Term Loan Facilities – On March 29, 2019, the Company entered into a $20.0million “Term Loan” agreement secured by a second lien on all assets of the Company including accounts receivable, intellectual property and general intangibles. The Term Loan agreement was subsequently amended,upsized to $60.0 million and currently has the principal amount of $60.0 million, bearsbore an interest rate of LIBOR plus 9.59.5%% (13.113.6%% at September 30, as of December 31, 2022) with thea maturity date of the earlier of March 29, 2024, or the maturity date of the Revolving Credit Facility. The Term Loan was amended on
On November 18, 2022, to, among other things, require the Company entered into an amendment to the Term Loan agreement, in which the lender consented to the amendments to the Revolving Credit Facility agreement and the Subordinated Term Loan agreement. The amended Term Loan agreement required the Company to cause the Yorkville Investor (See Note 11) to purchase the maximum amount of the Company’s equity interests available under the SEPA (See Note 11) and to utilize the net proceeds from such drawdowns to repay the Term Loan with any net proceeds provided by the SEPA until such time that the Term Loan is repaid in full. (see Note 20).
The Term Loan also includes a qualified equity contributions requirement, requiring the Company to raise $50.0 million in equity contribution on or prior to February 28, 2022. The lender had previously waived the requirement through June 30, 2022, but the Company did not meet the minimum equity raise requirement of $50.0 million by June 30, 2022, allowing the lender to reduce the Term Loan collateral by $20.0 million and requiring the use of available funds under the Revolving Credit Facility as additional Term Loan collateral. As a result of the $20.0 million reduction in the Term Loan collateral, the availability under the Revolving Credit Facilityit was reduced by approximately $8.7 million as of September 30, 2022.
Pursuant tofully repaid. Per the amended Term Loan agreement, an additional fee was incurred in the amount of $2.0 million, out of which $1.0 million became due in cash and the other $1.0 million was accrued to the principal balance of the Term Loan as the Company did not repay the Term Loan in full on October 15, 2021,or before March 27, 2023. Furthermore, beginning on April 3, 2023, an additional $0.15 million fee accrued to the principal balance of the Term Loan each week thereafter until the Term Loan was fully repaid.
On February 7, 2023, the Company entered into warrant agreements and issued common unit purchase warrants (the “Term Loan Warrants”). Thean amendment to the Term Loan Warrants were converted into Class A Common Stockagreement, which (i) amended the interest rate the Term Loan bears to SOFR plus 9.6% and Class B Units upon(ii) required the consummationCompany to make a prepayment of $10.3 million, including $10.0 million of the Mergers.principal and $0.3 million of the prepayment premium. Pursuant to the amended agreement, the Company made a $10.3 million payment to the Term Loan lender on February 7, 2023 and recorded $0.8 million as a loss on extinguishments of debt obligations on the accompanying consolidated statements of operations.
On May 19, 2023, the Company entered into an amendment to the Term Loan agreement, which extended the maturity date to May 23, 2024.
In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that these Term Loan amendments were debt modifications.
On June 7, 2023, the Company fully prepaid the borrowing under the Term Loan in the amount of $40.5 million and terminated the facility. As a result, the Company recorded $2.5 million of a loss on extinguishment of debt obligations on the accompanying condensed statements of operations for the three and six months ended June 30, 2023.
On December 22, 2021, the Company entered into a $20.0million “Subordinated Term Loan” agreement secured by a third lien on all assets of the Company including accounts receivable, intellectual property and general intangibles. The Subordinated Term Loan was originally scheduled to mature on December 22, 2022and bears, bore an interest rate of 15.0%. On November 18, 2022,15.0% through the Company entered into an amendment to the Subordinated Term Loan agreement, extending itsoriginal maturity date to December 31, 2023 (see Note 20).and 14.0% thereafter. Pursuant to the Subordinated Term Loan agreement, the Company entered into warrant agreements and issued common unit purchase warrants (the “Subordinated Term Loan Warrants”). If the Company does not repay the Subordinated Term Loan on or before its maturity,On December 21, 2022, the Subordinated Term Loan Warrants will be exercisable for additionalwere converted into Class A Common Stock untilStock. The maturity of the Subordinate Term Loan was subsequently extended to December 31, 2023 with the amendment entered into on November 18, 2022. On March 22, 2023, the Company fully paysentered into an amendment to the principal and interest in cash.
SeeSubordinated Term Loan agreement, modifying its maturity date to March 29, 2024, which was subsequently amended to May 23, 2024 with an amendment entered into on May 19, 2023. Concurrently, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements (see Note 9 for further information regarding the Subordinated Term Loan Warrants).
On June 7, 2023, the Company entered into an amendment to the Subordinated Term Loan agreement, which modified (a) its maturity to the earlier of (i) the scheduled maturity date (June 7, 2025, which the Company has an option to extend to June 7, 2026 upon achievement of certain conditions) and (ii) the maturity date of the June 2023 Revolving Credit Facility, unless the Springing Maturity applies, and (b) the interest rate the Subordinated Term Loan bears to 15%, of which 11% will be paid in cash and 4% will be paid in kind by capitalizing such interest accrued to the principal each month in arrears. Any accrued, capitalized and uncapitalized paid-in-kind interest charges will be due and payable in cash at maturity. Concurrently, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements (see Note 9 for further information regarding the Subordinated Term Loan Warrants).
In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that these Subordinated Term Loan amendments were debt modifications.
The Company capitalized $11.9 million in deferred debt charges related to the Subordinated Term Loan during the six months ended June 30, 2023. Amortization of deferred debt charges related to the Subordinated Term Loan agreement was $0.7 million and $0.4 million for the three months ended June 30, 2023 and 2022, respectively. Amortization of deferred debt charges related to the Subordinated Term Loan agreement was $0.9 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively.
On February 2, 2023, the Company issued an unsecured promissory note with a certain entity affiliated with Andres Chico (the chairman of the Company’s board of directors) and Jose Miguel Enrich (a beneficial owner of greater than 10% of the issued and outstanding Class A Common Stock and Class V Common Stock) for a principal and purchase price of $3.0 million (the “Rodina Note”). The Rodina Note’s maturity date was July 1, 2024 and bore interest at 16.0% per annum which is to be paid in kind by quarterly capitalizing the amount of the interest accrued to the principal at the end of each calendar quarter. On May 19, 2023, the Company entered into a loan conversion agreement to convert the principal and accrued interest of the Rodina Note to Class A Common Stock. Pursuant to the loan conversion agreement, on June 20, 2023, the Company issued 7,521,940 shares of Class A Common Stock to the holder of the Rodina Note for its full and final settlement.
On June 7, 2023, the Company entered into a $75.0 million “June 2023 Term Loan” agreement secured by the Company’s intellectual property, with a maturity date of the earlier of (i) the scheduled maturity date (June 7, 2025, which the Company has an option to extend to June 7, 2026 upon achievement of certain conditions) and (ii) the maturity date of the June 2023 Revolving Credit Facility, unless the Springing Maturity applies. The June 2023 Term Loan bears an interest rate of the prime rate plus a margin of 8.75% (or 8.25% if the Company meets certain conditions defined in the agreement). The Company has the option to pay the interest in kind each month in arrears by capitalizing such interest which accrues through September 30, 2023 as additional principal, and in such instance, the margin applicable for the interest rate is 10.25%. The Company elected to pay the interest accrued through June 30, 2023 in kind, and thus, the applicable interest rate as of June 30, 2023 was 18.5%. The Company also has the option to pay in kind any excess interest over 13.25% after paying the first 13.25% in cash from October 1, 2023 through the maturity. At the time of any repayment of the June 2023 Term Loan, the Company is required to pay a fee in the amount of 12.0% of the principal repaid. Such repayment fee amount has been accrued as additional principal on the accompanying condensed consolidated balance sheet as of June 30, 2023. Beginning on October 7, 2023 until the June 2023 Term Loan is fully repaid, the lender has the option to elect to convert the outstanding principal into Class A Common Stock. The aggregate number of shares delivered to the lender cannot result in the lender’s ownership exceeding (i) 19.99% of the number shares of Class A Common Stock issued and outstanding or (ii) $10.0 million. Concurrently, the Company entered into warrant agreements and issued common stock purchase warrants (the “June 2023 Term Loan Warrants”) (see Note 9 for further information regarding the June 2023 Term Loan Warrants).
The Company capitalized $24.0 million in deferred debt charges related to the June 2023 Term Loan during the six months ended June 30, 2023. Amortization of deferred debt charges related to the June 2023 Term Loan agreement was $0.4 million for the three and six months ended June 30, 2023.
The June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan Warrants. See Note 20 for further information regardingare subject to certain cross-default provisions under the amended agreements entered into forintercreditor agreement. In addition, the June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan agreements include the consistent minimum liquidity threshold, which reduces the availability under the June 2023 Revolving Credit Facility initially by $19.0 million (the “Minimum Liquidity Threshold”). During the terms of the agreements, the Minimum Liquidity Threshold could be decreased by up to $9.0 million, which will make the Minimum Liquidity Threshold to $10.0 million, upon the Company’s achievement of certain financial conditions defined in the agreements. As of June 30, 2023, the Minimum Liquidity Threshold was $19.0 million. Furthermore, the June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan agreements require the Company to maintain a $2.0 million letter of credit, which was reserved under the June 2023 Revolving Credit Facility and reduced the availability as of June 30, 2023. This letter of credit could be eliminated upon the Company’s achievement of certain financial conditions defined in the agreements.
Convertible Debentures – As part of the security purchase agreement (the “YA SPA”) (see Note 11), the Company issued convertible debentures (collectively, the “YA Convertible Debentures”) to YA II PN, Ltd. (the “Yorkville Investor”) on November 18, 2022.
30, 2022 (the “First YA Convertible Debenture”) and on February 3, 2023 (the “Second YA Convertible Debenture”). The principal amount of the First YA Convertible Debenture was $7.0
million for a purchase price of $7.0 million, and the principal amount of the Second YA Convertible Debenture was $10.0 million for a purchase price of $10.0 million. The YA Convertible Debentures have a maturity date of May 30, 2024 and bears interest at the rate of 4.0% per annum. The interest is due and payable upon maturity. At any time, so long as the YA Convertible Debentures are outstanding, the Yorkville Investor may covert all or part of the principal and accrued and unpaid interest of the YA Convertible Debentures into shares of Class A Common Stock at 90% of the lowest daily VWAP of Class A Common Stock during the seven consecutive trading days immediately preceding each conversion date, but in no event lower than $0.25 per share. Outside of an event of default under the YA Convertible Debentures, the Yorkville Investor may not convert in any calendar month more than the greater of (a) 25.0% of the dollar trading volume of the shares of Class A Common Stock during such calendar month, or (b) $3.0 million. The Company capitalized $1.7 million and $2.5 million in deferred debt charges related to the First YA Convertible Debenture and the Second YA Convertible Debenture for their originations, respectively. Amortization of deferred debt charges related to the YA Convertible Debentures was $0.5 million and $1.0 million for the three and six months ended June 30, 2023, respectively. Insignificant amounts of accrued and unpaid interest were recorded in accrued expenses on the accompanying condensed consolidated balance sheets as of June 30, 2023 and other long-term liabilities as of December 31, 2022, respectively. During the three months ended June 30, 2023, the Yorkville Investor converted $0.83.3 million of the principal and $0.2 million of the accrued interest of the YA Convertible Debentures to 9,766,358 shares of Class A Common Stock. During the six months ended June 30, 2023, the Yorkville Investor converted $5.5 million of the principal and $0.3 million of the accrued interest of the YA Convertible Debentures to 12,616,320 shares of Class A Common Stock. The Company recorded $1.7 million and $3.0 million in loss on extinguishment of debt obligations on the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2023, respectively. As disclosed in Note 19, on August 8, 2023, the Yorkville Investor assigned the YA Convertible Debentures to certain existing investors of the Company affiliated with Jose Miguel Enrich. Pursuant to the assignment agreement, the assignees assumed all of the Yorkville Investor’s duties, liabilities and obligations under the YA Convertible Debentures and the Yorkville Investor was discharged of all of such duties, liabilities and obligations. Subsequently, the Company and the assignees entered into an amendment to the debentures which extended the maturity date to December 1, 2026.
On December 16, 2022, the Company issued convertible debentures to certain members of the Company’s management team and board of directors, and certain other existing investors of the Company for a total principal amount of $11.9 million and the total net proceeds of $10.5 million (the “Insider Convertible Debentures”). The Insider Convertible Debentures had a maturity date of June 16, 2024 and accrue interest at the rate of 6.0% per annum. The interest is due and payable quarterly in arrears, and any portion of the aggregate interest accrued may, at the option of the Company, be paid in kind by capitalizing the amount of accrued interest to the principal on each applicable interest payment date. At any time, so long as the Insider Convertible Debentures are outstanding, each of the holders may convert all or part of the principal and accrued and unpaid interest of their Insider Convertible Debentures they hold into shares of Class A Common Stock at a conversion price equal to the lower of 110% of (i) the average closing price of Class A Common Stock for five trading days immediately preceding the date of the issuance of the Insider Convertible Debentures, and (ii) the closing price of Class A Common Stock immediately preceding the date of the issuance of the Insider Convertible Debentures. Concurrent with the issuance of the Insider Convertible Debentures, the Company entered into a lockup agreement with each of the holders of the Insider Convertible Debentures, pursuant to which the holders agreed to not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, any shares of Class A Common Stock the holders may receive from their exercise option to convert the Insider Convertible Debentures until the earlier of (i) June 16, 2024, and (ii) when the Yorkville Investor sells all shares of Class A Common Stock issued under the YA Convertible Debentures (the “Insider Lock-Up Agreement”). On June 2, 2023, the Company entered into an amendment to the Insider Convertible Debentures, with the exception of the three debentures, for which the amendment was executed on July 11, 2023 (see Note 19). The amendment extended the maturity date to December 1, 2026. In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that the amendment was a debt modification. The Company recorded the principal of the Insider Convertible Debentures, including interest incurred between the origination through June 30, 2023, which the Company elected to capitalize to the principal, in related-party debt obligations, net of debt issuance costs on the accompanying condensed consolidated balance sheet as of June 30, 2023. The Company capitalized $0.2 million and $0.4 million of accrued interest to the principal of the Insider Convertible Debentures during the three and six months ended June 30, 2023, respectively. Amortization of deferred debt charges related to the Insider Convertible Debentures was $0.2 million and $0.4 for the three and six months ended June 30, 2023, respectively. As of December 31, 2022, the Company had received $3.5 million of the total $10.5 million net proceeds from the investors and the remaining $7.0 million was recorded in related-party notes receivable on the accompanying condensed consolidated balance sheet as of December 31, 2022. The Company received the remaining $7.0 million in January and February 2023. Neither principal nor accrued interest of the Insider Convertible Debentures was converted to Class A Common Stock from the origination through June 30, 2023.
On February 1, 2023, the Company issued convertible debentures to certain third parties for a total principal amount of $1.4 million and a total net proceeds of $1.2 million (the “Third Party Convertible Debentures”). The Third Party Convertible Debentures have a maturity date of August 1, 2024 and accrue interest at the rate of 6.0% per annum. The interest is due and payable quarterly in arrears, and any portion of the aggregate interest accrued may, at the option of the Company, be paid in kind by capitalizing the amount of accrued interest to the principal on each applicable interest payment date. At any time, so long as the Third Party Convertible Debentures are outstanding, each of the holders may convert all or part of the principal and accrued and unpaid interest of their Third Party Convertible Debentures they hold into shares of Class A Common Stock at a conversion price equal to the lower of 110% of (i) the average closing price of Class A Common Stock for five trading days immediately preceding the date of the issuance of the Third Party Convertible Debentures, and (ii) the closing price of Class A Common Stock immediately preceding the date of the issuance of the Third Party Convertible Debentures. Concurrent with the issuance of the Third Party Convertible Debentures, the Company entered into a lockup agreement with each of the holders of the Third Party Convertible Debentures, pursuant to which the holders agreed to not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, any shares of Class A Common Stock the holders may receive from their exercise option to convert the Third Party Convertible Debentures until the earlier of (i) August 1, 2024, and (ii) when the Yorkville Investor sells all shares of Class A Common Stock issued under the YA Convertible Debentures (the “Third Party Lock-Up Agreement”). On June 2, 2023, the Company entered into an amendment to the Third Party Convertible Debentures, with the exception of the three debentures, for which the amendment was executed on July 31, 2023 (see Note 19). The amendment extended the maturity date to December 1, 2026. In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that the amendment was a debt modification. The Company recorded the principal of the Third Party Convertible Debentures, including interest incurred between the origination through June 30, 2023 which the Company elected to capitalize to the principal, in debt obligations, net of debt issuance costs on the accompanying condensed consolidated balance sheet as of June 30, 2023. The Company capitalized insignificant amounts of accrued interest to the principal of the Third Party Convertible Debentures during the three and six months ended June 30, 2023. Amortization of deferred debt charges related to the Third Party Convertible Debentures was insignificant for the three and six months ended June 30, 2023. Neither principal nor accrued interest of the Third Party Convertible Debentures was converted from the origination through June 30, 2023.
On February 1, 2023, the Company issued a convertible debenture to Guardians of New Zealand Superannuation (the “NZ Superfund”), a beneficial owner of greater than 10% of the issued and outstanding Class A Common Stock and Class V Common Stock, for a total principal amount of $5.1 million and the total net proceeds of $4.5 million (the “NZ Superfund Convertible Debenture”). The NZ Superfund Convertible Debenture has a maturity date of August 1, 2024 and accrued interest at the rate of 8.0% per annum. The interest is due and payable quarterly in arrears, and any portion of the aggregate interest accrued may, at the option of the Company, be paid in kind by capitalizing the amount of accrued interest to the principal on each applicable interest payment date. At any time, so long as the NZ Superfund Convertible Debenture is outstanding, the NZ Superfund may convert all or part of the principal and accrued and unpaid interest of the NZ Superfund Convertible Debenture it holds into shares of Class A Common Stock at a conversion price equal to the lower of 110% of (i) the average closing price of Class A Common Stock for five trading days immediately preceding the date of the issuance of the NZ Superfund Convertible Debenture, and (ii) the closing price of Class A Common Stock immediately preceding the date of the issuance of the NZ Superfund Convertible Debenture. Concurrent with the issuance of the NZ Superfund Convertible Debenture, the Company entered into a lockup agreement with the NZ Superfund, pursuant to which it agreed to not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, any shares of Class A Common Stock the holders may receive from its exercise option to convert the NZ Superfund Convertible Debenture until the earlier of (i) August 1, 2024, and (ii) when the Yorkville Investor sells all shares of Class A Common Stock issued under the YA Convertible Debentures (the NZ Superfund Lock-Up Agreement). On June 2, 2023, the Company entered into an amendment to the NZ Superfund Convertible Debenture, which extended the maturity date to December 1, 2026 and modified the interest rate it bears to 14.0%. In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that the amendment was a debt modification. The Company recorded the principal of the NZ Superfund Convertible Debenture, including interest incurred between the origination through June 30, 2023 which the Company elected to capitalize to the principal, in related party debt obligations, net of debt issuance costs on the accompanying condensed consolidated balance sheet as of June 30, 2023. The Company capitalized $0.1 million and $0.2 million of accrued interest to the principal of the NZ Superfund Convertible Debenture during the three and six months ended June 30, 2023, respectively. Amortization of deferred debt charges related to the NZ Superfund Convertible Debenture was $0.1 million and $0.1 million for the three and six months ended SeptemberJune 30, 2022 and 2021,2023, respectively. AmortizationNeither principal nor accrued interest of deferred debt charges were $2.5 million and $0.4 million for the nine months ended SeptemberNZ Superfund Convertible Debenture was converted from the origination through June 30, 2022 and 2021, respectively.2023.
Components of long-termthe Company’s debt obligations were as follows (in thousands):
| Schedule of components of long-term debt | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | | December 31,
2021 | | | June 30, 2023 | | | December 31,
2022 | |
| Term loan balance | | $ | 72,500 | | | $ | 77,000 | | | $ | 105,244 | | | $ | 71,000 | |
| Less unamortized loan origination costs | | | (2,957 | ) | | | (3,334 | ) | |
| Convertible debt balance | | | | 10,880 | | | | 7,000 | |
| Related-party convertible debt balance | | | | 17,670 | | | | 11,964 | |
| Less unamortized debt issuance costs | | | | (37,357 | ) | | | (6,138 | ) |
| Total borrowed | | | 69,543 | | | | 76,666 | | | | 96,437 | | | | 83,826 | |
| Less short-term loan balance | | | - | | | | (22,666 | ) | |
| Long-term loan balance | | $ | 69,543 | | | $ | 51,000 | | |
| Less short-term debt obligation balance | | | | - | | | | (3,771 | ) |
| Long-term debt obligation balance | | | $ | 96,437 | | | $ | 80,055 | |
At September 30,2022,June 30, 2023, the future aggregate maturities of long-term debt for the remainder of 20222023 and subsequent yearsperiods are as follows (in thousands):
| Schedule of maturities of long-term debt | | | | |
| Fiscal Years Ending December 31, | | | |
| 2022 | | $ | 1,500 | |
| 2023 | | | 71,000 | |
| Total | | $ | 72,500 | |
PPP Loans – In 2020, the Company received loans under the Paycheck Protection Program (“PPP”) for an amount totaling $10.8 million, which was established under the Coronavirus Aid, Relief, and Economic Security Act approved by the U.S. Congress on March 27, 2020 (the “CARES Act”) and administered by the Small Business Administration (“SBA”). The PPP Loans had a maturity date of 2 years from the initial disbursement and carried an interest rate of 1% per year. The application for the PPP Loan required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further required the Company to consider current business activity and ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that was not significantly detrimental to the business. The receipt of the funds from the PPP Loans and the forgiveness of the PPP Loans were dependent on the Company having initially qualified for the PPP Loans and qualifying for the forgiveness of such PPP Loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the PPP Loans.
| Schedule of maturities of long-term debt | | | | |
| Fiscal Years Ending December 31, | | | |
| 2023 | | $ | - | |
| 2024 | | | - | |
| 2025 | | | 108,543 | |
| 2026 | | | 25,251 | |
| Total | | $ | 133,794 | |
The PPP Loans were eligible for forgiveness as part oftotal interest expense related to the CARES Act, if certain requirements were met. The Company applied for forgiveness with the SBA in December 2020. On March 30, 2021, the SBA forgave the principal balanceRevolving Credit Facilities, Term Loan Facilities, and associated accumulated interest of one of the two PPP Loans in full. On June 10, 2021, the SBA forgave the principal balance and associated accumulated interest of the second PPP Loans in full. As a result, the Company recognizedConvertible Debentures was $10.98.8 million to gain on forgiveness of debt inand $3.9 million for the condensed consolidated statements of operations in the ninethree months ended SeptemberJune 30, 2021. Presently, the SBA2023 and other government communications have indicated that all loans in excess of $2.0 million will be subject to audit and that those audits could take up to seven years to complete. If the SBA determines that the PPP Loan was not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would be required to repay some or all of the PPP Loan and record additional expense which could have a material adverse effect on the Company’s business, financial condition and results of operations in a future period.
2022, respectively. The Company elected to repay $2.3 million of the PPP Loans during 2020, which the SBA paid back to the Company upon forgiveness of the PPP loan on June 10, 2021. The PPP Loan balances were $-0- as of September 30, 2022 and December 31, 2021.
Interesttotal interest expense related to the Revolving Credit Facility, the Term Loan the Subordinated Term Loan,Facilities, and PPP Loan, as applicable,Convertible Debentures was $4.616.5 million and $2.67.7 million for the threesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. Interest expense for the applicable borrowings was $12.3 million and $7.5 million for the nine months ended September 30, 2022 and 2021, respectively.
Note 6—Accrued expenses
Accrued expenses consist of the following as of SeptemberJune 30, 20222023 and December 31, 20212022 (in thousands):
| Schedule of Accrued expenses | | | | | | | | | |
| Schedule of accrued expenses | | | | | | | | | |
| | | September 30,
2022 | | | December 31,
2021 | | | June 30, 2023 | | | December 31,
2022 | |
| Accrued hauler expenses | | $ | 55,773 | | | $ | 49,607 | | | $ | 44,327 | | | $ | 44,773 | |
| Accrued compensation | | | 57,632 | | | | 9,656 | | | | 16,001 | | | | 43,054 | |
| Accrued income taxes | | | - | | | | 3 | | | | - | | | | 9 | |
| Accrued Mergers transaction expenses | | | 44,235 | | | | - | | | | - | | | | 13,433 | |
| Other accrued expenses | | | 4,788 | | | | 6,272 | | | | 5,719 | | | | 6,733 | |
| Total accrued expenses | | $ | 162,428 | | | $ | 65,538 | | | $ | 66,047 | | | $ | 108,002 | |
During the six months ended June 30, 2023, the Company granted certain RSU awards, valued at $8.2 million, as replacement awards for $26.8 million of the accrued management rollover consideration. The replacement awards resulted in a $18.6 million gain, which was included in gain on settlement of incentive compensation on the accompanying condensed consolidated statement of operations for the six months ended June 30, 2023.
Note 7—Goodwill and other intangibles
There were no additions to goodwill forduring the six months ended June 30, 2023 or the year ended December 31, 2021 or the nine months ended September 30, 2022. No impairment of goodwill was identified for the three or six months ended June 30, 2023 or the year ended December 31, 2021 or the nine months ended September 30, 2022.
Intangible assets consisted of the following (in thousands, except years):
| Schedule of Intangible Assets and Goodwill | | | | | | | | | | | | | | | |
| | | September 30, 2022 | |
| | | Useful Life
(in years) | | | Gross Carrying
Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | |
| Trade Name | | 5 | | | $ | 728 | | | $ | (728 | ) | | $ | - | |
| Customer and hauler relationships | | 2 to 8 | | | | 20,976 | | | | (11,502 | ) | | | 9,474 | |
| Non-competition agreements | | 3 to 4 | | | | 550 | | | | (550 | ) | | | - | |
| Technology | | 3 | | | | 3,178 | | | | (1,802 | ) | | | 1,376 | |
| Total finite-lived intangible assets | | | | | | 25,432 | | | | (14,582 | ) | | | 10,850 | |
| Domain Name | | Indefinite | | | | 835 | | | | - | | | | 835 | |
| Total intangible assets | | | | | $ | 26,267 | | | $ | (14,582 | ) | | $ | 11,685 | |
| Schedule of intangible assets and goodwill | | | | | | | | | | | | |
| | | December 31, 2021 | | | June 30, 2023 | |
| | | Useful Life
(in years) | | | Gross Carrying
Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | | | Useful Life
(in years) | | Gross
Carrying Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | |
| Trade Name | | 5 | | | $ | 728 | | | $ | (728 | ) | | $ | - | | | 5 | | $ | 728 | | $ | (728 | ) | | $ | - | |
| Customer and hauler relationships | | 2 to 8 | | | | 20,976 | | | | (9,582 | ) | | | 11,394 | | | 2 to 8 | | 20,976 | | | (13,421 | ) | | 7,555 | |
| Non-competition agreements | | 3 to 4 | | | | 550 | | | | (487 | ) | | | 63 | | | 3 to 4 | | 550 | | | (550 | ) | | - | |
| Technology | | 3 | | | | 3,178 | | | | (1,307 | ) | | | 1,871 | | | 3 | | | 3,178 | | | (2,298 | ) | | | 880 | |
| Total finite-lived intangible assets | | | | | | 25,432 | | | | (12,104 | ) | | | 13,328 | | | | | | 25,432 | | | (16,997 | ) | | | 8,435 | |
| Domain Name | | Indefinite | | | | 835 | | | | - | | | | 835 | | | Indefinite | | | 835 | | | - | | | | 835 | |
| Total intangible assets | | | | | $ | 26,267 | | | $ | (12,104 | ) | | $ | 14,163 | | | | | $ | 26,267 | | $ | (16,997 | ) | | $ | 9,270 | |
| | | December 31, 2022 | |
| | | Useful Life
(in years) | | Gross
Carrying Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | |
| Trade Name | | 5 | | $ | 728 | | | $ | (728 | ) | | $ | - | |
| Customer and hauler relationships | | 2 to 8 | | | 20,976 | | | | (12,141 | ) | | | 8,835 | |
| Non-competition agreements | | 3 to 4 | | | 550 | | | | (550 | ) | | | - | |
| Technology | | 3 | | | 3,178 | | | | (1,967 | ) | | | 1,211 | |
| Total finite-lived intangible assets | | | | | 25,432 | | | | (15,386 | ) | | | 10,046 | |
| Domain Name | | Indefinite | | | 835 | | | | - | | | | 835 | |
| Total intangible assets | | | | $ | 26,267 | | | $ | (15,386 | ) | | $ | 10,881 | |
Amortization expense for these intangible assets was $0.8 million and $0.70.8 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Amortization expense for these intangible assets was $2.51.6 million and $2.21.7 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Future amortization expense for the remainder of fiscal year 20222023 and subsequent years is as follows (in thousands):
| Schedule of Finite- Lived Intangible Assets, Future Amortization Expense | | | | | |
| Schedule of finite- lived intangible assets, future amortization expense | | | | | |
| Fiscal Years Ending December 31, | | | | | | |
| 2022 | | $ | 804 | | |
| 2023 | | | 3,220 | | | $ | 1,609 | |
| 2024 | | | 3,110 | | | | 3,110 | |
| 2025 | | | 2,559 | | | | 2,559 | |
| 2026 | | | 1,157 | | | | 1,157 | |
| Total finite-lived intangible assets, net | | $ | 10,850 | | |
| Total future amortization of intangible assets | | | $ | 8,435 | |
Note 8—Stockholders’ (deficit) equity
Upon closing of the Mergers on August 15, 2022, as discussed in Note 3, the Company’s capital stock consisted of (i) shares of Class A Common Stock issued as a result of the automatic conversion of Founder Class A Shares on a one-for-one basis, (ii) shares of Class A Common Stock issued to the PIPE Investors, (iii) shares of Class A Common Stock issued to the Blocked Unitholders and (iv) shares of Class V Common Stock issued to the Rubicon Continuing Unitholders.
