, 2022, the expected future obligations of the Company are as follows:
|
| Total |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| Thereafter |
| |||||||
Operating lease obligations |
| $ | 22,682 |
|
| $ | 5,580 |
|
| $ | 5,173 |
|
| $ | 5,279 |
|
| $ | 3,529 |
|
| $ | 2,222 |
|
| $ | 899 |
|
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Our Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The liquiditypreparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. Below is a discussion of the policies that we believe may involve a high degree of judgment and complexity.
We believe that the accounting policies disclosed below include estimates and assumptions critical to our business and their application could have a material impact on our consolidated financial statements. In addition to these critical policies, our significant accounting policies are included within Note 2 of our “Notes to Consolidated Financial Statements” included elsewhere in this filing.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, do not bear interest, and primarily represent receivables from consumers and credit card receivables from merchant processors, after performance obligations have been fulfilled. Amounts collected on accounts receivable are included in operating activities in the statements of cash flows.
The Company maintains an allowance for credit losses, as deemed necessary, for estimated losses inherent in its accounts receivable portfolio. In estimating this reserve, management considers historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any customers with off-balance-sheet credit exposure. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible.
Fair value measurements
Joint Ventures
The Company accounts for joint ventures in accordance with ASC 810-10, “Consolidations,” ASC 323-10, “Investments-Equity Method and Joint Ventures” and ASC 825-10, “Finance Instruments,” under which the
74
Company’s joint ventures meet the criteria to be accounted for as an equity method investment using the fair value method. As such, the difference between fair value and cash contribution is recorded as a gain to other income in the Company’s consolidated statement of operations. The joint ventures are subject to fair value assessment each reporting period and the changes in fair value is booked to the Company’s consolidated statement of operations. In valuing joint venture investments, we utilized the valuation from an independent third-party specialist, with input from management, which used a combination of net income and market approaches, with 50% weight to the discounted cash flow method and 25% weigh to each of the guideline public company and transaction methods. Changes in these estimates and assumptions or the relationship between those assumptions impact our valuation as of the valuation date and may have a material impact on the valuation.
Convertible notes
The Company accounts for mandatory liquidationthe convertible notes in accordance with ASC 825-10, "Financial Instruments," under which the Company's convertible notes meet the criteria to be accounted for using the fair value method. The Convertible Notes are subject to fair value assessment each reporting period. As such, changes to fair value are recorded in the consolidated income statements to change in fair value of the Convertible Notes. In valuing the Convertible Notes, we utilized the valuation from an independent third-party specialist, which uses a binomial lattice valuation model. Changes in these estimates and assumptions or the relationship between those assumptions impact our valuation as of the valuation date and may have a material impact on the valuation.
Standby Agreement
The Company has entered into a Standby Agreement and the Equity PIPE Subscription Agreement with a Financial Institution (note 8) which is accounted for as a derivative in its entirety in accordance with ASC 815-10, and the structured payments within the Equity PIPE Subscription Agreement was considered an embedded feature in the Equity PIPE Subscription Agreement that met the definition of a derivative and required bifurcation from the Equity PIPE Subscription Agreement, as it is not clearly and closely related to the Equity PIPE Subscription Agreement and would be accounted for in accordance with ASC 815-10 (together the “Standby Agreement Derivative"). The Company accounted for the Standby Agreement Derivative acquired at fair value upon the closing of the Business Combination. The Company will continue to account for the Standby Agreement Derivative at fair value each reporting period in accordance with ASC 815-10. The Company engages a third-party valuation specialist to assist with the fair value assessment. The fair value changes is recorded in change in fair value of derivatives on the consolidated statements of operations.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in FASB ASC 480 and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own shares of common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent dissolutionquarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter until settlement. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the consolidated statements of operations.
Revenue
Revenue is accounted for using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.
In accordance with ASC Topic 606, the Company recognizes revenue when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps:
75
A performance obligation is a promise in a contract to transfer a distinct product. Performance obligations promised in a contract are identified based on the goods that will be transferred that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. Performance obligations include establishing and maintaining customer online stores, providing access to the Company’s e-commerce platform, customer service support, photography services, warehousing, and fulfillment. The Company has concluded the sale of goods and related shipping and handling on behalf of our customers are accounted for as a single performance obligation, while the expenses incurred for actual shipping charges are included in cost of sales.
The Company’s revenue is mainly commission fees derived from contractually committed gross revenue processed by customers on the Company’s e-commerce platform. Customers do not have the contractual right to take possession of the Company’s software. Revenue is recognized in an amount that reflects the consideration that the Company expects to ultimately receive in exchange for those promised goods, net of expected discounts for sales promotions and customary allowances.
Commerce-as-a-Service Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged primarily in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers’ inventory or any credit risks relating to the products sold.
Variable consideration is included in revenue for potential product returns. The Company uses a reserve to constrain revenue for the expected variable consideration at each period end. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and expected levels of returns. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
Payment terms and conditions are generally consistent for customers, including credit terms to customers ranging from seven days to 60 days, and the Company’s contracts do not include any significant financing component. The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales in the statements of operations.
Commerce-as-a-Service
The Company’s main revenue stream is “Commerce-as-a-Service” revenue in which they receive commission fees derived from contractually committed gross revenue processed by customers on the Company’s e-commerce platform. Consideration for online sales is collected directly from the shopper by the Company and amounts not owed to the Company are remitted to the client. Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers’ inventory or any credit risks relating to the products sold.
Product revenue
Under one of the Company’s Master Services Agreements, the Company is the owner of inventory and reseller of record. As a result, the Company is the principal in sales to end customers and records these revenues on a gross basis a point in time.
76
Fulfillment
Revenue for business-to-business (“B2B”) fulfillment services is recognized on a gross basis either at a point in time or over a point in time. For example, inbound and outbound services are recognized when the service is complete, while monthly storage services are recognized over the service period.
Marketing
Revenue for marketing services is recognized on a gross basis as marketing services are complete. Performance obligations include providing marketing and program management such as procurement and implementation.
Shipping
Revenue for shipping services is recognized on a gross basis as shipments are completed and products are shipped to end customers.
Other services
Revenue for other services such as photography, business to customer (“B2C”) fulfillment, customer service, development and web design are reimbursable costs and recognized on the gross basis, and are services rendered as part of the performance obligations to clients for which an online platform and online orders are managed. All reimbursable costs are the responsibility of the Company as the Company uses such services to fulfill its performance obligations.
Set up and implementation
The Company provides set up and implementation services for new clients. The revenue is recognized on a gross basis at the completion of the service, with the unearned amounts received for incomplete services recorded as deferred revenue, if any.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales in the statements of operations
Recently Issued Accounting Pronouncements
We discuss the potential impact of recent accounting pronouncements in Note 2 to our “Notes to Consolidated Financial Statements” under the caption “Summary of Significant Accounting Policies”.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.
77
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
78
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Nogin, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Nogin, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, convertible redeemable preferred stock and stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company sustained recurring losses and negative cash flows from operations during the year ended December 31, 2022, and as of that date, the Company’s current liabilities exceeded its current assets by $18.5 million and its total liabilities exceeded its total assets by $73 million. The Company has an accumulated deficit of $82.3 million. These conditions, along with other matters as set forth in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. NoManagement’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments have been madethat might result from the outcome of this uncertainty.
Change in accounting principle
As discussed in Note 2 to the carrying amounts of assets or liabilities shouldconsolidated financial statements, the Company behas changed its method of accounting for leases in 2022 due to the adoption of ASC 842: Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to liquidate after February 2, 2023.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we will be ableplan and perform the audit to locate a suitable candidate for our initial business combination. You shouldobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not rely on the historical record of the performance of our management team’s or businesses associated with them as indicative of our future performance of an investment in the Company or the returns the Company will, or is likely to, generate going forward.
Our audits included performing procedures to assess the risks of material misstatement of our annual or interimthe financial statements, will not be prevented,whether due to error or detectedfraud, and correctedperforming procedures that respond to those risks. Such procedures included examining, on a timely basis.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Newport Beach, California
March 23, 2023
79
Nogin, Inc.
Consolidated Balance Sheets
(In such case, we may be unablethousands, except share and per share data)
|
| December 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash |
| $ | 15,385 |
|
| $ | 1,071 |
|
Accounts receivable, net |
|
| 1,578 |
|
|
| 1,977 |
|
Related party receivables |
|
| — |
|
|
| 5,356 |
|
Inventory |
|
| 15,726 |
|
|
| 22,777 |
|
Prepaid expenses and other current assets |
|
| 2,539 |
|
|
| 2,915 |
|
Total current assets |
|
| 35,228 |
|
|
| 34,096 |
|
Restricted cash |
|
| — |
|
|
| 3,500 |
|
Property and equipment, net |
|
| 1,595 |
|
|
| 1,789 |
|
Right-of-use asset, net (Note 21) |
|
| 17,391 |
|
|
| — |
|
Intangible assets, net |
|
| 5,493 |
|
|
| 1,112 |
|
Goodwill |
|
| 6,748 |
|
|
| — |
|
Investment in unconsolidated affiliates |
|
| 7,404 |
|
|
| 13,570 |
|
Other non-current asset |
|
| 1,074 |
|
|
| 664 |
|
Total assets |
| $ | 74,933 |
|
| $ | 54,731 |
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 19,605 |
|
| $ | 16,098 |
|
Due to clients |
|
| 10,891 |
|
|
| 5,151 |
|
Related party payables |
|
| 1,033 |
|
|
| — |
|
Accrued expenses and other liabilities (Note 6) |
|
| 17,826 |
|
|
| 14,018 |
|
Lease liabilities, current portion (Note 21) |
|
| 4,367 |
|
|
| — |
|
Total current liabilities |
|
| 53,722 |
|
|
| 35,267 |
|
Line of credit |
|
| — |
|
|
| 348 |
|
Long-term note payable, net |
|
| — |
|
|
| 19,249 |
|
Convertible notes |
|
| 60,852 |
|
|
| — |
|
Deferred tax liabilities |
|
| 394 |
|
|
| 1,174 |
|
Lease liabilities, net of current portion (Note 21) |
|
| 15,223 |
|
|
| — |
|
Other long-term liabilities (Note 6) |
|
| 17,766 |
|
|
| 734 |
|
Total liabilities |
|
| 147,957 |
|
|
| 56,772 |
|
Commitments and contingencies (Note 22) |
|
|
|
|
|
| ||
CONVERTIBLE REDEEMABLE PREFERRED STOCK |
|
|
|
|
|
| ||
Series A convertible, redeemable preferred stock, $0.0001 par value, 8,864,495 shares |
|
| — |
|
|
| 4,687 |
|
Series B convertible, redeemable preferred stock, $0.0001 par value, 6,944,093 shares |
|
| — |
|
|
| 6,502 |
|
|
|
|
|
|
|
| ||
STOCKHOLDERS' DEFICIT |
|
|
|
|
|
| ||
Common stock, $0.0001 par value, 500,000,000 and 60,760,816 shares authorized; 66,694,295 and |
|
| 7 |
|
|
| 4 |
|
Additional paid-in capital |
|
| 9,263 |
|
|
| 4,358 |
|
Treasury stock |
|
| — |
|
|
| (1,330 | ) |
Accumulated deficit |
|
| (82,294 | ) |
|
| (16,262 | ) |
Total stockholders’ deficit |
|
| (73,024 | ) |
|
| (13,230 | ) |
Total liabilities, convertible redeemable preferred stock and stockholders’ deficit |
| $ | 74,933 |
|
| $ | 54,731 |
|
See the accompanying notes to maintain compliance with securities law requirements regarding timely filingconsolidated financial statements.
80
Nogin, Inc.
Consolidated Statements of periodic reportsOperations
(In thousands, except share and per share data)
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net service revenue |
| $ | 40,855 |
|
| $ | 41,866 |
|
Net product revenue |
|
| 41,540 |
|
|
| 51,346 |
|
Net revenue from related parties |
|
| 12,076 |
|
|
| 8,136 |
|
Total net revenue |
|
| 94,471 |
|
|
| 101,348 |
|
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 26,706 |
|
|
| 24,174 |
|
Cost of product revenue (1) |
|
| 28,754 |
|
|
| 20,431 |
|
Sales and marketing |
|
| 2,672 |
|
|
| 1,772 |
|
Research and development |
|
| 5,330 |
|
|
| 5,361 |
|
General and administrative |
|
| 70,289 |
|
|
| 55,369 |
|
Depreciation and amortization |
|
| 808 |
|
|
| 520 |
|
Total operating costs and expenses |
|
| 134,559 |
|
|
| 107,627 |
|
Operating loss |
|
| (40,088 | ) |
|
| (6,279 | ) |
Interest expense |
|
| (6,328 | ) |
|
| (926 | ) |
Change in fair value of promissory notes |
|
| (4,561 | ) |
|
| — |
|
Change in fair value of derivative instruments |
|
| 1,117 |
|
|
| — |
|
Change in fair value of unconsolidated affiliates |
|
| (4,245 | ) |
|
| 4,937 |
|
Change in fair value of convertible notes |
|
| 4,271 |
|
|
| — |
|
Debt extinguishment loss |
|
| (1,885 | ) |
|
| — |
|
Other (loss) income, net |
|
| (1,787 | ) |
|
| 3,378 |
|
(Loss) Income before income taxes |
|
| (53,506 | ) |
|
| 1,110 |
|
(Benefit) Provision for income taxes |
|
| (780 | ) |
|
| 1,175 |
|
Net loss |
| $ | (52,726 | ) |
| $ | (65 | ) |
|
|
|
|
|
|
| ||
Net loss per common share – basic |
| $ | (1.08 | ) |
| $ | (0.00 | ) |
Net loss per common share – diluted |
| $ | (1.08 | ) |
| $ | (0.00 | ) |
Weighted average shares outstanding – basic |
|
| 49,041,640 |
|
|
| 39,621,946 |
|
Weighted average shares outstanding – diluted |
|
| 49,041,640 |
|
|
| 40,896,279 |
|
See the accompanying notes to consolidated financial statements
81
Nogin, Inc.
