UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterquarterly period ended June 30, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number:
Nogin, Inc. III
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)
Delaware | 86-1370703 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification |
1775 Flight WaySTE 400
Tustin, CA92782
(949) 222-0209
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading | Name of each exchange on which registered | ||
Common stock, par value $0.0001 per share | NOGN | The Nasdaq Stock Market LLC | ||
Warrants, each whole warrant exercisable for one share of common stock at an exercise price of $11.50 per share | NOGNW | The Nasdaq Stock Market LLC | ||
Class A Common Stock for $11.50 per share |
Indicate by check mark whether the issuerregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 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 ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation(§ (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, afiler”,filer,” “accelerated filer”,filer,” “smaller reporting company”, and “emerging growth company” in
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) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule.: Yes ☒☐ No ☐
As of SeptemberMay 9, 2021,2023, there were 20,000,00011,087,202 shares of Class Athe registrant’s common stock $0.0001outstanding, par value $0.0001 per share.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 5,750,000Section 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 statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-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 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 risks, uncertainties and assumptions described under the section in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2023 titled “Risk Factors.” 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.
Nogin, Inc. and Subsidiaries
Form 10-Q
Table of Contents
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44 | ||||
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47 | ||||
PART I - FINANCIALI—FINANCIAL INFORMATION
Item 1. Interim Financial Statements.
ASSETS | ||||
Current asset – Cash | $ | 25,001 | ||
Deferred offering costs | 331,691 | |||
TOTAL ASSETS | $ | 356,692 | ||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||
Current liabilities | ||||
Accrued expenses | $ | 1,000 | ||
Accrued offering costs | 169,054 | |||
Promissory note – related party | 162,637 | |||
Total Current Liabilities | 332,691 | |||
Stockholder’s Equity | ||||
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; NaNissued and outstanding | 0 | |||
Class A common stock, $0.0001 par value; 100,000,000 shares authorized; NaNissued and outstanding | 0 | |||
Class B common stock, $0.0001 par value; 10,000,000 shares authorized; 5,750,000 shares issued and outstanding (1) | 575 | |||
Additional paid-in capital | 24,425 | |||
Accumulated deficit | (999 | ) | ||
Total Stockholder’s Equity | 24,001 | |||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 356,692 | ||
Nogin, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets
See the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1
Nogin, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net service revenue |
| $ | 8,917 |
|
| $ | 8,533 |
|
Net product revenue |
|
| 6,544 |
|
|
| 12,922 |
|
Net revenue from related parties |
|
| 1,214 |
|
|
| 3,744 |
|
Total net revenue |
|
| 16,675 |
|
|
| 25,199 |
|
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 5,530 |
|
|
| 5,435 |
|
Cost of product revenue (1) |
|
| 3,942 |
|
|
| 10,251 |
|
Sales and marketing |
|
| 702 |
|
|
| 566 |
|
Research and development |
|
| 963 |
|
|
| 1,577 |
|
General and administrative |
|
| 17,325 |
|
|
| 17,222 |
|
Depreciation and amortization |
|
| 202 |
|
|
| 201 |
|
Total operating costs and expenses |
|
| 28,664 |
|
|
| 35,252 |
|
Operating loss |
|
| (11,989 | ) |
|
| (10,053 | ) |
Interest expense |
|
| (2,014 | ) |
|
| (652 | ) |
Change in fair value of promissory notes |
|
| (159 | ) |
|
| — |
|
Change in fair value of derivative instruments |
|
| 847 |
|
|
| — |
|
Change in fair value of unconsolidated affiliates |
|
| (645 | ) |
|
| (1,033 | ) |
Change in fair value of convertible notes |
|
| 4,591 |
|
|
| — |
|
Other (loss) income, net |
|
| (558 | ) |
|
| 1,954 |
|
Loss before income taxes |
|
| (9,927 | ) |
|
| (9,784 | ) |
(Benefit) Provision for income taxes |
|
| (26 | ) |
|
| 158 |
|
Net loss |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
|
|
|
|
|
|
| ||
Net loss per common share – basic and diluted |
| $ | (2.11 | ) |
| $ | (5.02 | ) |
Weighted average shares outstanding – basic and diluted |
|
| 4,688,331 |
|
|
| 1,981,097 |
|
See the accompanying notes to the unaudited condensed consolidated financial statements
2
Nogin, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of 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, 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 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Retroactive application of reverse stock split (2) |
|
| (8,421,271 | ) |
|
| — |
|
|
| (6,017,443 | ) |
|
| — |
|
|
| (37,640,849 | ) |
|
| (4 | ) |
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2021, as adjusted |
|
| 443,224 |
|
|
| 4,687 |
|
|
| 316,707 |
|
|
| 6,502 |
|
|
| 1,981,097 |
|
|
| — |
|
|
| 4,362 |
|
|
| (1,330 | ) |
|
| (16,262 | ) |
|
| (13,230 | ) |
Stock-based Compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 58 |
|
|
| — |
|
|
| — |
|
|
| 58 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,942 | ) |
|
| (9,942 | ) |
Balance, March 31, 2022 |
|
| 443,224 |
|
| $ | 4,687 |
|
|
| 316,707 |
|
| $ | 6,502 |
|
|
| 1,981,097 |
|
| $ | — |
|
| $ | 4,420 |
|
| $ | (1,330 | ) |
| $ | (26,204 | ) |
| $ | (23,114 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,334,714 |
|
|
| — |
|
|
| 9,270 |
|
|
| — |
|
|
| (82,294 | ) |
|
| (73,024 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 253 |
|
|
| — |
|
|
| — |
|
|
| 253 |
|
Fair value of equity classified warrants in common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 430 |
|
|
| — |
|
|
| — |
|
|
| 430 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,901 | ) |
|
| (9,901 | ) |
Balance, March 31, 2023 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
|
| 3,334,714 |
|
| $ | — |
|
| $ | 9,953 |
|
| $ | — |
|
| $ | (92,195 | ) |
| $ | (82,242 | ) |
Three Months Ended June 30, 2021 | For the ,Period from January 5, 2021 (inception) Through June 30 2021 | |||||||
Operating and formation costs | $ | (1 | ) | $ | 999 | |||
Net income (loss) | $ | 1 | $ | (999 | ) | |||
Weighted average shares outstanding, basic and diluted (1) | 5,000,000 | 5,000,000 | ||||||
Basic and diluted net loss per common share | $ | 0.00 | $ | (0.00 | ) | |||
Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholder’s Equity | |||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance — January 5, 2021 (inception) | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Issuance of Class B common stock to Sponsor (1) | 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 | $ | (1000 | ) | $ | 24,000 | ||||||||||
Net income | — | 0 | 0 | 1 | 1 | |||||||||||||||
Balance – June 30, 2021 | 5,750,000 | $ | 575 | $ | 24,425 | $ | (999 | ) | $ | 24,001 | ||||||||||
See the |
3
Cash Flows from Operating Activities: | ||||
Net loss | $ | (999 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
Changes in operating assets and liabilities: | ||||
Accrued expenses | 1,000 | |||
Net cash provided by operating activities | 1 | |||
Cash flows from financing activities: | ||||
Proceeds from issuance of common stock to Sponsor | 25,000 | |||
Proceeds from promissory note – related party | 162,637 | |||
Payment of offering costs | (162,637 | ) | ||
Net cash provided by financing activities | 25,000 | |||
Net Change in Cash | 25,001 | |||
Cash – Beginning of period | 0 | |||
Cash – End of period | $ | 25,001 | ||
Non-Cash investing and financing activities: | ||||
Deferred offering costs included in accrued offering costs | $ | 169,054 | ||
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 202 |
|
|
| 201 |
|
Amortization of debt issuance costs and discounts |
|
| 482 |
|
|
| 102 |
|
Stock-based compensation |
|
| 253 |
|
|
| 58 |
|
Deferred income taxes |
|
| (26 | ) |
|
| 158 |
|
Change in fair value of unconsolidated affiliates |
|
| 645 |
|
|
| 1,033 |
|
Change in fair value of warrant liability |
|
| 430 |
|
|
| — |
|
Change in fair value of promissory notes |
|
| 159 |
|
|
| — |
|
Change in fair value of convertible notes |
|
| (4,591 | ) |
|
| — |
|
Change in fair value of derivatives |
|
| (847 | ) |
|
| — |
|
Settlement of deferred revenue |
|
| — |
|
|
| (1,611 | ) |
(Gain) loss on disposal of asset |
|
| (1 | ) |
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (347 | ) |
|
| (363 | ) |
Related party receivables |
|
| — |
|
|
| (525 | ) |
Inventory |
|
| 1,282 |
|
|
| 4,052 |
|
Prepaid expenses and other current assets |
|
| (1,262 | ) |
|
| (2,309 | ) |
Accounts payable |
|
| (1,148 | ) |
|
| 2,505 |
|
Due to clients |
|
| (4,258 | ) |
|
| (277 | ) |
Related party payables |
|
| (814 | ) |
|
| 4,015 |
|
Lease assets and liabilities |
|
| (219 | ) |
|
| — |
|
Accrued expenses and other liabilities |
|
| (2,285 | ) |
|
| (2,374 | ) |
Net cash used in operating activities |
|
| (22,246 | ) |
|
| (5,277 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (21 | ) |
|
| (101 | ) |
Proceeds from sale of property and equipment |
|
| 3 |
|
|
| — |
|
Net cash used in investing activities |
|
| (18 | ) |
|
| (101 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
| ||
Proceeds from short-term loan |
|
| 3,250 |
|
|
| — |
|
Payment of short-term loan |
|
| (328 | ) |
|
| — |
|
Proceeds from promissory notes |
|
| 4,649 |
|
|
| — |
|
Payment of debt issuance costs |
|
| (75 | ) |
|
| — |
|
Proceeds from line of credit |
|
| — |
|
|
| 47,455 |
|
Repayments of line of credit |
|
| — |
|
|
| (43,803 | ) |
Net cash provided by financing activities |
|
| 7,496 |
|
|
| 3,652 |
|
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH |
|
| (14,768 | ) |
|
| (1,726 | ) |
Beginning of period |
|
| 15,385 |
|
|
| 4,571 |
|
End of period |
| $ | 617 |
|
| $ | 2,845 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 396 |
|
| $ | 652 |
|
Cash paid for taxes |
|
| 6 |
|
|
| 1 |
|
Right-of-use assets exchanged for lease liabilities |
|
| 1,120 |
|
|
| — |
|
|
|
|
|
|
|
| ||
SCHEDULE OF CASH AND RESTRICTED CASH |
|
|
|
|
|
| ||
Cash |
| $ | 617 |
|
| $ | 1,345 |
|
Restricted cash |
|
| — |
|
|
| 1,500 |
|
Total cash and restricted cash |
| $ | 617 |
|
| $ | 2,845 |
|
See the accompanying notes are an integral part ofto the unaudited condensed consolidated financial statements.statements
4
Nogin, Inc. and Subsidiaries
Note to Unaudited Condensed Consolidated Financial Statements
The Company’s headquarters and principal place of business are in Tustin, California.