The table set forth below reflects information about the Company’s equity as of SeptemberJune 30, 2022. The Earn-Out Interests are considered contingently issuable shares and therefore excluded from the number of shares of Class A Common Stock and Class V Common Stock issued and outstanding in the table below.2023.
| Schedule of Stockholders Equity | | | | | | | | | | | | | |
| Schedule of stockholders equity | | | | | | | | | | | | | |
| | | Authorized | | | Issued | | | Outstanding | | | Authorized | | | Issued | | | Outstanding | |
| Class A Common Stock | | | 690,000,000 | | | | 49,714,239 | | | | 49,714,239 | | | | 690,000,000 | | | | 229,818,370 | | | | 229,818,370 | |
| Class V Common Stock | | | 275,000,000 | | | | 115,463,646 | | | | 115,463,646 | | | | 275,000,000 | | | | 35,402,821 | | | | 35,402,821 | |
| Preferred Stock | | | 10,000,000 | | | | - | | | | - | | | | 10,000,000 | | | | - | | | | - | |
| Total shares as of September 30, 2022 | | | 975,000,000 | | | | 165,177,885 | | | | 165,177,885 | | |
| Total shares as of June 30, 2023 | | | | 975,000,000 | | | | 265,221,191 | | | | 265,221,191 | |
The table set forth below reflects information about the Company’s equity as of December 31, 2022.
| | | Authorized | | | Issued | | | Outstanding | |
| Class A Common Stock | | | 690,000,000 | | | | 55,886,692 | | | | 55,886,692 | |
| Class V Common Stock | | | 275,000,000 | | | | 115,463,646 | | | | 115,463,646 | |
| Preferred Stock | | | 10,000,000 | | | | - | | | | - | |
| Total shares as of December 31, 2022 | | | 975,000,000 | | | | 171,350,338 | | | | 171,350,338 | |
Each share of Class A Common Stock and Class V Common Stock entitles the holder one vote per share. Only holders of Class A Common Stock have the right to receive dividend distributions. In the event of liquidation, dissolution or winding up of the affairs of the Company, only holders of Class A Common Stock have the right to receive liquidation proceeds, while the holders of Class V Common Stock are entitled to only the par value of their shares. The holders of Class V Common Stock have the right to exchange Class V Common Stock for an equal number of shares of Class A Common Stock. The Company’s board of directors has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
18During the six months ended June 30, 2023, 80,060,825 shares of Class V Common Stock were exchanged to the equal number of shares of Class A Common Stock.
Note 9—Warrants
Public Warrants and Private Warrants – In connection with the Closing, on August 15, 2022, the Company assumed a total of 30,016,87530,016,851 outstanding Warrantswarrants to purchase one share of the Company’s Class A Common Stock with an exercise price of $11.50$11.50 per share. Of these Warrants,warrants, the 15,812,50015,812,476 Public Warrants were originally issued in Founder’s initial public offering (the “IPO”) and 14,204,375 Private Warrants were originally issued in a private placement in connection with the IPO. The Private Warrants are identical to the Public Warrants, except the Private Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable by the Company so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
In accordance with the guidance contained in ASC 815-40, Derivatives and Hedging – Contracts in an Entity’s Own Equity, the Company concluded that the IPO Warrants are not precluded from equity classification. Equity-classified contracts are initially measured at fair value (or allocated value). Subsequent changes in fair value are not recognized as long as the contracts continue to be classified in equity.
The IPO Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the IPO Warrants. The IPO Warrants became exercisable on September 14, 2022, 30 days after the Closing and no WarrantIPO Warrants has been exercised through SeptemberJune 30, 2022.2023. The IPO Warrants will expire five years from the Closing or earlier upon redemption.
The Company may redeem the Public Warrants and any Private Warrants no longer held by the initial purchaser thereof or its permitted transferee:
| - | in whole and not in part; |
| - | at a price of $0.01$0.01 per Warrant;warrant; |
| - | upon not less than 30 days’ prior written notice to each IPO Warrant holder and |
| - | if and only if, the last reported price of the Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30 trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the IPO Warrant holders. |
The Company determined the initial fair value of its Public Warrants based on the publicly listed trading price as of the valuation date. Accordingly, the Public Warrants are classified as Level 1 financial instruments. As the terms of the Private Warrants are identical to those of the Public Warrants except as otherwise stated above, the Company determined the initial fair value of its Private Warrants based on the publicly listed trading price of the Public Warrants as of the valuation date and have classified the Private Warrants as Level 2 financial instruments.
Warrant Liabilities– Pursuant to the amended Term Loan agreement entered on October 15, 2021 (see Note 5), the Company concurrently entered into warrant agreements and issued the Term Loan Warrants, which granted the lender the right to purchase up to 62,003 of Holdings LLC’s common units at the exercise price of $0.01 any time prior to the earlier of the tenth anniversary of the issuance date of October 15, 2021, or certain triggering events, including a sale of Holdings LLC, Holding LLC’s initial public offering and a merger between Holdings LLC and a special purpose acquisition company (“SPAC”), where the warrants are fully redeemed or exchanged. The Company determined that the Term Loan Warrants required liability classification pursuant to ASC 480 Distinguishing Liabilities from Equity. As such, the outstanding Term Loan Warrants were recognized as warrant liabilities on the consolidated balance sheets and were measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income (expense) on the consolidated statements of operations. The Company measured the fair value of the Term Loan Warrants as of the Closing Date and December 31, 2021, and recognized $1.8 million and $1.3 million of warrant liabilities in the Company’s consolidated balance sheets as of such dates, respectively, with the difference of $0.5 million recorded as other expense on the condensed consolidated statement of operations for the nine months ended September 30, 2022. The impact to the condensed consolidated statements of operations from the changes in the fair value of the Term Loan Warrants was insignificant for the three months ended September 30, 2022. The Term Loan Warrants were converted into Class A Common Stock and Class B Units and reclassified from liability to the stockholders’ deficit upon the consummation of the Mergers.
Pursuant to the Subordinated Term Loan agreement entered on December 22, 2021 (see Note 5), the Company concurrently entered into warrant agreements and issued the Subordinated Term Loan Warrants under the condition that if the Company doesdid not repay the Subordinated Term Loan on or prior to the original maturity date of December 22, 2022, the lender receiveswould receive the right to purchase up to the number of Class A Common Stock worth $2.0 million at the exercise price of $0.01 any time after the maturity date prior to the earlier of the date principal and interest on all outstanding term loans under this Subordinated Term Loan agreement are repaid, orand the tenth anniversary of the issuance date. Additionally, if the Company doesdid not repay the Subordinated Term Loan on or prior to the maturity date, the Subordinated Term Loan Warrants willwould be exercisable for additional $0.2 million of Class A Common Stock each additional full calendar month after the maturity date until the Company fully repays the principal and interest in cash.cash (the “Additional Subordinated Term Loan Warrants”). If the Company repaysrepaid the Subordinated Term Loan on or prior to the maturity date, the Subordinated Term Loan Warrants willwould automatically terminate and be voided and no Subordinated Term Loan Warrant willwould be exercisable.
On November 18, 2022, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements, which (i) increased the number of Class A Common Stock the lender has the right to purchase with the Subordinated Term Loan Warrants to such number of Class A Common Stock worth $2.6 million, (ii) caused the Subordinated Term Loan Warrants to be immediately exercisable upon execution of the amended Subordinated Term Loan Warrants agreements, and (iii) increased the value of Class A Common Stock the Additional Subordinated Term Loan Warrants would earn each additional full calendar month after March 22, 2023 to $0.25 million until the Company repays the Subordinated Term Loan in full.
On March 22, 2023, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements, which increased the value of Class A Common Stock the Additional Subordinated Term Loan Warrants earn each additional full calendar month after March 22, 2023 to $0.35 million until the Company repays the Subordinated Term Loan in full.
On June 7, 2023, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements, which amended the value of Class A Common Stock the Additional Subordinated Term Loan Warrants earn for the full calendar month starting June 23, 2023 to $0.38 million and such amount to increase by $25,000 each additional full calendar month thereafter until the Company repays the Subordinated Term Loan in full.
The Company determined that the Subordinated Term Loan Warrants required liability classification pursuant to ASC 480 Distinguishing Liabilities from Equity. The Company measured480. As such, the fair value of theoutstanding Subordinated Term Loan Warrants were recognized as warrant liabilities on the consolidated balance sheets, measured at their inception date fair value and subsequently remeasured at each reporting period with changes in fair value being recorded as a component of Septemberother income (expense) on the consolidated statements of operations. On December 21, 2022, the outstanding Subordinated Term Loan Warrants were converted to 1,092,417 shares of Class A Common Stock and reclassified from liability to the stockholders’ stockholders’ (deficit) equity. In June 2023, the outstanding Additional Subordinated Term Loan Warrants in amount of $1.1 million were exercised and converted to 2,559,375 shares of Class A Common Stock and reclassified from liability to stockholders’ (deficit) equity. As of June 30, 20222023 and December 31, 2021, and recognized $0.1 million and $0.1 million of warrant liabilities in2022, no Subordinated Term Loan Warrants were outstanding. The impact to the accompanying condensed consolidated balance sheets, respectively. The impact to the condensed consolidated statementsstatement of operations from the changes in the fair value of the Subordinated Term Loan Warrants was insignificant for the three months and the ninesix months ended SeptemberJune 30, 2023 and 2022. During
Pursuant to ASC 815, the nine months ended September 30, 2022 andCompany determined that the year ended December 31, 2021, none of theAdditional Subordinated Term Loan Warrants were exercisable.
See Note 20 regardingare an embedded derivative. This derivative, referred to throughout as the amendment to“Additional Subordinated Term Loan Warrants agreementsDerivative,” is recorded in derivative liabilities on the accompanying condensed consolidated balance sheet as of June 30, 2023. The Company entered into on November 18, 2022.
performed fair value measurements for the Additional Subordinated Term Loan Warrants Derivative, which are described in Note 10—Equity Investment Agreement14. The fair value of the Additional Subordinated Term Loan Warrants Derivative is remeasured at each reporting period.
On May 25,November 30, 2022, the Company enteredissued a pre-funded warrant for a purchase price of $6.0 million which was paid by the Yorkville Investor upon issuance (the “YA Warrant”). The YA Warrant is exercisable into the Rubicon Equity Investment Agreement with certain investors, whereby, the investors have agreed to advance to the Company up to $8,000,000 and, upon consummation$20.0 million of the Mergers, and in exchange for the advancements, (a) the Company will cause to be issued up to 880,000 Class B Units of the Company and 160,000 shares of Class A Common Stock toat an exercise price of $0.0001 per share any time on or after the investorsearlier of (i) August 30, 2023, and (b) Sponsor will forfeit up to 160,000(ii) the date upon which all of the YA Convertible Debentures have been fully repaid by the Company or fully converted into shares of Class A Common Stock, in each case subject to actual amounts advanced by the investors. In accordance with the Rubicon Equity Investment Agreement, on May 25, 2022, the Company received $8,000,000 of cash from the investors.Stock. The Company determined that the Rubicon Equity Investment AgreementYA Warrant required liability classification pursuant to ASC 480 Distinguishing Liabilities from Equity.480. As such, the Rubicon Equity Investment Agreementoutstanding YA Warrant was recognized as simple agreement for future equity (SAFE) under current liabilitieswarrant liability on the consolidated balance sheets, measured at the agreement executionits inception date fair value and subsequently remeasured at each reporting period with changes being recorded as a component of other income (expense) on the consolidated statements of operations. The Company measured its fair value as of the agreement execution and recognized $8.8 million of simple agreement for future equity on the condensed consolidated balance sheets, with the $0.8 million difference between the fair value and the amount of cash received recorded as other expense on the condensed consolidated statements of operations. Between the agreement execution date and the Closing Date, there was no change in the fair value of the Rubicon Equity Investment Agreement. On August 15,YA Warrant as of June 30, 2023 and December 31, 2022, and recognized $20.0 million and $20.0 million of warrant liability on the Mergers closed,accompanying condensed consolidated balance sheets, respectively. The fair value of the YA Warrant did not change during the three and six months ended June 30, 2023. Since its issuance through June 30, 2023, the YA Warrant was not exercisable.
Pursuant to the YA SPA executed with the Yorkville Investor on November 30, 2022 (See Note 11), the Company issuedcommitted to issue a warrant to an advisor for certain professional services provided in connection with the issuance of the facilities (the “Advisor Warrant”). The Advisor Warrant granted the right to purchase up to 880,000 Class B Units and 160,000500,000 shares of Class A Common Stock at the exercise price of $0.01 any time prior to November 30, 2025. The Advisor Warrant was issued on January 16, 2023. Prior to the investorsissuance of the Advisor Warrant, pursuant to ASC 480, the Company recorded the related obligation as warrant liability on the consolidated balance sheets at its fair value as of the date the obligation incurred and Sponsor forfeited subsequently remeasured at each reporting period with changes in fair value being recorded as a component of other income (expense) on the consolidated statements of operations. Upon issuance of the Advisor Warrant on January 16, 2023, the Company remeasured the fair value of the Advisor Warrant and recognized $160,0000.1 million of loss on change in fair value of the Advisor Warrant as a component of other income (expense) on the accompanying condensed consolidated statement of operations for the six months ended June 30, 2023, and the remeasured Advisory Warrant was reclassified to stockholders’ (deficit) equity on the issuance date. Since the issuance through June 30, 2023, the Advisor Warrant was not exercised.
Pursuant to the June 2023 Term Loan agreement entered on June 7, 2023 (see Note 5), the Company concurrently entered into warrant agreements and issued the June 2023 Term Loan Warrants, which granted the lender the right to purchase up to 16,972,879 shares of Class A Common Stock.Stock (the June 2023 Term Loan Warrants Shares) at the exercise price of $0.01 any time before June 7, 2033. If at any time on or before December 7, 2024, the Company issues additional shares of common stock (excluding any shares of common stock or securities convertible into or exchangeable for shares of common stock under the Company’s equity incentive plans existing as of the issue date), the number of the June 2023 Term Loan Warrants Shares issuable upon exercise immediately prior to such common stock issuance will be proportionately increased such that the percentage represented by the June 2023 Term Loan Warrants Shares in the Company’s diluted common stock outstanding will remain the same. Additionally, the holders of the June 2023 Term Loan Warrants have the right to purchase up to the pro rata portion of any new common stock issuance by the Company up to $20.0 million in the aggregate, other than any issuance in connection with (i) any grant pursuant to any stock option agreement, employee stock purchase plan, or similar equity-based plan or compensation agreement, (ii) the conversion or exchange of any securities into shares of the Company’s common stock, or the exercise of any option, warrant, or other right to acquire such shares, (iii) any acquisition by the Company of the stock, assets, properties, or business, (iv) any merger, consolidation, or other business combination involving the Company, or any other transaction or series of transactions resulting in a change of control of the Company and (v) any stock split, stock dividend, or similar recapitalization transaction. The Company determined that the June 2023 Term Loan Warrants did not qualify for equity classification in accordance with ASC 815. As such, the June 2023 Term Loan Warrants were recognized as warrant liability on the consolidated balance sheets, measured at its inception date fair value and subsequently remeasured at each reporting period with changes in fair value being recorded as a component of other income (expense) on the consolidated statements of operations. The Company measured the fair value of the June 2023 Term Loan Warrants as of the issuance date of June 7, 2023 and June 30, 2023, and recognized $9.4 million and $9.8 million of warrant liability on the consolidated balance sheets, respectively, with the change in fair value of $0.4 million recognized as a component of other income (expense) on the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2023. Since the issuance through June 30, 2023, none of the June 2023 Term Loan Warrants were exercised.
Note 11—10—Forward Purchase Agreement
On August 4, 2022, the Company and ACM Sellerthe FPA Sellers entered into the Forward Purchase Agreement for an OTC Equity Prepaid Forward Transaction (the “Forward Purchase Transaction”). On November 30, 2022, the Company and the FPA Sellers entered into the FPA Termination Agreement and terminated the Forward Purchase Agreement. Pursuant to the terms of the Forward PurchaseFPA Termination Agreement, the FPA Sellers intended, but were not obligated, to purchase (a) Founder Class A Shares after the date of the Forward Purchase Agreement from holders of the Founder Class A Shares (other than Founder or affiliates of Founder) who elected to redeem Founder Class A Shares (such purchased Founder Class A Shares, the “Recycled Shares”) pursuant to redemption rights set forth in Founder’s amended and restated memorandum and articles of association (the “Governing Documents”) in connection with the Mergers (such holders, “Redeeming Holders”) and (b) Founder Class A Shares in an issuance from Founder at a price per Founder Class A Share equal to approximately $10.17 per share, the per-share redemption price as set forth in the Governing Documents (such Founder Class A Shares, the “Additional Shares” and, together with the Recycled Shares, the “Subject Shares”). Pursuant to the terms of the FPA Agreement, the aggregate number of Subject Shares could not exceed 15 million shares (the “Maximum Number of Shares”). In addition, the FPA Sellers purchased an additional 1 million Founder Class A Shares from other Redeeming Holders (the “Separate Shares”). The FPA Sellers may not beneficially own greater than 9.9% of the Common Stock on a post-Mergers pro forma basis.
Pursuant to the terms of the Forward Purchase Agreement, the FPA Sellers purchased 7,082,616 Founder Class A Shares, which included 6,082,616 Subject Shares and 1,000,000 Separate Shares, at the per-share redemption price prior to the closing of the Mergers, in exchange for the prepayment by Founder of $68.7 million out of the funds in Founder’s trust account that were to be received by(i) the Company at the Closing. The prepayment amount was calculated as (a) the per-share redemption price multiplied by the 6,082,616 Subject Shares, less (b) 50% of the product of the 6,082,616 Subject Shares multiplied by $1.33 (the “Prepayment Shortfall”) and (c) an amount equal to the product of Separate Shares multiplied by the per-share redemption price. The FPA Sellers did not purchase any Additional Shares.
From time to time following the Closing, the FPA Sellers, in their discretion, may sell the Subject Shares, the effect of which is to terminate the Forward Purchase Agreement in respect of such Subject Shares sold (the “Terminated Shares”) and repay to the Companymade a portion of the forward price, in amounts corresponding to the number of shares sold. The Forward Purchase Agreement is to mature on the earlier of (a) the third anniversary of the Closing and (b) the date specified by the FPA Sellers at the FPA Sellers’ discretion after the occurrence of a VWAP Trigger Event (the “FPA Maturity Date”). A VWAP Triggering Event occurs if (i) during the first 90 days following the Closing, the VWAP for 20 trading days during any 30 consecutive trading day period is less than $3.00 per share and (ii) from the 91st day following the Closing, the VWAP for 20 trading days during any 30 consecutive trading day period is less than $5.00 per share. At maturity, the Company is obligated to payone-time $6.0 million cash payment to the FPA Sellers an amount equalupon execution of the FPA Termination Agreement and agreed to make a $2.0 million payment to the product of (a) (x) the Maximum Number of Shares, less (y) the number of the Terminated Shares, plus (z) the number of the Subject Shares sold whereby the proceeds of such sales were applied as a Prepayment Shortfall, multiplied by (b) $2.00 (the “Maturity Consideration”). The Company is obligated to pay the Maturity ConsiderationFPA Sellers, which can be settled in cash or shares of Class A Common Stock withat the price per share equal toCompany’s sole option, on or around the average daily VWAP forearlier of (a) May 30, 2024 (the “FPA Lock-Up Date”), and (b) six months following 90% or more of the 30 trading days following the FPA Maturity Date. As of September 30, 2022, the FPA Sellers sold 93,310YA Convertible Debentures is repaid or converted into shares of Class A Common Stock that were Subject Shares covered(the “FPA Earlier Lock-Up Date”), (ii) the FPA Sellers forfeited and returned to the Company 2,222,119 shares of Class A Common Stock which the Company subsequently canceled, and further agreed not to transfer any of 2,140,848 shares of Class A Common Stock the FPA Sellers retained until the earlier of (a) the FPA Lock-Up Date, and (b) the FPA Earlier Lock-Up Date. The value of 2,222,119 shares of Class A Common Stock returned by the Forward Purchase Agreement.
In accordance with ASC 815, DerivativesFPA Seller and Hedging,subsequently canceled by the Company was $4.6 million as of the FPA Termination Agreement execution date, which was recognized in common stock – Class A and accumulated deficit on the consolidated balance sheet. The $2.0 million obligation (the “FPA Settlement Liability”) has determined that the forward option within the Forward Purchase Agreement is (i) a freestanding financial instrument and (ii) a derivative. This derivative, referred to throughout as the “forward purchase option derivative” is recorded as a liabilitybeen included in accrued expenses on the accompanying condensed consolidated balance sheetsheets as of SeptemberJune 30, 2022. The Company has performed fair value measurements for this derivative2023 and other long-term liabilities as of the Closing and as of September 30,December 31, 2022 which is described in Note 15. The Company will remeasure the fair value of the forward purchase option derivative each reporting period., respectively.
See Note 20 regarding certain subsequent event related to the Forward Purchase Agreement specific to the occurrence of a VWAP Trigger Event.
Note 12—11—Standby Equity Purchase AgreementYorkville Facilities
Standby Equity Purchase Agreement – On August 31, 2022, the Company entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, Ltd. (the “Yorkville Investor”).the Yorkville Investor, which was subsequently amended on November 30, 2022. Pursuant to the SEPA, the Company has the right to sell to the Yorkville Investor, from time to time, up to $200.0 million of shares of Class A Common Stock until the earlier of the 36-month anniversary of the SEPA, or untiland the date on which the facility has been fully utilized, subject to certain limitations and conditions set forth in the SEPA, including the requirement that there be an effective registration statement registering such shares and limitations on the volume of shares that may be sold. Shares will be sold to the Yorkville Investor at a price equal to 97% of the lowest daily VWAP of the Class A Common Stock during the three consecutive trading days immediately prior to any notice to sell such securities provided by the Company. The Yorkville Investor may not beneficially own greater than 9.99% of the outstanding shares of Class A Common Stock.Stock. Sales of Class A Common Stock to the Yorkville Investor under the SEPA, and the timing of any such sales, are at the Company’s option, and the Company is under no obligation to sell any securities to the Yorkville Investor under the SEPA. Pursuant to the SEPA, on August 31, 2022, the Company issued the Yorkville Investor 200,000 shares of Class A Common Stock, which represented an initial up-front commitment fee and was recognized in other income (expense) within the accompanying condensed consolidated statements of operations. The Company did not sell any shares of Class A Common Stock under the SEPA during the period between August 31, 2022 and SeptemberJune 30, 2022.2023.
Securities Purchase Agreement – On November 30, 2022, the Company entered into the YA SPA with the Yorkville Investor, where by the Company agreed to issue and sell to the Yorkville Investor (i) convertible debentures (the “YA Convertible Debentures”) in the aggregate principal amount of up to $17.0 million, which are convertible into shares of Class A Common Stock (as converted, the “YA Conversion Shares”), and (ii) the YA Warrant, which is exercisable into $20.0 million of shares of Class A Common Stock. Upon execution of the YA SPA, the Company (i) issued and sold to the Yorkville Investor (a) the First YA Convertible Debenture in the principal amount of $7.0 million for a purchase price of $7.0 million, and (b) the YA Warrant for a pre-funded purchase price of $6.0 million, and (ii) paid the Yorkville Investor a cash commitment fee in the amount of $2.0 million, with such amount being deducted from the proceed of the First YA Convertible Debenture, netting to $11.0 million in total proceeds. The Company issued the YA Warrant to utilize the proceed to fund the cost of the FPA Termination Agreement. See Note 5 for additional information regarding the First YA Convertible Debenture and Note 9 regarding the YA Warrant.
Pursuant to execution of the YA SPA, the Company made a $0.4 million payment in cash and committed to issue the Advisor Warrant for certain professional services provided by a third party professional service firm in connection with the issuance of the facilities. The Advisor Warrant was issued on January 16, 2023. See Note 9 for additional information regarding the Advisor Warrant. The cash payment and the Advisor Warrant were recognized as debt issuance cost upon execution of the YA SPA, YA Convertible Debentures and YA Warrant.
Pursuant to the YA SPA, the Yorkville Investor committed to purchasing a YA Convertible Debenture in the principal amount of $10.0 million for a purchase price of $10.0 million upon the Company satisfying certain conditions, including, among others, the Company’s registration statement is declared effective by the SEC for the underlying securities of the First YA Convertible Debenture and YA Warrant. Accordingly, as of the YA SPA execution date, the Company recognized a commitment asset in the amount of $2.1 million, which was included in other noncurrent assets on the accompanying condensed consolidated balance sheet as of December 31, 2022. The Second YA Convertible Debenture was issued and sold to the Yorkville Investor on February 3, 2023 and the commitment asset was reclassified to debt discount upon issuance of the Second YA Convertible Debenture. See Note 5 for additional information regarding the Second YA Convertible Debenture.
In accordance with ASC 815, the Company has determined that certain redemption feature within the YA Convertible Debentures is an embedded derivative. This derivative, referred to throughout as the “Redemption Feature Derivative” is recorded in derivative liabilities on the accompanying condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. The Company performed fair value measurements for this derivative as of the YA Convertible Debentures issuance dates, December 31, 2022 and June 30, 2023 which is described further in Note 14. The fair value of the Redemption Feature Derivative is remeasured each reporting period.
Note 13—12—Equity-based compensation
During the three and six months ended June 30, 2023 and 2022, the Company recorded stock-based compensation related to the 2014 and 2022 Plans (as defined below). As more fully described in Notes 1 and 3, the Company completed the Mergers with Founder on August 15, 2022, and all incentive units and phantom units under the 2014 Plan fully vested as of the Closing Date, and the original operating agreement was terminated and replaced by a new operating agreement consistent with the Company’s Up-C structure.