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders' Deficit
(In thousands, except share data)
|
| Convertible Redeemable Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| Series A |
|
| Series B |
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Deficit |
|
| Total Stockholders’ Deficit |
| ||||||||||
Balance, December 31, 2020 |
|
| 2,042,483 |
|
| $ | 4,687 |
|
|
| 1,459,462 |
|
| $ | 6,502 |
|
|
| 9,129,358 |
|
| $ | 1 |
|
| $ | 4,308 |
|
| $ | (1,330 | ) |
| $ | (16,197 | ) |
| $ | (13,218 | ) |
Retroactive application of reverse recapitalization (1) |
|
| 6,822,012 |
|
|
| — |
|
|
| 4,874,688 |
|
|
| — |
|
|
| 30,492,588 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2020, as adjusted |
|
| 8,864,495 |
|
|
| 4,687 |
|
|
| 6,334,150 |
|
|
| 6,502 |
|
|
| 39,621,946 |
|
|
| 4 |
|
|
| 4,305 |
|
|
| (1,330 | ) |
|
| (16,197 | ) |
|
| (13,218 | ) |
Stock-based Compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53 |
|
|
| — |
|
|
| — |
|
|
| 53 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (65 | ) |
|
| (65 | ) |
Balance, December 31, 2021 |
|
| 8,864,495 |
|
| $ | 4,687 |
|
|
| 6,334,150 |
|
| $ | 6,502 |
|
|
| 39,621,946 |
|
| $ | 4 |
|
| $ | 4,358 |
|
| $ | (1,330 | ) |
| $ | (16,262 | ) |
| $ | (13,230 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2021 |
|
| 2,042,483 |
|
| $ | 4,687 |
|
|
| 1,459,462 |
|
| $ | 6,502 |
|
|
| 9,129,358 |
|
| $ | 1 |
|
| $ | 4,361 |
|
| $ | (1,330 | ) |
| $ | (16,262 | ) |
| $ | (13,230 | ) |
Retroactive application of reverse recapitalization (1) |
|
| 6,822,012 |
|
|
| — |
|
|
| 4,874,688 |
|
|
| — |
|
|
| 30,492,588 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2021, as adjusted |
|
| 8,864,495 |
|
|
| 4,687 |
|
|
| 6,334,150 |
|
|
| 6,502 |
|
|
| 39,621,946 |
|
|
| 4 |
|
|
| 4,358 |
|
|
| (1,330 | ) |
|
| (16,262 | ) |
|
| (13,230 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 130 |
|
|
| — |
|
|
| — |
|
|
| 130 |
|
Warrant issuance |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 713 |
|
|
| — |
|
|
| — |
|
|
| 713 |
|
Net settlement of liability classified warrants into common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 202,680 |
|
|
| — |
|
|
| 1,706 |
|
|
| — |
|
|
| — |
|
|
| 1,706 |
|
Net settlement of equity classified warrants into common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 559,051 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 199,147 |
|
|
| — |
|
|
| 84 |
|
|
| — |
|
|
| — |
|
|
| 84 |
|
Conversion of redeemable convertible preferred stock to common stock and cancellation of treasury shares |
|
| (8,864,495 | ) |
|
| (4,687 | ) |
|
| (6,334,150 | ) |
|
| (6,502 | ) |
|
| 15,198,645 |
|
|
| 2 |
|
|
| 9,857 |
|
|
| 1,330 |
|
|
| — |
|
|
| 11,189 |
|
Reverse capitalization, net of transaction costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,864,076 |
|
|
| 1 |
|
|
| (8,439 | ) |
|
| — |
|
|
| (13,306 | ) |
|
| (21,744 | ) |
Equity classified warrants issued with PIPE convertible notes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 366 |
|
|
| — |
|
|
| — |
|
|
| 366 |
|
Common stock issued to settle PIPE convertible note issuance costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 48,750 |
|
|
| — |
|
|
| 488 |
|
|
| — |
|
|
| — |
|
|
| 488 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (52,726 | ) |
|
| (52,726 | ) |
Balance, December 31, 2022 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
|
| 66,694,295 |
|
| $ | 7 |
|
| $ | 9,263 |
|
| $ | — |
|
| $ | (82,294 | ) |
| $ | (73,024 | ) |
See the accompanying notes to applicable stock exchange listing requirements, investors may lose confidence in ourconsolidated financial reporting and our stock price may declinestatements
82
Nogin, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (52,726 | ) |
| $ | (65 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 808 |
|
|
| 520 |
|
Amortization of debt issuance costs and discounts |
|
| 2,617 |
|
|
| 137 |
|
Debt issuance costs expensed under fair value option |
|
| 2,034 |
|
|
| — |
|
Amortization of contract acquisition costs |
|
| — |
|
|
| 361 |
|
Stock-based compensation |
|
| 130 |
|
|
| 53 |
|
Deferred income taxes |
|
| (780 | ) |
|
| 1,174 |
|
Change in fair value of unconsolidated affiliates |
|
| 4,245 |
|
|
| (4,937 | ) |
Change in fair value of warrant liability |
|
| 717 |
|
|
| (177 | ) |
Change in fair value of promissory notes |
|
| 4,561 |
|
|
| — |
|
Change in fair value of convertible notes |
|
| (4,271 | ) |
|
| — |
|
Change in fair value of derivatives |
|
| (1,117 | ) |
|
| — |
|
Loss on extinguishment of debt |
|
| 1,885 |
|
|
| — |
|
Settlement of deferred revenue |
|
| (1,611 | ) |
|
| — |
|
Gain on extinguishment of PPP loan |
|
| — |
|
|
| (2,266 | ) |
Loss on disposal of asset |
|
| 641 |
|
|
| 74 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 504 |
|
|
| 2,050 |
|
Related party receivables |
|
| (58 | ) |
|
| (5,356 | ) |
Inventory |
|
| 11,838 |
|
|
| (22,641 | ) |
Prepaid expenses and other current assets |
|
| (2,329 | ) |
|
| (2,138 | ) |
Accounts payable |
|
| (255 | ) |
|
| 9,780 |
|
Due to clients |
|
| 5,740 |
|
|
| (8,197 | ) |
Related party payables |
|
| 1,140 |
|
|
| — |
|
Lease assets and liabilities |
|
| 2,200 |
|
|
| — |
|
Accrued expenses and other liabilities |
|
| (2,501 | ) |
|
| 10,255 |
|
Net cash used in operating activities |
|
| (26,588 | ) |
|
| (21,373 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (1,589 | ) |
|
| (1,789 | ) |
Proceeds from sale of property and equipment |
|
| 700 |
|
|
| — |
|
Acquisition of an affiliate, net of cash acquired |
|
| (1,496 | ) |
|
| — |
|
Investment in unconsolidated affiliates |
|
| — |
|
|
| (8,633 | ) |
Net cash used in investing activities |
|
| (2,385 | ) |
|
| (10,422 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
| ||
Exercise of stock options |
|
| 84 |
|
|
| — |
|
Proceeds from business combination, net of issuance costs |
|
| 1,375 |
|
|
| — |
|
Proceeds from long-term notes payable |
|
| — |
|
|
| 20,000 |
|
Payment of long-term notes payable |
|
| (20,950 | ) |
|
| — |
|
Proceeds from promissory notes |
|
| 8,000 |
|
|
| — |
|
Proceeds from promissory notes – related parties |
|
| 2,175 |
|
|
| — |
|
Payment of promissory notes |
|
| (12,033 | ) |
|
| — |
|
Payment of promissory notes – related parties |
|
| (3,130 | ) |
|
| — |
|
Payment of debt issuance costs |
|
| (397 | ) |
|
| (150 | ) |
Proceeds from PIPE convertible note issuance |
|
| 65,500 |
|
|
| — |
|
Prepayment and other fees paid upon early settlement of debt |
|
| (489 | ) |
|
| — |
|
Proceeds from line of credit |
|
| 114,981 |
|
|
| 173,896 |
|
Repayments of line of credit |
|
| (115,329 | ) |
|
| (173,548 | ) |
Net cash provided by financing activities |
|
| 39,787 |
|
|
| 20,198 |
|
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH |
|
| 10,814 |
|
|
| (11,597 | ) |
Beginning of period |
|
| 4,571 |
|
|
| 16,168 |
|
End of period |
| $ | 15,385 |
|
| $ | 4,571 |
|
83
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 2,231 |
|
| $ | 444 |
|
Cash paid for taxes |
|
| 210 |
|
|
| 195 |
|
Issuance of warrants with debt |
|
| — |
|
|
| 738 |
|
Settlement of preexisting receivable in step-acquisition |
|
| 5,415 |
|
|
| — |
|
Derecognition of investment in unconsolidated entity-step acquisition |
|
| 1,921 |
|
|
| — |
|
Right-of-use assets exchanged for lease liabilities |
|
| 7,311 |
|
|
| — |
|
Non Cash Investing and Financing Activities |
|
|
|
|
|
| ||
Issuance of common stock to settle transaction and advisory costs |
|
| 3,588 |
|
|
| — |
|
Deferred transaction and advisory fees |
|
| 10,979 |
|
|
| — |
|
Cash election consideration payable at closing of Business Combination |
|
| 9,198 |
|
|
| — |
|
Conversion of redeemable convertible preferred stock into common stock |
|
| 11,189 |
|
|
| — |
|
Net settlement of liability classified warrants |
|
| 1,706 |
|
|
| — |
|
|
|
|
|
|
|
| ||
SCHEDULE OF CASH AND RESTRICTED CASH |
|
|
|
|
|
| ||
Cash |
| $ | 15,385 |
|
| $ | 1,071 |
|
Restricted cash |
|
| — |
|
|
| 3,500 |
|
Total cash and restricted cash |
| $ | 15,385 |
|
| $ | 4,571 |
|
See the accompanying notes to consolidated financial statements
84
Nogin, Inc.
Notes to Consolidated Financial Statements
Nogin (the “Company”) is an e-commerce, technology platform provider that delivers Commerce-as-a-Service (“CaaS”) solutions as a result. We cannot assure youheadless, flexible full stack enterprise commerce platform with cloud services and optimizations along with experts for brands and retailers that provide a unique combination of customizability and sales efficiency. The Company manages clients’ front-to-back-end operationsso clients can focus on their business. The Company’s business model is based on providing a comprehensive e-commerce solution to its customers on a revenue sharing basis. Unless the measures we have takencontext otherwise requires, references in this subsection to date, or any measures iwe may take“we,” “our,” “Nogin” and the “Company” refer to the business and operations of Legacy Nogin (as defined below) and its consolidated subsidiaries prior to the Business Combination (as defined below) and to Nogin, Inc. (formerly known as Software Acquisition Group Inc. III) and its consolidated subsidiaries following the consummation of the Business Combination.
The Company’s headquarters and principal place of business are in Tustin, California.
Business Combination
On August 26, 2022 (the “Closing Date”), the Company completed its previously announced Business Combination pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of February 14, 2022 (as amended on April 19, 2022 and August 26, 2022), by and among the Company (formerly known as Software Acquisition Group Inc. III (“SWAG”)), Nuevo Merger Sub, Inc., a wholly owned subsidiary of SWAG (“Merger Sub”), and Branded Online, Inc. dba Nogin (“Legacy Nogin”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Nogin, with Legacy Nogin surviving the Business Combination as a wholly owned subsidiary of the Company (the “Business Combination” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”).
While Legacy Nogin became a wholly-owned subsidiary of the Company, Legacy Nogin was deemed to be the acquirer in the future,Business Combination for accounting purposes. Accordingly, the Business Combination was accounted for as a reverse recapitalization, in which case the consolidated financial statements of the Company represent a continuation of Legacy Nogin and the issuance of common stock and cash consideration in exchange for the net assets of SWAG recognized at historical costs and no recognition of goodwill or other intangible assets. Operations prior to the Business Combination are those of Legacy Nogin and all share and per-share data included in these consolidated financial statements have been retroactively adjusted to give effect to the Business Combination.
As a result of the Business Combination, equityholders of Legacy Nogin received approximately 54.3 million shares of the Company’s common stock (“Common Stock”) and cash consideration of $15.0 million, of which $10.9 million was deferred on the Closing Date (Note 9).
The treatment of the Business Combination as a reverse recapitalization was based on the stockholders of Legacy Nogin holding the majority of voting interests of the Company, Legacy Nogin’s existing management team serving primarily as the initial management team of the Company, Legacy Nogin’s appointment of the majority of the initial board of directors of the Company and Legacy Nogin’s operations comprising the ongoing operations of the Company.
In connection with the Business Combination, the Company received proceeds of approximately $58.8 million from SWAG’s trust account, net of redemptions by SWAG’s public shareholders, as well as approximately $65.5 million in proceeds from the contemporaneous issuance of convertible notes (the “Convertible Notes”). The aggregate cash raised has been and will be sufficientused for general business purposes, the paydown of Legacy Nogin’s outstanding debt, the payment of transaction costs and the payment of the cash consideration.
85
Nogin, Inc.
Notes to avoid potential future material weaknesses.Consolidated Financial Statements
The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows and the consolidated statements of convertible redeemable preferred stock and stockholders’ deficit for the twelve months ended December 31, 2022:
Recapitalization | ||||
Cash - SWAG trust and cash, net of redemptions | 58,841 | |||
Cash - PIPE equity financing | 1,052 | |||
Less: Transaction and advisory fees paid in cash | (54,409 | ) | ||
Less: Cash election consideration paid in cash at the Closing Date | (4,109 | ) | ||
Net proceeds from Business Combination | 1,375 | |||
Plus: Issuance of common stock to settle certain transaction costs | 3,588 | |||
Less: non-cash items charged against additional paid-in capital | (17,510 | ) | ||
Less: Deferred cash election consideration (Note 9) | (9,198 | ) | ||
Net contributions from Business Combination and PIPE equity financing | (21,745 | ) | ||
The number of shares of Common Stock outstanding immediately following the consummation of the Business Combination was as follows:
Number of Shares | ||||
SWAG Common Stock, outstanding prior to the Business Combination | 28,509,835 | |||
Less: Redemption of SWAG shares | (17,021,595 | ) | ||
SWAG Common Stock | 11,488,240 | |||
Shares issued in PIPE equity financing | 517,079 | |||
Shares issued to financial advisors to settle transaction and issuance costs | 407,500 | |||
Business Combination and PIPE equity financing shares | 12,412,819 | |||
Nogin shares | 54,281,476 | |||
Total shares of common stock immediately after Business Combination | 66,694,295 | |||
Basis of Presentation and Principals of Consolidation
The accompanying consolidated financial statements are an emerging growth companypresented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and a smaller reporting company withinpursuant to the meaningrules and regulations of the Securities Act, and if we take advantageExchange Commission (“SEC”). The consolidated financial statements include the accounts of certain exemptions from disclosure requirements available to emerging growth companiesNogin, Inc. (“Nogin” or “Company”) consolidated with the accounts of all its subsidiaries and smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.affiliates in which Nogin holds controlling financial interests as of the financial statement date.
Emerging Growth Company
The Company is an “emerging growth company” within the meaningcompany,” as defined in Section 2(a) of the Securities Act, as modified by the JOBSJumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and weit may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our Class A common stock held bynon-affiliatesexceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply togrowth companies but any such an election to opt out is irrevocable. We have elected not to
Class B ordinary shares | Class A ordinary shares | |||||||||||||||||||
Name of Beneficial Owners (1) | Number of Shares Beneficially Owned | Approximate Percentage of Class | Number of Shares Beneficially Owned | Approximate Percentage of Class | Approximate Percentage of Voting Control | |||||||||||||||
Software Acquisition Holdings III LLC (2) | 5,701,976 | (3) | 100 | % | — | — | 20 | % | ||||||||||||
Jonathan S. Huberman (3) | 5,701,976 | (3) | 100 | % | — | — | 20 | % | ||||||||||||
Mike Nikzad (3) | 5,701,976 | (3) | 100 | % | — | — | 20 | % | ||||||||||||
Andrew Nikou (3) | 5,701,976 | (3) | 100 | % | — | — | 20 | % | ||||||||||||
C. Matthew Olton | — | — | — | — | — | |||||||||||||||
Stephanie Davis | — | — | — | — | — | |||||||||||||||
Steven Guggenheimer | — | — | — | — | — | |||||||||||||||
Dr. Peter H. Diamandis | — | — | — | — | — | |||||||||||||||
All officers and directors as a group (seven individuals) | 5,701,976 | (3) | 100 | % | — | — | 20 | % | ||||||||||||
ASSETS | ||||
Current assets | ||||
Cash | $ | 288,108 | ||
Prepaid expenses and other current assets | 570,528 | |||
Total Current Assets | 858,636 | |||
Marketable securities held in Trust Account | 231,506,662 | |||
TOTAL ASSETS | $ | 232,365,298 | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||
Current liabilities | ||||
Accrued expenses | $ | 1,306,281 | ||
Total Current Liabilities | 1,306,281 | |||
Deferred underwriting fee payable | 7,982,754 | |||
Total Liabilities | 9,289,035 | |||
Commitments and Contingencies (See Note 6) | 0 | |||
Class A common stock subject to possible redemption, 22,807,868 shares at redemption value | 231,499,860 | |||
Stockholders’ Deficit | ||||
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; NaNissued or outstanding | 0 | |||
Class A common stock, $0.0001 par value; 100,000,000 shares authorized; NaNshares issued and outstanding, and 22,807,868 subject to possible redemption | 0— | |||
Class B common stock, $0.0001 par value; 10,000,000 shares authorized; 5,701,967 shares issued and outstanding | 570 | |||
Additional paid-in capital | 0 | |||
Accumulated deficit | (8,424,167 | ) | ||
Total Stockholders’ Deficit | (8,423,597 | ) | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 232,365,298 | ||
Operating and formation costs | $ | 1,917,009 | ||
Loss from operations | (1,917,009 | ) | ||
Other income/(loss): | ||||
Interest earned on marketable securities held in Trust Account | 6,802 | |||
Interest income - bank | 24 | |||
Change in fair value of over-allotment option liability | (61,353 | ) | ||
Fair value of forfeited over-allotment option | 17,445 | |||
Total other loss, net | (37,082 | ) | ||
Net loss | $ | (1,954,091 | ) | |
Basic and diluted weighted average shares outstanding, Class A common stock | 10,024,409 | |||
Basic and diluted net loss per share, Class A | $ | (0.13 | ) | |
Basic and diluted weighted average shares outstanding, Class B common stock | 5,304,936 | |||
Basic and diluted net loss per share, Class B | $ | (0.13 | ) | |
Class A Common Stock | Class B Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||
Balance – January 5, 2021 (inception) | — | $ | — | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Issuance of Class B common stock to Sponsor | — | — | 5,750,000 | 575 | 24,425 | 0 | 25,000 | |||||||||||||||||||||
Net loss | — | — | — | 0 | 0 | (1,000 | ) | (1,000 | ) | |||||||||||||||||||
Balance – March 31, 2021 | — | $ | — | 5,750,000 | $ | 575 | $ | 24,425 | $ | (1,000 | ) | $ | 24,000 | |||||||||||||||
Net loss | — | — | — | 0 | 0 | 1 | 1 | |||||||||||||||||||||
Balance – June 30, 2021 | — | $ | — | 5,750,000 | $ | 575 | $ | 24,425 | $ | (999 | ) | $ | 24,001 | |||||||||||||||
Sale of 20,000,000 Units, net of underwriting discounts and offering expenses | — | — | — | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Proceed allocated to Public Warrants | — | — | — | 0 | 12,492,109 | 0 | 12,492,109 | |||||||||||||||||||||
Allocated value of transaction costs to warrants | — | — | — | 0 | (737,120 | ) | 0 | (737,120 | ) | |||||||||||||||||||
Adjustment of carrying value to initial redemption value | — | — | — | 0 | (21,762,173 | ) | (6,470,076 | ) | (28,232,249 | ) | ||||||||||||||||||
Sale of 9,000,000 Private Placement Warrants | — | — | — | 0 | 9,982,754 | 0 | 9,982,754 | |||||||||||||||||||||
Forfeiture of Founder Shares | — | — | (48,033 | ) | (5 | ) | 5 | 0 | 0 | |||||||||||||||||||
Net loss | — | — | — | 0 | 0 | (690,854 | ) | (690,854 | ) | |||||||||||||||||||
Balance – September 30, 2021 | — | $ | — | 5,701,967 | $ | 570 | $ | 0 | $ | (7,161,929 | ) | $ | (7,161,359 | ) | ||||||||||||||
Net Loss | — | — | — | 0 | 0 | (1,262,238 | ) | (1,262,238 | ) | |||||||||||||||||||
Balance – December 31, 2021 | — | $ | — | 5,701,967 | $ | 570 | $ | 0 | $ | (8,424,167 | ) | $ | (8,423,597 | ) | ||||||||||||||
Cash Flows from Operating Activities: | ||||
Net loss | $ | (1,954,091 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Interest earned on marketable securities held in Trust Account | (6,802 | ) | ||
Change in fair value of over-allotment liability | 61,353 | |||
Fair value of forfeited over-allotment optio n | (17,445 | ) | ||
Changes in operating assets and liabilities: | ||||
Prepaid expenses and other current assets | (570,528 | ) | ||
Accrued expenses | 1,306,281 | |||
Net cash used in operating activities | (1,181,232 | ) | ||
Cash Flows from Investing Activities: | ||||
Investment of cash in Trust Account | (231,499,860 | ) | ||
Net cash used in investing activities | (231,499,860 | ) | ||
Cash Flows from Financing Activities: | ||||
Proceeds from issuance of Class B common stock to Sponsor | 25,000 | |||
Proceeds from sale of Units, net of underwriting discounts paid | 223,517,106 | |||
Proceeds from sale of Private Placements Warrants | 9,982,754 | |||
Proceeds from promissory note – related party | 174,060 | |||
Repayment of promissory note – related party | (174,060 | ) | ||
Payment of offering costs | (555,660 | ) | ||
Net cash provided by financing activities | 232,969,200 | |||
Net Change in Cash | 288,108 | |||
Cash – Beginning of period | 0 | |||
Cash – End of period | $ | 288,108 | ||
Non-Cash investing and financing activities: | ||||
Initial value of over-allotment option liability | $ | 211,034 | ||
Elimination of over-allotment option liability | $ | (254,942 | ) | |
Adjustment of carrying value to initial redemption value | $ | 28,232,249 | ||
Deferred underwriting fee payable | $ | 7,982,754 | ||
Forfeiture of Founder Shares | $ | (5 | ) | |
86
Nogin, Inc.