Reverse Stock Split
On March 18, 2023, the Company’s Board of Directors approved a one-for-twenty reverse stock split of its common stock. The reverse stock split became effective upon filing of a certificate of amendment to the Company’s second amended and restated certificate of incorporation on March 28, 2023. Upon the effectiveness of the reverse stock split, (i) every twenty shares of outstanding common stock were reclassified and combined into one share of common stock and (ii) the number of common stock for which each outstanding option and warrant to purchase common stock is exercisable was proportionately decreased and the exercise price per share of common stock of each outstanding option and warrant to purchase common stock was proportionately increased. No fractional shares were issued as a result of the reverse stock split. The total number of authorized shares of common stock and the par value per share of common stock did not change as a result of the reverse stock split. Accordingly, all share and per share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split and exercise price of each outstanding option and warrant as if the transaction had occurred as of the beginning of the earliest period presented.
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 (the “Company”(“SWAG”) is), Nuevo Merger Sub, Inc., a blank check company incorporated in Delaware on January 5, 2021. The Company was formed for the purposewholly owned subsidiary of effecting a merger, capital stock exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities (a “Business Combination”SWAG (“Merger Sub”), and Branded Online, Inc. dba Nogin (“Legacy Nogin”).
While Legacy Nogin became a wholly-owned subsidiary of the signing a definitive agreement to enter a Business Combination. The Company, will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it notLegacy Nogin was deemed to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.
As a tender offer. result of the Business Combination, equity holders of Legacy Nogin received approximately 2.7 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 a proposedthe Business Combination, the Company may seek stockholder approvalreceived proceeds of a Business Combination at a meeting calledapproximately $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 used for such purpose at which stockholders may seek to redeem their shares, regardlessgeneral business purposes, the paydown of whether they vote for or against a Business Combination. The Company will proceed with a Business Combination only ifLegacy Nogin’s outstanding debt, the Company has net tangible assetspayment of at least $5,000,001 either immediately prior to or upon such consummation of a Business Combinationtransaction costs and if the Company seeks stockholder approval, a majoritypayment of the outstanding shares voted are voted in favorcash consideration.
5
The following table reconciles the elements of the Business Combination.
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 Incorporation, offer such redemption pursuant to the tender offer rulesshares of the Securities and Exchange Commission (the “SEC”), and file tender offer documents containing substantially the same information as would be included in a proxy statement with the SEC prior to completing a Business Combination.
Number of Shares | ||||
SWAG Common Stock, outstanding prior to the Business Combination | 1,425,492 | |||
Less: Redemption of SWAG shares | (851,080 | ) | ||
SWAG Common Stock | 574,412 | |||
Shares issued in PIPE equity financing | 25,854 | |||
Shares issued to financial advisors to settle transaction and issuance costs | 20,375 | |||
Business Combination and PIPE equity financing shares | 620,641 | |||
Nogin shares | 2,714,073 | |||
Total shares of common stock immediately after Business Combination | 3,334,714 | |||
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to FormSEC.Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s prospectusConsolidated Financial Statements for its Initial Public Offering as filed with the SEC on August 9, 2021, as well as the Company’s Current Report on Form8-K,as filed with the SEC on August 16, 2021.year ended December 31, 2022. The interim results for the periodthree months ended June 30, 2021March 31, 2023 are not necessarily indicative of the results to be expected for the period ending December 31, 20212023, or for any future annual or interim periods.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it 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 independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its 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.
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 to This
Liquidity and Capital Resources
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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 as of and for the three months ended March 31, 2023 have been prepared assuming the Company will continue as a going concern. The Company has sustained recurring losses and negative cash flows from operations and had a cash balance of $0.6 million as of March 31, 2023.
Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2022, expressed substantial doubt about our ability to continue as a going concern for at least twelve months from the date that such consolidated financial statements were issued.
In March 2023, the Company did not timely make comparisonthe payment of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted outaccrued interest on the Convertible Notes due on March 1, 2023 of using$2.3 million, resulting in a default. On March 26, 2023, the extended transition period difficult or impossible becauseCompany, the Notes Guarantors and the holders of the potential differencesConvertible Notes (collectively, the “Holders”) entered into limited waivers and consents (each, a “Waiver” and collectively, the “Waivers”) pursuant to which, among other things, each Holder agreed to (i) waive the Specified Default and any payment obligation of the Company under the Indenture with respect to the March Interest Payment (as defined below), (ii) in accounting standards used.lieu of the Interest Payments (as defined below), (a) receive a Promissory Note or Convertible Promissory Note, as applicable, and (b) amend the Warrant Agreement to reduce the exercise price of the warrants governed thereby from $11.50 to $0.01, and (iii) consent to the entry into the Supplemental Indenture (as defined below). The Supplemental Indenture, among other things, lowered the minimum amounts of liquidity the Company must maintain on a consolidated basis for each quarter in 2023 and the first quarter of 2024.
In April 2023, the Company completed a registered public offering of common stock and common warrants for aggregate gross proceeds of $22 million, before deducting placement agent fees and other offering expenses.
In addition, the Company is currently executing on various strategies to improve available cash balances, liquidity and cash generated from operations, including strategic growth plans, ongoing comprehensive cost reduction and performance improvement programs, reduced headcount and elimination of certain discretionary and general and administrative expenses, and taking steps to improve the operational efficiency of our fulfillment operations. With these strategies in place, the Company believes it will be able to continue as a going concern for at least the next twelve months.
COVID-19 Pandemic
The worldwide spread of COVID-19 and its variants have had, and continue to have a significant impact around the world. The COVID-19 pandemic has 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 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 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.
7
Use of Estimates
The preparation of the condensed 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 financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period.
Accounts Receivable, Net
The allowance for credit losses was $333 thousand as of March 31, 2023 and $425 thousand as of December 31, 2022.
Inventory
Inventory is comprised entirely of finished goods for resale. The reserve for returns was $159 thousand as of March 31, 2023 and $535 thousand as of December 31, 2022.
Concentration of Risks
Credit Risk
Financial instruments that potentially subject the Company to exercise 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 March 31, 2023, receivables from two customers amounted to $619 thousand (or 36% of accounts receivable) and $298 thousand (or 18% of accounts receivable), respectively. As of December 31, 2022, receivables from two customers amounted to $771 thousand (or 44% of accounts receivable) and $153 thousand (or 9% of accounts receivable), respectively.
Major Customers
For the three months ended March 31, 2023, revenue from our top three customers amounted to $2.9 million (or 17% of total revenue), $1.8 million (or 11% of total revenue), and $1.7 million (or 10% of total revenue), respectively. For the three months ended March 31, 2022, revenue from our top three customers amounted to $9.2 million (or 36% of total revenue), $3.7 million (or 15% of total revenue), and $2.0 million (or 8% of total revenue), respectively.
Major Suppliers
For the three months ended March 31, 2023, our top three vendors accounted for operating expense of $2.1 million (or 12% of total operating expense purchases), $2.0 million (or 12% of total operating expense purchases) and $1.4 million (or 8% of total operating expense purchases), respectively. For the three months ended March 31, 2022, our top three vendors accounted for operating expense of $4.8 million (or 20% of total operating expense purchases), $2.3 million (or 10% of total operating expense purchases) and $2.1 million (or 9% of total operating expense purchases), respectively.
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:
8
As of the date of adoption on January 1, 2022, the 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
There was no impairment of long-lived assets at March 31, 2023.
Goodwill
There was no impairment of goodwill at March 31, 2023.
Intangibles
Intangible assets include acquired technology, trade names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the asset, which range from five to fifteen years. Indefinite lived assets such as trade names are expected to generate cash flows indefinitely. Consequently, these assets were classified as indefinite-lived intangibles and accordingly are not amortized but reviewed for impairment annually, or sooner under certain circumstances. There was no impairment of indefinite-lived assets at March 31, 2023.
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 thisFASB ASC 480 and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial statementinstruments 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 determinationtime of warrant issuance and as of each subsequent quarterly 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 warrant liabilities. Such estimates may be subject to changewarrants are recognized as more current information becomes available and, accordingly,a non-cash gain or loss on the actual results could differ significantly from those estimates.
Income Taxes
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 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. Deferred tax assets were deemed to be de minimis as of June 30, 2021.
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the 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-not
9
unrecognized tax benefits as income tax expense. There were 0no unrecognized tax benefits and 0no amounts accrued for interest and penalties as of June 30, 2021.March 31, 2023. 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 determines 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, 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 lossof 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 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 reserve in revenue on the accompanying statement of operations. The reserve for returns as of March 31, 2023 was $0.6 million and as of December 31, 2022 was $1.4 million.
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 revenue in the condensed consolidated statements of operations.
10
Commerce as a Service
As noted above, the Company’s main revenue stream is CaaS revenue in which it receives 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 end customer by the weighted average number of common shares issuedCompany and outstanding duringamounts not owed to the period, excluding shares of common stock subjectCompany are remitted to forfeiture. Weighted average shares were reducedthe customer. 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 effect of an aggregate of 750,000 shares of Class B common stock that are subject to forfeiture depending on the extent to which the underwriters’ over-allotment option is not exercised (see Note 5). At June 30, 2021,customer and the Company diddoes not have any dilutive securities and other contracts that could, potentially, be exercised or converted into shares of common stock and then share in the earningstake possession of the Company.customers' inventory or any credit risks relating to the products sold.