2014 Plan
The 2014 Profits Participation Plan and Unit Appreciation Rights Plan (the “2014 Plan”) was a Board-approvedboard-approved plan of Holdings LLC. Under the 2014 Plan, Holdings LLC had the authority to grant incentive and phantom units to acquire common units. Unit awards generally vestvested at 25%25.0% of the units on the one year anniversary of continued employment, with the remaining 75% vesting in equal monthly installments over the next three years, unless otherwise specified.
As further described in Note 3, upon consummation of the Mergers, all incentive units granted under the 2014 Plan vested and converted into the Class V Common Stock and all phantom units granted under the 2014 Plan converted into RSUs and DSUs which will vest into shares of Class A Common Stock on February 11, 2023.Stock. The unrecognized compensation cost related to the 2014 Plan that was remaining at the Closing was recognized as expense as of upon consummation of the Mergers.
Incentive Units – Calculating incentive unit compensation expense required the input of highly subjective assumptions pertaining to the fair value of its units. The Company utilized an independent valuation specialist to assist with the Company’s determination of the fair value per unit. The methods used to determine the fair value per unit included discounted cash flow analysis, comparable public company analysis, and comparable acquisition analysis. In addition, the probability-weighted expected return method was used and multiple exit scenarios were considered. The assumptions used in calculating the fair value of incentive unit awards represented the Company’s best estimates, but these estimates involved inherent uncertainties and the application of management’s judgment. The Company estimated volatility based on a comparable market index and calculated the historical volatility for the index for a period of time that corresponded to the expected term of the incentive unit. The expected term was calculated based on the estimated time for which the incentive unit would be held by the awardee. The risk-free rate for periods within the contractual life of the incentive unit was based on the U.S. Treasury yield curve in effect at the time of the grant.
Management utilized the Black-Scholes-Merton option pricing model to determine the fair value of units issued. There were no incentive units granted during the nine months ended September 30, 2022. Compensation expense for all incentive units awarded to date was recognized over the vesting term of the underlying incentive units.
The following represents a summary of the Company’s incentive unit activity and related information during 2022 immediately prior to the consummation of the Mergers:
Schedule Of Incentive Unit Activity | | | | |
| | Units | |
Outstanding - January 1, 2022 | | | 3,084,650 | |
Granted | | | - | |
Forfeited | | | (14,499 | ) |
Outstanding – August 15, 2022 | | | 3,070,151 | |
| | | | |
Vested – August 15, 2022 | | | 3,070,151 | |
A summary of nonvested incentive units and changes during 2022 immediately prior to the consummation of the Mergers follows:
| Schedule Of Non vested Incentive Units | | | | | | | | |
| | | Units | | | Weighted Average
Grant Date Fair Value | |
| Nonvested - January 1, 2022 | | | 198,210 | | | $ | 10.25 | |
| Granted | | | - | | | | - | |
| Vested | | | (183,711 | ) | | | 10.25 | |
| Forfeited | | | (14,499 | ) | | | - | |
| Nonvested – August 15, 2022 | | | - | | | $ | - | |
Holdings LLC was authorized to issue phantom units to eligible employees under the terms of the Unit Appreciation Rights Plan. The Company estimated the fair value of the phantom units as of the end of each reporting period and expensed the vested fair market value of each award. The fair value of the phantom units was measured using the same independent valuation assessment as the incentive units.
The Company did not award any phantom units during the nine months ended September 30, 2022. At the Closing of the Mergers, all vested and unvested phantom units were exchanged for 970,389 vested RSUs and 540,032 vested DSUs.
2022 Plan
The 2022 Equity Incentive Plan (the “2022 Plan”), which became effective on August 15, 2022 in connection with the Closing, provides for the grant to certain employees, officers, non-employee directors and other services providers of options, stock appreciation rights, RSUs, restricted stock and other stock-based awards, any of which may be performance-based, and for incentive bonuses, which may be paid in cash, Common Stock or a combination thereof, as determined by the Company’s Compensation Committee. Under the 2022 Plan, 29,000,000 shares of Class A Common Stock are authorized to be issued. Subject to BoardUpon approval anby the Company’s board of directors, additional 2,485,7112,859,270 shares of Class A Common Stock will bebecame available for issuance on January 1, 2023 under the 2022 Plan as a result of the plan’s evergreen provision.
The following represents a summary of the Company’s RSU activity and related information during 2022 immediately after the consummation of the Mergers:six months ended June 30, 2023:
Schedule of RSUs | | | | |
| | RSUs | |
Outstanding – August 15, 2022 (prior to the Mergers consummation) | | | - | |
Granted – Phantom Unit exchanges | | | 970,389 | |
Granted – Morris Employment Agreement | | | 4,821,358 | |
Granted – Partial settlement of Management Rollover Consideration | | | 3,561,469 | |
Forfeited | | | - | |
Outstanding – August 15, 2022 (subsequent to the Mergers consummation) | | | 9,353,216 | |
| | | | |
Vested – August 15, 2022 (subsequent to the Mergers consummation) | | | 970,389 | |
| Schedule of RSUs activity | | | | | | | | |
| | | Units | | | Weighted Average Grant Date Fair Value | |
| Nonvested – December 31, 2022 | | | 1,456,695 | | | $ | 1.98 | |
| Granted | | | 15,138,947 | | | | 1.05 | |
| Vested | | | (7,626,353 | ) | | | 1.14 | |
| Forfeited/redeemed | | | (322,010 | ) | | | 1.87 | |
| Nonvested – June 30, 2023 | | | 8,647,279 | | | $ | 1.09 | |
The RSUs exchanged for phantom units vested upon the Closing of the Mergers. The remaining RSUs will vest over the requisite servicesservice periods ranging from six to thirty-six months from the grant date.
The Company recognized $90.61.8 million and $0.82.1 million in total equity compensation costs, duringincluding phantom unit expense, for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The Company recognized $95.311.1 million and $3.44.8 million in total equity compensation costs, duringincluding phantom unit expense, for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.
Pursuant to an Employment Agreement with Mr. Nate Morris,The majority of RSUs settled during the Company’s former Chief Executive Officer, dated February 9, 2021 and amended on April 26, 2022 and August 10, 2022,six months ended June 30, 2023 were net share settled such that the Company is obligated to grant Mr. Morris an additional RSU awardwithheld shares with a value equalequivalent to $5.0the employees’ obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately $1.1 million and were based on the fair market value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments to the taxing authorities for employees’ tax obligations pertaining to the withheld shares were $1.0 million. As of June 30, 2023, there were 13,987,442 vested RSUs and 306,802 vested DSUs remaining which are expected to be settled in shares of Class A Common Stock on the grant date. Such RSUs shall become fully vested and non-forfeitable on the six-month anniversary of the Closing. The associated liability is presented as deferred compensation expense on the accompanying condensed consolidated balance sheet as of September 30, 2022. See Note 20 for further information.prior to December 31, 2023.
DeferredAs of June 30, 2023, the total unrecognized compensation cost recognized during the three months ended September 30, 2022 and 2021related to outstanding RSUs was $1.39.4 million, and $-0- million, respectively. Deferred compensation cost recognized duringwhich the nine months ended September 30, 2022 and 2021 was $Company expects to recognize over a weighted-average period of 1.30.9 million and $-0- million, respectively.years.
Note 14—13—Loss per share
Basic net loss per share of Class A Common Stock is computed by dividing net loss attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period from August 15, 2022 (the Closing Date) to Septemberthree and six months ended June 30, 2022.2023. Diluted net loss per share of Class A Common Stock is computed by dividing net loss attributable to the Company, adjusted for the assumed exchange of all potentially dilutive securities, by weighted average number of shares of Class A Common Stock outstanding adjusted to give effect to potentially dilutive shares.
Prior to the Mergers, the membership structure of Holdings LLC included units which had profit interests. The Company analyzed the calculation of loss per unit for periods prior to the Mergers and determined that it resulted in values that would not be meaningful to the users of these condensed consolidated financial statements. Therefore, net loss per share information hasis not been presented for periods prior to August 15, 2022. The basic and diluted loss per share for the three and nine months ended September 30, 2022 represent only the period from August 15, 2022 to September 30, 2022. Furthermore, sharesShares of the Company’s Class V Common Stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class V Common Stock under the two-class method hasis not been presented.
The computation of net loss per share attributable to Rubicon Technologies, Inc. and weighted-average shares of the Company’s Class A Common Stock outstanding for period from August 15, 2022 (the Closing Date) to Septemberthe three and six months ended June 30, 20222023 are as follows (amounts in thousands, except for share and per share amounts):
| Schedule of net loss per share | | | | | | | | | | | | |
| | | | Three Months Ended June 30,
2023 | | Six Months Ended June 30,
2023 | |
| Numerator: | | | | | | | | | | | |
| Net loss for the period from August 15, 2022 through September 30, 2022 | | $ | (34,741 | ) | |
| Less: Net loss attributable to non-controlling interests for the period from August 15, 2022 through September 30, 2022 | | | (16,933 | ) | |
| Net loss for the period from August 15, 2022 through September 30, 2022 attributable to Rubicon Technologies, Inc. – Basic and diluted | | $ | (17,808 | ) | |
| Net loss | | | $ | (22,817 | ) | | $ | (32,268 | ) |
| Less: Net loss attributable to non-controlling interests | | | | (9,615 | ) | | | (15,937 | ) |
| Net loss attributable to Rubicon Technologies, Inc | | | $ | (13,202 | ) | | $ | (16,331 | ) |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Weighted average shares of Class A Common Stock outstanding – Basic and diluted | | | 48,670,776 | | | | 106,211,259 | | | | 82,943,357 | |
| | | | | | | | | | | | | |
| Net loss per share attributable to Class A Common Stock – Basic and diluted | | $ | (0.37 | ) | | $ | (0.12 | ) | | $ | (0.20 | ) |
The Company’s potentially dilutive securities below were excluded from the computation of diluted loss per share as their effect would be anti-dilutive:
| - | 15,812,500 PublicIPO Warrants, Additional Subordinated Term Loan Warrants, Advisor Warrant, June 2023 Term Loan Warrants and 14,204,375 Private Warrants.YA Warrant. |
| - | 1,488,519Earn-Out Class A Shares.Interests. |
| - | 970,389 vested RSUs and 540,032 vested DSUs. |
| | |
| | Exchangeable Class V Common Stock |
| | |
| - | Potential settlements in Class A Common Stock of the YA Convertible Debentures, the Insider Convertible Debentures, the Third Party Convertible Debentures, the NZ Superfund Convertible Debentures, the June 2023 Term Loan, the FPA Settlement Liability and portion of fees for the PIPE Software Services Subscription (as defined in Note 15). |
Note 15—14—Fair value measurements
The following tables summarize the Company’s financial assets and liabilities measured at fair value on recurring basis by level within the fair value hierarchy as of the dates indicated (in thousands):
Schedule of assets and liabilities measured at fair value on recurring basis | | | | | | | | | | | | |
| | September 30, 2022 | |
Liabilities | | Level 1 | | | Level 2 | | | Level 3 | |
Forward purchase option derivative | | | - | | | | - | | | | (8,205 | ) |
Earn-out liabilities | | | - | | | | - | | | | (7,000 | ) |
Warrant liabilities | | | - | | | | - | | | | (100 | ) |
Total | | | - | | | | - | | | | (15,305 | ) |
| Schedule of assets and liabilities measured at fair value on recurring basis | | | | | | | | | | | | |
| | | As of June 30, 2023 | |
| Liabilities | | Level 1 | | | Level 2 | | | Level 3 | |
| Warrant liabilities | | $ | - | | | $ | (29,795 | ) | | $ | - | |
| Redemption Feature Derivative | | | - | | | | - | | | | (2,231 | ) |
| Additional Subordinated Term Loan Warrants Derivative | | | - | | | | - | | | | (12,816 | ) |
| Earn-out liabilities | | | - | | | | - | | | | (310 | ) |
| Total | | $ | - | | | $ | (29,795 | ) | | $ | (7,165 | ) |
| | | | | | | | | | | | |
| | December 31, 2021 | |
Liabilities | | Level 1 | | | Level 2 | | | Level 3 | |
Warrant liabilities | | | - | | | | - | | | | (1,380 | ) |
Deferred compensation – phantom units | | | - | | | | - | | | | (8,321 | ) |
Total | | | - | | | | - | | | | (9,701 | ) |
| Level 3 Rollfoward | | Forward purchase option derivative | | | Earn-out liabilities | | | Warrant liabilities | | | Deferred compensation – phantom units | |
| Beginning balances | | | - | | | | - | | | | (1,380 | ) | | | (8,321 | ) |
| Additions | | | 16,615 | | | | (74,100 | ) | | | - | | | | - | |
| Changes in fair value | | | (24,820 | ) | | | 67,100 | | | | (436 | ) | | | (6,783 | ) |
| Reclassified to equity | | | - | | | | - | | | | 1,716 | | | | 15,104 | |
| Ending balances | | | (8,205 | ) | | | (7,000 | ) | | | (100 | ) | | | - | |
| | | | | | | | | | | | | |
| | | As of December 31, 2022 | |
| Liabilities | | Level 1 | | | Level 2 | | | Level 3 | |
| Warrant liabilities | | $ | - | | | $ | (20,890 | ) | | $ | - | |
| Redemption Feature Derivative | | | - | | | | - | | | | (826 | ) |
| Earn-out liabilities | | | - | | | | - | | | | (5,600 | ) |
| Total | | $ | - | | | $ | (20,890 | ) | | $ | (6,426 | ) |
| Level 3 Rollfoward | | Redemption
Feature
Derivative | | | Additional
Subordinated
Term Loan
Warrants
Derivative | | | Earn-out
liabilities | |
| December 31, 2022 balances | | $ | (826 | ) | | $ | - | | | $ | (5,600 | ) |
| Additions | | | (474 | ) | | | (2,887 | ) | | | - | |
| Changes in fair value | | | (2,198 | ) | | | - | | | | 4,820 | |
| March 31, 2023 balances | | | (3,498 | ) | | | (2,887 | ) | | | (780 | ) |
| Additions | | | - | | | | (9,377 | ) | | | - | |
| Changes in fair value | | | 1,267 | | | | (1,602 | ) | | | 470 | |
| Reclassified to level 2 | | | - | | | | 1,050 | | | | - | |
| June 30, 2023 balances | | $ | (2,231 | ) | | $ | (12,816 | ) | | $ | (310 | ) |
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and contract assets and liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value table above.
Warrant liabilities – The warrant liabilities were classified to level 2 as of June 30, 2023 and December 31, 2022. The outstanding warrants which were classified as warrant liabilities as of June 30, 2023 were the YA Warrant and the June 2023 Term Loan Warrants. In addition, as of December 31, 2022, the Advisor Warrants were classified as warrant liabilities as their terms were not determined at that time. The Advisor Warrants were reclassified to equity on January 16, 2023. The sole underlying asset of the outstanding warrant liabilities as of June 30, 2023 and December 31, 2022 was Class A Common Stock, which is an observable input, however the value of the warrants themselves were not directly or indirectly observable. The fair value of the forward purchase option derivativewarrant liabilities were determined based on price of the underlying share and the terms of each warrant, specifically whether each warrant is exercisable for a fixed number of shares of Class A Common Stock hence the value of the total shares a warrant is exercisable for is variable, or a fixed value of shares of Class A Common Stock thus the number of the total shares a warrant is exercisable for is variable. The exercise prices of the liability-classified warrants which were outstanding as of June 30, 2023 and December 31, 2022 were minimal ($0.01 per Class A Common Stock share for the Advisor Warrants and the June 2023 Term Loan Warrants and $0.0001 per Class A Common Stock share for the YA Warrant) and did not have significant impact to the fair value measurements of these warrants. See Note 9 for further information regarding the warrant liabilities.
Redemption Feature Derivative – The Redemption Feature Derivative’s fair value was estimated using a Monte-Carlo Simulationsingle factor binomial lattice model (the “Lattice Model”). The Lattice Model estimates fair value based on changes in the price of the underlying equity over time. It assumes that the stock price can only go up or down at each point in time, and it considers the likelihood of each outcome using a risk-neutral probability framework. Specifically,
The Lattice Model the futureCompany utilized is a single-factor model, which means it only considers uncertainty related to the Company’s stock price is simulated assuming a Geometric Brownian Motion (“GBM”). For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted at the term-matched risk-free rate. Finally,price. It calculates the value of the forward is calculatedoption to convert the YA Convertible Debentures into Class A Common Stock using a binomial tree structure and backward induction. The payoffs of the YA Convertible Debentures were computed via backward induction and discounted at a blended rate. The key inputs to the Lattice Model are the yield of a hypothetical identical note without the conversion features, and the volatility of common stock.
The following table provides quantitative information of the key assumptions utilized in the Redemption Feature Derivative fair value measurements as of measurement dates:
| Schedule of derivative fair value measurements | | | | | | | | | | | | |
| | | As of June 30, 2023 | | | As of February 3,
2023 | | | As of December 31,
2022 | |
| Price of Class A Common Stock | | $ | 0.37 | | | $ | 1.56 | | | $ | 1.78 | |
| Risk-free interest rate | | | 5.41 | % | | | 4.63 | % | | | 4.60 | % |
| Yield | | | 13.4 | % | | | 13.6 | % | | | 15.6 | % |
| Expected volatility | | | 50.0 | % | | | 50.0 | % | | | 50.0 | % |
As of December 31, 2022, the average present value over all simulated paths.Redemption Feature Derivative outstanding was a derivative embedded in the First YA Convertible Debenture. On February 3, 2023, the Second YA Convertible Debenture was issued with identical terms to the First YA Convertible Debenture, except for the principal amount, purchase price and the fixed conversion price. The Company measured and recognized the fair value of the forward purchase option derivativeRedemption Feature Derivative as of December 31, 2022, February 3, 2023 which is the Closing DateSecond YA Convertible Debenture issuance date, March 31, 2023 and SeptemberJune 30, 2022,2023 in derivative liabilities on the consolidated balance sheets, with the respective fair value adjustmentsadjustment recorded withinin loss on change in fair value of derivatives as a component of other income (expense) on the accompanying condensed consolidated statementstatements of operations.
Additional Subordinated Term Loan Warrants Derivative – The Additional Subordinated Term Loan Warrants Derivative’s fair value was estimated using a discounted cashflow/expected present value method. The value the Additional Subordinated Term Loan Warrants earn was $0.35 million for each additional full calendar month after March 22, 2023 through June 22, 2023, and starting June 23, 2023, the value the Additional Subordinated Term Loan Warrants earn increases by $25,000 for each additional full calendar month thereafter until the Company repays the Subordinated Term Loan in full. The key assumption utilized was the probability of the Subordinated Term Loan remaining unpaid through its maturity, which the Company determined to be approximately 75% as of March 22, 2023, which was the execution date of the second amendment to the Subordinated Term Loan, and approximately 100% as of June 30, 2023. As of June 30, 2023, the Company applied a discount rate of 15.0% to calculate the present value of the Additional Subordinated Term Loan Warrants Derivative. The Company measured and recognized fair value for the Additional Subordinated Term Loan Warrants Derivative as of the execution dates of the first (November 18, 2022), second (March 22, 2023) and third amendments (June 7, 2023) to the Subordinated Term Loan Warrants agreements, December 31, 2022, March 31, 2023 and June 30, 2023 in derivative liabilities on the consolidated balance sheets, with the respective fair value adjustment recorded in loss on change in fair value of derivatives as a component of other income (expense) on the consolidated statements of operations.
Earn-out liabilities – For the contingent consideration related to the Earn-Out Interests, the fair value was estimated using a Monte-Carlo Simulation in which the fair value was based on the simulated stock price of the Company over the maturity date of the contingent consideration. The key inputs used in the determination of the fair value included current stock price, expected volatility, and expected term.
The following table provides quantitative information of the key assumptions utilized in the earn-out liabilities fair value measurements as of measurement dates:
| Schedule of derivative fair value measurements | | | | | | | | |
| | | As of June 30,
2023 | | | As of December 31,
2022 | |
| Price of Class A Common Stock | | $ | 0.37 | | | $ | 1.78 | |
| Risk-free interest rate | | | 4.30 | % | | | 4.00 | % |
| Expected volatility | | | 75.0 | % | | | 65.0 | % |
| Expected remaining term | | | 4.1 years | | | | 4.6 years | |
The Company measured and recognized the fair value of the Earn-Out Interests as of December 31, 2022, March 31, 2023 and June 30, 2023 in earn-out liabilities on the Closing Date and September 30, 2022,consolidated balance sheets, with the respective fair value adjustmentsadjustment recorded withinin gain on change in fair value of earn-out liabilities as a component of other income (expense) on the accompanying condensed consolidated statementstatements of operations.operations for the three and six months ended June 30, 2023.
Note 16—15—Commitments and contingencies
Legal Matters
In the ordinary course of business, the Company is or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour and other claims.
The Company makes a provision for a liabilityliabilities relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. The outcomes of legal proceedings and other contingencies are, however, inherently unpredictable and subject to significant uncertainties. At this time, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces, and the Company’s estimates may not prove to be accurate.
In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s condensed consolidated resultsstatements of operations, cash flows or financial position.balance sheets. However, depending on the nature and timing of any such dispute or other contingency, an unfavorable resolution of a matter could materially affect the Company’s current or future results of operations or cash flows, or both.
Leases
The Company leases its office facilities under operating lease agreements expiring through 2031. While each of the leases includes renewal options, the Company has only included the base lease term in its calculation of lease assets and liabilities as it is not reasonably certain to utilize the renewal options. The Company does not have any finance leases.
The following table presents information regarding the maturities of the undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented on the SeptemberJune 30, 20222023 condensed consolidated balance sheet (in thousands).
| Schedule of operating lease payments | | | | | | | |
| Years Ending December 31, | | | | | | |
| 2022 | | $ | 563 | | |
| 2023 | | | 2,276 | | | 1,151 | |
| 2024 | | | 1,228 | | | 1,228 | |
| 2025 | | | 151 | | | 151 | |
| 2026 | | | 152 | | | 152 | |
| 2027 | | | 154 | |
| Thereafter | | | 732 | | | | 578 | |
| Total minimum lease payments | | $ | 5,102 | | | 3,414 | |
| Less: Imputed interest | | | (930 | ) | | | (640 | ) |
| Total operating lease liabilities | | $ | 4,172 | | | $ | 2,774 | |
Note 17—Operating lease amounts above do not include sublease income. The Company has entered into a sublease agreement with a third party. Under the agreement, the Company expects to receive sublease income of approximately $Related party transactions0.8 million over the next two years.
Software services subscription
The Company entered into a certain software services subscription agreement with Palantir Technologies, Inc.a certain PIPE Investor (the “PIPE Software Services Subscription”), including related support and update services on September 22, 2021. The Company subsequently amended the agreement on December 15, 2021.2021, March 6, 2023, March 28, 2023 and June 27, 2023. The term of the amended agreement is through December 31, 2024. Pursuant to the agreement, asAs of SeptemberJune 30, 2022, the Company is committed to pay2023, $15.516.9 million will become due in the next 12 months and $18.8$7.5 million thereafter through October 2024. Palantir Technologies, Inc. was a PIPE InvestorPursuant to the amended agreement, the Company settled the $3.8 million subscription fee for the service period between January 1, 2023 and purchased $35.0 million ofJune 30, 2023 in Class A Common Stock at $10.00 per share onStock. Additionally, the Closing Date.amended agreement provides the Company with the option, in its sole discretion, to settle the $7.5 million subscription fees which are scheduled to become due between July 2023 and December 2023 in (i) cash or (ii) the Company’s equity or debt securities.
Note 18—16—ConcentrationsRelated party transactions
During the three months ended September 30,Convertible debentures – On December 16, 2022, and 2021, the Company had two significant customers that accounted for approximately 24%issued the Insider Convertible Debentures, which were subsequently amended, and 31% of total revenues, respectively. Duringentered into the nine months ended September 30, 2022 and 2021, the Company had two significant customers that accounted for approximately 27% and 29% of total revenues, respectively. As of September 30, 2022 and December 31, 2021, approximately 22% and 23%, respectively,Insider Lock-Up Agreement with certain members of the Company’s accounts receivablemanagement team and contract assets were due from these two customers.board of directors, and certain other existing investors of the Company.
Note 19—Liquidity
DuringOn February 1, 2023, the nine months ended September 30, 2022,Company issued the NZ Superfund Convertible Debenture, which was subsequently amended, and in each fiscal year sinceentered into the Company’s inception, it has incurred losses from operations and generated negative cash flows from operating activities. The Company also has negative working capital and stockholders’ deficit as of September 30, 2022.NZ Superfund Lock-Up Agreement with NZ Superfund.
As of September 30, 2022, cash and cash equivalents totaled $See Note 5 for further information regarding these transactions.
4.5 million, accounts receivable totaled $58.7 million and unbilled accounts receivable totaled $62.8 million. Availability under the Revolving Credit Facility, which provides the ability to borrow up to $60.0 million, was $21.2 million. Pursuant to the SEPA,
Chico PIPE Agreements – On March 16, 2023, the Company hasentered into subscription agreements (the “Chico PIPE Agreements”) with Jose Miguel Enrich, Andres Chico and Felipe Chico Hernandez pursuant to which the right to sell up to $Company issued 200.01,222,222 million of shares of Class A Common Stock toin exchange for the Yorkville Investor, subject to certain limitations and conditions set forth in the SEPA, including the requirement that there be an effective registration statement registering such shares for resale and limitations on the volume of shares that may be sold. Additionally, because shares issued under the SEPA are sold at a discount to the then-current markettotal purchase price in light of the current market price and the NYSE rules limiting the number of shares that can be issued without the approval of the Company’s shareholders, the amount that could currently be raised pursuant to the SEPA is significantly lower than $200.0 million. Furthermore, the amended Term Loan agreement entered into on November 18, 2022 requires the Company to repay the Term Loan with any net proceeds provided by the SEPA until such time that the Term Loan is repaid in full (see Note 20). The Company's outstanding indebtedness includes the Revolving Credit Facility, the Term Loan and the Subordinated Term Loan, under which the principal of $36.21.1 million, $51.0 millionmillion. The Chico PIPE Agreements include resale restrictions in addition to customary terms, representations, and $20.0 million, respectively, were outstanding as of November 15, 2022 and are scheduled to mature in December 2023.warranties.
The Company currently projects that it will not have sufficient cash on hand or available liquidity under existing arrangements to meet the Company’s projected liquidity needs for the next 12 months. In the absence of additional capital, there is substantial doubt about the Company’s ability to continue as a going concern.
To address the Company’s projected liquidity needs for the next 12 months, the Company has negotiated and received a binding commitment for $30.0 million of additional financing (the “Financing Commitment”), pursuant to which certain existing investors agreed to contribute cash up to the $30.0 million commitment amount to the extent other equity capital of an equivalent amount has not been provided to the Company by January 15,March 2023 (see Note 20). In addition to the proceeds from the Financing Commitment the Company has begun to execute its plans to modify its operations to further reduce spending. Initiatives the Company has undertaken in the fourth quarter of 2022 include (i) increased focus on operational efficiencies and cost reduction measures, (ii) eliminating redundancies that have been the byproduct of the Company’s recent growth and expansion, (iii) evaluating the Company’s portfolio and less profitable accounts to better ensure the Company is deploying resources efficiently, and (iv) exercising strict capital discipline for future investments, such as requiring investments to meet minimum hurdle rates.
The Company believes that the extended maturity of the Revolving Credit Facility and the Financing Commitment along with cash on hand and available under the Revolving Credit Facility, and other cash flows from operations are expected to provide sufficient liquidity to meet the Company’s known liquidity needs for the next 12 months. The Company believes this plan is probable of being achieved and alleviates substantial doubt about the Company’s ability to continue as a going concern.