Notes to Consolidated Financial Statements
Liquidity and Capital Resources
Our primary requirements for short-term liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Our future capital requirements will depend on many factors, including our levels of revenue, the expansion of sales and marketing activities, successful customer acquisitions, the results of business initiatives, the timing of new product introductions and overall economic conditions.
Prior to the Business Combination, the Company’s available liquidity and operations were financed through equity contributions, a line of credit, promissory notes and cash flow from operations. Moving forward, the Company expects to fund operations through equity contributions and cash flow from operations.
Because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may make comparison of the Company’sdetermine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has sustained recurring losses and negative cash flows from operations. As of December 31, 2022, the Company has an accumulated deficit of $82.3 million, negative working capital, and a cash balance of $15.4 million, which consists of amounts held as bank deposits.
These factors and other uncertainties, including compliance with another public companythe covenants included in the Indenture governing our Convertible Notes, raise substantial doubt about our ability to continue as a going concern for at least twelve months from the date that these consolidated financial statements were issued. We are currently executing on various strategies to improve available cash balances, liquidity and cash generated from operations to alleviate these conditions, including a comprehensive cost reduction and performance improvement program, reduced headcount and elimination of certain discretionary and general and administrative expenses. We are also in the process of alleviating the inventory supply chain challenges that began in 2021, leading to lower revenue and cash flows, and are taking steps to improve the operational efficiency of our fulfillment center. Further, we expect to seek additional funds through potential securities financings. However, our failure to obtain financing as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, many of which is neither an emergingare beyond our control.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The worldwide spread of COVID-19 and its variants resulted in a global slowdown of economic activity which altered the demand for a broad variety of goods and services, including those provided by our clients, while also disrupting sales channels and advertising and marketing activities until economic activity normalized. Our revenue growth company nor an emerging growth companyand results of operations have been resilient despite the headwinds created by the COVID-19 pandemic and its variants. The extent to which has opted out of usingongoing and future developments related to the extended transition period difficult or impossible becauseglobal impact of the potential differences in accounting standards used.COVID-19 pandemic and related vaccination measures designed to curb its spread continue to impact our business, financial condition, and results of operations, all of which cannot be predicted with certainty. Many of these ongoing and future developments are beyond our control, including the speed of contagion, the development, distribution and implementation of effective preventative or treatment measures, including vaccines (and vaccination rates), the scope of governmental and other restrictions on travel, discretionary services and other activity, and the public reactions and receptiveness to these developments.
The impacts of the COVID-19 pandemic and its variants will depend on future developments, including the duration and spread of the pandemic. These developments and the impacts of the COVID-19 pandemic on the financial markets and overall economy are highly uncertain and cannot be predicted.
87
Nogin, Inc.
Notes to Consolidated Financial Statements
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period.
Cash
Cash consists of cash in bank deposits.
Restricted Cash
Restricted cash represents cash held as collateral for the Company’s purchases of certain inventory under one of the Company’s master services agreements. The collateral provides the Company with increased credit in order to purchase certain inventory. The funds can be released and available for use by the Company when it is determined the Company no longer needs the additional credit and can subsequently request for the funds to be released. The funds were released to the Company during fiscal year 2022.
Accounts Receivable, Net
Accounts receivable are recorded at the invoiced amount, do not bear interest, and primarily represent receivables from consumers and credit card receivables from merchant processors, after performance obligations have been fulfilled.
The Company maintains an allowance for credit losses, as deemed necessary, for estimated losses inherent in its accounts receivable portfolio. In estimating this reserve, management considers historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company does not have any customers with off-balance-sheet credit exposure. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible.
The reserve for credit losses as of December 31, 2022 and 2021, consisted of the following (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Balance at beginning of period |
| $ | 406 |
|
| $ | 428 |
|
Additions to allowance for credit losses |
|
| 228 |
|
|
| 433 |
|
Cash receipts |
|
| (126 | ) |
|
| — |
|
Write offs |
|
| (83 | ) |
|
| (455 | ) |
Balance at end of period |
| $ | 425 |
|
| $ | 406 |
|
Inventory
Inventory is stated at the lower of cost or net realizable value and consists entirely of finished goods purchased for resale. Cost is determined using the first-in, first-out (“FIFO”) method or weighted average cost depending on product brand. Adjustments are made, if necessary, to reduce excess or obsolete inventory to their net realizable value. These estimates requires managementare based on management’s judgment about future demand and market conditions. Once established, these adjustments are considered permanent and are not revised until the related inventory is sold or disposed.
The Company maintains a reserve for returns, which is included within inventory on the consolidated balance sheets with changes to exercisethe reserve in cost of product revenue on the accompanying statement of operations. The reserve for
88
Nogin, Inc.
Notes to Consolidated Financial Statements
returns was $535 thousand as of December 31, 2022 and $532 thousand as of December 31, 2021 on the consolidated balance sheet.
Concentration of Risks
Credit Risk
Financial instruments that potentially subject the Company to significant judgment. It isconcentrations of credit risk consist primarily of cash, restricted cash and accounts receivables. The Company maintains cash balances at least reasonably possiblefinancial institutions. Amounts on deposit at these institutions are secured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has had bank deposits in excess of the FDIC's insurance limit. The Company has not experienced any losses in its cash accounts to date. Management believes that the estimateCompany is not exposed to any significant credit risk with respect to its cash.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. As of December 31, 2022, receivables from two customers amounted to $0.8 million (or 44% of accounts receivable) and $0.2 million (or 9% of accounts receivable). As of December 31, 2021, receivables from two customers amounted to $1.1 million (or 15% of accounts receivable) and $5.4 million (or 73% of accounts receivable).
Major Customers
For the twelve months ended December 31, 2022, revenue from three customers amounted to $27.5 million (or 29% of total revenue), $15.0 million (or 16% of total revenue), and $8.5 million (or 9% of total revenue). For the twelve months ended December 31, 2021, revenue from three customer amounted to $30.4 million (or 30% of total revenue), $22.2 million (or 22% of total revenue), and $9.9 million (or 10% of total revenue).
Major Suppliers
For the twelve months ended December 31, 2022, three vendors accounted for $10.2 million (or 12% of total operating expense purchases), $10.1 million (or 11% of total operating expense purchases) and $8.2 million (or 9% of total operating expense purchases). For the twelve months ended December 31, 2021, three vendors accounted for $9.5 million (or 17% of total operating expense purchases), $6.4 million (or 12% of total operating expense purchases) and $5.8 million (or 11% of total operating expense purchases).
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the effectassets. Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a condition, situationmajor nature that extend the life of the asset are capitalized. At the time of retirement or setother disposition of property and equipment, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gains or losses are reflected in the accompanying statement of operations.
Estimated Useful Life (Years) | ||
Furniture and fixtures | 5 | |
Computer equipment and software | 3 to 7 | |
Leasehold improvements | Lesser of economic useful life |
The Company evaluates the carrying value of property and equipment for impairment whenever events or changes in circumstances indicate that existed atthe carrying amounts may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of forecasted future cash flows. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility, or deteriorations in operating cash flows. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.
89
Nogin, Inc.
Notes to Consolidated Financial Statements
Right-of-use Assets and Lease Liabilities
On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842, “Leases” (“ASC 842”), using the current period adjustment method. Accordingly, comparative period financial information was not restated for the effects of adopting ASC 842.
The significant practical expedients we adopted include the following:
As of the date of adoption on January 1, 2022, the consolidated financial statements, which management considered in formulating its estimate, could changeimpact of ASC 842 resulted in the nearrecognition of a right-of-use asset (“ROU asset”) and lease liability for our operating leases on our consolidated balance sheets of approximately $13.0 million and $15.1 million, respectively.
Lease liabilities were recognized based on the present value of remaining lease payments over the remaining lease term. ROU assets were recognized utilizing the lease liability as of January 1, 2022 adjusted for deferred rent recorded as under ASC 840 operating lease related balances. As the Company’s operating lease agreements do not provide a rate implicit in the lease, we discounted the remaining lease payments using an estimated incremental borrowing rate, which was based on the information available at the adoption date. Operating lease cost is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and other operating costs are expensed as incurred. Leases with an initial term due to oneof 12 months or more future confirming events. Oneless are not recorded on the balance sheet. The adoption of this new guidance did not have a material net impact on the Company’s consolidated statements of operations or consolidated statements of cash flows.
Our operating leases primarily consist of office space, distribution centers and equipment used within our operations. Most of the more significant accounting estimates includedleases have lease terms ranging from three to eight years, although the terms and conditions of our leases can vary significantly from lease to lease.
Long-lived Assets
The Company reviews long-lived assets with finite lives for impairment upon the occurrence of certain events or circumstances that indicate the related amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in these consolidated financial statementscircumstances indicate that the carrying amount of the assets may not be recoverable. An asset is considered to be impaired if the determinationsum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the warrant liabilities. Such estimates may be subject to change as more current information becomes available and, accordingly, the actual results could differ significantly from those estimates.
90
Nogin, Inc.
Notes to Consolidated Financial Statements
Goodwill
The Company evaluates goodwill for impairment annually or more frequently when an original maturityevent occurs or circumstances change that indicate the carrying value may not be recoverable. The Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of three months oran asset is less when purchasedthan its carrying value and if so, the Company will perform a quantitative test. The Company compared the carrying value of the indefinite-lived asset to its estimated fair value and if the fair value is determined to be cash equivalents. Theless than the carrying value, the Company did 0t have any cash equivalentswill recognize an impairment for the difference. There was no impairment recorded at December 31, 2021.
Investment in Trust Account
Investments for which the Company can exercise significant influence but does not have control are accounted for under the equity method unless the Company elects the fair value option of accounting. During fiscal year 2022, the Company had two joint ventures, ModCloth Partners LLC (“ModCloth”) and IPCO Holdings, LLC (“IPCO”), both of which the Company owns 50% and has elected the fair value option of accounting. Changes in the fair value of the assets held in the Trust Account were held in money market funds,joint ventures, which are invested primarilyinclusive of equity in U.S. Treasury securities. All of the Company’s investments held in the Trust Accountincome, are classifiedrecorded as trading securities. Trading securities are presented on the balance sheet at fair value at the end of each reporting period. Gains and losses resulting from the changechanges in fair value of investments heldunconsolidated affiliates in Trust Account are included in interest earned on marketable securities held in Trust Account in the accompanying consolidated statements of operations. operations during the periods such changes occur. Modcloth's remaining 50% interest was acquired in a step-acquisition on December 1, 2022 by the Company.
The estimatedjoint ventures were determined to be variable interest entities as the equity investment at risk is not sufficient to permit the joint ventures to finance its activities without additional subordinated financial support. The Company has determined that it is not the primary beneficiary as the Company does not have the ability to direct the most significant activities of the joint ventures. The Company’s maximum exposure to loss as a result of its investments in the joint ventures is equal to its carrying value of the investment, assuming no future capital funding requirements. The Company has recorded its 50% equity interest in the joint ventures as investments in unconsolidated affiliates under the fair valuesvalue option of investments held in Trust Account are determined using available market information.
Warrants
The Company accounts for its Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares of Class A common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that is either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at December 31, 2021, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ deficit section of the Company’s balance sheet.
Gross proceeds | $ | 228,078,680 | ||
Less: | ||||
Proceeds Allocated to Public Warrants | (12,492,109 | ) | ||
Class A common stock issuance costs | (12,318,960 | ) | ||
Add: | ||||
Adjustment of carrying value to initial redemption value | 28,232,249 | |||
Class A common stock subject to possible redemption | $ | 231,499,860 | ||
Income Taxes
The Company is subject to federal and state corporate income taxes on its taxable income. The Company accounts for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which the Company recognizes the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company’s has analyzedcalculation relies on several factors, including pre-tax earnings, differences between tax laws and accounting rules, statutory tax rates, tax credits, uncertain tax positions, and valuation allowances. The Company uses judgment and estimates in evaluating its tax positions. Valuation allowances are established when, in the Public WarrantsCompany’s judgment, it is more likely than not that the Company’s deferred tax assets will not be realized based on all available evidence. Deferred income taxes are provided on a liability method whereby deferred income tax assets are recognized for deductible temporary differences and Private Placement Warrantstax credit carryforwards and determined theydeferred income tax liabilities are considered to be freestanding instruments and do not exhibit anyrecognized for taxable temporary differences. Deferred income tax assets, when applicable, are reduced by a valuation allowance when, in the opinion of management, it is probable that some portion or all of the characteristicsdeferred tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in ASC 480tax laws and thereforerates on the date of enactment.
91
Nogin, Inc.
Notes to Consolidated Financial Statements
The major component comprising deferred income tax assets and liabilities is net operating loss.
The guidance requires that the Company determine whether the benefits of tax positions are “more likely than not” of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is more likely than not of being sustained in the financial statements. For tax positions that are not classified as liabilities under ASC 480. (see Note 8)
The Company follows the asset and liability method of accounting for income taxes under ASC Topic 740, “Income Taxes.”Taxes” (ASC 740). Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement’sstatements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must bemore-likely-than-not002021.2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since its inception.
Revenue Recognition
Revenue is accounted for using FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.