Product sales
Under certain licensee agreements, the Company is the owner of inventory and reseller of record. As a result, diluted loss per common share is the same as basic loss per common share for the periods presented.
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 Instruments
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.
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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 measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
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, under ASCsuch 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.
Recent Accounting Pronouncements
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 820, “Fair Value Measurement,326, Financial Instruments—Credit Losses,” approximateswhich clarifies the carrying amounts representedscope of guidance in the accompanying condensed balance sheet, primarily due to their short-term nature.
In August 2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”("ASU")Debt — Debt—Debt with Conversion and Other Options (SubtopicHedging — Hedging—Contracts in Entity’s Own Equity (Subtopic(“ASU2020-06”)simplifyimprove financial reporting associated with accounting for certain financial instruments. ASU2020-06eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosuresASU 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 freestanding instrumentsmore convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are indexedrequired for equity contracts to and settled in an entity’s own equity.qualify for the derivative scope exception, which will permit more equity contracts to qualify for it.
The ASU2020-06amends also simplifies the diluted earnings per share guidance, including(EPS) calculation in certain areas. ASU 2020-06 is effective for the requirement to useCompany beginning January 1, 2024, with early adoption permitted as of January 1, 2021. The Company early adopted theif-convertedmethod for all convertible instruments. provisions of ASUis effective January 1, 2022 and should be appliedit did not have a material impact on the Company’s financial statements as a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is currently assessing the impact, if any, that ASU2020-06would have on its financial position, resultsresult 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 condensedCompany's financial statements.
Property and equipment, net as of March 31, 2023 and December 31, 2022, consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
Furniture and equipment |
| $ | 2,402 |
|
| $ | 2,406 |
|
Leasehold improvements |
|
| 572 |
|
|
| 572 |
|
Property and equipment, gross |
|
| 2,974 |
|
|
| 2,978 |
|
Less accumulated depreciation |
|
| (1,498 | ) |
|
| (1,383 | ) |
Property and equipment, net |
| $ | 1,476 |
|
| $ | 1,595 |
|
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Depreciation expense for property and equipment for the three months ended March 31, 2023 and 2022 was $138 thousand and $143 thousand, respectively.
In connection with the ModCloth acquisition (Note 13), the Company recorded $6.7 million of goodwill.
In connection with the Betabrand acquisition, the Company’s amortization expense for capitalized software for the three months ended March 31, 2023 and 2022 was $55 thousand and $58 thousand, respectively.
As of March 31, 2023 and December 31, 2022, intangible assets consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
Software |
| $ | 1,166 |
|
| $ | 1,166 |
|
Trade Name |
|
| 4,617 |
|
|
| 4,617 |
|
|
| 5,783 |
|
|
| 5,783 |
| |
Less: Accumulated amortization |
|
| (344 | ) |
|
| (290 | ) |
Intangible assets-net |
| $ | 5,439 |
|
| $ | 5,493 |
|
As of March 31, 2023, the Company’s amortization of intangibles for the next five years are as follows (in thousands):
2023 (remaining payments) |
| $ 164 |
2024 |
| 219 |
2025 |
| 219 |
2026 |
| 219 |
2027 |
| - |
Total remaining intangible amortization |
| $ 821 |
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 14). 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 Company for $1.5 million, at which point ModCloth became a wholly-owned subsidiary of the Company. In addition, the Company paid the remaining balance of approximately $1 million on the inventory financing arrangement between ModCloth and Tiger Capital (Note 13).
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 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 14). 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 March 31, 2023 and December 31, 2022, the investment balance related to IPCO was $6.8 million and $7.4 million, respectively, and was included in investment in unconsolidated affiliates on the consolidated balance sheets. For the three months ended March 31, 2022, the Company recorded a loss of $1.6 million to other expense related to the settlement of deferred revenue related to sale of finished inventory to IPCO. In addition, the Company recorded a fair value loss related to its IPCO investment of $645 thousand and $114 thousand, respectively, included in changes in fair value of unconsolidated affiliates on the consolidated statement of operations for the three months ended March 31, 2023 and March 31, 2022.
13
The following table presents summarized financial information for the joint venture for the three months ended March 31, 2023 and 2022, and as of March 31, 2023 and December 31, 2022 (in thousands):
| IPCO |
| ||||||
|
| For the Three Months |
|
| For The Three Months |
| ||
|
| 2023 |
|
| 2022 |
| ||
Net revenue |
| $ | 4,018 |
|
| $ | 6,507 |
|
Gross margin |
|
| 2,674 |
|
|
| 1,356 |
|
Net loss |
|
| (1,397 | ) |
|
| (561 | ) |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
| IPCO |
| ||||||
|
| As of March 31, |
|
| As of December 31, |
| ||
Current assets |
| $ | 3,564 |
|
| $ | 4,254 |
|
Long term assets |
|
| 5,366 |
|
|
| 5,509 |
|
Current liabilities |
|
| 6,940 |
|
|
| 6,142 |
|
Long term liabilities |
|
| 907 |
|
|
| 1,032 |
|
The Company’s IPCO investments are Level 3 fair value measurements. The Company utilized the following valuation methods to conclude on the fair value as of March 31, 2023:
- Discounted Cash Flow– The key unobservable input utilized was a discount rate of 14.7% for IPCO.
- Guideline Public Company Method – The Company utilized a revenue multiple of 0.4x 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 0.45x 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 January 1, 2022 |
| $ | 7,133 |
|
Change in fair value |
|
| 271 |
|
Balance as of December 31, 2022 |
|
| 7,404 |
|
Change in fair value |
|
| (645 | ) |
Balance as of March 31, 2023 |
| $ | 6,759 |
|
Accrued expenses and other current liabilities as of Contents
|
| March 31, |
|
| December 31, |
| ||
Business Combination consideration payable |
| $ | 5,000 |
|
| $ | 5,000 |
|
Contract liability |
|
| 4,054 |
|
|
| 5,058 |
|
Payroll and other employee costs |
|
| 2,215 |
|
|
| 1,300 |
|
Sales tax payable |
|
| 557 |
|
|
| 1,191 |
|
Accrued interest |
|
| 5 |
|
|
| 1,622 |
|
Accrued transaction costs |
|
| — |
|
|
| 840 |
|
Inventory accrual |
|
| — |
|
|
| 503 |
|
Other accrued expenses and current liabilities |
|
| 3,197 |
|
|
| 2,312 |
|
Total |
| $ | 15,028 |
|
| $ | 17,826 |
|
14
Other long-term liabilities as of March 31, 2023 and December 31, 2022 were as follows (in thousands):
|
| March 31, |
|
| December 31, |
| ||
Deferred transaction costs payable |
| $ | 10,979 |
|
| $ | 10,979 |
|
Business Combination consideration payable |
|
| 3,555 |
|
|
| 3,355 |
|
Deferred PIPE issuance costs payable |
|
| 1,160 |
|
|
| 1,160 |
|
PIPE principal accretion |
|
| 1,104 |
|
|
| 617 |
|
Legal settlement |
|
| 940 |
|
|
| 621 |
|
Standby agreement derivative liability |
|
| — |
|
|
| 847 |
|
Other long-term liabilities |
|
| 102 |
|
|
| 187 |
|
Total |
| $ | 17,840 |
|
| $ | 17,766 |
|
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 par 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 one share of Common 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 March 31, 2023, the Standby Capital VWAP Sale Price was $1.76.
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
15
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 March 31, 2023 and December 31, 2022, the fair value of the Convertible Notes were $57.4 million and $62.5 million, respectively, of which $1.1 million and $1.6 million, respectively, representing accrued interest, is included in accrued expenses and other current liabilities on the consolidated balance sheets. The gain on fair value of the Convertible Notes during the three months ended March 31, 2023 was $4.6 million of which $1.1 million is included in interest expense, which is recognized based on the effective interest method.
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 15.04%, which is based on the company's credit rating, volatility of 96.85% and 41 time-nodes.
The Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023. On March 26, 2023, the Company, the Notes Guarantors and Holders entered into limited waivers and consents pursuant to which each holder agreed to (i) waive the Specified Default and any payment obligation of the Company under the Indenture with respect to the March Interest Payment, (ii) in lieu of the March Interest Payment and payment of the accrued interest on the Convertible Notes due on September 1, 2023 (collectively, the “Interest Payments”), (a) receive a Promissory Note (as defined below) and (b) amend the Warrant Agreement (as defined below) to reduce the exercise price of the warrants governed thereby from $11.50 to $0.01, and (iii) consent to the entry into the Supplemental Indenture.
The Supplemental Indenture, among other things, (i) lowered the minimum amounts of liquidity the Company must maintain on a consolidated basis for each quarter in 2023 and the first quarter of 2024, (ii) added restrictions on the Company's ability to make payments relating to certain restricted investments, (iii) decreased the maximum amount of equity interests that the Company may repurchase, redeem, acquire or retire, (iv) removed the Company's ability to issue preferred stock or incur certain unsecured indebtedness or junior lien indebtedness, (v) decreased other permitted debt baskets, (vi) decreased the threshold for a cross-default for purposes of determining an Event of Default and (vii) added a new Event of Default in the event the Company does not consummate an underwritten primary equity offering providing at least $10 million of proceeds to the Company by April 30, 2023.
On March 26, 2023, the Company, the Notes Guarantors and each holder of the Convertible Notes executed unsecured promissory notes (each, a “2023 Promissory Note” and collectively, the “2023 Promissory Notes”), with each 2023 Promissory Note having an aggregate principal amount equal to such holder's interest payments. The 2023 Promissory Notes mature on March 26, 2025 and accrue interest at seven percent (7.0%) per annum.
In addition, the 2023 Promissory Notes provide that, in the event the Company consummates the April 2023 Offering (as defined below) by April 30, 2023, the holder of each 2023 Promissory Note has the option to require the Company to repay a portion of the principal balance of the 2023 Promissory Note in an amount equal to or less than the gross proceeds to the Company from any purchases by the holder of the Company's securities in the April 2023 Offering (the “Put Option”). Each holder may exercise its Put Option within ten business days following the closing and funding of the April 2023 Offering. In addition, certain of the 2023 Promissory Notes provide such holders with the right to convert their respective promissory note (the “Convertible Promissory Notes”) into unregistered securities of the Company (the “Unregistered Securities”) on the same terms as the securities offered in the April 2023 Offering in the event such offering is consummated.
