NOGIN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes ofNogin, Inc. and its subsidiaries included elsewhere in this Report. Some of the information contained in this discussion and analysis contains forwardlooking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A. "Risk Factors," actual results may differ materially from those anticipated in these forwardlooking statements. Unless the context otherwise requires, references in this subsection to "we," "our," "Nogin" and the "Company" refer to the business and operations ofBranded Online, Inc. dbaNogin and its consolidated subsidiaries prior to the Business Combination and toNogin, Inc. (formerly known asSoftware Acquisition Group Inc. III) and its consolidated subsidiaries following the consummation of the Business Combination. For a comparison of our results of operations for the years endedDecember 31, 2021 andDecember 31, 2020 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our prospectus filed with theSEC onNovember 14, 2022 . Company OverviewNogin is an e-commerce, technology platform provider in the apparel and ancillary industry's multichannel retailing, business-to-consumer and business-to-business domains.Nogin's CaaS platform delivers full-stack enterprise-level capabilities to our clients enabling them to compete with large retailers. As clients grow their brand, they require additional capabilities beyond a simple online storefront. We provide the technology for these growing brands to manage complexities related to customer management, order optimization, returns, and fulfillment. The platform's tools provide clients with capabilities around website development, photography, content management, customer service, marketing, warehousing, and fulfillment. The Company's business model is based on providing a total e-commerce software solution to its partners on a revenue-sharing basis. The Company's platform is used by online businesses whose needs are too complex for low cost SaaS e-commerce platforms, yet require more flexibility and economic viability than provided by enterprise solutions. Our platform helps brands develop relationships directly with their customers leading to accelerated revenue growth, improved customer engagement, and reduced costs related to re-platforming and third-party integrations.
Recent Developments
Business Combination
OnFebruary 14, 2022 , the Company entered into the Merger Agreement with Merger Sub and Legacy Nogin, pursuant to which Merger Sub would merge with and into Legacy Nogin, with Legacy Nogin surviving the merger as a wholly owned subsidiary of the Company. OnApril 19, 2022 , the Company, the Notes Guarantors and the Subscribers entered into the PIPE Subscription Agreements pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of$75.0 million of Convertible Notes at the par value of the notes and (ii) up to an aggregate of 1.5 million PIPE Warrants with each whole PIPE Warrant entitling the holder thereof to purchase one share of common stock. OnAugust 26, 2022 , the Company and the "Equity Subscriber" entered into the Equity PIPE Subscription Agreement pursuant to which the Company agreed to issue and sell to the Equity Subscriber, immediately prior to the closing of the Business Combination, 517,079 PIPE Shares at a price per PIPE Share equal to$10.17 . OnAugust 26, 2022 , immediately prior to the Closing, the Company issued (i) 517,079 shares of common stock to the Equity Subscriber in accordance with the terms of the Equity PIPE Subscription Agreement, (ii)$65.5 million aggregate principal amount of Convertible Notes to the Subscribers in accordance with the terms of the PIPE Subscription Agreements and (iii) 1,396,419 PIPE Warrants to the Subscribers in accordance with the terms of the PIPE Subscription Agreements.
On
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In connection with Closing, we changed our name to Nogin, Inc. While we are the
legal acquirer of Legacy Nogin in the Business Combination, Legacy Nogin is
deemed to be the accounting acquirer, and the historical financial statements of
Legacy Nogin became the historical financial statements of the Company upon the
closing of the Transactions.
Notice of Non-Compliance from Nasdaq
On December 2, 2022 , we received a written notice (the "Notice") from the
Listing Qualifications Department of Nasdaq notifying us that, based on the
closing bid price of our common stock for the 30 consecutive trading days
preceding the notice, the Company no longer complied with the minimum bid price
requirement for continued listing on The Nasdaq Global Market. Nasdaq Listing
Rule 5450(a)(1) requires listed securities to maintain a minimum bid price of
$1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure
to meet the Minimum Bid Price Requirement exists if the deficiency continues for
a period of 30 consecutive trading days.