In accordance with ASC Topic 606, the Company recognizes revenue when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company compliesdetermines revenue recognition through the following steps:
A performance obligation is computeda promise in a contract to transfer a distinct product. Performance obligations promised in a contract are identified based on the goods that will be transferred that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. Performance obligations include establishing and maintaining customer online stores,
92
Nogin, Inc.
Notes to Consolidated Financial Statements
providing access to the Company’s e-commerce platform, customer service support, photography services, warehousing, and fulfillment. Most of the contracts of the Company with customers contain multiple promises, which may result in multiple performance obligations, while others are combined into one performance obligation. For contracts with customers, the Company accounts for individual promises separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors.
The Company has concluded the sale of goods and related shipping and handling on behalf of our customers are accounted for as a single performance obligation, while the expenses incurred for actual shipping charges are included in cost of sales.
The Company’s revenue is mainly commission fees derived from contractually committed gross revenue processed by dividingcustomers on the Company's e-commerce platform. The Company is acting as an agent in these arrangements and customers do not have the contractual right to take possession of the Company's software. Revenue is recognized in an amount that reflects the consideration that the Company expects to ultimately receive in exchange for those promised goods, net income (loss) byof expected discounts for sales promotions and customary allowances.
CaaS Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the weighted average number of common shares outstandingCompany is engaged primarily in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the period. Accretion associatedcustomer and the Company does not take possession of the customers' inventory or any credit risks relating to the products sold.
Variable consideration is included in revenue for potential product returns. The Company uses an estimate to constrain revenue for the expected variable consideration at each period end. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and expected levels of returns. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. The estimated reserve for returns is included on the balance sheet in accrued expenses with changes to the redeemable sharesreserve in revenue on the accompanying statement of Class A common sharesoperations.
The reserve for returns as of December 31, 2022 and 2021, consisted of the following (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Balance at beginning of period |
| $ | 1,839 |
|
| $ | 598 |
|
Additions to reserve |
|
| 2,069 |
|
|
| 1,559 |
|
Deductions from reserve |
|
| (2,494 | ) |
|
| (318 | ) |
Balance at end of period |
| $ | 1,414 |
|
| $ | 1,839 |
|
In most cases the Company acts as the merchant of record, resulting in a due to client liability (discussed below). However, in some instances, the Company may perform services without being the merchant of record in which case there is a receivable from the customer.
Payment terms and conditions are generally consistent for customers, including credit terms to customers ranging from seven days to 60 days, and the Company’s contracts do not include any significant financing component. The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net loss per sharerevenue in the consolidated statements of operations.
Commerce as a Service
As noted above, the redemption value approximates fair value.
For the Period from January 5, 2021 (Inception) Through December 31, 2021 | ||||||||
Class A | Class B | |||||||
Basic and diluted net loss per common share | ||||||||
Numerator: | ||||||||
Allocation of net loss, as adjusted | $ | (1,277,850 | ) | $ | (676,241 | ) | ||
Denominator: | ||||||||
Basic and diluted weighted average shares outstanding | 10,024,409 | 5,304,936 | ||||||
Basic and diluted net loss per ordinary share | $ | (0.13 | ) | $ | (0.13 | ) | ||
93
Nogin, Inc.
Notes to Consolidated Financial Statements
defined amounts based on the individual contractual terms for the customer and the Company does not exposedtake possession of the customers' inventory or any credit risks relating to significant risksthe products sold.
Product sales
Under certain licensee agreements, the Company is the owner of inventory and reseller of record. As a result, the Company is the principal in sales to end customers and records these revenues on a gross basis at a point in time.
Fulfillment services
Revenue for business-to-business (“B2B”) fulfillment services is recognized on a gross basis either at a point in time or over a point in time. For example, inbound and outbound services are recognized when the service is complete, while monthly storage services are recognized over the service period.
Marketing services
Revenue for marketing services is recognized on a gross basis as marketing services are complete. Performance obligations include providing marketing and program management such account.
Shipping services
Revenue for shipping services is recognized on a gross basis as shipments are completed and products are shipped to end customers.
Set up and implementation services
The Company provides set up and implementation services for new clients. The revenue is recognized on a gross basis at the completion of the service, with the unearned amounts received for incomplete services recorded as deferred revenue, if any.
Other services
Revenue for other services such as photography, business to customer (“B2C”) fulfillment, customer service, development and web design are reimbursable costs and recognized on the gross basis, and are services rendered as part of the performance obligations to clients for which an online platform and online orders are managed. All reimbursable costs are the responsibility of the Company as the Company uses such services to fulfill its performance obligations.
Cost of services
Cost of services reflects costs directly related to providing services under the master service agreements with customers, which primarily includes service provider costs directly related to processing revenue transactions, marketing expenses and shipping and handling expenses which correspond to marketing and shipping revenues, as well as credit card merchant fees. Cost of services is exclusive of depreciation and amortization and general salaries and related expenses.
Cost of product revenue
Cost of product revenue reflects costs directly related to selling inventory acquired from select clients, which primarily includes product cost, warehousing costs, fulfillment costs, credit card merchant fees and third-party royalty costs. Cost of product revenue is exclusive of depreciation and amortization and general salaries and related expenses.
Due to Clients
Due to clients consists of amounts payable to clients pertaining to the client’s last month pro rata share of revenue earned and collected by the Company, less any returns and any expenses incurred by the Company on behalf of the clients. In most cases, the Company acts as the merchant and seller of record and thus directly collects the funds from sales on the online store. As such, at the end of each month, there is an amount owed to the Company’s clients net of the Company’s fees, and expenses incurred on the client’s behalf.
Fair Value Measurement
The Company applies the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement.
94
Nogin, Inc.
Notes to Consolidated Financial Statements
The Company applies the provisions of ASC 820 to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
The Company defines fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of Financial Instruments
In determining fair value, the Company utilized valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counter party credit risk and nonperformance risk in its assessment of fair value.
The faircarrying value of the Company’s assets and liabilities, which qualify asshort-term financial instruments, such as cash and cash equivalents, restricted cash, accounts receivable, notes payable, and accounts payable, approximate the fair value due to the immediate or short-term maturity of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the interest rate on the Company’s secured credit facility and certain other debt has a variable component, which is reflective of the market.
Stock Incentive Plans
In January 2013, Legacy Nogin adopted the Branded Online, Inc. 2013 Stock Incentive Plan (the “2013 Plan”). Under the 2013 Plan, Legacy Nogin’s board of directors was authorized to grant “incentive stock options,” within the meaning of Section 422 of the Code (“ISOs”), to employees of Legacy Nogin and its parent or subsidiary corporations, and non-qualified stock options (“NSOs”), stock appreciation rights and restricted stock to employees, directors and consultants. Legacy Nogin had granted incentive stock options and nonqualified stock options under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented2013 Plan (“Legacy Nogin Options”). Upon the Closing of the Business Combination, all outstanding Legacy Nogin Options under the 2013 Plan were automatically converted into an option to purchase shares of Common Stock (the “Converted Options”). The Converted Options have an exercise price and cover a number of shares of Common Stock that results in the accompanyingConverted Options having the same (subject to rounding) intrinsic value as the outstanding Legacy Nogin Options and generally have the same terms and conditions as the corresponding Legacy Nogin Options.
The Nogin, Inc. 2022 Incentive Award Plan (the “2022 Plan”) was approved by our stockholders and became effective on the Closing Date. The 2022 Plan provides for the grant of stock options, including ISOs and NSOs, stock appreciation rights, restricted stock, restricted stock units and other stock-based and cash-based awards. The 2022 Plan has a term of ten years.
The Company accounts for its employee stock-based compensation awards in accordance with Accounting Standards Codification (ASC) Topic 718, Compensation - Stock Compensation. For stock-based awards, the Company measures compensation cost at fair value on the date of grant and recognizes compensation expense on a straight-line basis over the requisite service period during which the awards are expected to vest. Awards with a graded vesting schedule are amortized over the requisite service period for the entire award. The Company estimates grant-date fair value of its stock options using the Black-Scholes option pricing model.
Preferred Stock
The Company’s preferred stock is comprised of Series A convertible redeemable preferred stock and Series B convertible redeemable preferred stock. The preferred stock is classified as mezzanine equity on the balance sheet, primarily duesheets
95
Nogin, Inc.
Notes to Consolidated Financial Statements
because they are redeemable at the option of the Series A and Series B preferred stockholders. The preferred stock is recorded at fair value on the date of issuance and has been adjusted to the greater of their short-term nature.
Recent Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). The FASB issued this update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which clarifies the scope of guidance in the ASU 2016-13. The updated guidance is effective for annual periods beginning after December 15, 2022 and interim periods with fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact the adoption of this standard will have on the financial statements.
In August 2020, the FASB issued ASUNo.Accounting Standards Update ("ASU") 2020-06“Debt—Debt with Conversion and Other Options (SubtopicEquity” (“Equity, which improves Convertible Instruments and Contracts in an Entity’s Own Equity and is expected to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The ASU2020-06”),which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU2020-06and itwhich will permit more equity contracts to qualify for it.
The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. ASUfiscal yearsthe Company beginning after December 15, 2023, including interim periods within those fiscal years,January 1, 2024, with early adoption permitted.permitted as of January 1, 2021. The Company is currently assessingearly adopted the provisions of ASU 2020-06 effective January 1, 2022. There was no impact if any, that ASU2020-06would have on itsto the Company’s financial position, resultsstatements as a result of operations or cash flows.
Other recently issued but not yet effective, accounting standards if currently adopted, wouldare not expected to have a material effect on the Company’s consolidatedCompany's financial statements.
Property and equipment, net as of December 31, 2022 and December 31, 2021, consisted of the following (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Furniture and equipment |
| $ | 2,406 |
|
| $ | 2,160 |
|
Leasehold improvements |
|
| 572 |
|
|
| 536 |
|
Property and equipment, gross |
|
| 2,978 |
|
|
| 2,696 |
|
Less accumulated depreciation |
|
| (1,383 | ) |
|
| (907 | ) |
Property and equipment, net |
| $ | 1,595 |
|
| $ | 1,789 |
|
Depreciation expense for property and equipment for the twelve months ended December 31, 2022 and 2021 was $545 thousand and $481 thousand, respectively.
In connection with the Modcloth acquisition (Note 15), the Company recorded $6.7 million of goodwill.
The Company entered into a three-year master service agreement with a new customer for a $2.0 million contract acquisition fee on July 16, 2018. The agreement resulted in the acquisition of nine new contracts with different companies and brands. The cost is amortized over a three-year period, which ended in 2021.
In connection with the Betabrand and Modcloth acquisitions (Note 15), the Company’s amortization expense for capitalized software for the twelve months ended December 31, 2022 and 2021 was $224 thousand and $44 thousand, respectively.
96
Nogin, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021, intangible assets consist of the following (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Contract acquisition cost |
| $ | 2,000 |
|
| $ | 2,000 |
|
Software |
|
| 1,166 |
|
|
| 1,174 |
|
Trade Name |
|
| 4,617 |
|
|
| — |
|
|
|
| 7,783 |
|
|
| 3,174 |
|
Less: Accumulated amortization |
|
| (2,290 | ) |
|
| (2,062 | ) |
Intangible assets-net |
| $ | 5,493 |
|
| $ | 1,112 |
|
On April 6, 2021, the Company and Tiger Capital Group, LLC (“Tiger Capital”) formed a joint venture, Modcloth Partners, LLC (“Modcloth”). The Company and Tiger Capital each contributed $1.5 million into Modcloth and the Company owned 50% of the outstanding membership units. Tiger Capital provided the financing for the inventory, while the Company entered into a Master Services Agreement (“MSA”) with Modcloth to provide the e-commerce services (see Note 16). The Company accounted for its investment in ModCloth under the fair value option of accounting.
On December 1, 2022, Tiger Capital assigned its interest in Modcloth to the Initial Public Offering,Company for $1.5 million, at which point Modcloth became a wholly-owned subsidiary of the Company. In addition, the Company sold 20,000,000 Unitspaid the remaining balance of approximately $1 million on the inventory financing arrangement between Modcloth and Tiger Capital (Note 15).
As of December 31, 2021, the investment balance related to ModCloth was $6.4 million, and was included in investment in unconsolidated affiliates on the consolidated balance sheets. For the twelve months ended December 31, 2022, the Company recorded a decrease in fair value adjustment related to its ModCloth investment of $4.5 million included in changes in fair value of unconsolidated affiliates on the consolidated statements of operations.
On December 31, 2021, the Company and CFL Delaware, Inc. (“CFL”) formed a joint venture, IPCO, whereby Nogin contributed certain assets acquired from the BTB (ABC), LLC (“Betabrand”) acquisition (see Note 15) and entered into a MSA with IPCO to provide certain e-commerce services, marketing, photography, customer service and merchant credit card monitor fraud services (Note 16). Also, CFL entered into a Master Supply Agreement with IPCO and agreed to procure the supply of inventory to IPCO, provide manufacturing, fulfillment, logistics and warehousing services for the inventory. The Company accounts for its investment in IPCO under the fair value option of accounting. As of December 31, 2022 and December 31, 2021, the investment balance related to IPCO was $7.4 million and $7.1 million, respectively, and was included in investment in unconsolidated affiliates on the consolidated balance sheets. For the twelve months ended December 31, 2022, the Company recorded $1.6 million to other income, net related to the settlement of deferred revenue related to sale of finished inventory to IPCO. In addition, the Company recorded a fair value adjustment related to its IPCO investment of $271 thousand included in changes in fair value of unconsolidated affiliates on the consolidated statement of operations for the twelve months ended December 31, 2022.
97
Nogin, Inc.
Notes to Consolidated Financial Statements
The following table presents summarized financial information for the joint ventures for the twelve months ended December 31, 2022 and December 31, 2021 (in thousands):
|
| IPCO |
|
|
|
| ||
|
| For the Twelve Months |
|
|
|
| ||
|
| 2022 |
|
|
|
| ||
Net revenue |
| $ | 24,666 |
|
|
|
| |
Gross margin |
|
| 18,299 |
|
|
|
| |
Net loss |
|
| (2,661 | ) |
|
|
| |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
| IPCO |
| |||||
|
| December 31, |
|
| December 31, |
| ||
Current assets |
| $ | 4,254 |
|
| $ | 2,596 |
|
Long term assets |
|
| 5,509 |
|
|
| 6,130 |
|
Current liabilities |
|
| 6,142 |
|
|
| 1,699 |
|
Long term liabilities |
|
| 1,032 |
|
|
| — |
|
The Company’s ModCloth and IPCO investments are Level 3 fair value measurements. The Company utilized the following valuation methods to conclude on the fair value as of December 31, 2022:
- Discounted Cash Flow – The key unobservable input utilized was a discount rate of 21.8% for Modcloth and 18.2% for IPCO.
- Guideline Public Company Method – The Company utilized a revenue multiple of 0.7x for Modcloth and 0.5x for IPCO on current period forecasted revenues. The revenue multiple was derived from public peers of the Company.
- Guideline Transaction Method – The Company utilized a revenue multiple of 0.7x for Modcloth and 0.4x for IPCO on current period forecasted revenues. The revenue multiple was derived from public transactions in which the target companies were similar to the Company.
The following table summarizes the changes in the IPCO investment Level 3 fair value measurement (in thousands):
|
| IPCO |
| |
Balance as of December 31, 2021 |
| $ | 7,133 |
|
Change in fair value |
|
| 271 |
|
Balance as of December 31, 2022 |
| $ | 7,404 |
|
Accrued expenses and other current liabilities as of December 31, 2022 and December 31, 2021 were as follows (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Deferred revenue |
| $ | 5,058 |
|
| $ | 4,524 |
|
Business Combination consideration payable |
|
| 5,000 |
|
|
| — |
|
Accrued interest |
|
| 1,622 |
|
|
| — |
|
Payroll and other employee costs |
|
| 1,300 |
|
|
| 2,196 |
|
Sales tax payable |
|
| 1,191 |
|
|
| 1,113 |
|
Accrued transaction costs |
|
| 840 |
|
|
| 1,750 |
|
Inventory accrual |
|
| 503 |
|
|
| 1,126 |
|
Deferred rent |
|
| — |
|
|
| 1,573 |
|
Other accrued expenses and current liabilities |
|
| 2,312 |
|
|
| 1,736 |
|
Total |
| $ | 17,826 |
|
| $ | 14,018 |
|
98
Nogin, Inc.