Note 20—Subsequent events
– On October 13, 2022 (the “Transition Date”),March 20, 2023, the Company entered into a CEO Transition Agreementfinancing commitment with Mr. Nate Morris,a certain entity affiliated with Andres Chico and Jose Miguel Enrich whereby the former Chief Executive Officer (the “CEO”)entity or a third party entity designated by the entity intends to provide $15.0 million of the Company. Pursuantfinancing to the CEO Transition Agreement, Mr. Morris ceased serving asCompany through the Company’s CEO, but continued his role as Chairmanissuance by the Company of debt and/or equity securities including, without limitation, shares of capital stock, securities convertible into or exchangeable for shares of capital stock, warrants, options, or other rights for the Boardpurchase or acquisition of the Directorssuch shares and other ownership or profit interests of the Company (the “Board”) and was given the title of Founder, Chairman and Strategic Advisor through February 10,“March 2023 (the “End Date”Financing Commitment”). Mr. Morris will also continue to serve as a member of the Board until the earlier of (a) the first anniversary of the Transition Date, (b) the date of the Company’s annual shareholder meeting in 2023, and (c) the 10th day following notice by Mr. Morris that he intends to resign from the Board. The Company will make a series of transition payments to Mr. Morris in the aggregate amount of $1.9 million between the Transition Date and the End Date and pay Mr. Morris a $0.7 million bonus on the End Date with respect to his service in 2022. Additionally, in lieu of any obligation to deliver RSUs to the Mr. Morris pursuant to his Employment Agreement described in Note 13, the Company granted Mr. Morris 8,378,986 RSUs on October 19, 2022Any debt issued pursuant to the CEO Transition Agreement.
In October 2022,March 2023 Financing Commitment would have a VWAP Trigger Event occurredterm of at least 12 months and any equity or equity linked securities issued under the Forward Purchase Agreement could matureMarch 2023 Financing Commitment would have a fixed price such that no other shareholder or other exchange approvals would be required. The amount the entity agreed to contribute under the March 2023 Financing Commitment was reduced on the date specifieda dollar-for-dollar basis by the FPA Sellers atamount of any other capital the FPA Sellers’ discretion. The FPA Sellers have not specifiedCompany receives through December 31, 2023. Pursuant to the Maturity Date of the Forward Purchase Agreement as of the issuance of these unaudited interim condensed consolidated financial statements.
On November 4, 2022,March 2023 Financing Commitment, the Company entered into an amended agreement for certain professional services provided in connection with the Mergers. Pursuant to the amended agreement, the Company agreed to settle the unpaid fees with $1.0 million paid in cash upon execution of the amendment, plus the Company will issue the advisor a variable number of shares of Class A Common Stock by November 18, 2022, in such an amount equal to $1.0 million based on the fair market value of Class A Common Stock. The Company had previously recognized $12.7 million for the related professional services within its accrued expenses as of September 30, 2022 on the accompanying unaudited interim condensed consolidated balance sheets. The difference of $10.7 million between the amount recognized in the accrued expense as of September 30, 2022May 2023 Equity Agreements (see below) and the settlementMarch 2023 Financing Commitment amount in the amended agreement was recognized as other income on the Company’s consolidated statement of operations on the execution date of the amended agreement.
reduced to $0.
The Rodina Note Conversion Agreement - On November 14, 2022,May 19, 2023, the Company entered into a bindingloan conversion agreement to convert the principal and accrued interest of the Rodina Note to Class A Common Stock. Pursuant to the agreement, in June 2023, the Company issued Class A Common Stock to the lender of the Rodina Note for a full and final settlement of the Rodina Note. See Note 5 for further information regarding the loan conversion agreement.
May 2023 Financing Commitment – On May 20, 2023, the Company entered into the May 2023 Financing Commitment with a certain existing investors,entity affiliated with Andres Chico and Jose Miguel Enrich whereby the investors intendentity, or a third party entity designated by the entity, intends to provide $30.0$25.0 million of financing to the Company through the issuance by the Company of debt and/or equity securities including, without limitation, shares of capital stock, securities convertible into or exchangeable for shares of capital stock, warrants, options, or other rights for the purchase or acquisition of such shares and other ownership or profit interests of the Company. Any debt issued pursuant to this letterthe May 2023 Financing Commitment would have a term of at least 12 months and any equity or equity linked securities issued under this letterthe May 2023 Financing Commitment would have a fixed price such that no other shareholder or other exchange approvals would be required. The amount the investorsentity agreed to contribute under the May 2023 Financing Commitment will bewas reduced on a dollar-for-dollar basis by the amount of any other equity capital the Company receives outside of the May 2023 Equity Agreements through January 15,December 31, 2023. The May 2023 Financing Commitment amount was reduced to $0 in conjunction with the executions of the June 2023 Revolving Credit Facility agreement and the June 2023 Term Loan agreement.
May 2023 PIPE Subscription Agreements - In May and June 2023, the Company entered into subscription agreements with various investors, including certain entities affiliated with Andres Chico and Jose Miguel Enrich, to issue Class A Common Stock in exchange for the total purchase price of $23.7 million (the “May 2023 Equity Agreements”). Pursuant to the May 2023 Equity Agreements, the Company issued 56,836,444 shares of Class A Common Stock in June 2023.
On November 17, 2022, Note 17—Concentrations
During the Company’s Board of Directors committed tothree and six months ended June 30, 2023, the Company had a reduction in force plan (the “Plan”) as partcustomer who individually accounted for approximately 21% and 18% of the Company’s measurestotal revenue, respectively. That customer was the only party who individually accounted for 10% or more of the Company’s total revenue for the three and six months ended June 30, 2023. During the three and six months ended June 30, 2022, the Company had two customers who individually accounted for 10% or more of the Company’s total revenue and together for approximately 26% and 29% of the total revenues, respectively. As of June 30, 2023, the Company had two customers who individually accounted for 10% or more of the Company’s total accounts receivable and contract assets, and together for approximately 37% of the total accounts receivable and contract assets, while as of December 31, 2022, the Company had three customers who individually accounted for 10% or more of the Company’s total accounts receivable and contract assets and together for approximately 38% of the total accounts receivable and contract assets.
Note 18—Liquidity
During the three and six months ended June 30, 2023, and in each fiscal year since the Company’s inception, it has incurred losses from operations and generated negative cash flows from operating activities. The Company also has negative working capital and stockholders’ deficit as of June 30, 2023. However, all of the warrant liabilities and derivative liabilities under current liabilities on the accompanying condensed consolidated balance sheets will be settled in Class A Common Stock.
To address liquidity needs, the Company entered into various financial arrangements during the three months ended June 30, 2023, including the June 2023 Revolving Credit Facility, the June 2023 Term Loan, the May 2023 Equity Agreements, maturity extensions of the Subordinated Term Loan, the Insider Convertible Debentures, the Third Party Convertible Debentures and the NZ Superfund Convertible Debenture and a conversion of the Rodina Note to Class A Common Stock. In addition, subsequent to June 30, 2023, the Yorkville Investors assigned the YA Convertible Debentures to certain existing investors of the Company and the debentures’ maturity date was extended (See Note 19). The Company has also been working to execute various initiatives to modify its operations to further reduce spending and preserveimprove cash availableflow.
In management’s opinion, the Company’s cash on hand, availability under the line of credit and the execution of the cost reduction initiatives will provide liquidity for the Company’s operations. The Plan involves a reduction of 55 employees, which is approximately 11% ofCompany for at least one year. However, there can be no assurance that the Company’s workforce. The Company currently estimates that it will incur one-time cash charges of approximately $0.6 million, primarily consisting of an estimated $0.5 million in severance payments, and $0.1 million in related costs. The Company expects that most of these charges will be incurredsuccessful in the fourth quarter of 2022,executing its cost reduction initiatives and that the reductionmay need to raise additional capital in force will be substantially complete by the end of 2022. In aggregate, over the next twelve months, the reduction in force is expected to result in approximately $5.5 million in annual cash savings for the Company.future periods.
Note 19—Subsequent events The Company may incur other charges or cash expenditures not currently contemplated due to unanticipated events that may occur as a result of or in connection with the implementation of the Plan.
On November 18, 2022,July 6, 2023, the Company issued 5,193,906 shares of Class A Common Stock to a certain PIPE Investor as the payment for the $1.9 million of the subscription fee from April 1, 2023 to June 30, 2023 in relation to the PIPE Software Services Subscription.
On July 11, 2023, the Company entered into an amendment to three of the Revolving Credit Facility agreement, inInsider Convertible Debentures, which the lender consentedextended their maturity date to the amendment to the Subordinated Term Loan agreement. The amendment also extended its term through December 14, 2023 and modified the interest rate the Revolving Credit Facility bears to SOFR plus 5.6%. Additionally, the Company committed to raise $5.0 million from the Financing Commitment or a similar commitment by November 23, 2022, and additional $25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date the Company’s S-1 filed with the SEC on August 22, 2022 becomes effective, or (ii) January 31, 2023.1, 2026.
On July 26, 2023, the Company terminated the operating lease for an office facility in Lexington, Kentucky.
On November 18, 2022, July 31, 2023, the Company entered into an amendment to the Term Loan agreement, in which the lender consented to the amendments to the Revolving Credit Facility agreement and the Subordinated Term Loan agreement. Additionally, the Company committed to raise $5.0 million from the Financing Commitment or a similar commitment by November 23, 2022, and additional $25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date the Company’s S-1 filed with the SEC on August 22, 2022 becomes effective, or (ii) January 31, 2023. The amended Term Loan agreement also requires the Company to cause the Yorkville Investor to purchase the maximum amountthree of the Company’s equity interests available under the SEPA andThird Party Convertible Debentures, which extended their maturity date to utilize the net proceeds from such drawdowns to repay the Term Loan until it is fully repaid. If the Company does not repay the Term Loan in full by March 27, 2023, the Company will be liable for an additional fee in the amount of $2.0 million, out of which $1.0 million will be due in cash on March 27, 2023, and the other $1.0 million will accrue to the principal balance of the Term Loan. Furthermore, beginning on March 27, 2023, an additional $0.15 million fee will accrue to the principal balance of the Term Loan each week thereafter until the Term Loan is fully repaid.December 1, 2026.
The Company may not use the SEPA to fund the new equity financing commitments it agreed to in the amendments to the Revolving Credit Facility and the Term Loan, and the financings used to satisfy the commitments under the Revolving Credit Facility amendment may be used to also satisfy the commitments under the Term Loan amendment.
On November 18, 2022,August 8, 2023, the Yorkville Investor assigned the YA Convertible Debentures to certain existing investors of the Company affiliated with Jose Miguel Enrich. Pursuant to the assignment agreement, the assignees assumed all of the Yorkville Investor’s duties, liabilities and obligations under the YA Convertible Debentures and the Yorkville Investor was discharged of all of such duties, liabilities and obligations. Subsequently, the Company and the assignees entered into an amendment to the Subordinated Term Loan agreement. The amendmentdebentures which (a) extended the Subordinated Term Loan maturity throughdate to December 31, 2023. Concurrently,1, 2026, (b) modified the Company entered into an amendmentfixed conversion price to $1.50 and (c) removed restrictions on the Subordinated Term Loan Warrants agreements, which (i) increased the numberassignees’ ability to convert any portion of Convertible Debentures or receive shares of Class A Common Stock if it would result in (i) the lender hasassignees beneficially owning in excess of 4.99% of the right to purchase withCompany’s Class A Common Stock and (ii) the Subordinated Term Loan Warrants to such numbergreater of (A) 25.0% of the dollar trading volume of the shares of Class A Common Stock worth $2.6during any calendar month or (B) $3.0 million ($2.0in any calendar month.
Subsequent to June 30, 2023, Yorkville Investor converted $5.9 million prior to the amendment), (ii) caused the Subordinated Term Loan Warrants to be immediately exercisable upon execution of the amended Subordinated Term Loan Warrants agreements,Second YA Convertible Debenture principal and (iii) increased the valuean insignificant amount of related accrued interest into 19,772,486 shares of Class A Common Stock the Subordinated Term Loan Warrants will earn each additional full calendar month after March 22, 2023 to $0.25 million ($0.2 million prior to the amendment) until the Company repays the Subordinated Term Loan in full.
Stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, all references in this section to “Holdings LLC” refer to the businessThe following discussion and operations of Rubicon Technologies Holdings, LLC (formerly known as Rubicon Technologies, LLC) and its subsidiaries, including those periods prior to the consummationanalysis of the Mergers. References to “Rubicon” or “the Company” refer to the businessfinancial condition and results of operations of Rubicon Technologies, Inc., following the consummation of the Mergers. References toa Delaware corporation (“Rubicon,” “we,” “us” or“us,” and “our” refer to Rubicon and Holdings LLC collectively. You), should be read the following discussion and analysis of our financial condition and results of operations together with theour unaudited interim condensed consolidated financial statements and the related notes appearingincluded elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, certain statements in thisThe following discussion arecontains forward-looking statements. TheseWords such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements are subjectrelate to numerous risks, uncertainties and assumptionsfuture events or future performance, but reflect management’s current beliefs, based on information currently available. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that couldmight cause Rubicon’s actualfuture results to differ materially from management’s expectations, including,those projected in the forward-looking statements include, but are not limited to, the risks and uncertainties discussed herein and under the caption “Cautionary Note Regarding Forward-Looking Statements.”Statements” in this report. We assume no obligation to update any of these forward-looking statements except as required by law.
Overview
We are a digital marketplace for waste and recycling services. Underpinning this marketplace is a cutting-edge, modular platform that powers a modern, digital experience and delivers data-driven insights and transparency for our customers and hauling and recycling partners. We provide our waste generator customers with a platform that delivers pricing transparency, self-service capabilities, and a seamless customer experience while helping them achieve their environmental goals; we enhance our hauling and recycling partners’ economic opportunities and help them optimize their businesses; and we help governments provide more advanced waste and recycling services that allow them to serve their local communities more effectively.
Over the past decade, this value proposition has allowed us to scale our platform considerably. Our digital marketplace now servicesserves over 8,000 customers, including numerous large, blue-chip customers such as Apple, Dollar General, Starbucks, Walmart, Chipotle, and FedEx, and encompasses over 8,000 hauling and recycling partners across North America. We have also deployed our technology in over 70100 municipalities withinin the United States and operate in 20 countries. Furthermore, we have secured a robust portfolio of intellectual property, having been awarded more than 5060 patents with over 100 pending, and 2015 trademarks.
We operate as one segment. See Note 1 – Nature of operations and summary of significant accounting policies, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Qreport for our discussion about segments.
Recent Developments
MergersJune 2023 Refinancing
On August 15, 2022,June 7, 2023, we consummatedentered into a $90.0 million June 2023 Revolving Credit Facility, a $75.0 million June 2023 Term Loan agreements and an amendment to the Mergers. The Mergers were accounted for akin to a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. GAAP. The Mergers had several significant impacts on our reported financial position$20.0 million Subordinated Term Loan agreement. Concurrently, we repaid the Revolving Credit Facility and results, as a consequence of the reverse recapitalization treatment.Term Loan and terminated the related agreements. See “—Liquidity and Capital Resources—Debt” below.
Insider Convertible Notes Amendment
At the consummation of the Mergers, holders of 24,178,161 Founder Class A Shares (or approximately 76.5% of the issued
In June and outstanding Founder Class A Shares on such date) exercised their right to redeem those shares for cash at a price of approximately $10.176 per share, resulting in an aggregate redemption payment of approximately $246.0 million from Founder’s trust account. Following these redemptions, at the Closing,July 2023, we received approximately $75.8 million from Founder’s trust account, without accounting for the payments of transaction costs, payments under the Forward Purchase Agreement and Cash Transaction Bonuses. As a result of consummation of the Mergers, and accounting for the foregoing redemption payments and receipt of funds from Founder’s trust account, the most significant changes in our financial position was a net increase in cash of approximately $73.8 million after accounting for payments of transaction and other costs of $25.3 million, aggregate payments of $68.7 millionentered into amendments to the FPA Sellers underInsider Convertible Debentures, Third Party Convertible Debentures and NZ Superfund Convertible Debenture which extended their maturity date to December 1, 2026 and modified the Forward Purchase Agreement, net proceeds of $121.0 million frominterest rate the PIPE Investment,NZ Superfund Convertible Debenture bears to 14.0%. See “—Liquidity and the payments by us of aggregate Cash Transaction Bonuses of $28.9 million. SeeCapital Resources—Debt” below.
Rodina Note 3, MergersConversion, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.
We expect to incur additional general and administrative expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, professional and other similar services. General and administrative expenses may fluctuate further as a result of acquisitions or other strategic transactions we undertake in the future.
In connection with the Mergers,On May 19, 2023, we entered into a Tax Receivable Agreement with certainloan conversion agreement to convert the principal and accrued interest of our legacy investors. We may be requiredthe Rodina Note to make significant payments inClass A Common Stock. On June 20, 2023, we converted the future under this agreement depending on the extent of certain tax benefitsRodina Note to Class A Common Stock for its full and other factorsfinal settlement. See “—Liquidity and these payments could have a material impact on our results of operations and liquidity. See “—Tax Receivable AgreementCapital Resources—Debt” below for additional information.below.
May 2023 Equity Agreements
Prior toIn May and following the Closing,June 2023, we entered into subscription agreements (the “May 2023 Equity Agreements”) with various investors, including certain entities affiliated with Andres Chico and Jose Miguel Enrich, pursuant to which Rubicon issued Class A Common Stock to each purchaser in exchange for the Forward Purchase Agreementtotal purchase price of $23.7 million. The May 2023 Equity Agreements include resale restrictions in addition to customary terms, representations, and the SEPA to provide for certain equity financing arrangements.warranties. See “—Liquidity and Capital Resources—Other Financing ArrangementArrangements” below for additional information regarding these facilities. below.
COVID-19YA Convertible Debentures Assignment and Amendment
The COVID-19 pandemic created significant global economic uncertainty, adversely impactedOn August 8, 2023, the business of our customersYorkville Investor assigned the YA Convertible Debentures to Rubicon’s certain existing investors affiliated with Jose Miguel Enrich. Subsequently, the assignees and partners, impacted our business, results of operations and cash flows and in the future could further impact our business, results of operations and our cash flows. In responsewe entered into an amendment to the COVID-19 pandemic, we proactively took stepsdebentures, which (a) extended the maturity date to put our employees’, customers’December 1, 2026, (b) modified the fixed conversion price to $1.50 and partners’ needs first(c) removed restrictions on the assignees’ ability to ensure that we could provide our services safely and efficiently.
As aconvert any portion of Convertible Debentures or receive shares of Class A Common Stock if it would result in (i) the assignees beneficially owning in excess of 4.99% of the pandemic, we experienced customer attritionCompany’s Class A Common Stock and (ii) the greater of (A) 25.0% of the dollar trading volume of the shares of Class A Common Stock during the second half of 2020 which caused a decline in service revenue during the first half of 2021 as compared to the same prior-year period; however, our revenues subsequently began to recover and for the second half of 2021, our service revenue increased by $21.7 million as compared to the second half of 2020. This trend has continued into 2022 with our service revenue increasing by $72.2 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Additionally, our sales and marketing activities and spend decreased during 2021 and 2020 as a result of pandemic-related cost-saving initiatives. Some sales and marketing activities, including hiring in the sales and marketing teams and team members’ attendance at business development conferences and meetings, resumed beginning in the first quarter of 2022, contributing to an additional $2.7any calendar month or (B) $3.0 million in sales and marketing expense for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.any calendar month.. See “—Liquidity and Capital Resources—Debt” belowbelow.
Mergers Transaction Fee Settlements
The balance of accrued expenses related to the transaction fees in connection with the Mergers (as defined below) as of December 31, 2022 was $13.4 million. On February 2, 2023, we settled $7.1 million of fees with an advisor for information regarding loans we received and that were forgiven undercertain professional services provided related to the Paycheck Protection Program.Mergers (as defined below) by issuing Class A Common Stock. On April 24, 2023, another advisor waived the remaining $6.4 million of the unpaid fees for certain professional services provided in connection with the Mergers. See “—Contractual Obligations” below.
Key Factors Affecting Our Performance
Financial results from our operations and the growth and future success of our business are dependent upon many factors. While each of these factors presents significant opportunities for us, these factorsthey also pose challenges that we must successfully address to sustain and grow our business. See also “—Key Metrics and Non-GAAP Financial Measures” below for a discussion of key business and non-GAAP metrics that we use to help manage and evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Industry trends and customers preference
The waste and recycling industry is highly regulated and complex, and public policy is increasingly focused on improving diversion from landfills and reducing emissions. Current policies tend to encourage and reward reductions in carbon dioxide emissions, and many major cities in the United States have promulgated climate action plans committing to achieve emissions reductions in line with the Paris Climate Accords.reductions. Additionally, the waste generators’ awareness of benefits achieved by improved diversion from landfills has been increasing, which we believe is and will continue drivingto drive preference for recycling over landfills. We view these trends as an opportunity to accelerate the growth of our business, including our revenue and profitability.
Commodity nature of our recycling program
Through our recycling program, we market a variety of materials, including fibers such as old corrugated cardboard (“OCC”), old newsprint (“ONP”), aluminum, glass, pallets and other materials. Currently, old corrugated cardboardOCC is the most significant material in our recycling program. Our recyclable commodity revenue is influenced by fluctuations in prices of the recyclable commodities. Periods of increasing prices generally provide the opportunity for higher revenue while periods of declining prices may result in declines in sales. For the reporting periods, the trend of the recyclable commodity prices was overall upwardgenerally downward and contributed to higherlower recyclable commodity revenue in the current year periods as compared to the prior year, though some commodities’ prices, including old corrugated cardboard, have declined during more recent periods. For the three months ended SeptemberJune 30, 20222023 and 2021,2022, our recyclable commodity revenue was $22.2$13.9 million and $22.0$24.3 million, respectively, and forrespectively. For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, our recyclable commodity revenue was $71.6$28.7 million and $54.3$49.4 million, respectively.
See Item 3We may use a number of Part I, “Quantitative and Qualitative Disclosures About Market Risk” and Analysis of Financial Condition and Results of Operations and Item 1A of Part II, “Risk Factors” included in elsewhere in this Quarterly Report on Form 10-Q for further discussion regardingstrategies to mitigate impacts from recyclable commodity price risk.fluctuations, including, entering into purchase contracts indexed to the recyclable commodity price such that we mitigate the variability in cash flows generated from the sales of recycled materials at floating prices. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. As of June 30, 2023, we were not a party to any recyclable commodity hedging agreements.
Investment in products
We are actively investing in our business to support future growth and we expect this investment to continue. We have built a leading cloud-based digital marketplace that provides a transformational customer experience through an easy-to-use interface, where customers can manage services, track invoices, and view environmental outcomes. We believe that our platform is highly differentiated, and we expect to continue to invest in product development to further develop and enhance our platform’s features and functionality to further extend the adoption of our platform. For the three months ended September 30, 2022 and 2021, our product development cost was $9.8 million and $4.8 million, respectively, and for the nine months ended September 30, 2022 and 2021, our product development cost was $28.3 million and $13.4 million, respectively. While we continue to invest in product development, we are focusing on operational efficiencies and cost reduction measures, such as rationalizing redundancies across the organization. For the three months ended June 30, 2023 and 2022, our product development cost was $7.2 million and $9.3 million, respectively. For the six months ended June 30, 2023 and 2022, our product development cost was $15.3 million and $18.5 million, respectively. We expect product development costs to stay consistentdecrease as a percentage of total revenuerevenues in the next twelve12 months.
Components of Results of Operations
Revenue
We generate our revenue from waste removal, waste management and consultation services, platform subscriptions, and the purchase and sale of recyclable commodities.
Service revenue:
Service revenues are comprised of waste removal and consultation services provided to customers for waste, recycling and logistics solutions. Services include planning, consolidation of billing and administration, cost savings analyses, vendor procurement and performance management, and a suite of solutions providing insights into the customers’ waste streams.
Recyclable commodity revenue:
We recognize recyclable commodity revenue through the purchase and sale of old corrugated cardboard (“OCC”), old newsprint (ONP), aluminum, glass, pallets and other recyclable materials.
Cost of revenue, exclusive of amortization and depreciation
Cost of service revenues primarily consistconsists of expenses related to delivering our service and providing support, including third-party hauler costs, costs of data center capacity, certain fees paid to various third parties for the use of their technology, services and data, and employee-related costs such as salaries and benefits. Cost of recyclable commodity revenues is comprised of expenses related to purchases of recyclable materials and any associated transportation fees.
As part of our services, we work with our customers to locate opportunities to reduce waste volume and service frequency with the intention to reduce costs for the customers which in turn leads to reduced costs for us. We are typically entitled to bill for a portion of such savings the customers realize as a result of our services in accordance with the terms withof our customer contracts.
Cost of recyclable commodity revenues primarily consist of expenses related to purchase of old corrugated cardboard, old newsprint, aluminum, glass, pallets and other recyclable materials, and any associated transportation fees.
Sales and marketing
Sales and marketing expenses consist primarily of compensation costs, including salaries, bonuses, benefits and other incentives to our sales and marketing personnel, advertising expenses, digital marketing expenses, sales commissions and other promotional expenditures.
Product development
Product development expenses consist primarily of compensation costs, including salaries, bonuses and other benefits to our product development team, contract labor expenses and fees for software licenses, consulting, legal, and other services.
General and administrative
General and administrative expenses consist primarily of compensation and benefits related costs, including equity-based compensation expense for our general corporate functions. General and administrative costs also consist of third-party professional service fees for external legal, accounting, and other consulting services, insurance charges, hosting fees and overhead costs.
We expect that general and administrative expenses will decrease as a percentage of total revenues over the next several years as a result of our increased focus on operational efficiencies and planned cost reduction measures across the organization. We planare working to eliminate redundancies across the organization, which were a byproduct of our growth and expansion phase the past few years. However, we expect certain incremental costs to incur as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange and expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC.
Gain on settlement of incentive compensation
Equity-based
Gain on settlement of incentive compensation expense in the three and nine months ended September 30, 2022 was approximately $91.0 million and $95.8 million, respectively, an increaseconsists of $90.2 million and $92.4 million compared to the three and nine months ended September 30, 2021, respectively. At the consummationa gain from settlements of the Mergers, we incurred approximately $79.7 million of equity-based compensation expense due to the modification and vesting of the “Legacy Rubicon Incentive Units and Phantom Units,” which are those units we granted pursuant to the Holdings LLC Profits Participation Plan and Unit Appreciation Rights Plan (the “2014 Plan”) and additional $10.9 million for the RSUs granted to certain management members.
At the consummation of the Mergers, we also incurred approximately $47.6 million of one-time compensation costs associated with certain Rubicon management rollover consideration, which is payable in cash or equity at our discretion. It is expected we will make certain RSU and deferred stock unit (“DSU”) awards as replacement awards for Rubicon management rollover consideration under the Merger Agreement. We expect to issue a variable number of RSUs and DSUs in such an amount equal to $47.6 million based on the fair market value of Class A Common Stock at the time of the awards. These RSUs and DSUs would be subject to certain vesting conditions and will vest into an equivalent number of shares of Class A Common Stock. While the terms of these awards have not yet been finalized, the anticipated equity-based compensation expense for these RSUs and DSUs issuedbonuses in connection with the replacement awards is expected to be $47.6 million and offset the accrued compensation expenses associated with Rubicon management rollover consideration under the Merger Agreement.
On October 19, 2022, we granted certain RSU and DSU awards pursuant to the Merger Agreement as replacement awards for the Holdings LLC Phantom Units. The number of RSUs and DSUs issuable in exchange of Legacy Rubicon Phantom Units is expected to be approximately 970,389 and 540,032, respectively. These RSUs and DSUs will vest on February 11, 2023 into an equivalent number of Class A Common Stock. The equity-based compensation expense for the RSUs and DSUs issued in exchange for the Legacy Rubicon Phantom Units was approximately $2.2 million and recognized in general and administrative expense for the three months ended September 30, 2022. Accounting rules require immediate recognition of the equity-based compensation expense as a result of the non-substantive vesting period.Mergers.