We have been provided an initial compliance period of 180 calendar days to
regain compliance with the Minimum Bid Price Requirement. To regain compliance,
the closing bid price of our common stock must be at least $1.00 per share for a
minimum of 10 consecutive trading days prior to May 31, 2023 , and we must
otherwise satisfy The Nasdaq Global Market's requirements for listing.
If we do not regain compliance by May 31, 2023 , we may be eligible for an
additional 180 calendar day compliance period if we elect (and meet the listing
standards) to transfer to The Nasdaq Capital Market to take advantage of the
additional compliance period offered on that market. To qualify, we would be
required, among other things, to meet the continued listing requirement for
market value of publicly held shares as well as all other standards for initial
listing on The Nasdaq Capital Market, with the exception of the Minimum Bid
Price Requirement, and would need to provide written notice of our intention to
cure the bid price deficiency during the second compliance period. If we do not
regain compliance within the compliance period(s), including any extensions that
may be granted by Nasdaq, our securities will be subject to delisting.
We intend to monitor the bid price of the common stock and consider available
options to resolve the noncompliance with the Minimum Bid Price Requirement.
There can be no assurance that we will be able to regain compliance with The
Nasdaq Global Market's continued listing requirements or that Nasdaq will grant
the Company a further extension of time to regain compliance, if applicable.
Updates to Management and Board of Directors
OnJanuary 27, 2023 ,Jan-Christopher Nugent , Co-Chief Executive Officer and Chairman of the Board, resigned as the Company's Co-Chief Executive Officer and as a member and Chairman of the Board, effective as ofJanuary 27, 2023 .Jonathan S. Huberman , the Company's other Co-Chief Executive Officer, began serving as the sole Chief Executive Officer of the Company and as Chairman of the Board as of the Resignation Effective Date. OnFebruary 13, 2023 , the Board, upon the recommendation of the Nominating Committee, appointedAndrew Pancer to fill the vacancy on the Board created by the resignation ofJan-Christopher Nugent .Mr. Pancer will serve as a Class I director of the Board for a term ending at the 2023 annual meeting of stockholders of the Company, with such appointment effective as ofFebruary 13, 2023 . In approving the appointment, the Board concluded thatMr. Pancer satisfies the independence requirements of theNasdaq Stock Market and the Company's Corporate Governance Guidelines and theSecurities and Exchange Commission rules regarding audit committee membership.Mr. Pancer was appointed to serve as a member of the Nominating Committee and as a member of the Audit Committee of the Board. In connection withMr. Pancer's appointment as a Class I director, the Board reassignedHussain Baig from Class I to Class III in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Charter. OnFebruary 13, 2023 ,Deborah Weinswig , a Class I director of the Board and chair of the Nominating Committee, resigned from the Board, effective as ofFebruary 13, 2023 . In connection withMs. Weinswig's resignation, the Board reassignedGeoffrey Van Haeren from Class II to Class I in order to maintain the three classes of the Board as nearly equal in number as possible as prescribed by the Company's Charter.
Impact of COVID-19 pandemic and its variants
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. The worldwide spread of COVID-19 and its variants had resulted in a global slowdown of economic activity which altered demand for a 60 -------------------------------------------------------------------------------- broad variety of goods and services, including those provided by our clients, while also disrupting sales channels and advertising and marketing activities until economic activity normalized. Our historical revenue growth and results of operations have been resilient despite the headwinds created by the COVID-19 pandemic and its variants. The extent to which ongoing and future developments related to the global impact of the COVID-19 pandemic and related vaccination measures designed to curb its spread continue to impact our business, financial condition, and results of operations, all of which cannot be predicted with certainty. Many of these ongoing and future developments are beyond our control, including the speed of contagion, the development, distribution and implementation of effective preventative or treatment measures, including vaccines (and vaccination rates), the scope of governmental and other restrictions on travel, discretionary services and other activity, and the public reactions and receptiveness to these developments. See the section entitled "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic and its variants on our business. At the onset of COVID-19, the Company anticipated an impact to the business, its financial conditions and results of operations. The Company applied for and was granted a Paycheck Protection Plan ("PPP") loan. In addition, the Company had taken a number of actions to mitigate the impacts of the COVID-19 pandemic and its variants on its business. The Company witnessed a large shift in consumer spending from retail stores to online stores, and as a result, there were no significant declines in the periods presented. However, the impacts of the COVID-19 pandemic and its variants will depend on future developments, including the duration and spread of the pandemic. These developments and the impacts of the COVID-19 pandemic on the financial markets and overall economy are highly uncertain and cannot be predicted.