Notes to Consolidated Financial Statements
Other long-term liabilities as of December 31, 2022 and December 31, 2021 were as follows (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Deferred transaction costs payable |
| $ | 10,979 |
|
| $ | — |
|
Business Combination consideration payable |
|
| 3,355 |
|
|
| — |
|
Deferred PIPE issuance costs payable |
|
| 1,160 |
|
|
| — |
|
Standby agreement derivative liability |
|
| 847 |
|
|
| — |
|
Legal settlement |
|
| 621 |
|
|
| — |
|
PIPE principal accretion |
|
| 617 |
|
|
| — |
|
Warrant liability |
|
| — |
|
|
| 561 |
|
Other long-term liabilities |
|
| 187 |
|
|
| 173 |
|
Total |
| $ | 17,766 |
|
| $ | 734 |
|
Convertible Notes and Indenture
On April 19, 2022, the Company, certain guarantors named therein (the “Notes Guarantors”) and certain investors named therein (each, a “Subscriber” and collectively, the “Subscribers”), entered into subscription agreements (each, a “PIPE Subscription Agreement” and collectively, the “PIPE Subscription Agreements”) pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of $75.0 million of 7.00% Convertible Senior Notes due 2026 (the “Convertible Notes”) at apar value of the notes and (ii) up to an aggregate of 1.5 million warrants (the “PIPE Warrants”) with each whole PIPE Warrant entitling the holder thereof to purchase price of $10.00 per Unit. Each Unit consists of one share of Class ACommon Stock
On August 26, 2022, immediately prior to the closing of the Business Combination (the “Closing”), the Company issued $65.5 million aggregate principal amount of Convertible Notes and, as contemplated by the PIPE Subscription Agreements, the Company, the Note Guarantors and U.S. Bank Trust Company, National Association, as trustee, entered into an Indenture governing the Convertible Notes (the “Indenture”). The Convertible Notes were offered in a private placement under the Securities Act, pursuant to the PIPE Subscription Agreements. The Convertible Notes will mature on September 1, 2026 (the “Maturity Date”), unless earlier repurchased, redeemed or converted in accordance with their terms, and will accrue interest at a rate of 7.00% per annum, payable in cash. The Convertible Notes may be converted at any time (in whole or in part) into shares of Common Stock, at the option of the holder of such Convertible Note, based on the applicable conversion rate at such time. The initial conversion price is approximately $11.50 per share of Common Stock, based on an initial conversion rate of 86.9565 shares of Common Stock per $1,000 principal amount of Convertible Notes. For conversions with a conversion date on or after the first anniversary of the closing of the Transactions and prior to the regular record date immediately preceding the Maturity Date, the conversion consideration will also include an interest make-whole payment equal to the remaining scheduled payments of interest on the Convertible Note being converted through the Maturity Date. The Company will be able to elect to make such interest make-whole payment in cash or in Common Stock, subject to certain conditions. The conversion rate is subject to adjustments set forth in the Indenture, including conversion rate resets (x) on August 27, 2023, September 26, 2023 and September 26, 2024 and (y) following the consummation of certain equity and equity-linked offerings by the Company and sales of certain equity and equity-linked securities by certain shareholders of the Company. On August 27, 2023, the conversion rate will reset to the greater of (i) the then-current conversion rate and (ii) if the Standby Capital VWAP Sale Price (as defined below) is less than or equal to $7.50, the quotient of (x) $1,000 and (y) the volume weighted average sale price of shares of Common Stock sold under the Standby Agreement (as defined below) (the “Standby Capital VWAP Sale Price”). As of December 31, 2022, the Standby Capital VWAP Sale Price was $2.02.
Each holder of a Convertible Note will have the right to cause the Post-Combination Company to repurchase for cash all or a portion of the Convertible Notes held by such holder upon the occurrence of a “Fundamental Change” (as defined in the Indenture) at a price equal to (i) on or before September 26, 2023, 100% of the original principal amount of such Convertible Note, and (ii) from and after September 26, 2023, 100% of the accreted principal amount applicable at such time pursuant to the terms of the Indenture, in each case, plus accrued and unpaid interest.
The Indenture includes restrictive covenants that, among other things, require the Company to maintain a minimum level of liquidity on a consolidated basis and limit the ability of the Company and its subsidiaries to incur
99
Nogin, Inc.
Notes to Consolidated Financial Statements
indebtedness above certain thresholds or to issue preferred stock, to make certain restricted payments, to dispose of certain material assets and engage in other asset sales, subject to reinvestment rights, to pay certain advisory fees in connection to the Transactions and the transactions contemplated by the PIPE Subscription Agreements above a certain threshold, and other customary covenants with respect to the collateral securing the obligations created by the Convertible Notes and the Indenture, including the entry into security documents (in each case, subject to certain exceptions set forth in the Indenture); provided that the covenants with respect to (i) the making of restricted payments, (ii) the incurrence of indebtedness, (iii) the disposition of certain material assets and asset sales, (iv) liquidity, (v) the payment of advisory fees and (vi) the collateral securing the obligations created by the Convertible Notes and the Indenture shall terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The liquidity covenant would terminate if the Company achieves $175 million in consolidated revenue in the preceding four fiscal quarters. Certain of the Company’s subsidiaries will serve as Notes Guarantors that jointly and severally, fully and unconditionally guarantee the obligations under the Convertible Notes and the Indenture. The Indenture also requires certain future subsidiaries of the Post-Combination Company, if any, to become Notes Guarantors. This covenant will terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The Indenture also includes customary events of default and related provisions for potential acceleration of the Convertible Notes.
If the Company does not have an effective registration statement on file with the SEC within 90 days of the Closing Date, registering the underlying shares issuable upon conversion of the Convertible Notes, or fails to maintain the effectiveness of such registration statement, then additional interest would accrue on the outstanding principal of the Convertible Notes at a rate of (a) 0.25% per annum for the first 90 days commencing on the first business day following a ten business day grace period and (b) 0.50% per annum thereafter, in each case, until the Company cures the lapse of effectiveness. The Company accounts for such additional interest in accordance with ASC subtopic 825-20, Registration Payment Arrangements (“ASC 825-20”). ASC 825-20 specifies that the contingent obligation to make future payments under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with ASC 450-20, Loss Contingencies. The registration statement was declared effective on November 14, 2022.
The Company elected to account for the Convertible Notes under the fair value option of accounting upon issuance of the Convertible Notes. At issuance the Company recognized the fair value of the Convertible Notes of $65.1 million with the remaining $0.4 million of proceeds received allocated to the PIPE Warrants. As of December 31, 2022, the fair value of the Convertible Notes was $62.5 million, of which $1.6 million, representing accrued interest, is included in accrued expenses and other current liabilities on the consolidated balance sheets. The loss on the increase in fair value of the Convertible Notes during the twelve months ended December 31, 2022 was $4.3 million of which $1.6 million is included in interest expense, which is recognized based on the effective interest method, and $2.7 million included in the change in fair value of convertible notes on the consolidated statements of operations.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The fair value was determined using a binomial lattice valuation model. The significant inputs to the valuation of the Convertible Notes at fair value are Level 3 inputs since they are not directly observable. The significant assumptions used in the model are the discount rate of 15.76%, which is based on the company's credit rating, volatility of 85.41% and 48 time-nodes.
As of December 31, 2022, there have been no interest or principal payments made on the Convertible Notes. The Company is in compliance with the minimum liquidity covenant as of December 31, 2022.
The Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023, resulting in a default. Such default for thirty (30) consecutive days of the payment on interest due constitutes an Event of Default (as defined in the Indenture). In the event the Company does not make the interest payment on or prior to March 31, 2023 and no agreement is otherwise reached with the holders of the Convertible Notes, the trustee or holders of at least 25% in principal amount of the Convertible Notes may declare the principal and any interest immediately due and payable. The Company is in active negotiations with the holders of the Convertible Notes to resolve the default.
100
Nogin, Inc.
Notes to Consolidated Financial Statements
Line of credit
Effective January 14, 2015, the Company entered into a Revolving Credit Agreement with a financial institution that provided maximum borrowing under a revolving loan commitment of up to $2 million, bearing an interest rate of 2% plus prime rate as published by the Wall Street Journal. Effective July 3, 2020, the Company renewed the line of credit with the financial institution through May 31, 2021 that provided maximum borrowing under a revolving loan commitment of up to $5 million. In May 2021 the maturity date was extended to June 30, 2021 and then further extended to July 31, 2021. The line was then renewed on July 21, 2021 with an expanded credit limit of $8 million, a new maturity date of June 30, 2023 and an amended per annum interest rate of the greater of 2.25% plus prime rate as published by the Wall Street Journal or 5.50%. The line of credit was repaid and closed at the closing of the Business Combination.
Notes Payable
On August 11, 2021, the Company entered into a loan and security agreement (the “Note Agreement”) with a financial institution that provided for a borrowing commitment of $15 million in the form of promissory notes. In August 2021, the Company borrowed $10 million under the first tranche (“First Tranche Notes”). The Note Agreement had a commitment for additional second tranche borrowings of $5 million through June 30, 2022 (“Second Tranche Notes”). In October 2021, the Company borrowed the remaining $5 million committed under the Note Agreement. The borrowings under the Note Agreement were secured by substantially all assets of the Company.
The First Tranche Notes and Second Tranche Notes were due to mature on September 1, 2026 and November 1, 2026, respectively, and bore interest at a rate per annum of 6.25% plus the greater of 3.25% or the prime rate as published by the Wall Street Journal. The Company was required to make interest-only payments on the first of each month beginning October 1, 2021 and December 1, 2021, respectively. Beginning October 1, 2023 and December 1, 2023, respectively, the Company would have been required to make principal payments of $278 thousand and $139 thousand, respectively, plus accrued interest on the first of each month through maturity. Upon payment in full of the First Tranche Notes and Second Tranche Notes, the Company was required to pay exit fees of $600 thousand and $300 thousand, respectively.
In December 2021, the Company borrowed an additional $1 million from the same financial institution, which was repaid in full on December 31, 2021. In addition, the Company borrowed an additional $5 million (“Third Tranche Notes”) that bore interest at a rate per annum of 6.25% plus the greater of 3.25% or the prime rate as published by the Wall Street Journal. The Company is required to make interest-only payments on the first of each month beginning February 1, 2022, with the full principal amount due on July 1, 2023. Upon payment in full, the Company was required to pay exit fees of $50 thousand.
In connection with the Note Agreement, the Company issued warrants to purchase up to 33,357 shares of common stock andone-halfone redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase 1 share of Class A common stockCompany (the “Legacy Liability Warrants”) at an exercise price of $11.50, subject to adjustment (see Note 7)$0.01 per share (Note 8).
In addition, the Company consummatedissued additional notes payable in July 2022 for proceeds of $3.0 million. Such notes payable matured on the saleearlier of an(a) December 31, 2022 or (b) the close of the Business Combination. The amount due at maturity was $4.5 million. The Company elected to account for the additional 2,807,868 Units,notes payable under the fair value option of accounting.
The notes payable were repaid at $10.00 per Unit, and the sale of an additional 982,754 Private Placement Warrants, at $1.00 per Private Warrant.
Promissory Notes
During the Sponsor purchasedsecond quarter of 2022, the Company entered into promissory notes with various individuals (the “Promissory Notes”), including current investors, members of management and other unrelated parties in exchange for cash in an aggregateamount equal to $7.0 million (the “Promissory Notes”). The Promissory Notes were due to mature on the earlier of 9,000,000 Private Placement Warrants(a) one year from issuance or (b) the closing of the Business Combination (Note 1) and bore per annum interest at the rate of 7.75% plus the greater of 3.50% or the prime rate as published by the Wall Street Journal. The Company was required to make nine interest-only payments, followed by three principal and interest payments. In
101
Nogin, Inc.
Notes to Consolidated Financial Statements
connection with the Promissory Notes, the Company issued warrants (“Promissory Note Warrants”) to purchase up to 31,024 shares of common stock of the Company at an exercise price of $0.01 per share (Note 7). Upon payment in full of the Promissory Notes, the Company was required to make an additional final payment (“Final Payment”) of $3.5 million.
The Company elected to account for the Promissory Notes under the fair value option of accounting upon issuance of each of the Promissory Notes. At issuance the Company recognized the fair value of the Promissory Notes of $6.3 million with the remaining $0.7 million of proceeds received allocated to the Promissory Note Warrants.
The Promissory Notes were repaid at the closing of the Business Combination.
Paycheck Protection Program Loan
On April 14, 2020, the Company received loan proceeds of $2.3 million pursuant to the Paycheck Protection Program (the “PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The PPP Loan had a maturity date of April 22, 2022 and bore interest at a pricerate of $1.001% per Private Placement Warrant, for an aggregate purchase priceannum. The balance as of $9,000,000,December 31, 2020 of $2.3 million is included in Paycheck Protection Program loan payable on the consolidated balance sheets. On September 17, 2021, the PPP Loan was forgiven in full including accrued interest thereon. As such, the Company recorded a private placement. Each Private Placement Warrant is exercisablegain on loan forgiveness during the twelve months ended December 31, 2021 of $2.3 million included in other income in the consolidated statement of operations.
In connection with the Note Agreement, on August 11, 2021 the Company granted Legacy Liability Warrants to purchase one Class Aup to 33,357 shares of common stock at a price of $11.50. A portion$0.01 per share. The Legacy Liability Warrants were exercisable at any time through the tenth anniversary from the date of grant. The Legacy Liability Warrants had customary anti-dilution provisions for stock splits, stock dividends and recapitalizations of the Company’s common stock. In addition, in connection with issuance of the additional notes payable in July 2022, the Company granted additional Legacy Liability Warrants to purchase up to 13,343 shares of Common Stock that had a fair value of $428 thousand at issuance. The Legacy Liability Warrants had been determined to be liability classified as the exercise price may be reduced and result in the issuance of additional shares in connection with the sale of the Company if such Legacy Liability Warrants are not assumed. The Legacy Liability Warrants were initially recorded at fair value with a corresponding debt discount (Note 7) at grant date and are subsequently remeasured to fair value each reporting period. The Company recorded a fair value loss on the Legacy Liability Warrants of $717 thousand for the twelve months ended December 31, 2022, respectively, which is included in other (loss) income, net on the consolidated statements of operations. The Company did not recognize a change in fair value on the Legacy Liability Warrants during the twelve months ended December 31, 2021. The fair value of the warrant liability as of December 31, 2021 was $561 thousand, and is included in other long-term liabilities in the consolidated balance sheets. The Legacy Liability Warrants were settled in connection with the closing of the Business Combination.
The Company had determined the warrant liability to be a Level 3 fair value measurement. The Company utilizes the Black-Scholes-Merton (“Black-Scholes”) model to determine the fair value of the Legacy Liability Warrants at each reporting date. The significant inputs utilized in the Black-Scholes model as of December 31, 2021 were as follows.
|
| December 31, 2021 |
| |
Common Stock Fair Value Per Share |
| $ | 16.81 |
|
Exercise Price Per Share |
| $ | 0.01 |
|
Volatility |
|
| 75.7 | % |
Risk-free rate |
|
| 0.53 | % |
Expected Dividend Rate |
|
| 0.0 | % |
The expected dividend rate was 0.0% as the Company has not and does not intend to pay dividends. The Company utilized the probability weighted expected return method (“PWERM”) to value the Company’s common stock.
102
Nogin, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the changes in the warrant liability included in other long-term liabilities that were issued in connection with the Note Agreement (in thousands):
|
| Warrant Liability |
| |
Balance as of December 31, 2021 |
| $ | 561 |
|
Legacy Liability Warrants issued |
|
| 428 |
|
Change in fair value |
|
| 717 |
|
Settlement of warrant liability in common stock |
|
| (1,706 | ) |
Balance as of December 31, 2022 |
| $ | — |
|
Restricted Stock Units
The Company did not grant any RSUs under the 2022 plan as of December 31, 2022. The RSUs would be issued upon vesting. The RSUs vest over a period of one to three years and are expected to be settled in shares upon vesting. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. There were no unrecognized stock-based compensation expense related to the unvested RSUs as of December 31, 2022.
Convertible Note Warrants
The Company issued the PIPE Warrants in connection with the Convertible Notes issuance. There were 1,396,419 PIPE Warrants issued to purchase common stock of the Company at $11.50 per share. The PIPE Warrants are redeemable for $0.01 once the Company’s stock prices reaches $18.00 per share. The PIPE Warrants are equity classified. Approximately $377 thousand of the proceeds fromupon issuance of the Private PlacementConvertible Notes was allocated to the PIPE Warrants along with an immaterial amount of issuance costs.
Other Warrants
The Company had also granted Legacy Equity Warrants in 2017 and 2018 to purchase 100,000 shares of common stock at a price of $0.96 per share. 75,000 of such warrants were set to expire on January 12, 2027 and the remaining 25,000 were set to expire on July 20, 2028. The Legacy Equity Warrants were addedfully vested and exercisable at the Holder’s option at any time. Any shares not exercised at time of an acquisition would have automatically been deemed to be cashless exercised. Under the applicable accounting literature, these warrants meet the criteria to be classified as permanent equity within the equity section of the consolidated balance sheet. These warrants were settled in connection with the closing of the Business Combination.