Additionally, certain of our employees received a one-time incentive cash payment upon closing of the Mergers. The aggregate Cash Transaction Bonuses paid by us in connection with the Mergers was approximately $28.9 million, as well as additional discretionary bonuses in the amount of $2.8 million paid following the Closing. Historically, we have paid annual cash-based bonuses to our employees. For the years ended December 31, 2021 and 2020, the annual cash-based bonuses we incurred were $6.8 million and $6.0 million, respectively. We expect that annual cash-based bonuses will continue to be a component of our employee compensation practices to ensure that we are able to attract and retain employee talent; however, we do not expect that additional cash-based bonuses of a size comparable to the Cash Transaction Bonuses will be awarded or payable in the ordinary course, outside of a change of control or similar significant transaction. Accordingly, our general and administrative expenses increased by the payment of the Cash Transaction Bonuses during the three- and nine-month periods ended September 30, 2022 (the periods in which the Mergers were consummated).
Additionally, pursuant to the CEO Transition Agreement, we will make a series of transition payments to Mr. Nate Morris, the Company’s former CEO, in the aggregate amount of $1.9 million through February 10, 2023 and a $0.7 million bonus with respect to his service in 2022 that will be paid by February 10, 2023. In lieu of any obligation to deliver RSUs to Mr. Morris pursuant to his employment agreement, we granted to Mr. Morris an award of 8,378,986 RSUs that will vest on February 10, 2023. See Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of this Part I of this Quarterly Report on Form 10-Q for further information.
We expect that equity-based compensation will continue to be a substantial component of employee compensation practices of Rubicon; however, we do not expect that additional equity-based compensation of a size comparable to the grants made in respect of the Legacy Rubicon Incentive Units and Phantom Units or the CEO Transition Agreement will be awarded in the ordinary course, outside of a change of control or similar significant transaction or comparable management transitions. It is anticipated that such equity-based compensation expenses will likely increase our general and administrative expenses, dilute existing Rubicon stockholders, and reduce our earnings per share.
Amortization and depreciation
Amortization and depreciation consist of all depreciation and amortization expenses associated with our property and equipment, acquired intangible assets and customer acquisition costs.
Interest expense
Interest expense consists primarily of interest expense associated with our outstanding debt, including accretion of debt issuance costs.
Results of Operations
The following tables show our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Comparison of the three months ended SeptemberJune 30, 20222023 and 20212022
| | | Three Months Ended
September 30, | | | | | Three Months Ended
June 30, | | | | |
| | | 2022 | | | 2021 | | | Change $ | | | Change % | | | 2023 | | | 2022 | | | Change $ | | | Change % | |
| | | (in thousands, except changes in percentage) | | (in thousands, except changes in percentage) | |
| Revenue | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service | | $ | 162,789 | | | $ | 127,256 | | | $ | 35,533 | | | | 27.9 | % | | $ | 160,641 | | | $ | 140,268 | | | $ | 20,373 | | | | 14.5 | % |
| Recyclable commodity | | | 22,194 | | | | 21,952 | | | | 242 | | | | 1.1 | % | | | 13,923 | | | | 24,338 | | | | (10,415 | ) | | | (42.8 | )% |
| Total revenue | | | 184,983 | | | | 149,208 | | | | 35,775 | | | | 24.0 | % | | | 174,564 | | | | 164,606 | | | | 9,958 | | | | 6.0 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue (exclusive of amortization and depreciation) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service | | | 157,504 | | | | 122,771 | | | | 34,733 | | | | 28.3 | % | | | 150,914 | | | | 136,185 | | | | 14,009 | | | | 10.3 | % |
| Recyclable commodity | | | 20,234 | | | | 20,340 | | | | (106 | ) | | | (0.5 | )% | | | 11,968 | | | | 22,368 | | | | (10,418 | ) | | | (46.5 | )% |
| Total cost of revenue (exclusive of amortization and depreciation) | | | 177,738 | | | | 143,111 | | | | 34,627 | | | | 24.2 | % | | | 162,162 | | | | 158,571 | | | | 3,591 | | | | 2.3 | % |
| Sales and marketing | | | 4,840 | | | | 3,808 | | | | 1,032 | | | | 27.1 | % | | | 2,747 | | | | 4,546 | | | | (1,799 | ) | | | (39.6 | )% |
| Product development | | | 9,803 | | | | 4,827 | | | | 4,976 | | | | 103.1 | % | | | 7,224 | | | | 9,315 | | | | (2,091 | ) | | | (22.4 | )% |
| General and administrative | | | 186,640 | | | | 11,561 | | | | 175,079 | | | | NM | % | | | 13,932 | | | | 13,253 | | | | 679 | | | | 5.1 | % |
| Amortization and depreciation | | | 1,439 | | | | 1,344 | | | | 95 | | | | 7.1 | % | | | 1,344 | | | | 1,402 | | | | (58 | ) | | | (4.1 | )% |
| Total costs and expenses | | | 380,460 | | | | 164,651 | | | | 215,809 | | | | 131.1 | % | | | 187,409 | | | | 187,087 | | | | 322 | | | | 0.2 | % |
| Loss from operations | | | (195,477 | ) | | | (15,443 | ) | | | (180,034 | ) | | | NM | % | | | (12,845 | ) | | | (22,481 | ) | | | 9,636 | | | | (42.9 | )% |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest earned | | | 1 | | | | - | | | | 1 | | | | NM | % | | | 5 | | | | - | | | | 5 | | | | NM | % |
| Gain on change in fair value of warrants | | | 74 | | | | - | | | | 74 | | | | NM | % | |
| Loss on change in fair value of warrant liabilities | | | | (414 | ) | | | (232 | ) | | | (182 | ) | | | (78.4 | )% |
| Gain on change in fair value of earn-out liabilities | | | 67,100 | | | | - | | | | 67,100 | | | | NM | % | | | 470 | | | | - | | | | 470 | | | | NM | % |
| Loss on change in fair value of forward purchase option derivative | | | (76,919 | ) | | | - | | | | (76,919 | ) | | | NM | % | |
| Excess fair value over the consideration received for SAFE | | | - | | | | - | | | | - | | | | NM | % | |
| Loss on change in fair value of derivatives | | | | (335 | ) | | | - | | | | (335 | ) | | | NM | % |
| Excess fair value over the consideration for SAFE | | | | - | | | | (800 | ) | | | 800 | | | | (100.0 | )% |
| Gain on service fee settlements in connection with the Mergers | | | | 6,364 | | | | - | | | | 6,364 | | | | NM | % |
| Loss on extinguishment of debt obligations | | | | (6,783 | ) | | | - | | | | (6,783 | ) | | | NM | % |
| Interest expense | | | | (8,119 | ) | | | (3,911 | ) | | | (4,208 | ) | | | 107.6 | % |
| Related party interest expense | | | | (661 | ) | | | - | | | | (661 | ) | | | NM | % |
| Other expense | | | (1,307 | ) | | | (326 | ) | | | (981 | ) | | | 300.9 | % | | | (482 | ) | | | (357 | ) | | | (125 | ) | | | 35.0 | % |
| Interest expense | | | (4,578 | ) | | | (2,611 | ) | | | (1,967 | ) | | | 75.3 | % | |
| Total other income (expense) | | | (15,629 | ) | | | (2,937 | ) | | | (12,692 | ) | | | 432.1 | % | | | (9,955 | ) | | | (5,300 | ) | | | (4,655 | ) | | | 87.8 | % |
| Loss before income taxes | | | (211,106 | ) | | | (18,380 | ) | | | (192,726 | ) | | | NM | % | | | (22,800 | ) | | | (27,781 | ) | | | 4,981 | | | | (17.9 | )% |
| Income tax expense (benefit) | | | 19 | | | | (252 | ) | | | 271 | | | | (107.5 | )% | | | 17 | | | | 13 | | | | 4 | | | | 30.8 | % |
| Net loss | | | (211,125 | ) | | | (18,128 | ) | | | (192,997 | ) | | | NM | % | | | (22,817 | ) | | | (27,794 | ) | | | 4,977 | | | | (17.9 | )% |
| | | | | | | | | | | | | | | | | | |
| Net loss attributable to Holdings LLC unitholders prior to the Mergers | | | (176,384 | ) | | | (18,128 | ) | | | (158,256 | ) | | | 873.0 | % | | | - | | | | (27,794 | ) | | | 27,794 | | | | (100.0 | )% |
| Net loss attributable to noncontrolling interests | | | (16,933 | ) | | | - | | | | (16,933 | ) | | | NM | % | | | (9,615 | ) | | | - | | | | (9,615 | ) | | | NM | % |
| Net Loss Attributable to Class A Common Stockholders | | | (17,808 | ) | | | - | | | | (17,808 | ) | | | NM | % | | | (13,202 | ) | | | - | | | | (13,202 | ) | | | NM | % |
NM – not meaningful
Revenue
Total revenue increased by $35.8$10.0 million, or 24.0%6.0%, for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022.
Service revenue increased by $35.5$20.4 million, or 27.9%14.5%, primarily due to $22.5 million generated from our new customers since the end of the prior year quarter and a $17.1 million increase driven by higher prices charged forto existing customers in the services provided to our existing customers,amount of $31.1 million, which was partially offset by a $3.9 million decrease as a resultin volume with existing customers of lower volume and frequency of the services provided for the existing customers.$10.6 million.
Revenues from sales of recyclable commodities increaseddecreased by $0.2$10.4 million, or 1.1%42.8%, primarily due to a 64.2% increase$9.6 million decrease driven by the sales prices for recyclable commodities, especially in the salesOCC, whose price per unit for pallets compared to the three months ended September 30, 2021, which was partially offsetdecreased by 54.5%, and a 14.2% decrease in the price per tonvolume of old corrugated cardboard.$0.9 million.
Cost of revenue, exclusive of amortization and depreciation
Total cost of revenue increased by $34.6$3.6 million, or 24.2%2.3%, for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022.
Cost of service revenue increased by $34.7$14.0 million, or 28.3%10.3%, primarily attributabledue to a $20.8 millionan increase in connection with servicing our new customers including nonrecurringhauling-related costs incurred for onboarding a new significant customer, and a $16.2 million increase driven by price increase for the services provided to our existing customers, partially offset by a $2.5 million decrease as a result of cost increases to service existing customers by $23.7 million driven by higher prices, partially offset by reduced hauling volume by $7.6 million and a $1.5 million decrease in the customer operations costs driven by lower volume and frequency of the services provided to the existing customers.workforce costs.
Cost of recyclable commodity revenue decreased by $0.1$10.4 million, or 0.5%46.5%, primarily due to a $9.3 million decrease in pricesthe cost of certainrecyclable commodities including old corrugated cardboard, duringsold, mainly driven by decrease in the three-month ended September 30, 2022 as compared to prior year quarter.price of OCC, and a decrease in volume of $0.8 million.
Sales and marketing
Sales and marketing expenses increased by $1.0 million or 27.1% for the three months ended SeptemberJune 30, 2022,2023 decreased $1.8 million, or 39.6% compared to the three months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily attributable to higherlower costs of $0.9 million for sales and marketing workforce by $0.8 million and a decrease in other sales and marketing activities that we recommenced in 2022 following a temporary suspension as a result of the pandemic, including meetings, conferences and other business development activities.by $0.3 million.
Product development
Product development expenses increaseddecreased by $5.0$2.1 million, or 103.1%22.4%, for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily attributable to higherlower payroll related costs of $0.8 million, lower product development support costs of $4.3$0.7 million which was mainly drivenand lower consulting and professional service costs by higher software subscription costs to support our product development team, and higher payroll related costs of $0.6 million, which increased primarily due to the headcount increase in our product development team to support our growth.$0.5 million.
We expect the product development costscost to continue to be higher fordecrease as a percentage of total revenues over the next twelve12 months. The increaseA significant component of the product development is expected to be driven by the Palantir Technologies, Inc.a software services subscription cost with a certain PIPE Investor, which provides advanced data analytics capabilities to enhance the data security, visibility, models, and algorithms of our digital platform. See ““—Contractual Obligations.Obligations” However,below for further information regarding the increase from the Palantir Technologies, Inc. software services agreement is expected to be offset, at least partially, by planned cost reduction measures as a result of our increased focus on operational efficiencies. We also plan to eliminate any redundancies within the organization, including in product development, which were a byproduct of our growth and expansion phase the past few years.
subscription.
General and administrative
General and administrative of $186.6 million expenses increased by $175.1$0.7 million, or 5.1%, for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022. The increase was primarily attributable to an increase of stock-basedin the allowance for bad debt reserve by $1.4 million and an increase in insurance expenses by $0.6 million. The increase was partially offset by a decrease in salaries and wages by $0.5 million, equity based compensation by $0.5 million and other workforce expense by $90.2 million and cash payments and RSU and DSU issuances in connection with Rubicon management rollover consideration under the Merger Agreement increasing expense by $82.1$0.3 million. The majority of these stock-based compensation expenses were incurred in connection with vesting of Holdings LLC’s incentive units and phantom units granted under the 2014 Plan as well as bonuses and incentives in connection with the consummation of the Mergers. Additionally, payroll cost increased by $1.3 million due to headcount increases.
Amortization and depreciation
Amortization and depreciation expenses for the three months ended SeptemberJune 30, 20222023 were relatively unchanged compared to the three months ended SeptemberJune 30, 2021.2022.
Other income (expense)
Other expense increased by $12.7$4.7 million, or 432.1%87.8%, for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022. The increase was primarily attributable to an increase of a $76.9$6.8 million in loss on extinguishment of debt obligations as a result of conversions of debt obligations to Class A Common Stock and prepayments of the Revolving Credit Facility and Term Loan in June 2023 (see “—Liquidity and Capital Resources—Debt” below), a $4.9 million increase in interest expense, including related party interest expense, due to higher borrowings under the revolving line of credit, term loan facilities and convertible notes as well as higher interest rates under revolving credit facility and term loan facilities, a $0.3 million loss fromon change in fair value of forward purchase option derivative incurredderivatives and a $0.2 million increase in loss on change in fair value of warrant liabilities, partially offset by a $6.4 million gain on service fee settlements in connection with the Forward Purchase AgreementMergers, a decreased loss of $0.8 million related to the excess fair value over the consideration received for the SAFE incurred during the three months ended June 30, 2022 but did not repeat in 2023 and a $2.0 million increase in interest expense, partially offset by a $67.1$0.5 million gain fromon change in fair value of earn-out liabilities.
See Note 15, Fair Value Measurements, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for further information regarding the changes in fair value.
Income tax expense (benefit)
Income tax expense for the three months ended SeptemberJune 30, 2022 increased by $0.3 million2023 were relatively unchanged compared to the three months ended SeptemberJune 30, 2021. The increase was primarily attributable to the current state tax expenses.2022.
Comparison of the ninesix months ended SeptemberJune 30, 20222023 and 20212022
| | | Nine Months Ended
September 30, | | | | | | Six Months Ended
June 30, | | | | |
| | | 2022 | | | 2021 | | | Change $ | | | Change % | | | 2023 | | | 2022 | | | Change $ | | | Change % | |
| | | (in thousands, except changes in percentage) | | | (in thousands, except changes in percentage) | |
| Revenue | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service | | $ | 437,755 | | | $ | 365,511 | | | $ | 72,244 | | | | 19.8 | % | | $ | 327,006 | | | $ | 274,966 | | | $ | 52,040 | | | | 18.9 | % |
| Recyclable commodity | | | 71,640 | | | | 54,251 | | | | 17,389 | | | | 32.1 | % | | | 28,656 | | | | 49,446 | | | | (20,790 | ) | | | (42.0 | )% |
| Total revenue | | | 509,395 | | | | 419,762 | | | | 89,633 | | | | 21.4 | % | | | 355,662 | | | | 324,412 | | | | 31,250 | | | | 9.6 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue (exclusive of amortization and depreciation) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service | | | 423,382 | | | | 351,287 | | | | 72,095 | | | | 20.5 | % | | | 308,195 | | | | 265,878 | | | | 42,317 | | | | 15.9 | % |
| Recyclable commodity | | | 65,856 | | | | 51,098 | | | | 14,758 | | | | 28.9 | % | | | 25,155 | | | | 45,622 | | | | (20,467 | ) | | | (44.9 | )% |
| Total cost of revenue (exclusive of amortization and depreciation) | | | 489,238 | | | | 402,385 | | | | 86,853 | | | | 21.6 | % | | | 333,350 | | | | 311,500 | | | | 21,850 | | | | 7.0 | % |
| Sales and marketing | | | 13,336 | | | | 10,604 | | | | 2,732 | | | | 25.8 | % | | | 6,021 | | | | 8,496 | | | | (2,475 | ) | | | (29.1 | )% |
| Product development | | | 28,336 | | | | 13,350 | | | | 14,986 | | | | 112.3 | % | | | 15,316 | | | | 18,533 | | | | (3,217 | ) | | | (17.4 | )% |
| General and administrative | | | 212,520 | | | | 34,968 | | | | 177,552 | | | | 507.8 | % | | | 32,079 | | | | 25,880 | | | | 6,199 | | | | 24.0 | % |
| Gain on settlement of incentive compensation | | | | (18,622 | ) | | | - | | | | (18,622 | ) | | | NM | % |
| Amortization and depreciation | | | 4,331 | | | | 4,958 | | | | (627 | ) | | | (12.6 | )% | | | 2,705 | | | | 2,892 | | | | (187 | ) | | | (6.5 | )% |
| Total costs and expenses | | | 747,761 | | | | 466,265 | | | | 281,496 | | | | 60.4 | % | | | 370,849 | | | | 367,301 | | | | 3,548 | | | | 1.0 | % |
| Loss from operations | | | (238,366 | ) | | | (46,503 | ) | | | (191,863 | ) | | | 412.6 | % | | | (15,187 | ) | | | (42,889 | ) | | | 27,702 | | | | (64.6 | )% |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest earned | | | 1 | | | | 2 | | | | (1 | ) | | | (50.0 | )% | | | 6 | | | | - | | | | 6 | | | | NM | % |
| Gain on forgiveness of debt | | | - | | | | 10,900 | | | | 10,900 | | | | (100.0 | )% | |
| Loss on change in fair value of warrants | | | (436 | ) | | | - | | | | (436 | ) | | | NM | % | |
| Loss on change in fair value of warrant liabilities | | | | (469 | ) | | | (510 | ) | | | 41 | | | | (8.0 | )% |
| Gain on change in fair value of earn-out liabilities | | | 67,100 | | | | - | | | | 67,100 | | | | NM | % | | | 5,290 | | | | - | | | | 5,290 | | | | NM | % |
| Loss on change in fair value of forward purchase option derivative | | | (76,919 | ) | | | - | | | | (76,919 | ) | | | NM | % | |
| Loss on change in fair value of derivatives | | | | (2,533 | ) | | | - | | | | (2,533 | ) | | | NM | % |
| Excess fair value over the consideration received for SAFE | | | (800 | ) | | | - | | | | (800 | ) | | | NM | % | | | - | | | | (800 | ) | | | 800 | | | | (100.0 | ) |
| Gain on service fee settlements in connection with the Mergers | | | | 6,996 | | | | - | | | | 6,996 | | | | NM | % |
| Loss on extinguishment of debt obligations | | | | (8,886 | ) | | | - | | | | (8,886 | ) | | | NM | % |
| Interest expense | | | | (15,295 | ) | | | (7,686 | ) | | | (7,609 | ) | | | 99.0 | % |
| Related party interest expense | | | | (1,254 | ) | | | - | | | | (1,254 | ) | | | NM | % |
| Other expense | | | (1,994 | ) | | | (730 | ) | | | (1,264 | ) | | | 173.2 | % | | | (903 | ) | | | (687 | ) | | | (216 | ) | | | 31.4 | % |
| Interest expense | | | (12,264 | ) | | | (7,461 | ) | | | (4,803 | ) | | | 64.4 | % | |
| Total other income (expense) | | | (25,312 | ) | | | 2,711 | | | | (28,023 | ) | | | NM | % | | | (17,048 | ) | | | (9,683 | ) | | | (7,365 | ) | | | 76.1 | % |
| Loss before income taxes | | | (263,678 | ) | | | (43,792 | ) | | | (219,886 | ) | | | 502.1 | % | | | (32,235 | ) | | | (52,572 | ) | | | 20,337 | | | | (38.7 | )% |
| Income tax expense (benefit) | | | 60 | | | | (961 | ) | | | 1,021 | | | | (106.2 | )% | | | 33 | | | | 41 | | | | (8 | ) | | | (19.5 | )% |
| Net loss | | | (263,738 | ) | | | (42,831 | ) | | | (220,907 | ) | | | 515.8 | % | | | (32,268 | ) | | | (52,613 | ) | | | 20,345 | | | | (38.7 | )% |
| | | | | | | | | | | | | | | | | | |
| Net loss attributable to Holdings LLC unitholders prior to the Mergers | | | (228,997 | ) | | | (42,831 | ) | | | (186,166 | ) | | | 434.7 | % | | | - | | | | (52,613 | ) | | | 52,613 | | | | (100.0 | )% |
| Net loss attributable to noncontrolling interests | | | (16,933 | ) | | | - | | | | (16,933 | ) | | | NM | % | | | (15,937 | ) | | | - | | | | (15,937 | ) | | | NM | % |
| Net Loss Attributable to Class A Common Stockholders | | | (17,808 | ) | | | - | | | | (17,808 | ) | | | NM | % | | | (16,331 | ) | | | - | | | | (16,331 | ) | | | NM | % |
NM – not meaningful
Revenue
Total revenue increased by $89.6$31.3 million, or 21.4%9.6%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the ninesix months ended SeptemberJune 30, 2021.2022.
Service revenue increased by $72.2$52.0 million, or 19.8%18.9%, primarily due to $41.1 million generated from our new customers since the end of the prior year period and an increase in volumes of $64.0$28.6 million mainly driven by expanded services with existing customers, higher prices charged forto existing customers in the services provided to our existingamount of $22.8 million, $2.6 million from new customers and a one-time $1.1 million customer credit in 2022 which did not repeat in 2023, partially offset by a $32.9decrease of $3.6 million decrease as a result of lower volume and frequency of the services provideddue to the existingcancelled customers.
Revenues from sales of recyclable commodities increaseddecreased by $17.4$20.8 million, or 32.1%42.0%, primarily due to an increase ina $24.2 million decrease driven by the sales prices for recyclable commodities, especially old corrugated cardboard, which contributed to a $10.3 million increase driven by the higher average price per ton by 26.2%, and pallets, which contributed to a $6.0 million increase as a result of the higher averagein OCC, whose price per unit decreased by 49.3%,64.5%. The decrease was partially offset by an increase in each case as comparedpallet sales by $1.8 million, out of which $1.6 million is attributable to the averageincrease in volume and $0.2 million is due to higher price, and a $0.9 million increase in the prior year period.OCC volumes.
Cost of revenue, exclusive of amortization and depreciation
Total cost of revenue increased by $86.9$21.9 million, or 21.6%7.0%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the ninesix months ended SeptemberJune 30, 2021.2022.
Cost of service revenue increased by $72.1$42.3 million, or 20.5%15.9%, primarily attributabledue to increased hauling volume by $34.2 million mainly driven by service expansion with existing customers, an increase in hauling-related cost to service existing customers by $8.5 million driven by higher prices, and a $40.9$2.3 million increase in connection with servicing ourrelated to new customers, including nonrecurring costs for onboarding a new significant customer, and a $63.6 million increase driven by price increase from our hauling and recycling partners for servicing our existing customers, partially offset by a $31.4$2.9 million decrease as a result of lower volume and frequency of the services provided for the existingrelated to cancelled customers.
Cost of recyclable commodity revenue increaseddecreased by $14.8$20.5 million, or 28.9%44.9%, primarily due to a $23.2 million decrease driven by the sales prices for recyclable commodities, especially in OCC. The decrease was partially offset by a $0.9 million increase in OCC volumes, an increase of pallet sales by $1.8 million, out of which $1.5 million is attributable to cost increases driven byvolume increase and $0.3 million is due to higher prices of recyclable commodities sold, especially old corrugated cardboard by $10.3 million and pallets by $4.8 million.price.
Sales and marketing
Sales and marketing expenses increased by $2.7for the six months ended June 30, 2023 decreased $2.5 million, or 25.8% for the nine months ended September 30, 2022,29.1% compared to the ninesix months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily attributable to higherlower costs for sales and marketing activities that we recommenced in 2022 following a temporary suspension as a result of the pandemic, including meetings, conferences and other business development activities in the amount of $1.5workforce by $1.1 million and higher payroll related costs of $0.9 million due to headcount increases.a decrease in other sales and marketing activities, such as advertising and events, by $1.4 million.
Product development
Product development expenses increaseddecreased by $15.0$3.2 million, or 112.3%17.4%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the ninesix months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily attributable to higherlower payroll and workforce related costs by $1.4 million, lower product development support costs of $12.9by $1.2 million, which was mainly drivenand lower consulting and professional service costs by higher software subscription costs to support our product development team, and higher payroll related costs of $1.9 million, which increased primarily due to the headcount increases in our product development team to support our growth.$0.7 million.
We expect the product development costscost to continue to be higher fordecrease as a percentage of total revenues over the next twelve12 months. The increaseA significant component of the product development is expected to be driven by the Palantir Technologies, Inc.a software services subscription cost with a certain PIPE Investor, which provides advanced data analytics capabilities to enhance the data security, visibility, models, and algorithms of our digital platform. See “Contractual Obligations.“—Contractual Obligations” However,below for further information regarding the increase from the Palantir Technologies, Inc. software services agreement is expected to be offset, at least partially, by planned cost reduction measures as a result of our increased focus on operational efficiencies. We also plan to eliminate any redundancies within the organization, including in product development, which were a byproduct of our growth and expansion phase the past few years.subscription.
General and administrative
General and administrative expenses increased by $177.6$6.2 million, or 507.8%24.0%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the ninesix months ended SeptemberJune 30, 2021.2022. The increase was primarily attributable to $6.1 million severance pay incurred during the six months ended June 30, 2023 and an increase of stock-based compensation expensein insurance expenses by $92.4$1.2 million. Additionally, during the six months ended June 30, 2023, there was a $3.9 million and cash payments and RSU and DSU issuances in connection with Rubicon management rollover consideration under the Merger Agreement increasing expense by $82.3 million. The majority of these stock-based compensation expenses were incurred in connection with vesting of Holdings LLC’s incentive units and phantom units granted under the 2014 Plan as well as bonuses and incentives in connection with the consummation of the Mergers. Additionally, an increase of outside services by $3.0 million including professional service fees to operate as a publicly traded company, an increase of $3.5 million in payroll cost due to the headcount increase, partially offset by a $5.2 million decrease in bad debt expense due to improvedexpense. During the six months ended June 30, 2022, we collected cash collection of amountsfor approximately $3.0 million for which reserves had previously been established.established thereby resulting in a gain during the period. The increases in general and administrative expenses were partially offset by a decrease in equity based compensation by $2.3 million and workforce related costs by $2.1 million.
Gain on settlement of incentive compensation
The $18.6 million gain on settlement of incentive compensation for the six months ended June 30, 2023 was entirely attributable to replacing the $26.8 million of the accrued management rollover consideration with RSU awards which were valued at $8.2 million at the time of the settlement.
Amortization and depreciation
Amortization and depreciation expenses for the ninesix months ended SeptemberJune 30, 20222023 were relatively unchanged compared to the ninesix months ended SeptemberJune 30, 2021.2022.