Components of Our Results of Operations
Revenue
The Company's sources of revenue are summarized as follows:
•
Product revenue
o Under certain licensee agreements, the Company is the owner of inventory and reseller of record. As a result, the Company is the principal in sales to end customers and records these revenues on a gross basis at a point in time.
•
Service revenue
o Commerce as aService-The Company's main revenue stream is "Commerce as a Service" revenue in which it receives commission fees derived from contractually committed gross revenue processed by customers on the Company's e-commerce platform. Consideration for online sales is collected directly from the end customer by the Company and amounts not owed to the Company are remitted to the customer. Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers' inventories or any credit risks relating to the products sold. o Fulfillment service revenue-Revenue for business-to-business ("B2B") fulfillment services is recognized on a gross basis either at a point in time or over a point in time. For example, inbound and outbound services are recognized when the service is complete, while monthly storage services are recognized over the service period. o
Marketing service revenue-Revenue for marketing services is recognized on a gross basis as marketing services are completed. Performance obligations include providing marketing and program management such as procurement and implementation.
o
Shipping service revenue-Revenue for shipping services is recognized on a gross basis as shipments are completed and products are shipped to end customers.
o
Other service revenue-Revenue for other services such as photography, business
to customer ("B2C") fulfillment, customer service, development and web design
are reimbursable costs and recognized on the gross basis, and are services
rendered as part of the performance obligations to clients for which an online
61
--------------------------------------------------------------------------------platform and online orders are managed. All reimbursable costs are the responsibility of the Company as the Company uses such services to fulfill its performance obligations.
o Set up and implementation service revenue-The Company provides set up and implementation services for new clients. The revenue is recognized on a gross basis at the completion of the service, with the unearned amounts received for incomplete services recorded as deferred revenue, if any.
The Company recognizes revenue when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps:
•
Identification of a contract with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract;
•
Recognition of revenue when or as the performance obligations are satisfied.
A performance obligation is a promise in a contract to transfer a distinct
product. Performance obligations promised in a contract are identified based on
the goods that will be transferred that are both capable of being distinct and
are distinct in the context of the contract, whereby the transfer of the goods
is separately identifiable from other promises in the contract. Performance
obligations include establishing and maintaining customer online stores,
providing access to the Company's e-commerce platform, customer service support,
photography services, warehousing, and fulfillment. Most of the contracts of the
Company with customers contain multiple promises, which may result in multiple
performance obligations, while others are combined into one performance
obligation. For contracts with customers, the Company accounts for individual
promises separately if they are distinct. The transaction price is allocated to
the separate performance obligations on a relative standalone selling price
basis. The Company determines the standalone selling prices based on its overall
pricing objectives, taking into consideration market conditions and other
factors.
The Company has concluded the sale of goods and related shipping and handling on
behalf of our customers are accounted for as a single performance obligation,
while the expenses incurred for actual shipping charges are included in cost of
sales.
The Company's revenue is mainly commission fees derived from contractually
committed gross revenue processed by customers on the Company's e-commerce
platform. The Company is acting as an agent in these arrangements and customers
do not have the contractual right to take possession of the Company's software.
Revenue is recognized in an amount that reflects the consideration that the
Company expects to ultimately receive in exchange for those promised goods, net
of expected discounts for sales promotions and customary allowances.
CaaS Revenue is recognized on a net basis from maintaining e-commerce platforms
and online orders, as the Company is engaged primarily in an agency relationship
with its customers and earns defined amounts based on the individual contractual
terms for the customer and the Company does not take possession of the
customers' inventory or any credit risks related to the products sold.