16
The Company elected to account for the 2023 Promissory Notes and Convertible Promissory Notes under the fair value option of accounting upon issuance of such notes. At issuance the Company recognized the fair value of the 2023 Promissory Notes and Convertible Promissory Notes of $4.8 million. As of March 31, 2023, the fair value of the 2023 Promissory Notes and Convertible Promissory Notes remained consistent at $4.8 million. The loss on the increase in fair value of the notes during the three months ended March 31, 2023 was $159 thousand included in the change in fair value of promissory notes on the consolidated statements of operations.
Loans
In February 2023, the Company obtained a loan for $3 million with a third-party with an annual interest rate of 39% and debt issuance cost of $75 thousand, which are to be paid from future cash receipts. The third-party has rights to future cash receipts until the loan is fully repaid. The weekly repayments began at the end of February 2023 for $130 thousand and will continue until the loan is fully repaid in October 2023. As of March 31, 2023, the outstanding balance of the loan was $2.7 million.
In February 2023, the Company obtained a loan for $250 thousand with a merchant third-party with an annual percentage rate of 20.17%, which are to be repaid from future cash receipts directly from the merchant. During the three months ended March 31, 2023, repayments of $72 thousand have been made and the loan is expected to be fully repaid in August 2023. As of March 31, 2023, the outstanding balance of the loan was $203 thousand.
The Company calculates the interest and expenses of the debt issuance cost using the effective interest rate method.
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 the 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 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 8). 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.
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 price reaches $18.00 per share. The PIPE Warrants are equity classified. Approximately $377 thousand of the proceeds upon issuance of the Convertible Notes was allocated to the PIPE Warrants along with an immaterial amount of issuance costs.
On March 26, 2023, the Company and Continental Stock Transfer & Trust Company (the “Warrant Agent”) entered into an Amendment to that certain Warrant Agreement, dated as of August 26, 2022, by and between the Company and the Warrant Agent (the “Warrant Agreement”). Pursuant to the Initial Public Offering,Warrant Agreement Amendment, the exercise price of each warrant was reduced from $11.50 to $0.01. The Company recorded a loss related to the warrant amendment of $430 thousand in other expense in the consolidated statement of operations.
On March 28, 2023, the Company sold 20,000,000 Unitsfiled with the Secretary of State of the State of Delaware a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to effect a 1-for-20 reverse stock split of the Company's common stock (the “Reverse Stock Split”). Proportionate adjustments have been made to the per share exercise price and the number of shares of the Company's common stock that may be purchased upon exercise of warrants issued by the Company.
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 Closing 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 Closing Date (the “Standby Agreement”). At the Closing Date, the Company paid the Financial Institution 80% of the Financial Institution’s
17
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 Company 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.
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 $10.00$10.17 per Unit. Each Unit consists of one share of Class A common stock andone-halfof one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase 1 share of Class A common stock at an exercise price of $11.50, subject to adjustment (see Note 7).
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 Private Placement Warrants were addedSubscription Agreement, as it is not clearly and closely related to the proceeds fromSubscription Agreement and would be accounted for in accordance with ASC 815-10 (together the Initial Public Offering held“Standby Agreement Derivative). The Standby Agreement Derivative was not entered into 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 fair value as of December 31, 2022 of the Standby Agreement Derivative liability was $847 thousand and was recorded in other long-term liabilities on the condensed consolidated balance sheets. In March 2023, all shares were resold by the Financial Institution and the Company recognized a gain to fair value of derivative instruments of $847 thousand for the three months ended March 31, 2023 on the condensed 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 Trust Account. Iffinancial 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 measure fair value into three levels and bases the categorization 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 assets 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 does not complete a Business Combination withinutilized valuation techniques that maximize the Combination Period,use of observable inputs and minimize the proceeds from the saleuse of the Private Placement Warrants will be used to fund the redemption of the Public Shares (subjectunobservable 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.
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 March 31, 2023, 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.
18
The following details the Company’s recurring measurements for assets and liabilities at fair value (in thousands):
|
| March 31, |
|
| December 31, |
| ||
Investment in unconsolidated affiliates (Level 3) - Note 5 |
|
| 6,759 |
|
|
| 7,404 |
|
Convertible Note (Level 3) - Note 7 |
|
| 56,260 |
|
|
| 60,852 |
|
Standby Agreement derivative liability (Level 3)- Note 8 |
|
| — |
|
|
| 847 |
|
Non-current Business Combination Cash Consideration (Level 3) |
|
| 3,555 |
|
|
| 3,355 |
|
Deferred Business Combination cash consideration
In connection with the Business Combination, Legacy Nogin equity holders 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 March 31, 2023 on the Sponsor to the extent that the underwriters’ over-allotmentcondensed consolidated 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 valuation of the deferred 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 deferred cash consideration, based on the expected future payment discounted to present value. The significant input is the discount rate which is based on the Company’s credit rating.
The income tax expense for the three months ended March 31, 2023 and March 31, 2022 was a benefit of $26 thousand and an expense of $158 thousand, respectively. Income tax expense differs from the income taxes expected at the U.S. federal statutory tax rate of 21%, primarily due to state taxes and additional valuation allowance for the period ended March 31, 2023 and December 31, 2022.
Holders of common stock are entitled to one vote per share (as adjustedand, upon liquidation or dissolution, are entitled to receive all assets available for distribution to common stockholders. The holders of common stock splits,have no preemptive or other subscription rights, and there is no redemption or sinking fund provisions with respect to such shares.
Common stock dividends, reorganizations, recapitalizationswill be subordinate to any preferred stock the Company issues in the future with respect to rights upon liquidation of the Company.
In 2013, Legacy Nogin adopted the 2013 Plan pursuant to which Legacy Nogin was authorized to issue stock options or nonvested shares to officers and the like) for any 20 trading days within any30-tradingday period commencing at least 150 days afterkey employees in an amount up to 132,770 shares of its common stock. In connection with the Business Combination, the Founder Shares will be released fromCompany adopted thelock-up.
19
At March 31, 2023 and December 31, 2022, there were 172,147 and 59,028 shares available respectively, for grant under the Company's stock incentive plans.
Stock Options
Stock options have been granted under the 2013 and 2022 Plans. 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 March 31, 2023 and December 31, 2022 is as follows:
Outstanding Stock Options | ||||
Outstanding at January 1, 2022 | 42,546 | |||
Granted | 87,323 | |||
Exercised | (9,957 | ) | ||
Forfeited / Terminated | (46,171 | ) | ||
Outstanding at December 31, 2022 | 73,741 | |||
Granted | 83,000 | |||
Exercised | — | |||
Forfeited / Terminated | (4,666 | ) | ||
Outstanding at March 31, 2023 | 152,075 | |||
The weighted average exercise price of the outstanding options was $36.06 and $255.40 per share as of March 31, 2023 and December 31, 2022, respectively. There were 64,966 and 46,660 fully vested and exercisable options as of March 31, 2023 and December 31, 2022, respectively.
The Company recognized $200 thousand and $58 thousand in stock compensation expense for the three months ending March 31, 2023 and 2022, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. 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 three months ended March 31, 2023:
Valuations assumptions
Expected dividend yield | — | % | ||
Expected volatility | 61 | % | ||
Expected term (years) | 6 | |||
Risk-free interest rate | 3.9 | % |
Restricted Stock Units
As of March 31, 2023, restricted stock units ("RSUs") of 506,250 shares were granted under the 2022 Plan. The RSUs are issued upon vesting. The RSUs vest over a period of 1-3 years and are expected to be settled in shares upon vesting. The weighted average exercise price of each RSU was $15.40 per share as of March 31, 2023. The Company recognized $53 thousand in stock compensation expense for the three months ending March 31, 2023. There were no RSUs granted in fiscal year 2022.
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 “Promissory Note”“ModCloth Acquisition”) from Tiger Capital Group, LLC (“Tiger Capital”), pursuant to which the Company could borrow up to an aggregate principal amount of $300,000. The Promissory Note wasnon-interestbearing and, as amended effective May 28, 2021, payable on the earlier of (i) September 30, 2021 and (ii) the consummation of the Initial Public Offering. As of June 30, 2021, there was $162,637 outstanding under the Promissory Note.
Total purchase consideration in connection with the filingModCloth Acquisition was $6.9 million, including $1.5 million in cash and $5.4 million for the settlement of any such registration statements.
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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 Company’s investment in ModCloth had a fair value and carrying value of $4.5 million. The Company accounted for the acquisition of the remaining 50% equity interest in ModCloth as a step acquisition, which required remeasurement of the Company’s existing 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 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 ModCloth’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.
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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.
The Company provides services to its joint venture, IPCO, under Master Services agreements (“MSA”), which were entered into on December 31, 2021.
Sales under the MSA to IPCO were $1.2 million for the three months ended March 31, 2023 and March 31, 2022. In addition, the Company sold inventory to IPCO for $0.6 million during the first quarter of 2022, and such amount is included in net revenue to related parties in the consolidated statement of operations. As of March 31, 2023 and December 31, 2022, the Company had payables to IPCO of $0.2 million and $1.0 million, respectively, which were included in related party payables on the consolidated balance sheets.
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 $2.0 million for the three months ended March 31, 2022.
The Company’s chief executive officer 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. 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 March 31, 2023, the fair value of the Convertible Notes with the PIPE Related Parties was $1.3 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 holders of the Convertible Note.
In March 2023, in lieu of the missed Interest Payments, the PIPE Related Parties received the 2023 Promissory Notes (Note 7) totaling $106 thousand. As of March 31, 2023, the fair value of the 2023 Promissory Notes with the PIPE Related Parties were $106 thousand, which is included in Promissory Notes on the condensed consolidated balance sheets. The terms of the 2023 Promissory Notes with the PIPE Related Parties are consistent with the rest of the holders of the Convertible Note.