Other income (expense)
Other expense of $25.3 million increased by $28.0$7.4 million, or 76.1%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the ninesix months ended SeptemberJune 30, 2021.2022. The increase was primarily attributable to a $76.9$8.9 million loss on extinguishment of debt obligations as a result of conversions of debt obligations to Class A Common Stock and prepayments of the Revolving Credit Facility in June 2023 and Term Loan in February and June 2023 (see “—Liquidity and Capital Resources—Debt” below), a $8.9 million increase in interest expense, including related party interest expense, due to higher borrowings under the revolving line of credit, term loan facilities and convertible notes as well as higher interest rates under revolving credit facility and term loan facilities, and a $2.5 million loss on change in fair value of forward purchase option derivative incurredderivatives, partially offset by a $7.0 million gain on service fee settlements in connection with the Forward Purchase Agreement,Mergers, a $10.9$5.3 million debt forgivenessgain on change in 2021 which did not repeat,fair value of earn-out liabilities, and a $4.8 million increase in interest expense, andecreased loss of $0.8 million loss related to the excess fair value over the consideration received for the SAFE executedincurred during the six months end June 30, 2022 but did not repeat in May 2022 and an $0.8 million expense incurred for commitment shares issued in connection of SEPA, partially offset by a $67.1 million gain on change in fair value of earn-out liabilities.2023.
See Note 15, Fair Value Measurements, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for further information regarding the changes in fair value and “Liquidity and Capital Resources – Other Financing Arrangements below” for further information regarding the SAFE.
Income tax expense (benefit)
Income tax expense for the ninesix months ended SeptemberJune 30, 2022 increased by $1.0 million2023 were relatively unchanged compared to the ninesix months ended SeptemberJune 30, 2021. The increase was primarily attributable to the deferred tax expenses related to book and tax basis difference in goodwill and the current state tax expenses.2022.
Key Metrics and Non-GAAP Financial Measures
In addition to the measures presented in our unaudited interim condensed consolidated financial statements, we use the following key business and non-GAAP metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Revenue net retention
We believe our ability to retain customers is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We calculate revenue net retention as a year-over-year comparison that measures the percentage of revenue recognized in the current quarter from customers retained from the corresponding quarter in the prior year. We believe that our revenue net retention rate is an important metric to measure overall client satisfaction and the general quality of our service offerings as it is a composition of revenue expansion or contraction within our customer accounts.
Our revenue net retention rate was 118.3%104.9% and 109.0%113.4% as of SeptemberJune 30, 2023 and 2022, and 2021, respectively.
Adjusted gross profit and adjusted gross profit margin
Adjusted gross profit is a non-GAAP financial measure which is calculated by adding back amortization and depreciation for revenue generating activities and platform support costs to GAAP gross profit, the most comparable GAAP measurement. Adjusted gross profit margin is calculated as adjusted gross profit divided by total GAAP revenue.
We believe adjusted gross profit and adjusted gross profit margin are important measures and useful to investors because they show the progress in scaling our digital platform by quantifying the markup and margin we charge our customers that are incremental to our marketplace vendor costs. These measures demonstrate this progress because changes in these measures are driven primarily by our ability to optimize services for our customers, improve our hauling and recycling partners’ efficiency and achieve economies of scale on both sides of the marketplace. Our management team uses these non-GAAP measures as one of the means to evaluate the profitability of our customer accounts, exclusive of certain costs that are generally fixed in nature, and to assess how successful we are in achieving our pricing strategies. However, it is important to note that other companies, including companies in our industry, may calculate and use these measures differently or not at all, which may reduce their usefulness as a comparative measure. Further, these measures should not be read in isolation from or without reference to our results prepared in accordance with GAAP.
The following table shows the calculation of GAAP gross profit and a reconciliation of (i) GAAP gross profit to non-GAAP adjusted gross profit and GAAP gross profit margin to non-GAAP adjusted gross profit margin, (ii) amortization and depreciation for revenue generating activities to total amortization and depreciation and (iii) platform support costs to total cost of revenue (exclusive of amortization and depreciation) for each of the periods presented:
| | | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (in thousands, except percentages) | | | (in thousands, except percentages) | |
| Total revenue | | $ | 184,983 | | | $ | 149,208 | | | $ | 509,395 | | | $ | 419,762 | | | $ | 174,564 | | | $ | 164,606 | | | $ | 355,662 | | | $ | 324,412 | |
| Less: total cost of revenue (exclusive of amortization and depreciation) | | | 177,738 | | | | 143,111 | | | | 489,238 | | | | 402,385 | | | | 162,162 | | | | 158,571 | | | | 333,350 | | | | 311,500 | |
| Less: amortization and depreciation for revenue generating activities | | | 657 | | | | 450 | | | | 1,886 | | | | 2,012 | | | | 614 | | | | 579 | | | | 1,188 | | | | 1,229 | |
| Gross profit | | $ | 6,588 | | | $ | 5,647 | | | $ | 18,271 | | | $ | 15,365 | | | $ | 11,788 | | | $ | 5,456 | | | $ | 21,124 | | | $ | 11,683 | |
| Gross profit margin | | | 3.6 | % | | | 3.8 | % | | | 3.6 | % | | | 3.7 | % | | | 6.8 | % | | | 3.3 | % | | | 5.9 | % | | | 3.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | $ | 6,588 | | | $ | 5,647 | | | $ | 18,271 | | | $ | 15,365 | | | $ | 11,788 | | | $ | 5,456 | | | $ | 21,124 | | | $ | 11,683 | |
| Add: amortization and depreciation for revenue generating activities | | | 657 | | | | 450 | | | | 1,886 | | | | 2,012 | | | | 614 | | | | 579 | | | | 1,188 | | | | 1,229 | |
| Add: platform support costs(1) | | | 6,884 | | | | 5,787 | | | | 19,761 | | | | 16,026 | | | | 5,541 | | | | 6,657 | | | | 11,777 | | | | 12,877 | |
| Adjusted gross profit | | $ | 14,129 | | | $ | 11,884 | | | $ | 39,918 | | | $ | 33,403 | | | $ | 17,943 | | | $ | 12,692 | | | $ | 34,089 | | | $ | 25,789 | |
| Adjusted gross profit margin | | | 7.6 | % | | | 8.0 | % | | | 7.8 | % | | | 8.0 | % | | | 10.3 | % | | | 7.7 | % | | | 9.6 | % | | | 7.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization and depreciation for revenue generating activities | | $ | 657 | | | $ | 450 | | | $ | 1,886 | | | $ | 2,012 | | | $ | 614 | | | $ | 579 | | | $ | 1,188 | | | $ | 1,229 | |
| Amortization and depreciation for sales, marketing, general and administrative activities | | | 782 | | | | 894 | | | | 2,445 | | | | 2,946 | | | | 730 | | | | 823 | | | | 1,517 | | | | 1,663 | |
| Total amortization and depreciation | | $ | 1,439 | | | $ | 1,344 | | | $ | 4,331 | | | $ | 4,958 | | | $ | 1,344 | | | $ | 1,402 | | | $ | 2,705 | | | $ | 2,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Platform support costs(1) | | $ | 6,884 | | | $ | 5,787 | | | $ | 19,761 | | | $ | 16,026 | | | $ | 5,541 | | | $ | 6,657 | | | $ | 11,777 | | | $ | 12,877 | |
| Marketplace vendor costs(2) | | | 170,854 | | | | 137,324 | | | | 469,477 | | | | 386,359 | | | | 156,621 | | | | 151,914 | | | | 321,573 | | | | 298,623 | |
| Total cost of revenue (exclusive of amortization and depreciation) | | $ | 177,738 | | | $ | 143,111 | | | $ | 489,238 | | | $ | 402,385 | | | $ | 162,162 | | | $ | 158,571 | | | $ | 333,350 | | | $ | 311,500 | |
| (1) | We define platform support costs as costs to operate our revenue generating platforms that do not directly correlate with volume of sales transactions procured through our digital marketplace. Such costs include employee costs, data costs, platform hosting costs and other overhead costs. |
| (2) | We define marketplace vendor costs as direct costs charged by our hauling and recycling partners for services procured through our digital marketplace. |
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure and GAAP net loss is its most comparable GAAP measurement. We define adjusted EBITDA as GAAP net loss adjusted to exclude interest expense and income, income tax expense and benefit, amortization and depreciation, gain or loss on extinguishment of debt obligations, equity-based compensation, phantom unit expense, gain or loss on change in fair value of warrant liabilities, gain or loss on change in fair value of earn-out liabilities, gain or loss on change in fair value of forward purchase option derivative, excess fair value overderivatives, executive severance charges, gain or loss on settlement of the consideration received for SAFE,management rollover bonuses, gain or loss on service fee settlements in connection with the Mergers, other non-operating income and expenses, and unique non-recurring income and expenses.
We have included adjusted EBITDA because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses. Further, we believe it is helpful in highlighting trends in our operating results because it allows for more consistent comparisons of financial performance between periods by excluding gains and losses that are non-operational in nature or outside the control of management, as well as items that may differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. It is also often used by analysts, investors and other interested parties in evaluating and comparing our results to other companies within our industry. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of net loss or our other results as reported under GAAP. Some of these limitations are:
| ● | adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments; |
| | | |
| ● | adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| | |
| ● | adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; |
| | | |
| ● | although amortization and depreciation are non-cash charges, the assets being amortized and depreciated will often have to be replaced in the future and adjusted EBITDA does not reflect any cash requirements for such replacements; |
| | | |
| ● | adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which we may make adjustments in historical periods; and |
| | | |
| ● | other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:
| | | Three Months Ended September 30, | | | Nine Months Ended
September 30, | | | Three Months Ended June 30, | | | Six Months Ended
June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (in thousands, except percentages) | | | (in thousands, except percentages) | |
| Total revenue | | $ | 184,983 | | | $ | 149,208 | | | $ | 509,395 | | | $ | 419,762 | | | $ | 174,564 | | | $ | 164,606 | | | $ | 355,662 | | | $ | 324,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (211,125 | ) | | $ | (18,128 | ) | | $ | (263,738 | ) | | $ | (42,831 | ) | | $ | (22,817 | ) | | $ | (27,794 | ) | | $ | (32,268 | ) | | $ | (52,613 | ) |
| Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | 4.578 | | | | 2,611 | | | | 12,264 | | | | 7,461 | | | | 8,119 | | | | 3,911 | | | | 15,295 | | | | 7,686 | |
| Related party interest expense | | | | 661 | | | | - | | | | 1,254 | | | | - | |
| Interest earned | | | (1 | ) | | | - | | | | (1 | ) | | | (2 | ) | | | (5 | ) | | | - | | | | (6 | ) | | | - | |
| Income tax expense (benefit) | | | 19 | | | | (252 | ) | | | 60 | | | | (961 | ) | | | 17 | | | | 13 | | | | 33 | | | | 41 | |
| Amortization and depreciation | | | 1,439 | | | | 1,344 | | | | 4,331 | | | | 4,958 | | | | 1,344 | | | | 1,402 | | | | 2,705 | | | | 2,892 | |
| Loss on extinguishment of debt obligations | | | | 6,783 | | | | - | | | | 8,886 | | | | - | |
| Equity-based compensation | | | 88,793 | | | | 122 | | | | 88,977 | | | | 486 | | | | 1,804 | | | | 126 | | | | 11,106 | | | | 184 | |
| Phantom unit expense | | | 2,213 | | | | 641 | | | | 6,783 | | | | 2,907 | | | | - | | | | 2,021 | | | | - | | | | 4,570 | |
| Deferred compensation expense | | | 1,250 | | | | - | | | | 1,250 | | | | - | | |
| (Gain) Loss on change in fair value of warrant liabilities | | | (74 | ) | | | - | | | | 436 | | | | - | | |
| Loss on change in fair value of warrant liabilities | | | | 414 | | | | 232 | | | | 469 | | | | 510 | |
| Gain on change in fair value of earn-out liabilities | | | (67,100 | ) | | | - | | | | (67,100 | ) | | | - | | | | (470 | ) | | | - | | | | (5,290 | ) | | | - | |
| Loss on change in fair value of forward purchase option derivative | | | 76,919 | | | | - | | | | 76,919 | | | | - | | |
| Loss on change in fair value of derivatives | | | | 335 | | | | - | | | | 2,533 | | | | - | |
| Executive severance charges | | | | - | | | | - | | | | 4,553 | | | | - | |
| Gain on settlement of Management Rollover Bonuses | | | | - | | | | - | | | | (26,826 | ) | | | - | |
| Excess fair value over the consideration received for SAFE | | | - | | | | - | | | | 800 | | | | - | | | | - | | | | 800 | | | | - | | | | 800 | |
| Nonrecurring merger transaction expenses(3) | | | 80,712 | | | | - | | | | 80,712 | | | | - | | |
| Other expenses(4) | | | 1,307 | | | | 326 | | | | 1,994 | | | | 730 | | |
| Gain on forgiveness of debt | | | - | | | | - | | | | - | | | | (10,900 | ) | |
| Gain on service fee settlements in connection with the Mergers | | | | (6,364 | ) | | | - | | | | (6,996 | ) | | | - | |
| Other expenses(3) | | | | 482 | | | | 357 | | | | 903 | | | | 687 | |
| Adjusted EBITDA | | $ | (21,070 | ) | | $ | (13,336 | ) | | $ | (56,313 | ) | | $ | (38,152 | ) | | $ | (9,697 | ) | | $ | (18,932 | ) | | $ | (23,649 | ) | | $ | (35,243 | ) |
| Net loss as a percentage of total revenue | | | (114.1 | )% | | | (12.1 | )% | | | (51.8 | )% | | | (10.2 | )% | | | (13.1 | )% | | | (16.9 | )% | | | (9.1 | )% | | | (16.2 | )% |
| Adjusted EBITDA as a percentage of total revenue | | | (11.4 | )% | | | (8.9 | )% | | | (11.1 | )% | | | (9.1 | )% | | | (5.6 | )% | | | (11.5 | )% | | | (6.6 | )% | | | (10.9 | )% |
| (3) | Nonrecurring merger transaction expenses primarily consist of management bonus payments of $31.7 million, including $2.8 million bonuses paid subsequent to the Closing Date, accrual for Rubicon management rollover consideration under the Merger Agreement of $47.6 million, and related payroll tax expense of $1.2 million in connection with the Mergers. |
(4) |
Other expenses primarily consist of foreign currency exchange gains and losses, taxes, penalties commitment fee for SEPA, and gains and losses on sale of property and equipment. |
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows in the short- and long-term to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions and investments, and other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, and their sufficiency to fund our operating and investing activities.
Our principal sources of liquidity have been borrowings under our current and prior credit facilities, proceeds from the issuance of equity and warrant exercises and cash generated by operating activities. More recently, we received cash proceeds from the Mergers and the PIPE Investment, and have entered into the SEPA to provide additional liquidity (see “—Other Financing Arrangements” below). Our primary cash needs are for day-to-day operations, to fund working capital requirements, to fund our growth strategy, including investments and acquisitions, to pay interest and principal on our indebtedness and to pay $34.3 million underservice our software subscription agreement with Palantir Technologies, Inc., through October 2024 (see “—Contractual Obligations” below).debt obligations.
Our principal uses of cash in recent periods have been funding operations and paying expenses associated with the Mergers, including amounts paid under the Forward Purchase Agreement.servicing debts. Our long-term future capital requirements will depend on many factors, including revenue growth rate, achieving higher profitability on our revenue contracts, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support investments, including research and development efforts and the continuing market adoption of our products, and the terms on which we refinance our existing indebtedness.products.
During the ninethree and six months ended SeptemberJune 30, 2022,2023, and in each fiscal year since the Company’s inception, we have incurred losses from operations and generated negative cash flows from operating activities. We also have negative working capital and stockholders’ deficit as of SeptemberJune 30, 2022. Our total2023. However, all of the warrant liabilities and derivative liabilities under current liabilities as of September 30, 2022 are $258.7 million.will be settled in Class A Common Stock.
As of September 30, 2022, cash and cash equivalents totaled $4.5 million, accounts receivable totaled $58.7 million and unbilled accounts receivable totaled $62.8 million. Availability under our Revolving Credit Facility, which provides44
To address liquidity needs, we entered into the ability to borrow up to $60.0 million, was $21.2 million. As of November 15, 2022, we had approximately $5.1 million in cash and cash equivalents and $23.8 million available under our Revolving Credit Facility. Our outstanding indebtedness includes theJune 2023 Revolving Credit Facility, the June 2023 Term Loan and the May 2023 Equity Agreements during the three months ended June 30, 2023. Additionally, we have amended the Subordinated Term Loan, under whichInsider Convertible Debentures, Third Party Convertible Debentures and NZ Superfund Convertible Debenture to extend their maturity dates and converted the principal of $36.2 million, $51.0 million and $20.0 million, respectively, were outstanding as of November 15, 2022 and are scheduledRodina Note to mature in December 2023. Pursuant to the SEPA, we have the right to sell up to $200.0 million of shares of Class A Common StockStock. Furthermore, subsequent to June 30, 2023, the Yorkville Investor, subjectYA Convertible Debentures were assigned to certain limitations and conditions set forth in the SEPA. However, because shares issued under the SEPA are sold at a discount to the then-current market price, in light of the current market price and the NYSE rules limiting the number of shares that can be issued without shareholder approval, the amount that could be raised pursuant to the SEPA is significantly lower than $200.0 million without first obtaining shareholder approval. Furthermore, the amended Term Loan agreement entered into on November 18, 2022 requires us to repay the Term Loan with any net proceeds provided by the SEPA until such time that the Term Loan is repaid in full.
We currently project that we will not have sufficient cash on hand or available liquidity under existing arrangements to meet our projected liquidity needs for the next 12 months. In the absence of additional capital, there is substantial doubt about our ability to continue as a going concern.
To address projected liquidity needs for the next 12 months, we have negotiated and received a binding commitment for $30.0 million of additional financing (the “Financing Commitment”), pursuant to which certain existing investors have agreed to contribute cash upof ours and the assignees and we entered into an amendment to the $30.0 million commitment amount todebentures which extended the extent other equity capital of an equivalent amount has notmaturity date. We have also been provided to the Company by January 15, 2023. See “—Financing Arrangements” below for additional information regarding the Financing Commitment. In addition to the proceeds from the Financing Commitment, we have begunworking to execute our plan to modify our operations to further reduce spending. Initiatives we have undertaken in the fourth quarter of 2022 include (i) increased focus on operational efficienciesspending and cost reduction measures, (ii) eliminating redundancies that have been the natural byproduct of our recent growth and expansion, (iii) evaluating our portfolio and less profitable accounts to better ensure we are deploying resources efficiently, and (iv) exercising strict capital discipline for future investments, such as requiring investments to meet minimum hurdle rates.improve cash flow.
We believe that the extended maturity of theJune 2023 Revolving Credit Facility, the Financing Commitment,June 2023 Term Loan, the extended maturities of the Subordinated Term Loan, the Insider Convertible Debentures, the Third Party Convertible Debentures, the NZ Superfund Convertible Debenture and the YA Convertible Debentures, the May 2023 Equity Agreements, execution of the cost reduction initiatives, cash on hand and available under the Revolving Credit Facility, and other cash flows from operations are expected to provide sufficient liquidity to meet our known liquidity needs for the next 12 months. We believe this plan is probable of being achievedHowever, there can be no assurance that we will be successful in executing the cost reduction initiatives and alleviates substantial doubt about our abilitymay need to continue as a going concern. In the longer-term, we intend to refinance all of the indebtedness maturingraise additional capital in 2023 with new, longer-term debt facilities (the “New Debt Facilities”).future periods.
We may receive additional capital from the cash exercise of the Public and Private Warrants. However, the exercise price of our Public and Private Warrants is $11.50 per warrant and the last reported sales price of our Class A Common Stock on November 18, 2022August 10, 2023 was $2.19.$0.72. The likelihood that Warrant holders will exercise their Public and Private Warrants, and therefore the likelihood of any amount of cash proceeds that we may receive, is dependent upon the trading price of our Class A Common Stock and we do not currently expect to receive any cash proceeds from the exercise of Public and Private Warrants in the short- to medium-term due to the trading price of our Class A Common Stock. If the trading price for our Class A Common Stock continues to be less than $11.50 per share, we do not expect Public and Private Warrant holders to exercise their Warrants.warrants. Similarly, the Private Warrants may be exercised on a cashless basis and we will not receive any proceeds from such exercise, even if the Private Warrants are in-the-money. We will have broad discretion over the use of any proceeds from the exercise of such securities. Any proceeds from the exercise of such securities would increase our liquidity, but we are not currently budgeting for any cash proceeds from the exercise of Public and Private Warrants when planning for our operational funding needs.
If we raise funds by issuing equity securities, including under the SEPA, dilution to stockholders will occur and may be substantial. Any equity securities issued may also provide for rights, preferences, or privileges senior to those of holders of common stock. If we raise funds by issuing debt securities, including the convertible notes proposed to be entered into as part of the Financing Commitment and the New Debt Facilities, these debt securities could have rights, preferences, and privileges senior to those of common stockholders. The terms of debt securities or borrowings, including the terms of the Financing Commitment and the New Debt Facilities, could impose significant restrictions on our operations and will increase the cost of capital due to interest payment requirements. The capital markets have been very difficult and expensive to access in recent periods, which could impact the availability and cost of equity and debt financing under the Financing Commitment, the New Debt Facilities or otherwise. It is possible that we will not enter into all of financing contemplated with respect to the New Debt Facilities and that no additional funding will be available at all in the capital markets. In addition, recent and anticipated future increases in federal fund rates set by the Federal Reserve, which serve as a benchmark for rates on borrowing, will impact the cost and availability of debt financing.
If we are unable to obtain adequate capital resources to fund operations, we will not be able to continue to operate our business pursuant to our current business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing, product development and other activities, which could have a material adverse impact on our operations and our ability to increase revenues, or we may be forced to discontinue our operations entirely. Similarly, in the longer-term, any inability to repay or refinance our indebtedness maturing in 2023 through the New Debt Facilities or otherwise would have similar effects on our business.
See “—Contractual Obligations” below for a discussion of other obligations with respect to which we will be required to make significant future payments or under which we have significant financial contractual obligations.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | Six Months Ended
June 30, | |
| | | Nine Months Ended
September 30, | | | 2023 | | | 2022 | |
| | | 2022 | | 2021 | | | (in thousands) | |
| Net cash used in operating activities | | $ | (112,918 | ) | | $ | (45,110 | ) | | $ | (37,309 | ) | | $ | (16,272 | ) |
| Net cash used in investing activities | | | (69,865 | ) | | | (1,344 | ) | | | (628 | ) | | | (685 | ) |
| Net cash provided by financing activities | | | 176,630 | | | | 48,071 | | | | 51,374 | | | | 13,222 | |
| Net increase (decrease) in cash and cash equivalents | | $ | (6,153 | ) | | $ | 1,617 | | | $ | 13,437 | | | $ | (3,735 | ) |
Cash flows used in operating activities
Net cash used in operating activities increased by $67.8$21.0 million to $112.9$37.3 million for the ninesix months ended SeptemberJune 30, 20222023, compared to $45.1$16.3 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increase in cash used in operating activities was driven by:
| | ● | a $220.9$32.9 million increase in net loss. |
| | |
| ● | a $112.1 million increase in non-cash charges which was primarily attributable to a $88.1 million increase in equity-based compensation, an increase of $76.9 million in loss from change in fair value of forward purchase option derivative, a $10.9 million decrease in gain of forgiveness of debt, a $3.9 million increase in phantom unit expense, a $1.4 million increase in amortization of debt issuance costs, a $1.3 million increase in deferred compensation expense, a $1.0 million increase in deferred tax income expense, partially offset by a $67.1 million increase in gain from change in fair value of earn-out liabilities and a $5.5 decrease in bad debt reserve. |
| | |
| ● | a $41.0 million favorableunfavorable impact attributable to changes in operating assets and liabilities, primarily driven by an increase in favorableunfavorable impact from accounts payable by $24.6 million, accrued expenses by $46.6$15.1 million, prepaid expenses by $2.9 million and contract assetsother liabilities by $6.0$1.8 million, partially offset by an increase in unfavorablefavorable impact from contract assets by $9.0 million, contract liabilities by $1.4 million and accounts receivable by $7.9$0.7 million; and |
| ● | a $8.4 million net increase in non-cash gains which was primarily attributable to a $26.8 million increase in settlement of accrued incentive compensation, a $7.0 million gain on service fee settlement in connection with the Mergers, a $5.3 million gain on change in fair value of earn-out liabilities, a $4.6 million decrease in phantom unit expense and prepaid expensea $0.8 million decrease in excess fair value over the consideration received for SAFE, partially offset by $3.7 million.$10.9 million increase in equity-based compensation costs, a $8.9 million loss on extinguishment of debt obligations, $4.1 million paid-in-kind interest capitalized to the principal of debt obligations, a $3.9 million increase in bad debt reserve, $3.8 million of service fees settled in common stock, a $2.5 million loss on change in fair value of derivatives and a $2.2 million increase in amortization of deferred debt charges, including related party debt issuance costs; |
| ● | partially offset by $20.3 million decrease in net loss. |
Cash flows used in investing activities
Net cash used in investing activities increaseddecreased by $68.5$0.1 million to $69.9$0.6 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $1.3$0.7 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increasedecrease in cash used in investing activities was primarily driven by payments made under the Forward Purchase Agreement.a decrease in cash used for property and equipment purchases.
Cash flows from financing activities
Net cash provided by financing activities was $176.6$51.4 million for the ninesix months ended SeptemberJune 30, 2022, compared to $48.12023 and $13.2 million for the ninesix months ended SeptemberJune 30, 2021.2022. Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2023 resulted primarily from proceeds of $86.2 million from new third party debt, $24.8 million from the issuance of common stock and $14.5 million from related party debt, offset in part by $53.5 million repayments of debt, $13.9 million of financing costs paid, $5.6 million net payments on the line of credit and $1.1 million cash outflow for RSUs withheld to pay taxes. Net cash provided by financing activities for the six months ended June 30, 2022 resulted primarily from net proceeds from the Mergers of $175.0 million and proceeds of $8.0 million from the SAFE, offset in part by $4.5 million repayments of long-term debt, and $2.0 million payments of financing costs. Net cash provided by financing activities was $48.1 million for the nine months ended September 30, 2021 resulted primarily from proceeds of $32.5 million from warrants exercised and $22.3 million from long-term debt, offset in part by net paymentborrowing on line of credit of $4.4$11.5 million and proceeds from the SAFE of $8.0 million, partially offset by $3.0 million repayments of long-term debt, in the amount$2.0 million of $1.5 millionfinancing costs paid and $0.8$1.3 million payments of financingdeferred offering costs.
Tax Receivable Agreement
In connection with the consummation of the Mergers, weRubicon entered into the Tax Receivable Agreement with the common and preferred unitholders of Holdings LLC (“TRA Holders”),Holders, whereby following the Mergers, we areRubicon is obligated to make payments underpay to the Tax Receivable Agreement equal toTRA Holders 85% of certain of ourRubicon’s realized (or in certain cases, deemed realized) tax savings as a result of certain tax benefits related to the transactions contemplated by the Merger Agreement and future exchanges of Class B Units for Class A Common Stock or cash. Rubicon will benefit from the remaining 15% of such tax savings.
The actual future payments to the TRA Holders will vary, and estimating the amount of payments that may be made under the Tax Receivable Agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors and future events. The actual future payments under the Tax Receivable Agreement are dependent on a number of factors, including the price of Class A Common Stock at the time of the exchange; the timing of future exchanges; the extent to which exchanges are taxable; the amount and timing of the utilization of tax attributes; the amount, timing and character of our income; the U.S. federal, state and local tax rates then applicable; the depreciation and amortization periods that apply to the increases in tax basis; the timing and amount of any earlier payments that we may have made under the TRA; and the portion of our payments under the TRA that constitutes imputed interest or gives rise to depreciable or amortizable tax basis.
A significant portion of any potential future payments under the Tax Receivable Agreement is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us,Rubicon, assuming Holdings LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by Holdings LLC, ourthe associated taxable income of Rubicon will be affected and the associated tax benefits to be realized will be limited, thereby similarly reducing the associated Tax Receivable Agreement payments to be made. We may however still need to seek additional sources of financing depending on the given circumstances at the time any payments will be made.