Variable consideration is included in revenue for potential product returns. The
Company uses an estimate to constrain revenue for the expected variable
consideration at each period end. The Company reviews and updates its estimates
and related accruals of variable consideration each period based on the terms of
the agreements, historical experience, and expected levels of returns. Any
uncertainties in the ultimate resolution of variable consideration due to
factors outside of the Company's influence are typically resolved within a short
timeframe therefore not requiring any additional constraint on the variable
consideration. The estimated reserve for returns is included on the balance
sheet in accrued expenses with changes to the reserve in revenue on the
accompanying statement of operations.
In most cases the Company acts as the merchant of record, resulting in a due to
client liability (discussed below). However, in some instances, the Company may
perform services without being the merchant of record in which case there is a
receivable from the customer.
Payment terms and conditions are generally consistent for customers, including
credit terms to customers ranging from seven days to 60 days, and the Company's
contracts do not include any significant financing component. The
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--------------------------------------------------------------------------------Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net revenue in the consolidated statements of operations.
Operating Expenses
We classify our operating expenses into the following categories:
•
Cost of services. Cost of services reflects costs directly related to providing services under the master service agreements with customers, which primarily includes service provider costs directly related to processing revenue transactions, marketing expenses and shipping and handling expenses which correspond to marketing and shipping revenues, as well as credit card merchant fees. Cost of services is exclusive of depreciation and amortization and general salaries and related expenses.
•
Cost of product revenue. Cost of product revenue reflects costs directly related to selling inventory acquired from select clients, which primarily includes product cost, warehousing costs, fulfillment costs, credit card merchant fees and third-party royalty costs. Cost of product revenue is exclusive of depreciation and amortization and general salaries and related expenses.
•
Sales and marketing. Sales and marketing expense consists primarily of salaries associated with selling across all our revenue streams.
•
Research and development. Research and development expense consists primarily of salaries and contractors' costs associated with research and development of the Company's technology platform.
•
General, and administrative. General and administrative expense consists primarily of lease expense, materials and equipment, dues and subscriptions, professional services, and acquisition costs incurred.
•
Depreciation and amortization. Depreciation and amortization expenses are primarily attributable to our capital investment and consist of fixed asset depreciation and amortization of intangibles considered to have finite lives.
Interest Expense Interest expense primarily consists of interest incurred under our line of credit, promissory notes and Convertible Notes. The line of credit and promissory notes were fully repaid at the closing of the Transactions.
Change in Fair Value of Unconsolidated Affiliates
Change in fair value of unconsolidated affiliates represents the fair value adjustments associated with the Company's joint venture investments for which the Company elected to use the fair value option of accounting.
Other Income (Expense)
Other income (expense) is mainly related to debt issuance cost expensed under the fair value option, offset by sublease rental income derived from the sublease of property by the Company as well as gain from settlement of deferred revenue and PPP loan forgiveness.
Provision (Benefit) for Income Taxes
The provision (benefit) for income taxes consist primarily ofU.S. federal, state, and foreign income taxes. Deferred tax assets and liabilities are recognized with respect to the tax consequences attributable to differences between the financial statement carrying values and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred tax assets if it is more likely than not that some portion or all the deferred tax assets will not be realized. Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards during the year. 63 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our consolidated results of operations and our