In addition, in connection with the Promissory Notes, the Company issued the Promissory Note Warrants to purchase up to 31,024 shares of common stock of the Company at an exercise price of $0.01 per share. The Promissory Note Warrants are fully vested and exercisable at the Holder’s option at any time. Under the applicable accounting literature, these warrants meet the criteria to be classified as permanent equity within the equity section of the consolidated balance sheet. These warrants were settled in connection with the closing of the Business Combination.
Standby Agreement Derivative Liability
In connection with the Business Combination, Legacy Nogin acquired from SWAG a derivative liability associated with agreements entered into by SWAG prior to the proceedsClosing Date. SWAG entered into an agreement with a financial institution (the “Financial Institution”), whereby the Financial Institution purchased SWAG Class A common stock from third parties prior to the Initial Public Offering held inClosing Date (the “Standby Agreement”). At the Trust Account. IfClosing Date, the Company does not complete a Business Combination withinpaid the Combination Period,Financial Institution 80% of the Financial Institution’s aggregate purchase price of such shares of SWAG Class A common stock. After the Closing Date, the Financial Institution may sell the shares purchased pursuant to the Standby Agreement and keep all the proceeds of such sales until they have recouped the remaining 20% of the aggregate purchase price of the shares purchased prior to the Closing Date. After such time, proceeds from the sale of such shares would be paid to the Private Placement WarrantsCompany less a liquidity fee equal to 3.5% of the proceeds from such sales. If the Financial Institution has not fully recouped the aggregate purchase price of the shares purchased prior to the Closing Date by August 26, 2026, the Company would be obligated to pay the remaining amount due to the Financial Institution on such date. Any remaining unsold shares as of August 26, 2026 would be returned to the Company.
103
Nogin, Inc.
Notes to Consolidated Financial Statements
In addition, SWAG entered into a subscription agreement (the “Subscription Agreement”) with the same Financial Institution whereby the Financial Institution purchased 517,079 shares of Common Stock at a purchase price of $10.17 per share at the closing of the Business Combination and paid the Company an amount equal to 20% of the purchase price. The Subscription Agreement was structured similarly to the Standby Agreement between the Company and the Financial Institution regarding the timing and amount of future payments, as well as the return of any unsold shares at maturity.
The Company concluded the Standby Agreement would be accounted for as a derivative in its entirety in accordance with ASC 815-10, and the structured payments within the Subscription Agreement was considered an embedded feature in the Subscription Agreement that met the definition of a derivative and required bifurcation from the Subscription Agreement, as it is not clearly and closely related to the Subscription Agreement and would be accounted for in accordance with ASC 815-10 (together the “Standby Agreement Derivative"). The Standby Agreement Derivative was not entered in to for hedging purposes. The Company accounted for the Standby Agreement Derivative acquired at fair value upon the closing of the Business Combination. The Company will continue to account for the Standby Agreement Derivative at fair value each reporting period in accordance with ASC 815-10.
The Company engaged a third-party valuation specialist to assist with the fair value assessment. The acquisition date fair value at the closing of the Business Combination was $2.0 million. The fair value as of December 31, 2022 of the Standby Agreement Derivative liability is $0.8 million and is recognized in other long-term liabilities on the consolidated balance sheets. The change in fair value of the Standby Agreement Derivative liability for the twelve months ended December 31, 2022 of $1.1 million is recorded in change in fair value of derivatives on the consolidated statements of operations.
The Company applies the provisions of FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement.
The Company applies the provisions of ASC 820 to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
The Company defines fair value as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to fundmeasure fair value into three levels and bases the redemptioncategorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the Public Shares (subjectassets or liabilities.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
In determining fair value, the Company utilized valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the requirementsextent possible as well as considers counter party credit risk and nonperformance risk in its assessment of applicable law) and the Private Placement Warrants will expire worthless.
104
Nogin, Inc.
Notes to partially exercise their over-allotment option. As such, on August 4, 2021, the Company consummated the sale of an additional 2,807,868 Units, at $10.00 per Unit, and the sale of an additional 982,754 Private Placement Warrants, at $1.00 per Private Warrant.
The carrying value of the Company’s Class B common stockshort-term financial instruments, such as cash, restricted cash, accounts receivable, notes payable, and accounts payable, approximate the fair value due to the immediate or short-term maturity of these instruments. As of December 31, 2022, the Company no longer has recurring measurements for an aggregate pricewarrant liability. Further, the Company has elected to apply the fair value option of $25,000.accounting for its Convertible Notes and equity investments in unconsolidated affiliates. The Founder Shares include an aggregateCompany is required to present the fair value of upthe Standby Agreement derivative liability each reporting period. The following details the Company’s recurring measurements for assets and liabilities at fair value (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Warrant liability (Level 3) - Note 8 |
| $ | — |
|
| $ | 561 |
|
Investment in unconsolidated affiliates (Level 3) - Note 5 |
|
| 7,404 |
|
|
| 13,570 |
|
Convertible Note (Level 3) - Note 7 |
|
| 60,852 |
|
|
| — |
|
Standby Agreement derivative liability (Level 3)- Note 8 |
|
| 847 |
|
|
| — |
|
Non-current Business Combination Cash Consideration (Level 3) |
|
| 3,355 |
|
|
| — |
|
Deferred Business Combination cash consideration
In connection the Business Combination, Legacy Nogin equityholders elected to 750,000 sharesreceive $15.0 million of the merger consideration in cash. In order to meet conditions to close the Transactions, the Company paid $4.1 million of the $15.0 million cash consideration at the Closing Date. Of the $10.9 million in deferred cash consideration, $5.0 million is payable, subject to forfeiture bycertain conditions, on February 21, 2023, and is included in accrued expenses and other current liabilities as of December 31, 2022 on the Sponsor to the extent that the underwriters’ over-allotmentconsolidated balance sheets (the “Current Cash Consideration”). The remaining $5.9 million (the “Non-current Cash Consideration”) is not exercised in full or in part, so that the Sponsor will collectively own, on anas-convertedbasis, 20% of the Company’s issued and outstanding shares after the Initial Public Offering (assuming the Sponsor does not purchase any Public Shares in the Initial Public Offering). On August 2, 2021, the underwriters notified the Company of their intention to partially exercise their over-allotment option. As such, on August 4, 2021, the Company consummated the sale of an additional 2,807,868 Units. As a result of the underwriters’ election to partially exercise their over-allotment option and the forfeiture of the remaining over-allotment option, 48,033 Founder Shares were forfeited, and 701,967 Founder Shares are no longerpayable, subject to forfeiture resulting in an aggregate of 5,701,967 Founder Shares outstanding at August 4, 2021.
The significant inputs to the day on which the Company consummates a Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise pricevaluation of the warrants will be adjusted (todeferred cash consideration at fair value are Level 3 inputs since they are not directly observable. The Company primarily used a discounted cash flow method to value the nearest cent)deferred cash consideration, based on the expected future payment discounted to be equalpresent value. The significant input is the discount rate of 15.76% which is based on the Company’s credit rating.
105
Nogin, Inc.
Notes to 115% of the higher of the Market Value and the Newly Issued Price, the $18.00 per share redemption trigger price described above will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price.Consolidated Financial Statements
December 31, 2021 | ||||
Deferred tax assets (liability) | ||||
Net operating loss carryforward | $ | 40,116 | ||
Startup/Organization Expenses | 361,022 | |||
Total deferred tax assets (liability) | 401,138 | |||
Valuation Allowance | (401,138 | ) | ||
Deferred tax assets (liability), net of allowance | $ | 0— | ||
The income tax provision for the period from January 5, 2021 (inception) throughyears ended December 31, 2022 and 2021 consists of the following:following (in thousands):
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Current: |
|
|
|
|
|
| ||
Federal |
| $ | — |
|
| $ | — |
|
State |
|
| — |
|
|
| 1 |
|
Total |
|
| — |
|
|
| 1 |
|
Deferred: |
|
|
|
|
|
| ||
Federal |
|
| (273 | ) |
|
| 371 |
|
State |
|
| (507 | ) |
|
| 803 |
|
Total |
| $ | (780 | ) |
| $ | 1,174 |
|
Income tax (benefit) expense |
| $ | (780 | ) |
| $ | 1,175 |
|
A reconciliation of the federal income tax rate to the Company’s effective tax rate at December 31, 2022 and 2021 are as follows:
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
U.S. federal statutory tax rate |
|
| 21.0 | % |
|
| 21.0 | % |
State income taxes, net of federal benefit |
|
| 0.8 | % |
|
| 57.2 | % |
PPP Loan |
|
| 0.0 | % |
|
| (42.9 | )% |
Return to provision |
|
| 0.0 | % |
|
| 10.5 | % |
Transaction costs |
|
| 1.2 | % |
|
| — | % |
Other adjustments |
|
| 0.1 | % |
|
| 1.8 | % |
Change in valuation allowance |
|
| -21.6 | % |
|
| 58.3 | % |
Effective tax rate |
|
| 1.5 | % |
|
| 105.9 | % |
2021 | ||||
The tax effects of significant items comprising the Company’s deferred taxes as of December 31, 2022 and 2021 the Company had a total of $191,032 U.S. federal net operating loss carryovers available to offset future taxable income. The federal net operating loss can be carried forward indefinitely.are as follows (in thousands):
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Deferred Tax Assets: |
|
|
|
|
|
| ||
Net operating loss and other tax attributes carryforwards |
|
| 17,041 |
|
|
| 4,950 |
|
Accrued expenses |
|
| 150 |
|
|
| 343 |
|
163(j) interest limitation |
|
| 2,489 |
|
|
| 166 |
|
Amortization |
|
| 1,433 |
|
|
| 58 |
|
Transaction costs |
|
| 2,108 |
|
|
| — |
|
Lease liabilities |
|
| 5,886 |
|
|
| — |
|
Other deferred tax assets |
|
| 735 |
|
|
| 231 |
|
|
|
| 29,842 |
|
|
| 5,748 |
|
Deferred Tax Liabilities: |
|
|
|
|
|
| ||
Depreciation |
|
| (66 | ) |
|
| (73 | ) |
Unrealized gain (loss) on joint venture |
|
| (998 | ) |
|
| (2,541 | ) |
Right of use assets |
|
| (5,239 | ) |
|
| — |
|
Debt |
|
| (696 | ) |
|
| — |
|
Other deferred tax liabilities |
|
| — |
|
|
| (26 | ) |
|
|
| (6,999 | ) |
|
| (2,640 | ) |
Valuation allowance |
|
| (23,237 | ) |
|
| (4,282 | ) |
Net deferred tax liability |
|
| (394 | ) |
|
| (1,174 | ) |
In assessing the realizationrealizability of the deferred tax assets, management considers whether it is more likely than not that some portion ofor all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
106
Nogin, Inc.
Notes to Consolidated Financial Statements
dependent upon the generation of future taxable income during the periods in which those temporary differences representing net future deductible amounts become deductible. Management considersBased upon the scheduled reversalanalysis of federal and state deferred tax liabilities, projectedbalances, future tax projections and availability of taxable income in the carryback period, the Company recorded a valuation allowance against the Federal and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of theState deferred tax assets of $21.6 million.
As of December 31, 2022, the Company has federal net operating loss (“NOL”) of approximately $52.2 million and has therefore established a full valuation allowance. For the period from January 5, 2021 (inception) throughstate NOL of $68.7, which begin to expire in 2033. As of December 31, 2021, the changeCompany has federal NOL of approximately $17.5 million and state NOL of $18.1, which begin to expire in the valuation allowance was $401,138.
Utilization of the federal incomenet operating loss and research tax ratecredit carryforwards are subject to the Company’s effective tax rate at December 31, 2021 is as follows:
2021 | ||||
The Company files income tax returns in the U.S. federal jurisdiction and is subject to examination by the various taxing authorities. The company is not currently under any audits.
As of December 31, 2022 and 2021, the Company had no uncertain tax positions or potential losses related to uncertain tax positions.
The Company previously issued two series of preferred stock (Series A and Series B). Information related to these issuances of stock is as follows:
Series A convertible redeemable preferred stock (“Series A”)
On May 14, 2014, 2,042,483 Series A shares were issued, with a par value of $0.0001 per share, in exchange for $3.1 million.
Series B convertible redeemable preferred stock (“Series B”)
On June 2, 2017, 1,459,462 Series B shares were issued, with a par value of $0.0001 per share, in exchange for $4.3 million.
Redemption
At the election of the Series A preferred stockholders at any time following March 31, 2018, the Company could be required to redeem the Series A preferred stock at a redemption price equal to $2.295 per share plus any accrued and unpaid dividends and to structure the redemption payments as equal installments paid quarterly over a 24- month period. Series A preferred stockholders had certain defined registration rights outlined in the Series A Preferred Stock Purchase Agreement executed in May 2014.
At the election of the Series B preferred stockholders at any time following March 31, 2020, the Company could be required to redeem the Series B preferred stock at a redemption price equal to $4.45335 per share plus any accrued and unpaid dividends and to structure the redemption payments as equal installments paid quarterly over a 24-month period.
Conversion
The Series A and Series B preferred stock were convertible to common stock at the election of a majority of the preferred shareholders or via automatic conversion upon the occurrence of a firm initial public offering, as defined in the stock purchase agreement. The Series A and Series B preferred stock could be converted to equal number of shares of common stock. The conversion rate was subjected to adjustments for stock dividends, stock splits and other such equity transactions.
Voting
Each Series A and Series B preferred stockholder was entitled to the number of votes equal to the number of shares of common stock into which such preferred shares of Series B and Series A could be converted immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent and had voting rights and powers equal to the voting rights and powers of the common stockholders and were entitled to notice of any stockholders’ meeting in accordance with the bylaws of the Company.
107
Nogin, Inc.
Notes to Consolidated Financial Statements
Liquidation
Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (a “Liquidation Event”) or any asset transfer or acquisition, before any distribution or payment was made to the holders of any Series A preferred stock or the holders of any common stock, the holders of Series B preferred stock were entitled to be paid out of the assets of the Company legally available for distribution for each share of Series B preferred stock held by them, an amount per share of Series B preferred stock equal to the greater of (i) two times (2x) the Series B Original Issue Price ($2.9689) plus all declared and unpaid dividends on the Series B preferred stock, and (ii) such amount per share that was payable when all shares of Series B preferred stock were converted into shares of common stock immediately prior to such Liquidation Event or such asset transfer or acquisition. As of December 31, 2021 and 2020, the holders of the shares of Series B preferred stock were entitled to a liquidation preference of approximately $8.7 million in the event of any liquidation, dissolution or winding up of the Company as of such year end.
Upon any Liquidation Event, before any distribution or payment was made to the holders of any common stock, the holders of Series A preferred stock were entitled to be paid out of the assets of the Company legally available for distribution for each share of Series A preferred stock held by them, an amount per share of Series A preferred stock equal to two times (2x) the Original Issue Price of $1.53, plus all declared and unpaid dividends on the Series preferred stock.
As of December 31, 2021 and 2020, the holders of the shares of Series A preferred stock were entitled to a liquidation preference of approximately $6.3 million in the event of any liquidation, dissolution or winding up of the Company as of such year end.
After the payment of the full liquidation preferences of the Series A preferred stock, the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the common stock.
Dividend Rights
So long as any preferred shares of Series B and Series A were outstanding, the Company could not pay or declare any dividend, whether in cash or property, or make any other distribution on the common stock, or purchase, redeem or otherwise acquire for value any shares of common stock, except for: (i) acquisitions of common stock by the Company pursuant to agreements that permit the Company to repurchase such shares at cost (or the lesser of cost or fair market value) upon termination of services to the Company; (ii) acquisitions of common stock in exercise of the Company’s tax returnsright of first refusal to repurchase such shares; or (iii) distributions to holders of common stock in accordance with Sections 3 and 4 of the Company’s third amended and restated certificate of incorporation. In the event dividends were paid on any share of Common Stock, the Company could pay an additional dividend on all outstanding shares of Series Preferred in a per share amount equal (on an as-if-converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock. Such dividends were payable only when, as and if declared by the board of directors of the Company. Upon the closing of the Business Combination, the outstanding shares of preferred stock were converted into shares of common stock of the post combination company at an exchange ratio of 4.34.
As part of the Business Combination, all of the convertible preferred stock of Legacy Nogin, (including both the Series A preferred stock and Series B preferred stock) were converted into approximately 15.2 million shares of the Company’s Common Stock. As a result of the conversion of the Series A preferred stock and Series B preferred stock, the Company reclassified the amounts previously recorded in mezzanine equity to additional paid-in capital.