While many of the factors that will determine the amount of payments that weRubicon will make under the Tax Receivable Agreement are outside of its control, we expectRubicon expects that the payments weit will make under the Tax Receivable Agreement will be substantial. WeRubicon generally expectexpects to fund such distributions out of available cash of Holdings LLC, and as a result, such payments will reduce the cash provided by the tax savings generated from the relevant transactions that would otherwise have been available to usRubicon and Holdings LLC for other uses, including repayment of debt, funding day-to-day operations, reinvestment in the business or returning capital to holders of Class A Common Stock in the form of dividends or otherwise.
WeRubicon may incur significant costs in addition to the due course obligations arising under the Tax Receivable Agreement described above. In particular, in the event that (a) we undergoRubicon undergoes certain change of control events (e.g., certain mergers, dispositions and other similar transactions), (b) there is a material uncured breach under the Tax Receivable Agreement, or (c) we electRubicon elects to terminate the Tax Receivable Agreement early, in each case, ourRubicon’s obligations under the Tax Receivable Agreement would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax savings calculated based on certain assumptions, as set forth in the Tax Receivable Agreement. In addition, the interest on the payments made pursuant to the Tax Receivable Agreement may significantly exceed ourRubicon’s other costs of capital. In certain situations, including upon the occurrence of the events described above, weRubicon could be required to make payments under the Tax Receivable Agreement that exceed its actual cash savings, requiring it to seek funding from other sources, including incurring additional debt. Thus, ourRubicon’s obligations under the Tax Receivable Agreement could have a substantial negative effect on its financial condition and liquidity.
Despite these potential costs, we do not believe that that the Tax Receivable Agreement will be a material detriment to ourRubicon’s and Holdings LLC’s future results of operations and liquidity, as any payments required under the Tax Receivable Agreement will arise directly from our realized (or in certain cases, deemed realized) tax savings of Rubicon as a result of certain tax benefits related to the Mergers and future exchanges of Class B Units for Class A Common Stock or cash and are expected to be made in lieu of income taxes otherwise payable by us.Rubicon. Additionally, weRubicon will receive the benefit of 15% of any such tax savings.
Debt
See Note 1, Nature of operations and summary of significant accounting policies, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for further information regarding the Tax Receivable Agreement.
Debt
On December 14, 2018, we entered into a Revolving Credit Facility, which was subsequently amended, and which providesprovided for borrowings of up to $60.0$75.0 million with a maturity date of the earlier of (a) December 14, 2025, (b) the maturity of the Term Loan and as recently(c) the maturity of the Subordinated Term Loan. During the three months ended June 30, 2023 until it was fully prepaid on June 7, 2023, the Revolving Credit Facility bore interest between 4.8% up to SOFR plus 4.9% determined based on certain metrics defined within the amended matures in December 2023. As of September 30, 2022,agreement. On June 7, 2023, we had approximately $30.1 million of borrowingsfully prepaid the borrowing under the Revolving Credit Facility in the amount of $48.6 million and terminated the facility, resulting in an unused borrowing capacity$2.6 million of approximately $21.2 million. We may use the proceedsa loss on extinguishment of future borrowings under the Revolving Credit Facility to finance our acquisition strategy and for other general corporate purposes. The Revolving Credit Facility bore interest at LIBOR plus 4.5% until an amended agreement entered on April 26, 2022, and since the amendment, it bore interest at SOFR plus 4.6%. We entered into an amended agreement on November 18, 2022, which extended the maturity of the Revolving Credit Facility and increased the interest rate thereafter to SOFR plus 5.6%. Additionally, pursuant to the amendment, we committed to raise $5.0 million from the Financing Commitment or a similar commitment by November 23, 2022, and additional $25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date our S-1 filed with the SEC on August 22, 2022 becomes effective, or (ii) January 31, 2023. Our Revolving Credit Facility also includes a lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at the discretion of the lender.debt obligations.
On March 29, 2019, we entered into a Term Loan agreement, which was subsequently amended, and which providesprovided for $60.0 million of term loan secured bywith a second lien on allmaturity date of our assets at an interest rate of LIBOR plus 9.5%.May 23, 2024. The Term Loan matures onbore interest at SOFR plus 9.6% during the earlier of March 2024 or the maturity date under the Revolving Credit Facility. We did not meet the minimum equity raise requirement of $50.0 million bythree months ended June 30, 2022, which if not met,2023 until it was fully prepaid on June 7, 2023. On June 7, 2023, we fully prepaid the lender could reduce the Term Loan collateral by $20.0 million and require the use of available funds under the Revolving Credit Facility as additional Term Loan collateral. As a result of the $20.0 million reduction in the Term Loan collateral, the availability under the Revolving Credit Facility was reduced by approximately $8.7 million as of September 30, 2022. As of September 30, 2022, we had loans outstandingborrowing under the Term Loan agreement with a total carrying value of $49.9 million. On November 18, 2022, we entered into an amendment to the Term Loan agreement, in which the lender consented to the amendments to the Revolving Credit Facility agreement and the Subordinated Term Loan agreement. Additionally, we committed to raise $5.0 million from the Financing Commitment or a similar commitment by November 23, 2022, and additional $25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date our S-1 filed with the SEC on August 22, 2022 becomes effective, or (ii) January 31, 2023. The amended Term Loan agreement also requires us to cause the Yorkville Investor to purchase the maximum amount of our equity interests available under the SEPA and to utilize the net proceeds from such drawdowns to repay the Term Loan until it is fully repaid. If we do not repay the Term Loan in full by March 27, 2023, we will be liable for an additional fee in the amount of $2.0$40.5 million outand terminated the facility, resulting in $2.5 million of which $1.0 million will be due in casha loss on March 27, 2023, and the other $1.0 million will accrue to the principal balanceextinguishment of the Term Loan. Furthermore, beginning on March 27, 2023, an additional $0.15 million fee will accrue to the principal balance of the Term Loan each week thereafter until the Term Loan is fully repaid.debt obligations.
We may not use the SEPA to fund the new equity financing commitments we agreed to in the amendments to the Revolving Credit Facility and Term Loan, and the financings used to satisfy the commitments under the Revolving Credit Facility amendment may be used to also satisfy the commitments under the Term Loan amendment.
On December 22, 2021, we entered into a Subordinated Term Loan agreement which provides for $20.0 million of term loan secured bywith a third lien on allmaturity date of our assets at an interest rate of 15.0%.May 23, 2024. The Subordinated Term Loan as recentlybore interest at 14% until the agreement was amended matures on December 31,June 7, 2023. As of September 30, 2022, we had term loans outstanding under the Subordinated Term Loan agreement with a total carrying value of $19.6 million. If we do not repay the Subordinated Term Loan on or before its maturity, the Subordinated Term Loan Warrants will become exercisable for additional Class A Common Stock until such time that the principal and interest are fully paid in cash. On November 18, 2022,June 7, 2023, we entered into an amendment to the Subordinated Term Loan agreement. The amendment extendedagreement, which modified (a) its maturity date to the earlier of (i) the scheduled maturity date (June 7, 2025, which we have an option to extend to June 7, 2026 upon achievement of certain conditions) and (ii) the maturity date of the June 2023 Revolving Credit Facility, unless the Springing Maturity applies, and (b) the interest rate the Subordinated Term Loan maturity through December 31, 2023.bears to 15.0%, of which 11.0% will be paid in cash and 4.0% will be paid in kind by capitalizing such interest accrued to the principal each month in arrears. Concurrently, we entered into an amendment to the Subordinated Term Loan Warrants agreements,agreement, which (i) increased the number of Class A Common Stock the lender has the right to purchase with the Subordinated Term Loan Warrants to such number of Class A Common Stock worth $2.6 million ($2.0 million prior to the amendment), (ii) caused the Subordinated Term Loan Warrants to be immediately exercisable upon execution of the amended Subordinated Term Loan Warrants agreements, and (iii) increased the value of Class A Common Stock the Additional Subordinated Term Loan Warrants will earn for the full calendar month starting June 23, 2023 to $0.38 million and such amount to increase by $25,000 each additional full calendar month after March 22, 2023 to $0.25 million ($0.2 million prior to the amendment)thereafter until we repay the Subordinated Term Loan in full.
On November 30, 2022, as part of the YA SPA, we received loansissued the First YA Convertible Debenture in the principal amount of $7.0 million for a purchase price of $7.0 million, net proceed of $5.0 million after deduction of commitment fee. The First YA Convertible Debenture has a maturity date of May 30, 2024 and bears interest at the rate of 4.0% per annum. The interest is due and payable upon maturity. At any time, so long as the First YA Convertible Debenture is outstanding, the Yorkville Investor may convert all or part of the principal and accrued and unpaid interest of the First YA Convertible Debenture into shares of Class A Common Stock. Outside of an event of default under the PPP, which was establishedFirst YA Convertible Debenture, the Yorkville Investor may not convert in any calendar month more than the greater of (a) 25.0% of the dollar trading volume of the shares of Class A Common Stock during such calendar month, or (b) $3.0 million. During the three months ended June 30, 2023, the Yorkville Investor converted $2.0 million of the principal and insignificant amount of the accrued interest of the First YA Convertible Debenture to Class A Common Stock. During the six months ended June 30, 2023, the Yorkville Investor converted $4.2 million of the principal and $0.1 million of the accrued interest to Class A Common Stock. There has been no additional conversion of the First YA Convertible Debenture subsequent to June 30, 2023. On August 8, 2023, the Yorkville Investor assigned the First YA Convertible Debenture to certain existing investors of ours affiliated with Jose Miguel Enrich. Pursuant to the assignment agreement, the assignees assumed all of the Yorkville Investor’s duties, liabilities and obligations under the CARES ActFirst YA Convertible Debentures and the Yorkville Investor was discharged of all of such duties, liabilities and obligations. Subsequently, the assignees and we entered into an amendment to the debenture which (a) extended the maturity date to December 1, 2026, (b) modified the fixed conversion price to $1.50 and (c) removed restrictions on the assignees’ ability to convert any portion of debenture or receive shares of Class A Common Stock if it would result in (i) the assignees beneficially owning in excess of 4.99% of the Company’s Class A Common Stock and (ii) the greater of (A) 25.0% of the dollar trading volume of the shares of Class A Common Stock during any calendar month or (B) $3.0 million in any calendar month.
On December 16, 2022, we entered into a security purchase agreement (the “First Closing Insider SPA”) with certain members of our management team and board of directors (the “First Closing Insider Investors”). Pursuant to the First Closing Insider SPA, on December 16, 2022, the First Closing Insider Investors purchased convertible debentures with a total principal amount of $11.9 million and the total net proceeds of $10.5 million (the “First Closing Insider Convertible Debentures”). The First Closing Insider Convertible Debentures had a maturity date of June 16, 2024, and accrue interest at a rate of 6.0% per annum. The interest is administereddue and payable quarterly in arrears, and any portion of the aggregate interest accrued may, at our option, be paid in kind by capitalizing the SBA,amount of accrued interest to the principal on each applicable interest payment date. At any time, so long as the First Closing Insider Convertible Debentures are outstanding, each of the First Closing Insider Investors may covert all or part of the principal and accrued and unpaid interest of their First Closing Insider Convertible Debentures into shares of Class A Common Stock. During the six months ended June 30, 2023, the First Closing Insider Investors did not convert any amount of the principal or accrued interest of the First Closing Insider Convertible Debentures. Concurrent with the issuance of the First Closing Insider Convertible Debentures, we entered into a lockup agreement with each of the First Closing Insider Investors, pursuant to which the First Closing Insider Investors agreed to not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, any shares of Class A Common Stock the holders may receive from their exercise of option to convert the First Closing Insider Convertible Debentures until the earlier of (i) June 16, 2024, and (ii) when the Yorkville Investor sells all shares of Class A Common Stock issued under the YA Convertible Debentures. The First Closing Insider SPA contained customary representations, warranties, and covenants for the sale and purchase of the First Closing Insider Convertible Debentures. On June 2, 2023 and July 11, 2023, we entered into an amendment to all of the First Closing Insider Convertible Debentures, extending their maturity date to December 1, 2026.
On February 1, 2023, we entered into security purchase agreements (the “Third Party SPA” and the “NZ Superfund SPA”, collectively the “Second Closing Insider SPA”) with various third-party investors (the “Third Party Insider Investors”) and the NZ Superfund (the Third Party Insider Investors and NZ Superfund collectively, “Second Closing Insider Investors”). Pursuant to the Second Closing Insider SPA, the Second Closing Insider Investors purchased the Third Party Insider Convertible Debentures and NZ Superfund Convertible Debenture (collectively “Second Closing Insider Convertible Debentures”) in the aggregate principal amount totaling $10.8of $6.5 million and purchase price of $5.7 million. The Second Closing Insider Convertible Debentures have a maturity date of August 1, 2024, and accrue interest at a rate of 6.0% per annum, except for NZ Superfund Debenture that accrued interest at 8.0% per annum. The interest is due and payable quarterly in arrears, and any portion of the aggregate interest accrued may, at our option, be paid in kind by capitalizing the amount of accrued interest to the principal on each applicable interest payment date. At any time, so long as the Second Closing Insider Convertible Debentures are outstanding, each of the Second Closing Insider Investors may covert all or part of the principal and accrued and unpaid interest of their Second Closing Insider Convertible Debentures into shares of Class A Common Stock. During the six months ended March 31, 2023, the Second Closing Insider Investors did not convert any amount of the principal or accrued interest of the Second Closing Insider Convertible Debentures. Concurrent with the issuance of the Second Closing Insider Convertible Debentures, we entered into a lockup agreement with each of the Second Closing Insider Investors, pursuant to which the Second Closing Insider Investors agreed to not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, any shares of Class A Common Stock the holders may receive from their exercise of option to convert the Second Closing Insider Convertible Debentures until the earlier of (i) August 1, 2024, and (ii) when the Yorkville Investor sells all shares of Class A Common Stock issued under the YA Convertible Debentures. The Second Closing Insider SPA contained customary representations, warranties, and covenants for the sale and purchase of the Second Closing Insider Convertible Debentures. On June 2, 2023 and July 31, 2023, we entered into amendments to all of the Second Closing Insider Convertible Debentures, extending their maturity date to December 1, 2026 and modifying the interest rate the NZ Superfund Convertible Debenture bears to 14.0%.
On February 2, 2023, we issued the Rodina Note. The Rodina Note has a principal of $3.0 million, accrues interest at an annual rate of 16.0% and matures on July 1, 2024. Interest is to be paid in kind by quarterly capitalizing the accrued amount to the principal at the end of each calendar quarter and will be due at maturity with the principal. On May 19, 2023, we entered into a loan conversion agreement to convert the principal and accrued interest of the Rodina Note to Class A Common Stock. Pursuant to the conversion agreement, we agreed to issue Class A Common Stock to the lender of the Rodina Note for a full and final settlement of the Rodina Note. On June 20, 2023, we issued Class A Common Stock in accordance with the conversion agreement and settled the Rodina Note.
On February 3, 2023, as part of the YA SPA, we issued the Second YA Convertible Debenture in the principal amount of $10.0 million for a purchase price of $10.0 million. The Second YA Convertible Debenture has a maturity date of May 30, 2024 and bears interest at the rate of 4.0% per annum. The interest is due and payable upon maturity. At any time, so long as the Second YA Convertible Debenture is outstanding, the Yorkville Investor may convert all or part of the principal and accrued and unpaid interest of the Second YA Convertible Debenture into shares of Class A Common Stock. Outside of an event of default under the Second YA Convertible Debenture, the Yorkville Investor may not convert in any calendar month more than the greater of (a) 25.0% of the dollar trading volume of the shares of Class A Common Stock during such calendar month, or (b) $3.0 million. During the three and six months ended June 30, 2023, the Yorkville Investor converted $1.3 million of the principal and $0.1 million of the accrued interest of the Second YA Convertible Debenture to Class A Common Stock. Additionally, subsequent to June 30, 2023, the Yorkville Investor converted $5.9 million of the principal and insignificant amount of the accrued interest of the Second YA Convertible Debenture to Class A Common Stock. On August 8, 2023, the Yorkville Investor assigned the Second YA Convertible Debenture to certain existing investors of ours affiliated with Jose Miguel Enrich. Pursuant to the assignment agreement, the assignees assumed all of the Yorkville Investor’s duties, liabilities and obligations under the Second YA Convertible Debentures and the Yorkville Investor was discharged of all of such duties, liabilities and obligations. Subsequently, the assignees and we entered into an amendment to the debenture which (a) extended the maturity date to December 1, 2026, (b) modified the fixed conversion price to $1.50 and (c) removed restrictions on the assignees’ ability to convert any portion of debenture or receive shares of Class A Common Stock if it would result in (i) the assignees beneficially owning in excess of 4.99% of the Company’s Class A Common Stock and (ii) the greater of (A) 25.0% of the dollar trading volume of the shares of Class A Common Stock during any calendar month or (B) $3.0 million in any calendar month.
On June 7, 2023, we entered into the June 2023 Revolving Credit Facility, which provides a line of credit up to $90.0 million, with a maturity date of the earlier of (i) June 7, 2026 or (ii) 90 days prior to the maturity date of the June 2023 Term Loan (the “Springing Maturity”). The June 2023 Revolving Credit Facility bears an interest rate of SOFR plus 4.25% (or 3.95% if the Company meets certain conditions defined in the agreement) (9.5% as of June 30, 2023). As of June 30, 2023, we had $46.2 million of borrowings under the Revolving Credit Facility and $3.0 million remained available to draw. The borrowing capacity is calculated based on qualified billed and unbilled receivables. The fee on the average daily balance of unused loan commitments is 0.5%. Interest and fees are payable monthly in arrears on the first day of each month.
On June 7, 2023, we entered into a $75.0 million June 2023 Term Loan agreement with a maturity date of the earlier of (i) the scheduled maturity date (June 7, 2025, which the Company has an option to extend to June 7, 2026 upon achievement of certain conditions) and (ii) the maturity date of the June 2023 Revolving Credit Facility, unless the Springing Maturity applies. The June 2023 Term Loan bears an interest rate of the prime rate plus a margin of 8.75% (or 8.25% if the Company meets certain conditions defined in the agreement). We have the option to pay the interest in kind each month in arrears by capitalizing such interest which accrues through September 30, 2023 as additional principal, and in such instance, the margin applicable for the interest rate is 10.25%. We elected to repay $2.3 millionpay the interest accrued through June 30, 2023 in kind, and thus, the applicable interest rate as of June 30, 2023 was 18.5%. We also have the option to pay in kind any excess interest over 13.25% after paying the first 13.25% in cash from October 1, 2023 through the maturity. At the time of any repayment of the PPP loans during the year ended December 31, 2020. The SBA forgave the PPP loansJune 2023 Term Loan, we are required to pay a fee in the full amount of $10.8 million along with associated accumulated interest during the year ended December 31, 2021, resulting in a refund12% of the $2.3 millionprincipal repaid. Beginning on October 7, 2023 until the June 2023 Term Loan is fully repaid, the lender has the option to elect to convert the outstanding principal into Class A Common Stock. The aggregate number of shares delivered to the lender cannot result in the lender’s ownership exceeding (i) 19.99% of the PPP loans repaid.number shares of Class A Common Stock issued and outstanding or (ii) $10.0 million. Concurrently, we entered into the June 2023 Term Loan Warrants agreements and issued common stock purchase warrants. The June 2023 Term Loan Warrants granted the lender the right to purchase up to 16,972,879 shares of Class A Common Stock (the June 2023 Term Loan Warrants Shares) at the exercise price of $0.01 any time before June 7, 2033. If at any time on or before December 7, 2024, we issue additional shares of common stock (excluding any shares of common stock or securities convertible into or exchangeable for shares of common stock under our equity incentive plans existing as of the issue date), the number of the June 2023 Term Loan Warrants Shares issuable upon exercise immediately prior to such common stock issuance will be proportionately increased such that the percentage represented by the June 2023 Term Loan Warrants Shares in Rubicon’s diluted common stock outstanding will remain the same. Additionally, the holders of the June 2023 Term Loan Warrants have the right to purchase up to the pro rata portion of any new common stock issuance by Rubicon up to $20.0 million in the aggregate, with certain exceptions defined in the agreement. Since the issuance through June 30, 2023, none of the June 2023 Term Loan Warrants were exercised.
The June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan are subject to certain cross-default provisions under the intercreditor agreement. Additionally, the June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan agreements include the consistent Minimum Liquidity Threshold, which reduces the availability under the June 2023 Revolving Credit Facility initially by $19.0 million. During the terms of the agreements, the Minimum Liquidity Threshold could be decreased by up to $9.0 million, which will make the Minimum Liquidity Threshold to $10.0 million, if we achieve certain financial conditions defined in the agreements. As of SeptemberJune 30, 20222023, the Minimum Liquidity Threshold was $19.0 million. Furthermore, the June 2023 Revolving Credit Facility, the June 2023 Term Loan and December 31, 2021, we had no outstanding PPP loan balances. The SBA and other government communications have however indicated that all loans in excess ofthe Subordinated Term Loan agreements require us to maintain a $2.0 million willletter of credit, which could be subject to audit and that those audits could take up to seven years to complete.eliminated upon our achievement of certain financial conditions defined in the agreements.
See Note 5 – Debt, Note 9 – Warrantsand Note 20,19 – Subsequent Eventsevents, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Qreport for a more detailed description of our indebtedness and the recent amendments thereto.indebtedness.
We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.
Other Financing Arrangements
On May 25, 2022, we entered into the Rubicon Equity Investment Agreement (Simple Agreement for Future Equity or “SAFE”) with certain investors, whereby, the investors advanced us $8,000,000 and, in connection with the consummation of the Mergers and in exchange for the advancements, (a) Holdings LLC issued 880,000 of its Class B Units to such investors, (b) Rubicon issued 160,000 shares of Class A Common Stock to such investors, and (c) Founder SPAC Sponsor LLC forfeited 160,000 shares of Class A Common Stock. All the obligations thereunder were satisfied upon the Closing and the exchanges for the advancements discussed above. See Note 10, Equity Investment Agreement, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for more information regarding the SAFE.
On August 4, 2022, we entered into the Forward Purchase Agreement for an OTC Equity Prepaid Forward Transaction with the FPA Sellers. Pursuant to the Forward Purchase Agreement, prior to the Closing, the FPA Sellers purchased an aggregate of 7,082,616 shares of Class A Common Stock from Founder shareholders who, pursuant to the governing documents of Founder, elected to redeem such shares in connection with the Closing, and upon such purchase, the FPA Sellers waived their redemption rights to such securities. The Forward Purchase Agreement resulted in an additional $4.0 million of cash at the Closing. Pursuant to the terms therein, we are entitled to receive certain additional payments in the future periods in connection with certain sales of Class A Common Stock by the FPA Sellers, if any. In addition, we may be required to issue additional shares of Class A Common Stock pursuant to the FPA Agreement. See Note 11, Forward-Purchase Agreement, and Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for more information regarding the Forward Purchase Agreement and for discussion of the occurrence of a VWAP Trigger Event, which could allow the FPA Sellers to accelerate the maturity date of the Forward Purchase Agreement.
On August 31, 2022, we entered into the SEPA with the Yorkville Investor.Investor, which was subsequently amended on November 30, 2022. Pursuant to the SEPA, we haveRubicon has the right to sell to the Yorkville Investor, from time to time, up to $200.0 million of shares of our Class A Common Stock at a discounted per share price until the earlier of the 36-month36 month anniversary of the SEPA or until the date on which the facility has been fully utilized, subject to certain limitations and conditions set forth in the SEPA. Salestherein. Any issuances and sales of Class A Common Stock to the Yorkville Investor under the SEPA, and the timing of any such sales, are at our option, and we are under no obligation to sell any securities to the Yorkville Investor under the SEPA. Pursuant to the SEPA, on August 31, 2022, the Companywe issued the Yorkville Investor 200,000 shares of Class A Common Stock, which represented an initial up-front commitment fee. The Company hasWe have not sold any shares of Class A Common Stock under the SEPA during the period frombetween August 31, 2022 and SeptemberJune 30, 2022. See2023. For more information regarding the SEPA, see Note 12,11 – Standby Equity Purchase AgreementYorkville Facilities, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1this report.
On November 30, 2022, we entered into the YA Warrant, which is exercisable at a price of Part I, “Financial Statements”$0.0001 per share for a number of this Quarterly Report on Form 10-Q forshares of Class A Common Stock equal to $20.0 million, subject to certain adjustments pursuant to the terms set forth therein. We received approximately $6.0 million in proceeds from the issuance of the YA Warrant. For more information regarding the SEPA.
On November 14, 2022, we entered into a binding Financing Commitment with certain existing investors, whereby the investors intend to provide us with up to $30.0 million of financing through the issuance by us of debt and/or equity securities including, without limitation, shares of capital stock, securities convertible into or exchangeable for shares of capital stock, warrants, options, or other rights for the purchase or acquisition of such shares and other ownership or profit interests of the Company. Any debt issued pursuant to this letter would have a term of at least 12 months and any equity or equity linked securities issued under this letter would have a fixed price such that no other shareholder or other exchange approvals would be required. The amount the investors agreed to contribute under the Financing Commitment will be reduced on a dollar-for-dollar basis by the amount of any other equity capital we receive through January 15, 2023. SeeYA Warrant, see Note 20,11 – Subsequent EventsYorkville Facilities, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q for more information regarding the Financing Commitment.report.
In May 2023, we entered into the May 2023 Equity Agreements with various investors, including entities affiliated with Andres Chico and Jose Miguel Enrich, pursuant to which we agreed to issue Class A Common Stock for the total purchase price of $23.7 million. On June 20, 2023, we issued Class A Common Stock to the investors pursuant to the May 2023 Equity Agreements.
Contractual Obligations
Our principal commitments consist of obligations under debt agreements and leases for office facilities. We have a substantial level of debt. For more information regarding our debt service obligations and our lease obligations, see Note 5 – Debt and Note 16,15 – Commitments and contingencies, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q, respectively. report.
As of SeptemberJune 30, 2022,2023, our software services subscription agreement with Palantir Technologies, Inc.a certain PIPE Investor requires us to pay an aggregate of $34.3$24.4 million through October 2024, $15.5$16.9 million of which is due through SeptemberJune 30, 2023.2024. See Note 17,15 – Related party transactionsCommitments and contingencies, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Qreport for more information regarding our software services subscription agreement with Palantir Technologies, Inc. the PIPE Investor.
As disclosed in Note 15 – Commitments and contingencies, on March 28, 2023 and June 27, 2023, we entered into amendments to the software services subscription agreement with the PIPE Investor, which provides us with the option, in our sole discretion, to settle the $7.5 million of fees which are scheduled to become due between July 2023 and December 2023 (i) in cash or (ii) our equity or debt securities if we satisfy certain conditions as defined within the amended agreement.
As disclosed in Note 19 – Subsequent events, to our unaudited interim condensed consolidated financial statements included elsewhere in this report, in accordance with the amended agreement, we settled $1.9 million of the software services subscription fee incurred during the three months ended June 30, 2023 by issuing Class A Common Stock on July 6, 2023.
As disclosed in Note 19 – Subsequent events, to our unaudited interim condensed consolidated financial statements included elsewhere in this report, we terminated the operating lease for an office facility in Lexington, Kentucky.
We could also be required to make certain significant payments under the Tax ReceivablesReceivable Agreement discussed above. Additionally, in connection with the Mergers, as of September 30, 2022, $44.2 million of fees for certain advisors have been recognized as accrued expenses on our unaudited interim condensed consolidated balance sheet included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q. As disclosed in Note 20, Subsequent Events, included in Item 1 of Part I, “Financial Statements” of this Quarterly Report on Form 10-Q, we settled with an advisor on the fees for certain professional services provided in connection with the Mergers on November 4, 2022, which reduced the total transaction costs by $10.7 million. These advisory fees are due on various dates on or before February 15, 2023, most of which are to be paid in cash or Class A Common Stock at our discretion, in accordance with the terms of the agreements with each of the advisors.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements areand accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the followingFor additional information about our critical accounting policies reflectand estimates, see the moredisclosure included in our Annual Report on Form 10-K for the year ended December 31, 2022 as well as Note 1, Nature of operations and summary of significant estimates and assumptions usedaccounting policies in the preparation of our consolidated financial statements.