consolidated results of operations as a percentage of revenue for the periods
presented (in thousands):
Twelve Months Ended December 31,
2022 2021
Net service revenue $ 40,855 $ 41,866
Net product revenue 41,540 51,346
Net revenue from related parties 12,076 8,136
Total net revenue 94,471 101,348
Operating costs and expenses:
Cost of services (1) 26,706 24,174
Cost of product revenue (1) 28,754 20,431
Sales and marketing 2,672 1,772
Research and development 5,330 5,361
General and administrative 70,289 55,369
Depreciation and amortization 808 520
Total operating costs and expenses 134,559 107,627
Operating loss (40,088 ) (6,279 )
Interest expense (6,328 ) (926 )
Change in fair value of promissory notes (4,561 ) -
Change in fair value of derivative instruments 1,117 -
Change in fair value of unconsolidated affiliates (4,245 ) 4,937
Change in fair value of convertible notes 4,271 -
Debt extinguishment loss (1,885 ) -
Other (loss) income, net (1,787 ) 3,378
(Loss) Income before income taxes (53,506 ) 1,110
(Benefit) Provision for income taxes (780 ) 1,175
Net loss $ (52,726 ) $ (65 )
Twelve Months Ended December 31,
(as a percentage of total revenue*) 2022 2021
Net service revenue 43.2 % 41.3 %
Net product revenue 44.0 % 50.7 %
Net revenue from related parties 12.8 % 8.0 %
Total net revenue 100.0 % 100.0 %
Operating costs and expenses:
Cost of services (1) 28.3 % 23.9 %
Cost of product revenue (1) 30.4 % 20.2 %
Sales and marketing 2.8 % 1.7 %
Research and development 5.6 % 5.3 %
General and administrative 74.4 % 54.6 %
Depreciation and amortization 0.9 % 0.5 %
Total operating costs and expenses 142.4 % 106.2 %
Operating loss -42.4 % -6.2 %
Interest expense -6.7 % -0.9 %
Change in fair value of promissory notes -4.8 % 0.0 %
Change in fair value of derivative instruments 1.2 % 0.0 %
Change in fair value of unconsolidated affiliates -4.5 % 4.9 %
Change in fair value of convertible notes 4.5 % 0.0 %
Debt extinguishment loss -2.0 % 0.0 %
Other (loss) income, net -1.9 % 3.3 %
(Loss) Income before income taxes -56.6 % 1.1 %
(Benefit) Provision for income taxes -0.8 % 1.2 %
Net loss -55.8 % -0.1 %
* Percentages may not sum due to rounding
(1) Exclusive of depreciation and amortization shown separately.
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Comparison of the Twelve Months Ended
Net service revenue
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Net service revenue $ 40,855 $ 41,866 $ (1,011 ) (2.4 )%
Percent of total revenue 43.2 % 41.3 %
Net service revenue decreased by $1.0 million , or 2.4%, to $40.9 million for the
twelve months ended December 31, 2022 as compared to $41.9 million for the
twelve months ended December 31, 2021 . The Company historically recognizes net
revenue as a percentage of service sales. The decrease is primarily due to a
brand for whom the Company purchased inventory in the late third quarter of
2021, and therefore commenced recognizing product revenue instead of service
revenue. Net service revenue as a percentage of total revenue was 43.2% for the
twelve months ended December 31, 2022 compared to 41.3% for the twelve months
ended December 31, 2021 .
Net product revenue
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Net product revenue $ 41,540 $ 51,346 $ (9,806 ) (19.1 )%
Percent of total revenue 44.0 % 50.7 %
Net product revenue decreased by $9.8 million , or 19.1%, to $41.5 million for
the twelve months ended December 31, 2022 as compared to $51.3 million for the
twelve months ended December 31, 2021 . Starting in the second quarter of 2021,
the Company added product revenue, which was generated from purchased inventory
from select clients, to assist those clients with managing inventory through the
pandemic in order to continue marketing and selling their particular brand of
products. The Company sourced the products from vendors approved by licensees,
and the products were received into the Company's leased distribution centers
and orders by end-customers were then fulfilled. As a result, the Company
recognized the gross revenue for the sale of the inventory-owned products, and
the corresponding cost of product revenue in the period the order was fulfilled.
The Company does not anticipate continuing the practice of purchasing inventory
after finding a buyer to distribute the inventory. The decrease in product
revenue is primarily due to inventory supply chain issues resulting in less
inventory being received and lower sales volume. Net product revenue as a
percentage of total revenue was 44.0% for the twelve months ended December 31,
2022 compared to 50.7% for the twelve months ended December 31, 2021 .