Subsequent to the Business Combination, the Company is authorized to issue 50 million shares of preferred stock with a par value of $0.0001 per share. There were no shares of preferred stock issued and outstanding as of December 31, 2022.
Holders of common stock are entitled to one vote per share and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to common stockholders. The holders of common stock have no preemptive or other subscription rights, and there is no redemption or sinking fund provisions with respect to such shares.
Common stock is subordinate to the preferred stock with respect to rights upon liquidation of the Company.
108
Nogin, Inc.
Notes to Consolidated Financial Statements
In 2013, Legacy Nogin adopted the 2013 Plan pursuant to which the Legacy Nogin was authorized to issue stock options or nonvested shares to officers and key employees in an amount up to 2,655,391 shares of its common stock. In connection with the Business Combination, the Company adopted the 2022 Plan, which became effective on the Closing Date. The aggregate number of shares of the Company’s common stock available for issuance under the 2022 Plan is equal to (i) 5,102,948 shares plus (ii) an annual increase for ten years on the first day of each calendar year beginning on January 1, 2023, equal to the lesser of (A) 15% of the aggregate number of shares of the Company’s common stock outstanding on the last day of the immediately preceding calendar year and (B) such smaller amount of shares as determined by the Company’s board of directors. Following the effectiveness of the 2022 Plan, the Company will not grant additional awards under the 2013 Plan.
At December 31, 2022 and 2021, there were 1,180,570 and 1,804,479 shares available respectively, for grant under the Company's stock incentive plans.
Stock Options
Stock options have been granted under the 2013 Plan. Such options have a 10-year term and generally vest ratably over a period of four years. Summary information related to stock options outstanding as of December 31, 2022 and 2021 is as follows:
Outstanding Stock Options | ||||
Outstanding at January 1, 2021 | 959,413 | |||
Granted | — | |||
Exercised | — | |||
Forfeited / Terminated | (108,501 | ) | ||
Outstanding at December 31, 2021 | 850,912 | |||
Granted | 1,746,470 | |||
Exercised | (199,148 | ) | ||
Forfeited / Terminated | (923,413 | ) | ||
Outstanding at December 31, 2022 | 1,474,821 | |||
The weighted average exercise price of the outstanding options was $12.77 and $2.85 per share as of December 31, 2022 and 2021, respectively, 933,208 and 709,356, respectively, of which are fully vested and exercisable as of December 31, 2022 and 2021, respectively.
The Company recognized $130 thousand and $52 thousand in stock compensation expense for the year ending December 31, 2022 and 2021, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. At the time of grant of the options, shares were not publicly traded and were rarely traded privately. As a result, expected volatility was computed based on the historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield to curve in effect at the time of grant.
The Company has no history or expectations of paying dividends on its common stock.
The following table summarizes the assumptions used in the calculation of the fair market value for awards granted during the year ended December 31, 2021 remain open and subject2022:
Valuations assumptions
Expected dividend yield | — | % | ||
Expected volatility | 55 | % | ||
Expected term (years) | 6 | |||
Risk-free interest rate | 1.9 | % |
109
Nogin, Inc.
Notes to examination.Consolidated Financial Statements
The Company followssponsors a defined contribution retirement plan (the “Plan”) under the guidanceprovisions of section 401(k) of the Internal Revenue Code for the benefit of substantially all employees. The Company does not match contributions to the Plan.
On December 2, 2021, the Company acquired the assets of Betabrand through a credit bid of $7.0 million on Betabrand’s outstanding indebtedness. The Company engaged a third-party valuation specialist to assist with the purchase price valuation, which resulted in ASC 820 for its financial assets and liabilities that arere-measuredand reported at fair value at each reporting period, andnon-financialassets and liabilities that arere-measuredand reported at fair value at least annually.
|
| As of |
| |
Acquired assets |
|
|
| |
Inventory |
| $ | 2,408 |
|
Other current assets |
|
| 741 |
|
Property and equipment |
|
| 26 |
|
Internal-use software and website |
|
| 348 |
|
Intangible assets |
|
|
| |
Customer relationships |
|
| 2,538 |
|
Developed technology |
|
| 748 |
|
Trade name |
|
| 438 |
|
Security Deposits |
|
| 19 |
|
Total identifiable assets |
| $ | 7,266 |
|
Liabilities assumed |
|
|
| |
Accounts payable |
| $ | 151 |
|
Deferred revenue |
|
| 3,224 |
|
Total liabilities |
| $ | 3,375 |
|
On December 31, 2021, the Company would haveand CFL entered into a Limited Liability Operating Agreement (the “LLC Agreement”), whereby Nogin contributed certain assets acquired from the Betabrand acquisition and entered into a MSA with IPCO to provide certain e-commerce services, marketing, photography, customer service and merchant credit card monitor fraud services; and CFL entered into a Master Supply Agreement with IPCO and agreed to procure the supply of inventory to IPCO, provide manufacturing, fulfillment, logistics and warehousing services for the inventory. The Company and CFL each received fifty percent ownership.
Prior to December 1, 2022, the Company owned a 50% equity interest in a joint venture, ModCloth Partners, LLC. (“Modcloth”), which was accounted for under the fair value option of accounting. On December 1, 2022, the Company acquired the remaining 50% equity interest in Modcloth (the “Modcloth Acquisition”) from Tiger Capital Group, LLC (“Tiger Capital”), pursuant to Tiger Capital’s exercise of their put option to require the Company to purchase all of Tiger Capital’s equity interest for $1.5 million in cash. As a result of the Modcloth Acquisition, Modcloth is now a wholly owned consolidated subsidiary of the Company.
Total purchase consideration in connection with the saleModcloth Acquisition was $6.9 million, including $1.5 million in cash and $5.4 million for the settlement of a preexisting relationship. Under the terms of the assets or paid in connection with the transferModcloth Tiger Assignment (“Equity Assignment Agreement”), control of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities,Modcloth transferred to the Company seeks to maximize the useon December 1, 2022 (the “Acquisition Date”). Cash consideration was funded with cash previously recorded as restricted cash in our consolidated balance sheets as of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Description | Level | December 31, 2021 | ||||||
Assets: | ||||||||
Marketable securities held in Trust Account | 1 | $ | 231,506,662 | |||||
Prior to the closing of the Modcloth Acquisition, the Company accounted for the existing 50% equity interest in Modcloth using the fair value option of accounting. As of September 30, 2022 the Sponsor agreed to loanCompany’s investment in Modcloth had a fair value and carrying value of $4.5 million. The Company accounted for the Company $300,000pursuant toacquisition of the remaining 50% equity interest in Modcloth as a new promissory note (the “Working Capital Loan”). The Working Capital Loan isnon-interestbearing and payable upon consummationstep acquisition, which required remeasurement of the Company’s initialexisting 50% ownership interest in Modcloth to fair value as of December 1, 2022. The Company utilized weighted discounted cash flow, guideline public company and comparable market transaction valuation approaches to determine the fair value of the existing equity interest. This resulted in a fair value of $1.92 million and the
110
Nogin, Inc.
Notes to Consolidated Financial Statements
recognition of a loss of $2.58 million, which was included in Change in fair value of unconsolidated affiliates on the consolidated statements of operations.
The Modcloth Acquisition was accounted for as a business combination by applying the acquisition method of accounting pursuant to ASC Topic 805, “Business Combinations”.
The following table summarizes the purchase price consideration in connection with the Modcloth Acquisition as of December 1, 2022 (amounts in thousands):
Total cash consideration |
| $ | 1,500 |
|
Settlement of pre-existing relationship (a) |
|
| 5,415 |
|
Total consideration |
|
| 6,915 |
|
Fair value of previously held equity interest |
|
| 1,920 |
|
Total |
|
| 8,835 |
|
(a)Effective settlement of pre-existing accounts receivable of $5.4 million for services provided to Modcloth under the Company’s Master Services Agreement with Modcloth and additional operational funding provided by the Company to Modcloth. The $5.4 million accounts receivable balance as of the acquisition date was based on the Company’s estimate of the amount that will ultimately be collected from Modcloth.
The following table summarizes the preliminary fair values of the assets acquired, liabilities assumed and resulting goodwill in the Modcloth Acquisition as of December 1, 2022 (amounts in thousands):
|
| As of |
| |
Acquired assets |
|
|
| |
Cash |
| $ | 3 |
|
Accounts receivable, net |
|
| 25 |
|
Inventory |
|
| 4,787 |
|
Prepaid expenses and other current assets |
|
| 30 |
|
Property and equipment, net |
|
| 108 |
|
Right-of-use asset, net |
|
| 895 |
|
Other non-current asset |
|
| 80 |
|
Intangible assets, net |
|
| 4,610 |
|
Goodwill |
|
| 6,748 |
|
Total acquired assets |
| $ | 17,286 |
|
Liabilities assumed |
|
|
| |
Accounts payable |
| $ | 5,544 |
|
Accrued expenses and other liabilities |
|
| 2,908 |
|
Total liabilities assumed |
| $ | 8,452 |
|
The fair value of Modcloths’s identifiable intangible assets and useful lives are as follows (amounts in thousands, except years):
|
| Fair Value |
|
| Useful Life (Years) | |
Trade name |
|
| 4,610 |
|
| 10 |
Total identifiable intangible assets |
| $ | 4,610 |
|
|
|
Fair value measurement methodology used to estimate the fair value of the trade name is based on the relief from royalty method, which estimates the value of the trade names based on the hypothetical royalty payments that are saved by owning the asset. Some of the more significant assumptions inherent in the development of intangible asset fair values, from the perspective of a market participant, include, but are not limited to (i) the amount and timing of projected future cash flows (including revenue and expenses), (ii) the discount rate selected to measure the risks inherent in the future cash flows, and (iii) the assessment of the asset’s life cycle.
The goodwill of $6.7 million represents future economic benefits expected to arise from synergies from combining operations and commercial organizations to increase market presence and the extension of existing customer relationships. The goodwill recorded is not deductible for income tax purposes.
111
Nogin, Inc.
Notes to Consolidated Financial Statements
The amounts of revenue and loss from operations of Modcloth included in the Company’s Consolidated Statements of Operations from the Modcloth Acquisition Date to December 31, 2022 are not considered material.
The Company provides services to its joint ventures, ModCloth and IPCO under Master Services agreements (“MSA”), which were entered into on April 25, 2021 and December 31, 2021, respectively.
Prior to December 1, 2022, the Company owned a 50% equity interest in a joint venture, ModCloth Partners, LLC. (“Modcloth”), which was accounted for under the fair value option of accounting. On December 1, 2022, the Company acquired the remaining 50% equity interest in Modcloth (the “Modcloth Acquisition”) from Tiger Capital Group, LLC (“Tiger Capital”), pursuant to Tiger Capital’s exercise of their put option to require the Company to purchase all of Tiger Capital’s equity interest for $1.5 million in cash. As a result of the Modcloth Acquisition, Modcloth is now a wholly owned consolidated subsidiary of the Company, and the results of Modcloth are consolidated into the results of the company post-assignment. Sales under the MSA to ModCloth prior to the assignment were $5.5 million for the eleven months ended November 30, 2022. As of December 31, 2021, the Company had receivables from ModCloth of $7.7 million, which were included in related party receivables on the consolidated balance sheets. As of December 1, 2022, the Company had receivables from Modcloth of approximately $9.0 million. Approximately $3.6 million of these receivables were written off and the remaining $5.4 million was accounted for as consideration as part of the acquisition.
Sales under the MSA to IPCO were $6.9 million for the twelve months ended December 31, 2022. In addition, the Company sold inventory to IPCO for $0.6 million during the first quarter of 2022, which such amount is included in net revenue to related parties in the consolidated statement of operations. As of December 31, 2022, the Company had payables to IPCO of $1.0 million, which was included in related party payables on the consolidated balance sheets.
During the second quarter of 2022, the Company issued a portion of the Promissory Notes described in Note 7 to certain principal owners and members of management of the Company which have been identified as related parties. The Company received proceeds in connection with the Promissory Notes to related parties of $2.0 million at issuance of which $0.2 million was allocated to the Promissory Note Warrants. The Company paid $3.1 million to settle the Promissory Notes at the closing of the Business Combination. At the lender’s discretion, the Working Capital Loan may be repayable in warrants
One of the postCompany’s co-chief executive officers and his immediate family member (together, the “PIPE Related Parties”) were investors in the PIPE issuance of Convertible Notes (Note 7) for total proceeds of $1.5 million, which is included in proceeds from PIPE convertible note issuance in the consolidated statements of cash flows for the twelve months ended December 31, 2022. In addition to the $1.5 million in Convertible Notes, the PIPE Related Parties also received 32,142 equity classified Convertible Note Warrants (Note 8). As of December 31, 2022, the fair value of the Convertible Notes with the PIPE Related Parties was $1.7 million, which is included in Convertible Notes on the consolidated balance sheets. The terms of the Convertible Notes with the PIPE Related Parties are consistent with the rest of the Convertible Note holders.
Disaggregation of Revenue
The Company has five major streams of revenue. CaaS service revenue, product revenue and shipping revenue are considered transferred to customers at the point of sale. Marketing and other revenue (other than B2C fulfillment services for rental space) are considered transferred to customers when services are performed. Thus, these revenues streams are recognized at a point in time. B2C fulfillment services for rental space is recognized over time.
112
Nogin, Inc.
Notes to Consolidated Financial Statements
The following table presents a disaggregation of the Company’s revenues by revenue source for the twelve months ended December 31, 2022 and 2021 (in thousands):
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Commerce-as-a-Service Revenue |
| $ | 23,644 |
|
| $ | 19,830 |
|
Product sales revenue |
|
| 41,540 |
|
|
| 51,346 |
|
Marketing revenue |
|
| 15,482 |
|
|
| 19,249 |
|
Shipping revenue |
|
| 9,660 |
|
|
| 7,030 |
|
Other revenue |
|
| 4,145 |
|
|
| 3,893 |
|
Total revenue |
| $ | 94,471 |
|
| $ | 101,348 |
|
The Company conducts business domestically and our revenue is managed on a consolidated basis. Our Chief Executive Officer, Jonathan S. Huberman, who is our Chief Operating Decision Maker, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, the Company is considered to be a single reportable segment.
All of the Company’s long-lived assets and external customers are located within the United States.
Basic and diluted net income (loss) per share are computed using the two-class method as required when there are participating securities. The Company’s redeemable convertible preferred stock are participating securities as the holders of the redeemable convertible preferred stock are entitled to participate with in dividends with common stock. In periods of net income, net income is attributed to common stockholders and participating securities based on their participating rights. Net losses are not allocated to the participating securities as the participating securities do not have a contractual obligation to share in any losses. The following table presents the Company’s basic and diluted net income (loss) per share:
|
| Twelve Months Ended December 31, |
| |||||
(In thousands, except share and per share amounts) |
| 2022 |
|
| 2021 |
| ||
Numerator: Basic EPS |
|
|
|
|
|
| ||
Net (loss) income |
| $ | (52,726 | ) |
| $ | (65 | ) |
Less: Undistributed earnings attributable to participating securities |
|
| — |
|
|
| — |
|
Net (loss) income attributable to common stockholders-basic |
| $ | (52,726 | ) |
| $ | (65 | ) |
Denominator: Basic EPS |
|
|
|
|
|
| ||
Weighted average shares of common stock outstanding-basic |
|
| 49,041,640 |
|
|
| 39,621,946 |
|
Net (loss) income per share attributable to common stock-basic |
| $ | (1.08 | ) |
| $ | (0.00 | ) |
|
| Twelve Months Ended December 31, |
| |||||
(In thousands, except share and per share amounts) |
| 2022 |
|
| 2021 |
| ||
Numerator: Diluted EPS |
|
|
|
|
|
| ||
Net income (loss) attributable to common stockholders-diluted |
| $ | (52,726 | ) |
| $ | (65 | ) |
Denominator: Diluted EPS |
|
|
|
|
|
| ||
Adjusted weighted average shares of common stock outstanding-basic |
|
| 49,041,640 |
|
|
| 39,621,946 |
|
Dilutive potential shares of common stock: |
|
|
|
|
|
| ||
Options to purchase shares of common stock |
|
| — |
|
|
| 728,284 |
|
Warrants to purchase shares of common stock |
|
| — |
|
|
| 546,049 |
|
Weighted average shares of common stock outstanding-diluted |
|
| 49,041,640 |
|
|
| 40,896,279 |
|
Net income (loss) per share attributable to common stock-diluted |
| $ | (1.08 | ) |
| $ | (0.00 | ) |
113
Nogin, Inc.