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.
The following table presents a disaggregation of the Company’s revenues by revenue source for the three months ended March 31, 2023 and 2022 (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Commerce-as-a-Service Revenue |
| $ | 3,733 |
|
| $ | 5,201 |
|
Product sales revenue |
|
| 6,544 |
|
|
| 12,922 |
|
Marketing revenue |
|
| 2,658 |
|
|
| 3,670 |
|
Shipping revenue |
|
| 1,867 |
|
|
| 1,881 |
|
Other revenue |
|
| 1,873 |
|
|
| 1,525 |
|
Total revenue |
| $ | 16,675 |
|
| $ | 25,199 |
|
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
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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 shares of the Company’s redeemable convertible preferred stock were participating securities as the holders of the redeemable convertible preferred stock were entitled to participate with any dividends payable in 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:
|
| Three Months Ended March 31, |
| |||||
(In thousands, except share and per share amounts) |
| 2023 |
|
| 2022 |
| ||
Numerator: Basic EPS |
|
|
|
|
|
| ||
Net loss |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
Net loss attributable to common stockholders-basic |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
Denominator: Basic EPS |
|
|
|
|
|
| ||
Weighted average shares of common stock outstanding-basic |
|
| 4,688,331 |
|
|
| 1,981,097 |
|
Net loss per share attributable to common stock-basic |
| $ | (2.11 | ) |
| $ | (5.02 | ) |
|
| Three Months Ended March 31, |
| |||||
(In thousands, except share and per share amounts) |
| 2023 |
|
| 2022 |
| ||
Numerator: Diluted EPS |
|
|
|
|
|
| ||
Net loss attributable to common stockholders-diluted |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
Denominator: Diluted EPS |
|
|
|
|
|
| ||
Adjusted weighted average shares of common stock outstanding-basic |
|
| 4,688,331 |
|
|
| 1,981,097 |
|
Dilutive potential shares of common stock: |
|
|
|
|
|
| ||
Options to purchase shares of common stock |
|
| — |
|
|
| — |
|
Warrants to purchase shares of common stock |
|
| — |
|
|
| — |
|
Weighted average shares of common stock outstanding-diluted |
|
| 4,688,331 |
|
|
| 1,981,097 |
|
Net loss per share attributable to common stock-diluted |
| $ | (2.11 | ) |
| $ | (5.02 | ) |
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
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Series A convertible, redeemable preferred shares |
|
| — |
|
|
| 443,224 |
|
Series B convertible, redeemable preferred shares |
|
| — |
|
|
| 316,707 |
|
Stock-based compensation awards |
|
| 370,075 |
|
|
| 60,663 |
|
Legacy Nogin Warrants |
|
| 28,639 |
|
|
| 31,652 |
|
PIPE Warrants |
|
| 24,294 |
|
|
| — |
|
SWAG Warrants |
|
| 372,070 |
|
|
| — |
|
Shares Underlying Convertible Notes |
|
| 99,089 |
|
|
| — |
|
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There were no significant changes in the Company’s mezzanine equity and shareholders’ deficit during the three months ended March 31, 2023.
Common Stock
Subsequent to the Business Combination, the Company is authorized to issue 1,000,000up to 500 million shares of common stock with a par value of $0.0001 per 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$0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At June 30, 2021, thereshare. There were 0sharesno shares of preferred stock issued or outstanding.and outstanding as of March 31, 2023.
The Company is authorized to issue 100,000,000 shareshas 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 Class A common stock withadopting ASC 842.
As of the date of adoption on January 1, 2022, the impact of ASC 842 resulted in the recognition of a parright-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 $0.0001 per share. Holdersremaining lease payments over the remaining lease term. ROU assets were recognized utilizing the lease liability as of Class AJanuary 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 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 stockarea costs and other operating costs are entitledexpensed as incurred. Leases with an initial term of 12 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.
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 one vote for each share. At June 30, 2021, there were 0shareseight years, although the terms and conditions of Class A common stock issued or outstanding.
The Company is authorized to issue 10,000,000 shares of Class B common stock with a par value of $0.0001 per share. Holders of Class B common stock are entitled to one vote for each share. At June 30, 2021, there were 5,750,000 shares of Class B common stock issued and outstanding, of which an aggregate of up to 750,000 shares of Class B common stock are subject to forfeiture tofollowing schedule represents the extent that the underwriters’ over-allotment option is not exercised in full or in part, so that the number of shares of Class B common stock will equal 20%components of the Company’s issuedoperating lease assets and outstanding common stock afterliabilities as of March 31, 2023 (in thousands):
Leases |
| Classification |
| March 31, 2023 |
| |
Assets |
|
|
|
|
| |
Operating |
| Operating lease right-of-use assets |
| $ | 17,350 |
|
|
|
|
|
|
| |
Liabilities |
|
|
|
|
| |
Operating lease liabilities (current) |
| Operating lease liabilities, current |
| $ | 4,565 |
|
Operating lease liabilities (non-current) |
| Operating lease liabilities, non-current |
|
| 14,775 |
|
24
The following schedule represents the Initial Public Offering. components of lease expense for the fiscal year ended March 31, 2023 (in thousands):
|
| March 31, 2023 |
| |
Lease Costs: |
|
|
| |
Operating lease costs |
| $ | 1,501 |
|
Variable lease costs |
|
| 317 |
|
Short-term lease costs |
|
| — |
|
Sublease income |
|
| — |
|
Total lease costs |
| $ | 1,818 |
|
As of March 31, 2023, the Company’s maturity of operating lease liabilities for the next five years and thereafter are as follows (in thousands):
|
| Operating Leases |
| |
2023 (remaining payments) |
| $ | 4,127 |
|
2024 |
|
| 5,214 |
|
2025 |
|
| 5,310 |
|
2026 |
|
| 3,453 |
|
2027 |
|
| 2,222 |
|
Thereafter |
|
| 899 |
|
Total lease payments |
|
| 21,225 |
|
Less: imputed interest |
|
| (2,708 | ) |
Total operating lease payments |
| $ | 18,517 |
|
Other operating leases information:
Cash paid for amounts included in the measurement of lease liabilities |
| $ | 1,711 |
|
Right-of-use assets obtained in exchange for new lease liabilities |
| $ | 1,120 |
|
Weighted-average remaining term (in years) |
|
| 4.1 |
|
Weighted-average discount rate |
|
| 6.9 | % |
In accordance with ASC 840, the following is a resultschedule by years of future minimum lease payments required under 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 longer subject to forfeiture resulting in an aggregate of 5,701,967 Founder Shares outstanding at August 4, 2021.
As of March 31, 2022: |
|
|
| |
2022 (remaining payments) |
| $ | 2,250 |
|
2023 |
|
| 1,272 |
|
2024 |
|
| 873 |
|
2025 |
|
| 900 |
|
2026 |
|
| 927 |
|
Thereafter |
|
| 1,853 |
|
Total minimum lease payments |
| $ | 8,075 |
|
In July 2018, the amounts issuedCompany assumed the operating lease for office space of the entity with which an asset purchase agreement was executed. The monthly lease payment was $75 thousand and expires in May 2023. The future minimum lease payments are included in the Initial Public Offeringtable 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. Future rental income is as follows: approximately $1.0 million per year during 2022 and related toapproximately $435 thousand in 2023 until the closing of a Business Combination, the ratio at which the shares of Class B common stock will convert into shares of Class A common stock will be adjusted (unless the holders of a majorityexpiration of the issuedlease.
Rent expense for the three months ended March 31, 2022 was approximately $1.4 million, and outstanding shares of our Class B common stock agree to waive such anti-dilution adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal,is included in general and administrative expenses in the aggregate, on anas-convertedbasis, 20%condensed consolidated statements of the sum of all shares of common stock issued and outstanding upon the completion of the Initial Public Offering, plus all shares of our Class A common stock and equity-linked securities issued or deemed issued in connection with a Business Combination, excluding any shares or equity-linked securities issued, or to be issued, to any seller in our a Business Combination.operations.
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements were issued. Based upon this review, other than described in these financial statements,
25
On April 4, 2023, the Company did not identify any subsequent events that would have required adjustment or disclosureentered into Securities Purchase Agreements (the “Purchase Agreements”) with certain investors (the “Investors”), pursuant to which the Company agreed to sell, issue, and deliver to Investors, in a registered public offering (the “Offering”) (i) 7,333,334 shares of Common Stock and (ii) warrants to purchase 7,333,334 shares of Common Stock (the “Common Warrants”) (collectively, the condensed financial statements.
In April 2023, the 2023 Promissory Notes and Convertible Promissory Notes (Note 7) were repaid in full.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’sour financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto containedof Nogin, Inc. and its subsidiaries included elsewhere in this Quarterly Report. CertainSome of the information contained in thethis discussion and analysis set forth below includescontains forward-looking statements that involve risks and uncertainties.
Unless the forward-looking statements, pleasecontext otherwise requires, references in this subsection to “we,” “our,” “Nogin” and the “Company” refer to the Risk Factors sectionbusiness and operations of the Company’s final prospectus forBranded Online, Inc. dba Nogin and its Initial Public Offering filed withconsolidated subsidiaries prior to the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
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
The 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 of $1.00 per warrant. The warrants would be identicalPIPE Share equal to $10.17.
On August 26, 2022, immediately prior to the Private Placement Warrants.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.
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.
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
27
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.
Waiver of Missed Interest Payment
The Company did not timely make payment of the accrued interest on the Convertible Notes on March 1, 2023 (the “March Interest Payment”) as required pursuant to Section 2.05 of the Indenture (the “Specified Default”).
On March 26, 2023, the Company, the Notes Guarantors and Holders entered into limited waivers and consents pursuant to which each holder agreed to (i) waive the Specified Default and any payment obligation of the Company under the Indenture with respect to the March Interest Payment, (ii) in lieu of the Interest Payments, (a) receive a Promissory Note (as defined below) and (b) amend the Warrant Agreement (as defined below) to reduce the exercise price of the warrants governed thereby from $11.50 to $0.01, and (iii) consent to the entry into the Supplemental Indenture.