Net revenue from related parties
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Net revenue from related parties
48.4 % Percent of total revenue 12.8 % 8.0 % Net revenue from related parties increased by$3.9 million , or 48.4%, to$12.1 million for the twelve months endedDecember 31, 2022 as compared to$8.1 million for the twelve months endedDecember 31, 2021 . The Company provides services to its joint ventures under Master Services agreements that are classified as related party revenue. The increase is primarily due to the addition of a second joint venture added in the fourth quarter of 2021, and revenue for the second joint venture was included for the twelve months endedDecember 31, 2022 . In the fourth quarter of 2022, the Company acquired the remaining 50% interest in one of the joint ventures at which point such joint venture became a wholly owned subsidiary. The Company will record such revenue into the consolidated results of the Company, which will cause revenue from related parties to decrease in future periods. Net service revenue from related parties as a percentage of total revenue was 12.8% for the twelve months endedDecember 31, 2022 compared to 8.0% for the twelve months endedDecember 31, 2021 . 65 --------------------------------------------------------------------------------
Cost of services
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Cost of services $ 26,706 $ 24,174 $ 2,532 10.5 %
Percent of total revenue 28.3 % 23.9 %
Cost of services increased by $2.5 million , or 10.5%, to $26.7 million for the
twelve months ended December 31, 2022 as compared to $24.2 million for the
twelve months ended December 31 2021. The increase in cost of services in 2022
was related to higher shipping costs. Cost of services as a percentage of total
revenue was 28.3% for the twelve months ended December 31 2022 compared to 23.9%
for the twelve months ended December 31, 2021 .
Cost of product revenue
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Cost of product revenue $ 28,754 $ 20,431 $ 8,323 40.7 %
Percent of total revenue 30.4 % 20.2 %
Cost of product revenue increased by $8.3 million , or 40.7%, to $28.8 million
for the twelve months ended December 31, 2022 as compared to $20.4 million for
the twelve months ended December 31, 2021 . The increase was primarily related to
marketing efforts to drive sales through discounted pricing in fiscal year 2022
to generate cash through the Closing of the Transactions. In addition, product
sales for one brand began in the third quarter of fiscal year 2021, compared to
the full year of sales in fiscal year 2022. Cost of product revenue as a
percentage of total revenue was 30.4% for the twelve months ended December 31,
2022 , compared to 20.2% for the twelve months ended December 31, 2021 .
Sales and Marketing
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 2,672 $ 1,772 $ 900 50.8 %
Percent of total revenue 2.8 % 1.7 %
Sales and marketing expense increased by $0.9 million , or 50.8%, to $2.7 million
for the twelve months ended December 31, 2022 as compared to $1.8 million for
the twelve months ended December 31, 2021 . The increase in sales and marketing
expense in 2022 was primarily due to an increase in headcount in the sales and
marketing department to drive additional sales.
Research and development
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Research and development $ 5,330 $ 5,361 $ (31 ) (0.6 )%
Percent of total revenue 5.6 % 5.3 %
Research and development expense slightly decreased by
General and administrative
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
General and administrative $ 70,289 $ 55,369 $ 14,920 26.9 %
Percent of total revenue 74.4 % 54.6 %
66-------------------------------------------------------------------------------- General and administrative expense increased by$14.9 million , or 26.9%, to$70.3 million for the twelve months endedDecember 31, 2022 as compared to$55.4 million for the twelve months endedDecember 31 2021 . The increase in general and administrative expense in 2022 was primarily due to additional headcount and operating expense to support the Company through the Business Combination and on-going strategic initiatives.
Depreciation and amortization
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Depreciation and amortization
55.4 % Percent of total revenue 0.9 % 0.5 % Depreciation and amortization expense increased by$0.3 million , or 55.4%, to$0.8 million for the twelve months endedDecember 31, 2022 as compared to$0.5 million for the twelve months endedDecember 31, 2021 . The increase in depreciation and amortization in 2022 was primarily due to the purchase of new hardware and equipment and additional amortization related to the acquired capitalized software. Interest expense Twelve Months Ended December 31, 2022 2021 $ Change % Change (in thousands, except percentages) Interest expense$ 6,328 $ 926 $ 5,402 583.4 % Percent of total revenue 6.7 % 0.9 % Interest expense increased by$5.4 million , or 583.4%, to$6.3 million for the twelve months endedDecember 31, 2022 as compared to$0.9 million for the twelve months endedDecember 31, 2021 . The increase in interest expense in 2022 was primarily due to interest on the Convertible Notes, along with the Company's notes payable issued in the third and fourth quarters of 2021 and the third quarter of 2022 and investor notes issued in the second quarter of 2022. The notes payable and investor notes were fully repaid at closing of the Business Combination.