Notes to Consolidated Financial Statements
The Company’s potentially dilutive securities below, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive.
Weighted-average number of potentially anti-dilutive shares excluded from calculation of dilutive earnings per share
|
| Twelve Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Series A convertible, redeemable preferred shares |
|
| 5,780,137 |
|
|
| 8,864,495 |
|
Series B convertible, redeemable preferred shares |
|
| 4,130,213 |
|
|
| 6,334,150 |
|
Stock-based compensation awards |
|
| 2,419,681 |
|
|
| — |
|
Legacy Nogin Warrants |
|
| 572,779 |
|
|
| — |
|
PIPE Warrants |
|
| 485,877 |
|
|
| — |
|
SWAG Warrants |
|
| 7,441,396 |
|
|
| — |
|
Shares Underlying Convertible Notes |
|
| 1,981,776 |
|
|
| — |
|
Significant changes in the Company’s mezzanine equity and shareholders’ deficit during the twelve months ended December 31, 2022 were as follows:
Common Stock
Subsequent to the Business Combination, entity atthe Company authorized up to 500 million shares of common stock with a pricepar value of $1.00warrant.share. Each share of common stock entitles the shareholder to one vote.
Preferred Stock
As part of the Business Combination, all of the convertible preferred stock of Legacy Nogin, (including both the Series A preferred stock and Series B preferred stock) were converted into approximately 15.2 million shares of the Company’s Common Stock. As a result of the conversion of the Series A preferred stock and Series B preferred stock, the Company reclassified the amounts previously recorded in mezzanine equity to additional paid-in capital.
Subsequent to the Business Combination, the Company is authorized to issue 50 million shares of preferred stock with a par value of $0.0001 per share. There were no shares of preferred stock issued and outstanding as of December 31, 2022.
The Company has entered into lease agreements for offices and warehouses located in California and Pennsylvania.
On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842, “Leases” (“ASC 842”), using the modified retrospective transition method. Accordingly, comparative period financial information was not restated for the effects of adopting ASC 842.
As of the date of adoption on January 1, 2022, the impact of ASC 842 resulted in the recognition of a right-of-use asset (“ROU asset”) and lease liability for our operating leases on our consolidated balance sheets of approximately $13.0 million and $15.1 million, respectively.
Lease liabilities were recognized based on the present value of remaining lease payments over the remaining lease term. ROU assets were recognized utilizing the lease liability as of January 1, 2022 adjusted for certain ASC 840 operating lease related balances. As the Company’s operating lease agreements do not provide a rate implicit in the lease, we discounted the remaining lease payments using an Agreementestimated incremental borrowing rate, which was based on the information available at the adoption date. Operating lease cost is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and Planother operating costs are expensed as incurred. Leases with an initial term of Merger (as it12 months or less are not recorded on the balance sheet. The adoption of this new guidance did not have a material net impact on the Company’s consolidated statements of operations or consolidated statements of cash flows.
114
Nogin, Inc.
Notes to Consolidated Financial Statements
Our operating leases primarily consist of office space, distribution centers and equipment used within our operations. Most of the leases have lease terms ranging from three to eight years, although the terms and conditions of our leases can vary significantly from lease to lease.
The following schedule represents the components of the Company’s operating lease assets as of December 31, 2022 (in thousands):
Leases |
| Classification |
| December 31, 2022 |
| |
Assets |
|
|
|
|
| |
Operating |
| Operating lease right-of-use assets |
| $ | 17,391 |
|
|
|
|
|
|
| |
Liabilities |
|
|
|
|
| |
Operating lease liabilities (current) |
| Operating lease liabilities, current |
| $ | 4,367 |
|
Operating lease liabilities (non-current) |
| Operating lease liabilities, non-current |
|
| 15,223 |
|
The following schedule represents the components of lease expense for the fiscal year ended December 31, 2022 (in thousands):
|
| December 31, 2022 |
| |
Lease Costs: |
|
|
| |
Operating lease costs |
| $ | 4,576 |
|
Variable lease costs |
|
| — |
|
Short-term lease costs |
|
| — |
|
Sublease income |
|
| — |
|
Total lease costs |
| $ | 4,576 |
|
As of December 31, 2022, the Company’s maturity of operating lease liabilities for the next five years and thereafter are as follows (in thousands):
|
| Operating Leases |
| |
2023 |
| $ | 5,580 |
|
2024 |
|
| 5,173 |
|
2025 |
|
| 5,279 |
|
2026 |
|
| 3,529 |
|
2027 |
|
| 2,222 |
|
Thereafter |
|
| 899 |
|
Total lease payments |
|
| 22,682 |
|
Less: imputed interest |
|
| (3,092 | ) |
Total operating lease payments |
| $ | 19,590 |
|
Other operating leases information:
Cash paid for amounts included in the measurement of lease liabilities |
| $ | 3,870 |
|
Right-of-use assets obtained in exchange for new lease liabilities |
| $ | 8,188 |
|
Weighted-average remaining term (in years) |
|
| 4.3 |
|
Weighted-average discount rate |
|
| 6.9 | % |
115
Nogin, Inc.
Notes to Consolidated Financial Statements
In accordance with ASC 840, the following is a schedule by years of future minimum lease payments required under the operating leases that have initial or noncancelable lease terms in excess of one year as of December 31, 2021.
Fiscal year ending December 31: |
|
|
| |
2022 |
| $ | 3,017 |
|
2023 |
|
| 1,272 |
|
2024 |
|
| 873 |
|
2025 |
|
| 900 |
|
2026 |
|
| 927 |
|
Thereafter |
|
| 1,853 |
|
Total minimum lease payments |
| $ | 8,842 |
|
In July 2018, the Company assumed the operating lease for office space of the entity with which an asset purchase agreement (APA) was executed. The monthly lease payment is $75 thousand and expires in May 2023. The future minimum lease payments are included in the table above. The Company subleased the office space to a third-party in December 2018 for approximately $87 thousand per month. The sublease agreement will expire in May 2023. The sublessee terminated the sublease arrangement in the third quarter of 2022. As such, the Company recognized a loss on the remaining rental income of $500 thousand for the twelve months ended December 31, 2022 in other expenses on the consolidated statement of operations.
Litigation
In the ordinary course of business, the Company may be amended, supplemented or otherwise modifiedface various claims brought by third parties and the Company may, from time to time, make claims or take legal actions to assert its rights, including intellectual property disputes, contractual disputes, and other commercial disputes. Any of these claims could subject the Company to litigation. As of December 31, 2022, there are no claims that would cause a material impact on the consolidated financial statements.
Indemnities
The Company’s directors and officers agreements require us, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in accordanceconnection with its terms, the “Merger Agreement”) with Branded Online, Inc. (d/b/a Nogin), a Delaware corporation (“Nogin”any action, suit or the “Company”). If (i) the Merger Agreement is adopted and the transactions contemplated thereby, including the Merger, are approved by SWAG’s and Nogin’s stockholders and (ii) the Merger is subsequently completed, Merger Sub will merge with and into Nogin, with Nogin surviving the Merger as a wholly owned subsidiary of SWAG (the “Merger” and, along with the transactions contemplated in the Merger Agreement, the “Transactions”).
These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not incurred any Sponsor Securities they may hold.
The sponsor has also agreed, subjectCompany evaluated subsequent events and transactions that occurred after the balance sheet date up to certain exceptions, not to transfer any of its shares of SWAG Class B common stock (the “Founder Shares”) (or any shares of SWAG common stock issuable upon conversion in connection with the Closing) until the earlier of (i) the date that is the consolidated financial statements were issued.
oneIn January 2023, the Company settled a litigation case from 2021 for $-year anniversary800 thousand, which was included in accrued expenses, other current liabilities and other long-term liabilities as of December 31, 2022 on the consolidated balance sheets.
In March 2023, the Company did not timely make the payment of the Closing and (ii)accrued interest on the dateConvertible Notes due on which SWAG completesMarch 1, 2023 of $2.3 million, resulting in a liquidation, merger, capital stock exchange, reorganization or other similar transaction that resultsdefault. The Company is in all of SWAG’s stockholders havingactive negotiations with the right to exchange their shares of SWAG common stock for cash, securities or other property or (iii) subsequent to the consummationholders of the Transactions,Convertible Notes to resolve the datedefault.
116
Item 9. Changes in and Disagreements with Accountants on which the last reported sale priceAccounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Our management has established and maintains a system of the Transactions (the “Founder Shares Lock-up Period”).
As of the unvested Founder Shares (the “First Tranche Shares”) will vest on any day following the Closing when the closing price of a share of SWAG Class A common stock on NASDAQ (the “Closing Share Price”) equals or exceeds $12.50 (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) and the remaining 50% will vest (along with any unvested First Tranche Shares) when the Closing Share Price equals or exceeds $14.50 (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like).
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which this Report relates that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
117
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S‑K in response to this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the Merger Agreement, SWAG, Noginfiscal year covered by this Report (our “Definitive Proxy Statement”). Such responsive information is expected to be included under the captions “Proposal 1—Election of Directors,” “Corporate Governance” and “Executive Compensation.”
Item 11. Executive Compensation
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K in response to this Item 11 is incorporated herein by reference to the information under the caption "Executive Compensation" in our Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information regarding security ownership required by Item 403 of Regulation S‑K is incorporated herein by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our Definitive Proxy Statement. See also the information provided in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, Director Independence
The information required regarding certain stockholdersrelationships and related transactions and director independence required by Items 404 and 407(a) of Nogin (collectively,Regulation S‑K is incorporated herein by reference to the “Supporting Nogin Stockholders”information under the captions “Certain Relationships and each, a “Supporting Nogin Stockholder”) entered intoRelated Transactions” and “Proposal 1 Election of Directors” in our Definitive Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information regarding principal accountant fees and services required by Item 9(e) of Schedule 14A of the Exchange Act is incorporated herein by reference to the information under the caption “Principal Accountant Fees and Services” in our Definitive Proxy Statement.
118
PART IV
Item 15. Exhibits and Financial Statement Schedules
The Consolidated Financial Statements of the Company Support Agreement. are included in Part II, Item 8 of this Report.
All financial statement schedules for the Company have been included in the Consolidated Financial Statements or the related footnotes, or are either inapplicable or not required.
The following is a list of exhibits filed as part of this Report.
|
| Incorporated by Reference | ||
Exhibit | Exhibit Description | Form | Exhibit | Filing Date |
2.1* | S‑4 | 2.1 | 2/14/2022 | |
2.2 | S-4 | 2.2 | 5/16/2022 | |
2.3 | 8-K | 2.3 | 9/01/2022 | |
3.1 | Amended and Restated Certificate of Incorporation of Nogin, Inc.. | 8‑K | 3.1 | 9/01/2022 |
3.2 | 8‑K | 3.2 | 6/10/2021 | |
4.1 | S‑1 | 4.2 | 7/14/2021 | |
4.2 | S‑1 | 4.3 | 7/14/2021 | |
4.3 | 8‑K | 4.1 | 8/02/2021 | |
4.4 | 8-K | 4.4 | 9/01/2022 | |
4.5 | Form of 7.00% Convertible Senior Notes due 2026 (included in Exhibit 4.4). | 8-K | 4.5 | 9/01/2022 |
4.6 | 8-K | 4.6 | 9/01/2022 | |
4.7 | Description of the Registrant’s Securities (filed herewith). |
|
|
|
10.1 | 8‑K | 10.1 | 9/01/2022 | |
10.2 | 8-K | 10.1 | 8/02/2021 | |
10.3 | S-4 | 10.9 | 2/14/2022 | |
10.4 | S-4 | 10.12 | 5/16/2022 | |
10.5 | S-4 | 10.13 | 7/18/2022 | |
10.6† | 8-K | 10.6 | 9/01/2022 | |
10.7† | 8-K | 10.7 | 9/01/2022 | |
119
|
| Incorporated by Reference | ||
Exhibit | Exhibit Description | Form | Exhibit | Filing Date |
10.8† | 8-K | 10.8 | 9/01/2022 | |
10.9† | 8-K | 10.9 | 9/01/2022 | |
10.10 | 8‑K | 10.10 | 9/01/2022 | |
10.11 | Employment Agreement, dated January 30, 2023, by and between Nogin, Inc. and Jonathan S. Huberman. | 8-K | 10.1 | 2/03/2023 |
10.12 | Employment Agreement, dated January 30, 2023, by and between Nogin, Inc. and Shahriyar Rahmati. | 8-K | 10.2 | 2/03/2023 |
21.1 |
|
|
| |
23.1 |
|
|
| |
31.1 |
|
|
| |
31.2 |
|
|
| |
32.1 |
|
|
| |
32.2 |
|
|
| |
101 | The following financial information from Nogin, Inc.’s Annual Report on Form 10‑K for the year ended December 31, 2021, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statements of Changes in Stockholders’ Deficit, (iv) the Consolidated Statement of Cash Flows, and (v) the Notes to Consolidated Financial Statements (submitted electronically herewith). |
|
|
|
104 | Cover Page Interactive Data File, formatted in Inline XBRL (included as Exhibit 101). |
|
|
|
* | Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S‑K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
|
|
|
† | Indicates a management contract or compensatory plan or arrangement. |
|
|
|
|
|
|
|
|
Item 16. Form 10‑K Summary
None.
120
SIGNATURES
Pursuant to the Company Support Agreement, among other things, each Supporting Nogin Stockholder agreed to (i) vote at any meetingrequirements of Section 13 or 15(d) of the stockholdersSecurities Exchange Act of Nogin all of1934, the registrant has duly caused this Annual Report to be signed on its Nogin common stock and/or Nogin preferred stock, as applicable (or any securities convertible into or exercisable or exchangeable for Nogin common stock or Nogin preferred stock), held of record or thereafter acquired in favor of the transactions and the adoption of the Merger Agreement; (ii) appoint the chief executive officer of Nogin as such stockholder’s proxy in the event such stockholder fails to fulfil its obligations under the Company Support Agreement, (iii) be bound by certain other covenants and agreements related to the Merger and (iv) be bound by certain transfer restrictions with respect to Nogin securities, in each case, on the terms and subject to the conditions set forth in the Company Support Agreement. The shares of Nogin capital stock that are ownedbehalf by the Supporting Nogin Stockholders and subject to the Company Support Agreement represent approximately 84.8% of the outstanding shares of Nogin common stock and approximately 99.5% of the outstanding shares of Nogin preferred stock. The execution and delivery of written consents by all of the Supporting Nogin Stockholders will constitute the Nogin stockholder approval at the time of such delivery. Additionally, the Supporting Nogin Stockholders have agreed to waive any appraisal rights (including under Section 262 of the DGCL) with respect to the Merger and any rights to dissent with respect to the Merger.
NOGIN, INC. | |
By: | /s/ Jonathan S. Huberman |
Name: | Jonathan S. Huberman |
Title: | Chief Executive Officer, President and Chairman of the Board |
March 23, 2023 | |
Pursuant to the Registration Rights Agreement, SWAG will agree to file a shelf registration statement registering the resalerequirements of the SWAG Class A common stock (including those held asSecurities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the effective time or issuable upon future exercise of the Private Placement Warrants)registrant and the Private Placement Warrants (the “Registrable Securities”) under the Registration Rights Agreement within 15 days of the Closing. Up to four times total and up to twice in any 12-month period, certain legacy Nogin stockholders and legacy SWAG stockholders may request to sell all or any portion of their Registrable Securities in an underwritten offering so long as the total offering price is reasonably expected to exceed $35 million. SWAG also agreed to provide customary “piggyback” registration rights, subject to certain requirements and customary conditions. The Registration Rights Agreement also provides that SWAG will pay certain expenses relating to such registrations and indemnify the stockholders against certain liabilities.
Signature | Title | Date |
/s/ Jonathan S. Huberman | Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | March 23, 2023 |
Jonathan S. Huberman | ||
/s/ Shahriyar Rahmati | Chief Financial Officer and Chief Operating Officer (Principal Financial Officer and Principal Accounting Officer) | March 23, 2023 |
Shahriyar Rahmati | ||
/s/ Geoffrey Van Haeren | Chief Technology Officer | March 23, 2023 |
Geoffrey Van Haeren | ||
/s/ Wilhelmina Fader | Director | March 23, 2023 |
Wilhelmina Fader | ||
/s/ Eileen Moore Johnson | Director | March 23, 2023 |
Eileen Moore Johnson | ||
/s/ Hussain Baig | Director | March 23, 2023 |
Hussain Baig | ||
/s/ Andrew Pancer | Director | March 23, 2023 |
Andrew Pancer
121