On March 26, 2023, the Company, the Notes Guarantors, the Trustee and the Collateral Agent entered into the Supplemental Indenture (the “Supplemental Indenture”) to the Indenture, amending certain terms of the Indenture consented to by the holders of all of the aggregate principal amount of the outstanding Convertible Notes.
The Supplemental Indenture, among other things, (i) lowered the minimum amounts of liquidity the Company must maintain on a consolidated basis for each quarter in 2023 and the first quarter of 2024, (ii) added restrictions on the Company's ability to make payments relating to certain restricted investments, (iii) decreased the maximum amount of equity interests that the Company may repurchase, redeem, acquire or retire, (iv) removed the Company's ability to issue preferred stock or incur certain unsecured indebtedness or junior lien indebtedness, (v) decreased other permitted debt baskets, (vi) decreased the threshold for a cross-default for purposes of determining an Event of Default and (vii) added a new Event of Default in the event the Company does not consummate an underwritten primary equity offering providing at least $10 million of proceeds to the Company by April 30, 2023. On April 6, 2023, the Company completed the April 2023 Offering.
On March 26, 2023, the Company, the Notes Guarantors and each holder of the Convertible Notes executed unsecured promissory notes (each, a “2023 Promissory Note” and collectively, the “2023 Promissory Notes”), with each 2023 Promissory Note having an aggregate principal amount equal to such holder's interest payments. The 2023 Promissory Notes mature on March 26, 2025 and accrue interest at seven percent (7.0%) per annum.
In addition, the 2023 Promissory Notes provided that, in the event the Company consummated the April 2023 Offering by April 30, 2023, the holder of each 2023 Promissory Note had the option to require the Company to repay a portion of the principal balance of the Promissory Note in an amount equal to or less than the gross proceeds to the Company from any purchases by the Holder of the Company's securities in the April 2023 Offering (the “Put Option”). Each holder had the right to exercise its Put Option within ten business days following the closing and funding of the April 2023 Offering. In addition, certain of the 2023 Promissory Notes provided such holders with the right to convert the 2023 Promissory Note (the “Convertible Promissory Notes”) into unregistered securities of the Company (the “Unregistered Securities”) on the same terms as the securities offered in the April 2023 Offering in the event such offering takes place. The 2023 Promissory Notes and Convertible Promissory Notes were repaid in full in April 2023.
On March 26, 2023, the Company and Continental Stock Transfer & Trust Company (the “Warrant Agent”) entered into an Amendment to that certain Warrant Agreement, dated as of August 26, 2022, by and between the Company and the Warrant Agent. Pursuant to the Warrant Agreement Amendment, the exercise price of each warrant was reduced from $11.50 to $0.01.
28
Reverse Stock Split
On February 27, 2023, our stockholders approved a reverse stock split of our common stock at a ratio in the range of 1-for-10 to 1-for-20, such ratio to be determined by the Board or a committee of the Board, and included in a public announcement. On March 28, 2023, we effected a 1-for-20 reverse stock split (the “Reverse Stock Split”).
Registered Equity Offering
On April 6, 2023, the Company closed its public offering of 7,333,334 shares of common stock and 7,333,334 common warrants to purchase 7,333,334 shares of common stock at a combined price of $3.00 per share and common warrant for aggregate gross proceeds of approximately $22 million, before deducting placement agent fees and other offering expenses.
Impact of COVID-19 pandemic
The worldwide spread of COVID-19 and its variants had resulted in a global slowdown of economic activity which altered 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 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 on 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:
29
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 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 condensed consolidated statements of operations.
30
Operating Expenses
We classify our operating expenses into the following categories:
Interest Expense
Interest expense primarily consists of interest incurred under our Convertible Notes.
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 change in fair value of deferred cash consideration, change in fair value of warrant, 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.
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 tax credits and utilization of net operating loss carryforwards during the year.
31
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):
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net service revenue |
| $ | 8,917 |
|
| $ | 8,533 |
|
Net product revenue |
|
| 6,544 |
|
|
| 12,922 |
|
Net revenue from related parties |
|
| 1,214 |
|
|
| 3,744 |
|
Total net revenue |
|
| 16,675 |
|
|
| 25,199 |
|
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 5,530 |
|
|
| 5,435 |
|
Cost of product revenue (1) |
|
| 3,942 |
|
|
| 10,251 |
|
Sales and marketing |
|
| 702 |
|
|
| 566 |
|
Research and development |
|
| 963 |
|
|
| 1,577 |
|
General and administrative |
|
| 17,325 |
|
|
| 17,222 |
|
Depreciation and amortization |
|
| 202 |
|
|
| 201 |
|
Total operating costs and expenses |
|
| 28,664 |
|
|
| 35,252 |
|
Operating loss |
|
| (11,989 | ) |
|
| (10,053 | ) |
Interest expense |
|
| (2,014 | ) |
|
| (652 | ) |
Change in fair value of promissory notes |
|
| (159 | ) |
|
| — |
|
Change in fair value of derivative instruments |
|
| 847 |
|
|
| — |
|
Change in fair value of unconsolidated affiliates |
|
| (645 | ) |
|
| (1,033 | ) |
Change in fair value of convertible notes |
|
| 4,591 |
|
|
| — |
|
Other (loss) income, net |
|
| (558 | ) |
|
| 1,954 |
|
Loss before income taxes |
|
| (9,927 | ) |
|
| (9,784 | ) |
(Benefit) Provision for income taxes |
|
| (26 | ) |
|
| 158 |
|
Net loss |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
|
| Three Months Ended March 31, |
| |||||
(as a percentage of total revenue*) |
| 2023 |
|
| 2022 |
| ||
Net service revenue |
|
| 53.5 | % |
|
| 33.9 | % |
Net product revenue |
|
| 39.2 | % |
|
| 51.3 | % |
Net revenue from related parties |
|
| 7.3 | % |
|
| 14.9 | % |
Total net revenue |
|
| 100.0 | % |
|
| 100.0 | % |
Operating costs and expenses: |
|
|
|
|
|
| ||
Cost of services (1) |
|
| 33.2 | % |
|
| 21.6 | % |
Cost of product revenue (1) |
|
| 23.6 | % |
|
| 40.7 | % |
Sales and marketing |
|
| 4.2 | % |
|
| 2.2 | % |
Research and development |
|
| 5.8 | % |
|
| 6.3 | % |
General and administrative |
|
| 103.9 | % |
|
| 68.3 | % |
Depreciation and amortization |
|
| 1.2 | % |
|
| 0.8 | % |
Total operating costs and expenses |
|
| 171.9 | % |
|
| 139.9 | % |
Operating loss |
|
| -71.9 | % |
|
| -39.9 | % |
Interest expense |
|
| -12.1 | % |
|
| -2.6 | % |
Change in fair value of promissory notes |
|
| -1.0 | % |
|
| 0.0 | % |
Change in fair value of derivative instruments |
|
| 5.1 | % |
|
| 0.0 | % |
Change in fair value of unconsolidated affiliates |
|
| -3.9 | % |
|
| -4.1 | % |
Change in fair value of convertible notes |
|
| 27.5 | % |
|
| 0.0 | % |
Other (loss) income, net |
|
| -3.3 | % |
|
| 7.8 | % |
Loss before income taxes |
|
| -59.5 | % |
|
| -38.8 | % |
(Benefit) Provision for income taxes |
|
| -0.2 | % |
|
| 0.6 | % |
Net loss |
|
| -59.4 | % |
|
| -39.5 | % |
* Percentages may not sum due to rounding
(1) Exclusive of depreciation and amortization shown separately.
32
Comparison of the Three Months Ended March 31, 2023 and 2022
Net service revenue
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net service revenue |
| $ | 8,917 |
|
| $ | 8,533 |
|
| $ | 384 |
|
|
| 4.5 | % |
Percent of total revenue |
|
| 53.5 | % |
|
| 33.9 | % |
|
|
|
|
|
| ||
Net service revenue increased by $0.4 million, or 4.5%, to $8.9 million for the three months ended March 31, 2023 as compared to $8.5 million for the three months ended March 31, 2022. The Company historically recognizes net revenue as a percentage of service sales. The increase is primarily due to an increase in B2B volume. Net service revenue as a percentage of total revenue was 53.5% for the three months ended March 31, 2023 compared to 33.9% for the three months ended March 31, 2022.
Net product revenue
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net product revenue |
| $ | 6,544 |
|
| $ | 12,922 |
|
| $ | (6,378 | ) |
|
| (49.4 | )% |
Percent of total revenue |
|
| 39.2 | % |
|
| 51.3 | % |
|
|
|
|
|
| ||
Net product revenue decreased by $6.4 million, or 49.4%, to $6.5 million for the three months ended March 31, 2023 as compared to $12.9 million for the three months ended March 31, 2022. The decrease in product revenue is primarily due to a push in the prior fiscal quarter to liquidate inventory, which caused lower margins. In the current fiscal year, the Company is not liquidating inventory and is focusing on stabilizing margins. Net product revenue as a percentage of total revenue was 39.2% for the three months ended March 31, 2023 compared to 51.3% for the three months ended March 31, 2022.
Net revenue from related parties
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Net revenue from related parties |
| $ | 1,214 |
|
| $ | 3,744 |
|
| $ | (2,530 | ) |
|
| (67.6 | )% |
Percent of total revenue |
|
| 7.3 | % |
|
| 14.9 | % |
|
|
|
|
|
| ||
Net revenue from related parties decreased by $2.5 million, or 67.6%, to $1.2 million for the three months ended March 31, 2023 as compared to $3.7 million for the three months ended March 31, 2022. The Company provides services to its joint ventures under Master Services agreements that are classified as related party revenue. On December 1, 2022, the Company acquired the remaining 50% equity interest in ModCloth; as a result ModCloth became a wholly owned consolidated subsidiary of the Company, and the results of ModCloth are consolidated into the results of the Company. As such, the decrease in revenue from related parties is due to ModCloth's revenue being recorded in product revenue starting in the first quarter of 2023, as compared to being recorded in revenue from related parties in the same quarter last year. Net service revenue from related parties as a percentage of total revenue was 7.3% for the three months ended March 31, 2023 compared to 14.9% for the three months ended March 31, 2022.