Revenue recognition
We derive our revenue principally from waste removal, waste management and consultation services, platform subscriptions, and the purchase and sale of recyclable commodities. We recognize service revenue over time, consistent with efforts performed and when the customer simultaneously receives and consumes the benefits provided by our services. We recognize recyclable commodity revenue at the point in time when the ownership, risks and rewards are transferred.
Further, judgment is required in evaluating the presentation of revenue on a gross versus net basis based on whether we control the service providednotes to the end-user and are the principal in the transaction (gross), or we arrange for other parties to provide the service to the end-user and are the agent in the transaction (net). We have concluded that we are the principal in most arrangements as we control the waste removal service and are the primary obligor in the transactions. The assessment of whether we are considered the principal or the agent in a transaction could impact the timing and amount of revenue recognized.
Customer acquisition costs
We make certain expenditures related to acquiring contracts for future services. These expenditures are capitalized as customer acquisition costs and amortized in proportion to the expected future revenue from the customer, which in most cases results in straight-line amortization over the life of the customer. Amortization of these customer acquisition costs is presented within amortization and depreciation on our consolidated statements of operations. Subsequent adjustments to customer acquisition costs estimates are possible because actual results may differ from these estimates if conditions dictate the need to enhance or reduce customer acquisition costs.
Equity-based compensation
We account for equity-based compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which require compensation expense for the grant-date fair value of equity-based awards to be recognized over the requisite service period.
Warrants
We have issued warrants to purchase shares of our Class A Common Stock. Warrants may be accounted for as either liability or equity instruments depending on the terms of the warrant agreements. We determine whether each of the warrants issued require liability or equity classification at their issuance dates. Warrants classified as equity are recorded at fair value as of the date of the issuance on our consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as liability are recorded at fair value as of the date of the issuance on our consolidated balance sheets and subsequently remeasured at each reporting period with changes being recorded as a component of other income (expense) on our consolidated statements of operations.
Following the consummation of the Mergers on August 15, 2022, we have both liability-classified and equity-classified warrants outstanding. See Note 9, Warrants, of the unaudited condensed consolidated financial statements included in Item 1 of Part I, “Financial Statements”Item 1, of this Quarterly Report on Form 10-Q for further information.10-Q.
Income taxes
Rubicon Technologies, Inc. is a corporation and is subject to U.S. federal as well as state income taxes including the income or loss allocated from its investment in Rubicon Technologies Holdings, LLC. Rubicon Technologies Holdings, LLC is taxed as a partnership for which the taxable income or loss is allocated to its members. Certain of the Rubicon Technologies Holdings, LLC operating subsidiaries are considered taxable Corporations for U.S. income tax purposes. Prior to the Mergers, Holdings LLC was not subject to U.S. Federal and certain state income taxes at the entity level.
We account for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute our business plans and tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed.
We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. The tax positions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statutes of limitations. At September 30, 2022 or December 31, 2021, we have no tax positions that meet this threshold and, therefore, have not recognized any adjustments. While we believe our tax positions are fully supportable, they may be challenged by various tax authorities. If actual results were to be materially different than estimated, it could result in a material impact on our consolidated financial statements in future periods.
The provision for income taxes includes the impact of reserve provisions and changes to reserves as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the tax authorities which may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes.
Loss contingencies
In the ordinary course of business, we are or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour and other claims. We record a provision for a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements.
We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Significant judgment is required to determine both the probability and the estimated amount of loss. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based on new information and future events.
The outcomes of litigation and other disputes are inherently uncertain and subject to significant uncertainties. Therefore, if one or more of these matters were resolved against us for amounts in excess of management’s expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
Leases
Leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use (“ROU”) assets and lease liabilities. Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Recent Accounting Pronouncements
For information regarding recently issued accounting pronouncements and recently adopted accounting pronouncements, see Note 2 – Recent accounting pronouncements, to our unaudited interim condensed consolidated financial statements included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q.report.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. All statements, other than statements of present or historical fact included in this Quarterly Report, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “could,” “would,” “should,” “seeks,” “plans,” “scheduled,” “anticipates,” “intends,” the negative of such terms and similar expressions, although not all forward-looking statements contain such identifying words. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statement. These forward-looking statements are based upon current expectations, estimates, projections, and assumptions that, while considered reasonable by the Company and its management, are inherently uncertain; factors that may cause actual results to differ materially from current expectations include, but are not limited to: 1) the outcome of any legal proceedings that may be instituted against the Company or others following the closing of the business combination;Mergers; 2) the Company’s ability to meet the NYSE’s listing standards following the consummation of the business combination;Mergers; 3) the risk that the business combination disruptsMergers disrupt current plans and operations of the Company as a result of consummation of the business combination;Mergers; 4) the ability to recognize the anticipated benefits of the business combination,Mergers, which may be affected by, among other things, the ability of the combined company to grow and manage growth profitably, maintain relationships with customers and suppliers and retain its management and key employees; 5) costs related to the business combination;Mergers; 6) changes in applicable laws or regulations; 7) the possibility that the Company may be adversely affected by other economic, business and/or competitive factors, including the impacts of the COVID-19 pandemic, geopolitical conflicts, such as the conflict between Russia and Ukraine, the effects of inflation and potential recessionary conditions; 8) the Company’s execution of anticipated operational efficiency initiatives, cost reduction measures and financing arrangements; and 9) other risks and uncertainties. More information regarding the risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth under the heading “Risk Factors” in our Registration StatementAnnual Report on Form S-1,10-K, as filed with the SEC on August 22,2022,March 23,2023, and as may be updated in this and other subsequent Quarterly Reports on Form 10-Q and the Company’s other filings with the SEC. There may be additional risks that the Company presently does not know of or that the Company currently believes are immaterial that could also cause actual results to differ from those contained in the forward-looking statements, many of which are beyond the Company’s control. Forward-looking statements are not guarantees of future performance and speak only as of the date hereof. We do not undertake, and expressly disclaim, any obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
InWe are a smaller reporting company, as defined by Rule 12b-2 under the normal courseExchange Act and in Item 10(f)(1) of business, we are exposed to market risks, including changes in interest rates, certain commodity prices and foreign currency rates. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Interest rate risk
Our exposures to market risk for changes in interest rates relate primarily to our Term Loan Facility and our Revolving Credit Facility. The Term Loan Facility and Revolving Credit Facility are floating rate loans and bear interest subject to LIBOR or SOFR. Therefore, fluctuations in interest rates will impact our consolidated financial statements. A rising interest rate environment will increase the amount of interest paid on these loans. A hypothetical 100 basis point increase or decrease in interest rates would not have a material effect on the results of our operations.
Recyclable commodity price risk
Through our recycling program, we market a variety of materials, including fibers such as old corrugated cardboard, old newsprint, aluminum, glass, pallets and other recyclable materials. We may use a number of strategies to mitigate impacts from recyclable commodity price fluctuations including, entering into purchase contracts indexed to the recyclable commodity price such that we mitigate the variability in cash flows generated from the sales of recycled materials at floating prices. We do not use financial instruments for trading purposesRegulation S-K and are not a party to any leveraged derivatives. As of September 30, 2022, we were not a party to any recyclable commodity hedging agreements. In the event of a decline in recyclable commodity prices, a 10% decrease in average recyclable commodity prices from the average prices in effect would have impacted our revenues by $7.2 million and $4.6 million for the nine months ended September 30, 2022 and 2021, respectively. A 10% decrease in average recyclable commodity prices from the average prices in effect would have impacted our operating loss by $0.6 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Foreign currency risk
To date, foreign currency transaction gains and losses have not been material to our consolidated financial statements as the majority of our revenue has been generated in the United States. As we expand our presence in international markets, to the extent we are required to enter into agreements denominated in a currency other thanprovide the US dollar, our results of operations and cash flows may increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.information under this item.
Inflation
To date, the impact of inflation on our business results has been primarily limited to increases of revenue and cost of revenue, such that the net effect has been insignificant to our gross profit, adjusted gross profit and net loss. We expect this trend to continue as most contracts with our waste generator customers allow us to adjust the applicable prices without any significant advanced notice requirement based on the economic environment where fees charged by our hauling and recycling partners are increasing, and recyclable commodity price fluctuations tend to impact both selling and purchasing sides in a similar manner. However, we may not be able to adjust prices quickly enough or sufficiently to offset the effect of certain other cost increases, such as labor costs, without negatively impacting customer demand.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control overOver Financial Reporting
During the quarter ended SeptemberJune 30, 2022, we completed the Mergers and the internal controls of Rubicon Technologies Holdings, LLC became our internal controls. Management has added resources and implemented a number of process2023, there were no significant changes to improve the design and implementation ofin our internal control over financial reporting as such term is(as defined in RulesRule 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act in a manner commensurate withof 1934, as amended) that have materially affected or are reasonably likely to materially affect the scale of our operations subsequent to the Mergers.Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item 1In the ordinary course of Part I, “Financial Statements – Note 16, Commitmentsbusiness, we are or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and contingencies – Legal Matters.”other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour and other claims. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position.
Item 1A. Risk Factors
Factors that could materially and adversely affect our business, financial condition and/or resultsAs of operations are described in our Registration Statement on Form S-1,the date of this quarterly report, other than as filed with the SEC on August 22, 2022. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business, financial condition and/or results of operations. Other than the risk factor set forth below, there have been no material changes with respect to those risk factors previously disclosed in our risk factors since our Registration Statement(i) registration statement on Form S-1, as originally filed with the SEC on February 8, 2023 (as further amended, the “Registration Statement”), (ii) the 10-K Annual Report as filed with the SEC on August 22, 2022.
Our current liquidity, including negative cash flowsMarch 23, 2023, and a lack of existing financial resources, raises substantial doubt about our ability to continue as a going concern, which may materially and adversely affect our business, financial condition, results of operations and prospects.
Pursuant to ASC 205, Presentation of Financial Statements, we are required to and do evaluate at each annual and interim financial statement period whether there are conditions or events, considered in(iii) the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Based on the definitions in the relevant accounting standards and our history of operating losses and negative cash flows, we currently project that we will not have sufficient cash on hand or available liquidity under existing arrangements to meet our projected liquidity needs for the next 12 months, which raises substantial doubt about our ability to continue as a going concern.
Although we have taken, and plan to continue to take, proactive measures to enhance our liquidity position and provide additional financial flexibility, including, among other things, negotiation with respect to the New Debt Facilities and receipt of binding commitments for the Financing Commitment, there can be no assurance that these measures, including the timing and terms thereof, will be successful or sufficient. Any new financing may also lead to increased costs, increased interest rates, additional and more restrictive financial covenants and other lender protections, and whether we will be able to successfully complete any such refinancing will depend on market conditions, the negotiations with those lenders and investors, and our financial performance. The Financing Commitment and the New Debt Facilities are also proposed to include potential equity financing, the terms of which could cause substantial dilution to existing stockholders. In addition, we are formulating additional plans to extend cash availability, including modifying our operations to further reduce spending, but these steps may not produce the anticipated results or provide any benefit at all. While management believes that our plan to address the pending debt maturities is probable of being achieved, and our financial statements have accordingly been prepared assuming that we will continue as a going concern, there can be no assurance the necessary financing will be available on terms acceptable to us, or at all. See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 19, Liquidity, and Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included elsewhere in this10-Q Quarterly Report filed with the SEC on Form 10-Q for further information.
If we are unable to obtain adequate additional capital resources to fund our liquidity needs, we will not be able to continue to operate our business pursuant to our current business plan, which would require us to further modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing, product development and other activities, selling certain business lines or assets or we may be forced to discontinue our operations entirely and/or liquidate our assets, in which case it is likely that equity investors would lose most or all of their investment. The substantial doubt about our ability to continue as a going concern may also affect the price of our common stock and our credit rating, negatively impact relationships with third parties with whom we do business, including customers, vendors, lenders and employees, prevent us from identifying, hiring or retaining the key personnel that may be necessary to operate and grow our business and limit our ability to raise additional capital.May 22, 2023. Any of the foregoingthese factors could haveresult in a significant or material adverse effect on our business, financial condition, results of operations and prospects.or financial condition. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Except as previously disclosed in a Current Report on Form 8-K or as disclosed below, no unregistered sales of the Company’s equity securities were made during the fiscal quarter ended SeptemberJune 30, 2022.2023.
Use of Proceeds
In connection with its Initial Public Offering, Founder incurred offering costs of $18.2 million, consisting of $6.3 million of underwriting fees, $11.1 million of deferred underwriting fees and $0.8 million of other offering costs. After deducting the underwriting discounts and commissions (excluding the deferred portion, which amount was payable upon consummation of the Mergers) and the Initial Public Offering expenses, $321.0 million of the net proceeds from our Initial Public Offering and from the Private Placement of the Private Placement Warrants was placed in the Trust Account. After deducting payments to existing shareholders of $246.0 million in connection with their exercise of redemption rights, the remainder of the trust account was used to fund the Mergers.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Deadlines for Stockholder Proposals and Director Nominations to Be Considered at the 2023 Annual Meeting of Stockholders
In accordance with Rule 14a-8 under the Exchange Act (“Rule 14a-8”) and the Bylaws (the “Bylaws”) of the Company, the deadlines for the receipt of any stockholder proposals and director nominations to be considered at the 2023 Annual Meeting of Stockholders (the “2023 Annual Meeting”) are set forth below.
Any stockholder proposal submitted pursuant to Rule 14a-8 for inclusion in the Company’s proxy materials for the 2023 Annual Meeting must be received by our corporate secretary at our principal executive offices no later than the close of business on December 27, 2022. Any such proposal also needs to comply with the SEC’s stockholder proposal rules, including the eligibility requirements set forth in Rule 14a-8.
In addition, any stockholder seeking to nominate a director or to bring other business before the 2023 Annual Meeting outside of Rule 14a-8 under the advance notice provisions included in the Bylaws must provide timely notice, as set forth in the Bylaws. Specifically, written notice of any such proposed business or nomination must be received by our corporate secretary at our principal executive offices no earlier than the close of business on February 1, 2023 and no later than the close of business on March 3, 2023. Any notice of proposed business or nomination also must comply with the notice and other requirements set forth in the Bylaws and with any applicable law.
For purposes of stockholder proposals, the “close of business” shall mean 6:00 p.m. local time at the principal executive offices of the Company on any calendar day, whether or not the day is a business day.
Results of Operations and Financial Condition
On November 9, 2022,August 8, 2023, the Company filed with the SEC a Current Report on Form 8-K (the “Form 8-K”), including as Exhibit 99.1 thereto a press release that announced earnings results for the quarter ended SeptemberJune 30, 20222023 (the “Earnings Release”). On November 18, 2022,August 8, 2023, the Yorkville Investor assigned the YA Convertible Debentures to certain existing investors of the Company (1)affiliated with Jose Miguel Enrich (a beneficial owner of greater than 10% of the issued and outstanding Class A Common Stock and Class V Common Stock). Pursuant to the assignment agreement, the assignees assumed all of the Yorkville Investor’s duties, liabilities and obligations under the YA Convertible Debentures and the Yorkville Investor was discharged of all of such duties, liabilities and obligations. Subsequently, the Company and the assignees entered into an amendment to the Revolving Credit Facility agreement anddebentures which extended its termtheir terms through December 14, 2023 and (2) entered into an amendment to the Subordinated Term Loan agreement and extended its term through December 31, 2023 (collectively, the “Amendments”).1, 2026.
As a result, of the Amendments, the Company has reclassified $69.5$9.5 million of indebtedness, previously presented in “Debt obligations, net of debt issuance costs” under “Current portion of long-term debt, net of issuance costs” inLiabilities” on the Company’s unaudited condensed consolidated balance sheets at Septembersheet as of June 30, 20222023 included in the Earnings Release, as “Long-term debt,to “Debt obligations, net of debt issuance costs,”costs” under “Long-Term Liabilities” as presented inon the Company’s unaudited condensed consolidated balance sheets at Septembersheet as of June 30, 20222023 included elsewhere in this Quarterly Report on Form 10-Q. Additionally, the Company has reclassified $2.2 million previously presented in “Derivative Liabilities” under “Current Liabilities” on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2023 included in the Earnings Release, to “Derivative Liabilities” under “Long-Term Liabilities” as presented on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2023 included elsewhere in this Quarterly Report on Form 10-Q. The Company is not revising the Earnings Release previously filed with the Form 8-K as a result of thisthese subsequent update.updates.
Item 6. Exhibits
| | | | | Incorporated by Reference |
| Exhibit | | Description | | Schedule/
Form | | File Number | | Exhibits | | Filing Date |
| 2.1# | | Merger Agreement, dated as of December 15, 2021, by and among Founder, Merger Sub, the Blocker Companies, the Blocker Merger Subs and Rubicon. | | Form 8-K | | 001-40910 | | 2.1 | | December 17, 2021 |
| 3.1 | | Certificate of Incorporation of Rubicon Technologies, Inc. | | Form 8-K | | 001-40910 | | 3.2 | | August 19, 2022 |
| 3.2 | | Bylaws of Rubicon Technologies, Inc. | | Form 8-K | | 001-40910 | | 3.3 | | August 19, 2022 |
| 4.1 | | Specimen Warrant Certificate of Founder. | | Form S-1/A | | 333-258158 | | 4.3 | | October 12, 2021 |
| 4.2 | | Warrant Agreement, dated October 14, 2021, by and between Founder and Continental Stock Transfer & Trust Company, as warrant agent. | | Form 8-K | | 001-40910 | | 4.1 | | October 20, 2021 |
| 4.3 | | Amendment of Warrant Agreement, dated August 15, 2022, by and between Rubicon Technologies, Inc. and Continental Stock Transfer & Trust Company, as warrant agent. | | Form 8-K | | 001-40910 | | 4.5 | | August 19, 2022 |
| 4.4 | | Specimen Class A Common Stock Certificate of Rubicon Technologies, Inc. | | Form S-4/A | | 333-262465 | | 4.5 | | June 24, 2022 |
| 10.1 | | Letter Agreement, dated October 14, 2021, by and among Founder, its executive officers, its directors and Sponsor. | | Form 8-K | | 001-40910 | | 10.1 | | October 20, 2021 |
| 10.2^ | | Indemnity Agreements, dated October 14, 2021, by and among Founder and its directors and officers. | | Form S-1/A | | 333-258158 | | 10.4 | | October 12, 2021 |
| 10.3^ | | Form of Indemnification Agreement of Rubicon Technologies, Inc. | | Form 8-K | | 001-40910 | | 10.3 | | August 19, 2022 |
| 10.4^ | | Rubicon Technologies, Inc. 2022 Equity Incentive Plan. | | Form 8-K | | 001-40910 | | 10.4 | | August 19, 2022 |
| 10.5# | | Amended and Restated Registration Rights Agreement, dated as of August 15, 2022, by and among Founder, Sponsor, Rubicon, and certain equityholders of Rubicon. | | Form 8-K | | 001-40910 | | 10.5 | | August 19, 2022 |
| 10.6 | | Form of Lock-Up Agreement, by and among Founder, Rubicon and certain equityholders of Rubicon. | | Form 8-K | | 001-40910 | | 10.4 | | December 17, 2021 |
| 10.7 | | Form of Subscription Agreement by and among Founder and the subscriber parties thereto. | | Form 8-K | | 001-40910 | | 10.3 | | December 17, 2021 |
| 10.8 | | Sponsor Agreement by and among Founder, Rubicon, Sponsor, and certain insiders of Founder. | | Form 8-K | | 001-40910 | | 10.1 | | December 17, 2021 |
| 10.9# | | Eighth Amended and Restated Limited Liability Company Agreement of Rubicon Technologies Holdings, LLC. | | Form 8-K | | 001-40910 | | 10.9 | | August 19, 2022 |
| 10.10# | | Tax Receivable Agreement, dated August 15, 2022, by and among New Rubicon, Rubicon, the TRA Representative, and certain former equityholders of Rubicon. | | Form 8-K | | 001-40910 | | 10.10 | | August 19, 2022 |
| 10.11^ | | Amended and Restated Employment Agreement, by and between Nate Morris and Rubicon Global Holdings, LLC, effective as of February 9, 2021, as amended on April 26, 2022 and August 10, 2022. | | Form 8-K | | 001-40910 | | 10.11 | | August 19, 2022 |
| 10.12^ | | Employment Agreement, by and between Phil Rodoni and Rubicon Global Holdings, LLC, dated as of November 17, 2016, as amended on April 20, 2019, April 16, 2020, August 4, 2020, January 3, 2021, February 3, 2021, and November 30, 2021. | | Form S-4/A | | 333-262465 | | 10.19 | | May 12, 2022 |
| 10.13^ | | Employment Agreement, by and between Michael Heller and Rubicon Global Holdings, LLC, dated as of November 17, 2016, as amended on July 11, 2018, January 5, 2019, April 16, 2020, September 17, 2020, January 3, 2021, and February 3, 2021. | | Form S-4/A | | 333-262465 | | 10.20 | | June 10, 2022 |
| 10.14 | | Rubicon Equity Investment Agreement, dated May 25, 2022, by and among Rubicon, Founder, Sponsor, MBI Holdings LP, David Manuel Gutiérrez Muguerza, Raul Manuel Gutiérrez Muguerza, and Sergio Manuel Gutiérrez Muguerza. | | Form S-4/A | | 333-262465 | | 10.21 | | June 24, 2022 |
| 10.15 | | Form of Insider Loan, dated July 19, 2022, by and between Rubicon and each of those certain members, affiliates, directors and officers of Rubicon. | | Form 8-K | | 001-40910 | | 10.15 | | August 19, 2022 |
| 10.16 | | Sponsor Forfeiture Agreement, dated August 15, 2022, by and among Founder, Sponsor and Rubicon. | | Form 8-K | | 001-40910 | | 10.16 | | August 19, 2022 |
| 10.17 | | Underwriting Agreement, dated October 14, 2021, by and between Founder and Jefferies LLC, as representative of the underwriters. | | Form 8-K | | 001-40910 | | 1.1 | | October 19, 2021 |
| 10.18 | | Forward Purchase Agreement, dated August 4, 2022, by and among ACM ARRT F LLC, Founder, and Rubicon. | | Form 8-K | | 001-40910 | | 10.1 | | August 5, 2022 |
| 10.19# | | Fourth Amendment to Loan and Security Agreement, dated April 26, 2022, by and among Rubicon Global, LLC, RiverRoad Waste Solutions, Inc., Rubicon, Cleanco LLC, Charter Waste Management, Inc. and Pathlight Capital LP. | | Form 8-K | | 001-40910 | | 10.1 | | August 19, 2022 |
| 10.20# | | Loan and Security Agreement, dated December 21, 2021, by and among Rubicon Global, LLC, RiverRoad Waste Solutions, Inc., Rubicon, Cleanco LLC, Charter Waste Management, Inc., Rubicon Technologies International, Inc., the lenders thereto, and Mizzen Capital, LP. | | Form 8-K | | 001-40910 | | 10.20 | | August 19, 2022 |
| 10.21# | | Fifth Amendment to Loan and Security Agreement, dated April 26, 2022, by and among the lenders thereto, Eclipse Business Capital LLC, Rubicon Global, LLC, RiverRoad Waste Solutions, Inc., Rubicon, Cleanco LLC, and Charter Waste Management, Inc. | | Form 8-K | | 001-40910 | | 10.21 | | August 19, 2022 |
| 10.23 | | Standby Equity Purchase Agreement, dated August 31, 2022, by and between Rubicon Technologies, Inc. and YA II PN, Ltd. | | Form 8-K | | 001-40910 | | 10.1 | | August 31, 2022 |
| 10.24^ | | CEO Transition Agreement, dated October 13, 2022 | | Form 8-K | | 001-40910 | | 10.1 | | October 14, 2022 |
| 10.25^ | | Form of Grant Notice for Restricted Stock Unit Award and Standard Terms and Conditions for Restricted Stock Units (Rollover Form) under the Rubicon Technologies, Inc. 2022 Equity Incentive Plan. | | Form S-8 | | 333-267947 | | 99.2 | | October 19, 2022 |
| 10.26^ | | Amended and Restated Employment Agreement by and between Rubicon Technologies Holdings, LLC, Rubicon Technologies, Inc., and Kevin Schubert, dated November 8, 2022. | | Form 8-K | | 001-40910 | | 10.1 | | November 9, 2022 |
| 31.1* | | Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 31.2* | | Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 32.1** | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 32.2** | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
101.INS | | Inline XBRL Instance Document. | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit | | Description | | Schedule/
Form | | File Number | | Exhibits | | Filing Date |
| 4.1 | | Form of Warrant Agreement by and between Rubicon Technologies, Inc. and each holder thereto. | | 8-K | | 001-40910 | | 4.1 | | June 8, 2023 |
| 10.1 | | Form of May 2023 Equity Subscription Agreement | | 8-K | | 001-40910 | | 10.1 | | May 24, 2023 |
| 10.2 | | Eighth Amendment to Loan and Security Agreement, dated as of May 19, 2023, by and among the Borrowers, Guarantors, and Pathlight Capital LP. | | 8-K | | 001-40910 | | 10.2 | | May 24, 2023 |
| 10.3 | | Third Amendment to Subordinated Term Loan Agreement, dated as of May 19, 2023, by and among the Borrower, Guarantors, and Mizzen Capital LP. | | 8-K | | 001-40910 | | 10.3 | | May 24, 2023 |
| 10.4 | | The Loan Conversion Agreement, dated as of May 19, 2023, by and between the Company and CHPAF Holdings SAPI de CV. | | 8-K | | 001-40910 | | 10.4 | | May 24, 2023 |
| 10.5 | | Financing Commitment, dated as of May 20, 2023, by and between the Company and Rodina Capital. | | 8-K | | 001-40910 | | 10.5 | | May 24, 2023 |
| 10.6 | | Amendment to the Grant Notice and Standard Terms and Conditions of Restricted Stock Unit Award, dated as of May 21, 2023, of Philip Rodoni. | | 8-K | | 001-40910 | | 10.6 | | May 24, 2023 |
| 10.7 | | Amendment to CEO Transition Agreement, dated as of May 21, 2023, of Nathaniel Morris. | | 8-K | | 001-40910 | | 10.7 | | May 24, 2023 |
| 10.8 | | Credit, Security and Guaranty Agreement, dated as of June 7, by and among the Borrowers, Guarantors and Acquiom Agency Services LLC. | | 8-K | | 001-40910 | | 10.1 | | June 8, 2023 |
| 10.9 | | Credit, Security and Guaranty Agreement, dated as of June 7, by and among the Borrowers, Guarantors, and Midcap Funding IV, Trust. | | 8-K | | 001-40910 | | 10.2 | | June 8, 2023 |
| 10.10 | | Fourth Amendment to Subordinated Term Loan Agreement, dated as of June 7, 2023, by and among the Borrower, Guarantors, and Mizzen Capital LP. | | 8-K | | 001-40910 | | 10.3 | | June 8, 2023 |
| 10.11 | | Form of Amendment to Convertible Debenture (First Closing). | | 8-K | | 001-40910 | | 10.4 | | June 8, 2023 |
| 10.12 | | Form of Amendment to Convertible Debenture (Second Closing). | | 8-K | | 001-40910 | | 10.5 | | June 8, 2023 |
| 31.1* | | Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 31.2* | | Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 32.1** | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 32.2** | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document. | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | |
| # | Schedule and exhibits to this Exhibit omitted pursuant to Regulation S-K Item 601(b)(2). A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. |
| ^ | Indicates management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Rubicon Technologies, Inc. |
| | |
Date: November 18, 2022August 11, 2023 | By: | /s/ Jevan AndersonPhilip Rodoni |
| | | Jevan AndersonPhilip Rodoni |
| | Chief FinancialExecutive Officer (Principal Financial and Accounting Officer and Authorized Signatory) |