Cost of services
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Cost of services |
| $ | 5,530 |
|
| $ | 5,435 |
|
| $ | 95 |
|
|
| 1.7 | % |
Percent of total revenue |
|
| 33.2 | % |
|
| 21.6 | % |
|
|
|
|
|
| ||
Cost of services slightly increased by $95 thousand, or 1.7%, to $5.5 million for the three months ended March 31, 2023 as compared to $5.4 million for the three months ended March 31, 2022. The increase in cost of services is in line with the increase in service revenue for the same period. Cost of services as a percentage of total revenue was 33.2% for the three months ended March 31, 2023 compared to 21.6% for the three months ended March 31, 2022.
33
Cost of product revenue
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Cost of product revenue |
| $ | 3,942 |
|
| $ | 10,251 |
|
| $ | (6,309 | ) |
|
| (61.5 | )% |
Percent of total revenue |
|
| 23.6 | % |
|
| 40.7 | % |
|
|
|
|
|
| ||
Cost of product revenue decreased by $6.3 million, or 61.5%, to $3.9 million for the three months ended March 31, 2023 as compared to $10.3 million for the three months ended March 31, 2022. The decrease is in line with the decrease in product revenue. Cost of product revenue as a percentage of total revenue was 23.6% for the three months ended March 31, 2023 compared to 40.7% for the three months ended March 31, 2022.
Sales and Marketing
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Sales and marketing |
| $ | 702 |
|
| $ | 566 |
|
| $ | 136 |
|
|
| 24.0 | % |
Percent of total revenue |
|
| 4.2 | % |
|
| 2.2 | % |
|
|
|
|
|
| ||
Sales and marketing expense increased by $136 thousand, or 24.0%, to $702 thousand for the three months ended March 31, 2023 as compared to $566 thousand for the three months ended March 31, 2022. The increase in sales and marketing expense was primarily due to rebuilding of the sales team to support the Company's growth initiatives.
Research and development
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Research and development |
| $ | 963 |
|
| $ | 1,577 |
|
| $ | (614 | ) |
|
| (38.9 | )% |
Percent of total revenue |
|
| 5.8 | % |
|
| 6.3 | % |
|
|
|
|
|
| ||
Research and development expense decreased by $0.6 million, or 38.9%, to $1.0 million for the three months ended March 31, 2023 as compared to $1.6 million for the three months ended March 31, 2022. The decrease in research and development expense was primarily due to rebalancing of the technology team.
General and administrative
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
General and administrative |
| $ | 17,325 |
|
| $ | 17,222 |
|
| $ | 103 |
|
|
| 0.6 | % |
Percent of total revenue |
|
| 103.9 | % |
|
| 68.3 | % |
|
|
|
|
|
| ||
General and administrative expense slightly increased by $103 thousand, or 0.69%, to $17.3 million for the three months ended March 31, 2023 as compared to $17.2 million for the three months ended March 31, 2022. General and administrative expenses increased as a percentage of revenue from 68.3% for the three months ended March 31, 2022 to 103.9% for the three months ended March 31, 2023, which was primarily due to severance expense of $1.6 million, increase in directors and officer insurance of $0.4 million, increase in stock compensation expense of $0.2 million and director fees of $0.1 million in the current fiscal period compared to the prior period.
Depreciation and amortization
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Depreciation and amortization |
| $ | 202 |
|
| $ | 201 |
|
| $ | 1 |
|
|
| 0.5 | % |
Percent of total revenue |
|
| 1.2 | % |
|
| 0.8 | % |
|
|
|
|
|
| ||
Depreciation and amortization expense remained relatively flat at $0.2 million for the three months ended March 31, 2023 and March 31, 2022.
34
Interest expense
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Interest expense |
| $ | 2,014 |
|
| $ | 652 |
|
| $ | 1,362 |
|
|
| 208.9 | % |
Percent of total revenue |
|
| 12.1 | % |
|
| 2.6 | % |
|
|
|
|
|
| ||
Interest expense increased by $1.4 million, or 208.9%, to $2.0 million for the three months ended March 31, 2023 as compared to $0.7 million for the three months ended March 31, 2022. The increase in interest expense was primarily due to interest on the Company’s Convertible notes in the first quarter of 2023, as compared to interest on the notes payable in the first quarter of 2022. The notes payable were fully repaid at closing of the Business Combination.
Change in fair value of promissory notes
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of promissory notes |
| $ | 159 |
|
| $ | — |
|
| $ | 159 |
|
|
| 100.0 | % |
Percent of total revenue |
|
| 1.0 | % |
|
| — | % |
|
|
|
|
|
| ||
Change in fair value of promissory notes was $159 thousand for the three months ended March 31, 2023. The Company recognized a loss of $159 thousand for the three months ended March 31, 2023 that were related to the 2023 Promissory Notes and Convertible Promissory Notes in connection with the amendments to the Convertible Notes. The Company engaged a third party specialist to assist with the valuation of such notes.
Change in fair value of derivatives
|
| Three Months Ended March 31, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change | |||
|
| (in thousands, except percentages) | ||||||||||||
Change in fair value of derivatives |
| $ | (847 | ) |
| $ | — |
|
| $ | (847 | ) |
| 100.0% |
Percent of total revenue |
|
| (5.1 | )% |
|
| — | % |
|
|
|
|
| |
Change in fair value of derivatives notes was a loss of $847 thousand for the three months ended March 31, 2023. The Company recognized a change in fair value of derivatives notes in connection with the Standby Agreement. All shares from such agreement were resold as of March 31, 2023.
Change in fair value of unconsolidated affiliate
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of unconsolidated affiliates |
| $ | 645 |
|
| $ | 1,033 |
|
| $ | (388 | ) |
|
| (37.6 | )% |
Percent of total revenue |
|
| 3.9 | % |
|
| 4.1 | % |
|
|
|
|
|
| ||
Change in fair value of unconsolidated affiliates decreased by $0.4 million, or 37.6%, to a loss of $0.6 million for the three months ended March 31, 2023 as compared to a loss of $1.0 million for the three months ended March 31, 2022. The decrease in the first quarter of 2022 is attributable to the Company’s investment in ModCloth, which was formed in April 2021, and IPCO, which was formed in December 2021. The decrease in the first quarter of 2023 is attributable to the Company's investment in IPCO. 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 three months ended March 31, 2023 and March 31, 2022.
35
Change in fair value of convertible notes
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Change in fair value of convertible notes |
| $ | (4,591 | ) |
| $ | — |
|
| $ | (4,591 | ) |
|
| 100.0 | % |
Percent of total revenue |
|
| (27.5 | )% |
|
| — | % |
|
|
|
|
|
| ||
Change in fair value of the Convertible Notes was a gain of $4.6 million for the three months ended March 31, 2023. 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.
Other (loss) income
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Other (loss) income |
| $ | (558 | ) |
| $ | 1,954 |
|
| $ | (2,512 | ) |
|
| (128.6 | )% |
Percent of total revenue |
|
| (3.3 | )% |
|
| 7.8 | % |
|
|
|
|
|
| ||
Other (loss) income decreased by $2.5 million, or 128.6%, to a loss of $0.6 million for the three months ended March 31, 2023. as compared to a gain of $2.0 million for the three months ended March 31, 2022. The loss in the first quarter of 2023 is primarily related to the warrant fair value adjustment in connection with the Warrant Agreement Amendment. The gain in the first quarter of 2022 was primarily related to the settlement of deferred revenue of $1.6 million related to sale of finished inventory to IPCO.
Provision for income tax
|
| Three Months Ended March 31, |
| ||||||||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
| % Change |
| ||||
|
| (in thousands, except percentages) |
| ||||||||||||
(Benefit) Provision for income tax |
| $ | (26 | ) |
| $ | 158 |
|
| $ | (184 | ) |
| (116.5 | )% |
Percent of total revenue |
|
| (0.2 | )% |
|
| 0.6 | % |
|
|
|
|
| ||
The provision for income tax increased $184 thousand, or 116.5%, to a benefit of $26 thousand during the three months ended March 31, 2023 as compared to an expense of $158 thousand for the three months ended March 31, 2022. The increase 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 U.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 performance 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, (3) depreciation and amortization, (4) severance pay and (5) stock based compensation.
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 analytical tool and should not be considered in isolation or as a 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
36
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 Three Months |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net Loss |
| $ | (9,901 | ) |
| $ | (9,942 | ) |
Interest expense |
|
| 2,014 |
|
|
| 652 |
|
(Benefit) Provision for income taxes |
|
| (26 | ) |
|
| 158 |
|
Depreciation and amortization |
|
| 202 |
|
|
| 201 |
|
Severance pay |
|
| 1,593 |
|
|
| 12 |
|
Stock based compensation |
|
| 253 |
|
|
| 58 |
|
Adjusted EBITDA |
| $ | (5,865 | ) |
| $ | (8,861 | ) |
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 anemerging 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 as of and for the three months ended March 31, 2023 have been prepared assuming the Company will continue as a going concern. The Company has sustained recurring losses and negative cash flows from operations and had a cash balance of $0.6 million as of March 31, 2023.
Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2022, expressed substantial doubt about our ability to continue as a going concern for at least twelve months from the date that such consolidated financial statements were issued.
In March 2023, the Company did not timely make the payment of the accrued interest on the Convertible Notes due on March 1, 2023 of $2.3 million, resulting in a default. On March 26, 2023, the Company, the Notes Guarantors and Holders entered into the Waivers pursuant to which, among other things, each Holder agreed to (i) waive the Specified Default and any payment obligation of the Company under the Indenture with respect to the March Interest Payment, (ii) in lieu of the Interest Payments, (a) receive a Promissory Note or Convertible Promissory Note, as applicable, and (b) amend the Warrant Agreement to reduce the exercise price of the warrants governed thereby from $11.50 to $0.01, and (iii) consent to the entry into the Supplemental Indenture. The Supplemental Indenture, among other things, lowered the minimum amounts of liquidity the Company must maintain on a consolidated basis for each quarter in 2023 and the first quarter of 2024.
In April 2023, the Company completed a registered public offering of common stock and common warrants for aggregate gross proceeds of $22 million, before deducting placement agent fees and other offering expenses.
In addition, the Company is currently executing on various strategies to improve available cash balances, liquidity and cash generated from operations, including strategic growth plans, ongoing comprehensive cost reduction and performance improvement programs,
37
reduced headcount and elimination of certain discretionary and general and administrative expenses, and taking steps to improve the operational efficiency of our fulfillment operations. With these strategies in place, the Company believes it will be able to continue as a going concern for at least the next twelve months.
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 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, 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).
On March 26, 2023, the Company, the Notes Guarantors and Holders entered into limited waivers and consents pursuant to which each holder agreed to (i) waive the Specified Default and any payment obligation of the Company under the Indenture with respect to the March Interest Payment, (ii) in lieu of the Interest Payments, (a) receive a Promissory Note (as defined below) and (b) amend the Warrant Agreement (as defined below) to reduce the exercise price of the warrants governed thereby from $11.50 to $0.01, and (iii) consent to the entry into the Supplemental Indenture.
The Supplemental Indenture, among other things, (i) lowered the minimum amounts of liquidity the Company must maintain on a consolidated basis for each quarter in 2023 and the first quarter of 2024, (ii) added restrictions on the Company's ability to make
38
payments relating to certain restricted investments, (iii) decreased the maximum amount of equity interests that the Company may repurchase, redeem, acquire or retire, (iv) removed the Company's ability to issue preferred stock or incur certain unsecured indebtedness or junior lien indebtedness, (v) decreased other permitted debt baskets, (vi) decreased the threshold for a cross-default for purposes of determining an Event of Default and (vii) added a new Event of Default in the event the Company does not consummate an underwritten primary equity offering providing at least $10 million of proceeds to the Company by April 30, 2023.
On March 26, 2023, the Company, the Notes Guarantors and each holder of the Convertible Notes executed unsecured promissory notes, with each 2023 Promissory Note having an aggregate principal amount equal to such holder's interest payments. The 2023 Promissory Notes mature on March 26, 2025 and accrue interest at seven percent per annum (7.0%).
In addition, the 2023 Promissory Notes provide that, in the event the Company consummates the April 2023 Offering by April 30, 2023, the holder of each 2023 Promissory Note has the option to require the Company to prepay a portion of the principal balance of the 2023 Promissory Note in an amount equal to or less than the gross proceeds to the Company from any purchases by the Holder of the Company's securities in the April 2023 Offering. Each holder may exercise its Put Option within ten business days following the closing and funding of the April 2023 Offering. In addition, certain of the 2023 Promissory Notes provide such holders with the right to convert the Promissory Note into unregistered securities of the Company on the same terms as the securities offered in the April 2023 Offering in the event such offering takes place.
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 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 is 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 the 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 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 8). Upon
39
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.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
| For the Three Months |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash flow used in operating activities |
| $ | (22,246 | ) |
| $ | (5,277 | ) |
Cash flow used in investing activities |
|
| (18 | ) |
|
| (101 | ) |
Cash flow provided by financing activities |
|
| 7,496 |
|
|
| 3,652 |
|
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, and 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 three months ended March 31, 2023, net cash used in operating activities increased by $17.0 million to $22.3 million, compared to net cash used in operating activities of $5.3 million during the three months ended March 31, 2022. The primary driver of the change was the timing of payment for clients and vendors.
Investing Activities
Our primary investing activities have consisted of purchases of property and equipment and software.
During the three months ended March 31, 2023, net cash used in investing activities decreased by $83 thousand to $18 thousand compared to net cash used in investing activities of $101 thousand during the three months ended March 31, 2022. The primary driver of the decrease was cash used in the prior year in equipment purchases.
Financing Activities
Our financing activities consisted primarily of borrowings and repayments of debt as well as activity related to the Business Combination.
During the three months ended March 31, 2023, net cash provided by financing activities increased by $3.8 million to $7.5 million, compared to net cash provided by financing activities of $3.7 million for the three months ended March 31, 2022. The change was primarily driven by the proceeds from the Loans.
Off-Balance Sheet Arrangements
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of identifying a target business, undertakingin-depthdue diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our Public Shares upon consummation of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination.
Critical Accounting Policies
Management’s Discussion and Analysis of condensedOur Financial Condition and Results of Operations are based upon our consolidated financial statements, and related disclosureswhich have been prepared in conformityaccordance with accounting principles generally accepted in the United StatesU.S. (“GAAP”). The preparation of Americathese financial statements requires managementus to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and liabilities,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.
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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 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 the Convertible Notes in accordance with ASC 825-10, "Financial Instruments," under which the 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 quarterly 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
41
recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter until settlement. Changes in the financialestimated fair value of the warrants are recognized as a non-cash gain or loss on the condensed consolidated statements and income and expenses during the periods reported. Actual results could materially differ from those estimates. At June 30, 2021, we have not identified any critical accounting policies.
Revenue
Revenue is accounted for using Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateCodification (“ASU”ASC”)2020-06,Debt — Debt Topic 606, Revenue from Contracts with Conversion and Other Options (Subtopic470-20)and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic815-40)(“ASU2020-06”)
In accordance with ASC Topic 606, the Company recognizes revenue when control of the promised goods or services is transferred to simplify accounting for certain financial instruments. ASU2020-06eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contractsCompany’s customers, in an entity’s own equity.amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The new standard also introduces additional disclosures for convertible debtCompany 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 indexedboth 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 settledfulfillment. 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 entity’s own equity. ASU2020-06amendsamount that reflects the diluted earnings per share guidance, includingconsideration that the requirementCompany expects to use theif-convertedmethodultimately receive in exchange for all convertible instruments. ASU2020-06
Commerce-as-a-Service Revenue is effective January 1, 2022 and should be appliedrecognized on a full or modified retrospectivenet basis from maintaining e-commerce platforms and online orders, as the Company is engaged primarily in an agency relationship with early adoption permitted beginningits customers and earns defined amounts based on January 1, 2021. We are currently assessing the impact, if any, that ASU2020-06would have on our financial position, results of operations or cash flows.
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.
42
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 recently issued, but not yet effective,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 standards, if currently adopted, would have a material effect onpronouncements in Note 2 to our condensed financial statements.
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Item 3. QuantitativeQuantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and procedures that are designed to ensureprovide reasonable assurance that information required to be disclosed by us in ourthe reports that we file or submit under the Exchange Act, reportssuch as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms,forms. The disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer or persons performing similar functions,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act, as such disclosure controls and procedures are defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officerChief Executive Officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended June 30, 2021, as such term is defined in Rules13a-15(e)and15d-15(e)under the Exchange Act.Chief Financial Officer. Based on this evaluation, our principal executive officerChief Executive Officer and principal financial and accounting officerChief Financial Officer have concluded that, during the period covered by this report,as of March 31, 2023, our disclosure controls and procedures were effective at ato provide reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There was no changehave not been any changes in our internal control over financial reporting that occurred(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter of 2021 covered byto which this Quarterly Report on Form10-Qhashave materially affected, or isare reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. LegalLegal 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 and other claims. Although management is unable to predict with certainty the eventual outcome of any legal action, management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at March 31, 2023, will not materially affect the Company’s consolidated results of operations, financial position or cash flows. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our financial results.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our actual results to differ materially from those in this report includebusiness. For a discussion of such risks and uncertainties, please see the risk factors describedsection in our final prospectus for our Initial Public OfferingAnnual Report on Form 10-K filed with the SEC. As of the date of this Report, thereSEC on March 23, 2023 titled “Risk Factors.” There have been no material changes to the risk factors disclosed therein.
Item 2. Unregistered Sales of Equity Securities
Other than with respect to the Unregistered Securities described in our final prospectus for the Initial Public OfferingCompany’s Current Report on Form 8-K filed with the SEC.
Item 3. DefaultsDefaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. OtherOther Information
None.
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Item 6. Exhibits
|
|
|
| Incorporated by Reference | ||||
Exhibit |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
3.1 |
| Amended and Restated Certificate of Incorporation of Nogin, Inc. |
| 8-K |
| 3.1 |
| 9/01/2022 |
3.2 |
|
| 8-K |
| 3.2 |
| 9/01/2022 | |
3.3 |
|
| 8-K |
| 3.1 |
| 3/28/2023 | |
4.1 |
|
| 8-K |
| 4.1 |
| 3/27/2023 | |
4.2 |
|
| 8-K |
| 4.2 |
| 3/27/2023 | |
4.3 |
|
| 8-K |
| 4.3 |
| 3/27/2023 | |
10.1 |
|
| 8-K |
| 10.1 |
| 3/27/2023 | |
10.2 |
|
| 8-K |
| 10.1 |
| 1/27/2023 | |
10.3 |
| Employment Agreement, dated January 30, 2023, by and between Nogin, Inc. and Jonathan S. Huberman. |
| 8-K |
| 10.1 |
| 1/30/2023 |
10.4 |
| Employment Agreement, dated January 30, 2023, by and between Nogin, Inc. and Shahriyar Rahmati. |
| 8-K |
| 10.2 |
| 1/30/2023 |
31.1 |
|
|
|
|
|
|
| |
31.2 |
|
| �� |
|
|
|
| |
32.1 |
|
|
|
|
|
|
| |
32.2 |
|
|
|
|
|
|
| |
101 |
| The following financial information from Nogin, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets - Unaudited, (ii) the Condensed Consolidated Statement of Operations - Unaudited, (iii) the Condensed Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders’ Deficit - Unaudited, (iv) the Condensed Consolidated Statement of Cash Flows - Unaudited and (v) the Notes to Condensed Consolidated Financial Statements - Unaudited (submitted electronically herewith). |
|
|
|
|
|
|
104 |
| Cover Page Interactive Data File, formatted in Inline XBRL (included as Exhibit 101). |
|
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* Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The followingCompany agrees to furnish a copy of all omitted exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form10-Q.
NOGIN, INC. | |||||||
By: | /s/ Jonathan S. Huberman | ||||||
Jonathan S. Huberman | |||||||
Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | |||||||
May 15, 2023 | |||||||
By: | /s/ Shahriyar Rahmati | ||||||
Shahriyar Rahmati | |||||||
Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) | |||||||
May 15, 2023 | |||||||
47