Change in fair value of promissory notes
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Change in fair value of promissory notes $ 4,561 $ - $ 4,561 100.0 %
Percent of total revenue 4.8 % - %
Change in fair value of promissory notes was $4.6 million for the twelve months
ended December 31, 2022 . The Company recognized a loss of $4.6 million for the
twelve months ended December 31, 2022 that were related to the Promissory Notes
issued in the second and third quarter of 2022, which were based on the
estimated cash payment needed to repay the Promissory Notes at closing of the
Business Combination.
Change in fair value of derivatives
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Change in fair value of derivatives
100.0% Percent of total revenue -1.2 % - % Change in fair value of derivatives notes was a gain of$1.1 million for the twelve months endedDecember 31, 2022 . The Company recognized a change in fair value of derivate notes in connection with the Standby Agreement. 67 --------------------------------------------------------------------------------
Change in fair value of unconsolidated affiliate
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Change in fair value of unconsolidated
affiliates $ 4,245 $ (4,937 ) $ 9,182 (186.0 )%
Percent of total revenue 4.5 % (4.9 )%
Change in fair value of unconsolidated affiliates decreased by $9.2 million , or
186.0%, to a loss of $4.2 million for the twelve months ended December 31, 2022
as compared to a gain of $4.9 million for the twelve months ended December 31,
2021 . The decrease is attributable to the Company's investment in ModCloth,
which was formed in April 2021 , and IPCO, which was formed in December 2021 . The
Company elected to apply the fair value option of accounting to the joint
ventures. The Company engaged a third-party valuation specialist to assist with
the fair value assessment. As a result, the Company recorded a fair value
adjustment for the investment in connection with its 50% interest during the
twelve months ended December 31, 2022 and December 31, 2021 . In the fourth
quarter of 2022, the Company acquired the remaining interest in Modcloth at
which point Modcloth became a wholly owned subsidiary and operations were
consolidated with the results of the Company.
Change in fair value of convertible notes
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Change in fair value of convertible notes $ (4,271 ) $ - $ (4,271 ) 100.0 %
Percent of total revenue (4.5 )% - %
Change in fair value of convertible notes was $9.9 million for the twelve months
ended December 31, 2022 . The change is attributable to fair value of the
convertible notes, which the Company engaged a third-party valuation specialist
to assist with the fair value assessment.
Debt Extinguishment Loss
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Debt extinguishment loss $ 1,885 $ - $ 1,885 100.0 %
Percent of total revenue 2.0 % - %
Debt Extinguishment loss was $1.9 million for the twelve months ended December
31, 2022 . The Company recognized a loss of $1.9 million for the extinguishment
of debt as part of the closing of the Business Combination.
Other (loss) income
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Other (loss) income $ (1,787 ) $ 3,378 $ (5,165 ) (152.9 )%
Percent of total revenue (1.9 )% 3.3 %
Other (loss) income decreased by $5.2 million , or 152.9%, to $(1.8) million for
the twelve months ended December 31, 2022 as compared to $3.4 million for the
twelve months ended December 31, 2021 . The decrease was primarily related to the
settlement of deferred revenue of $1.6 million related to sale of finished
inventory to IPCO in the first quarter of 2022 and forgiveness of the PPP loan
of $2.6 million in the third quarter of 2021.
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Provision for income tax
Twelve Months Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Provision for income tax $ (780 ) $ 1,175 $ (1,955 ) -166.4 %
Percent of total revenue (0.8 )% 1.2 %
The provision for income tax was a benefit of $0.8 million for the twelve months
ended December 31, 2022 as compared to $1.2 million of income tax expense for
the twelve months ended December 31, 2021 . The decrease was primarily due to a
full valuation allowance for differences related to GAAP and tax income related
to the Company's joint ventures due to election of accounting for the joint
ventures using the equity method fair value option.
Non-GAAP Financial Measures
We prepare and present our consolidated financial statements in accordance withU.S. GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance, as these measures are regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. This non-GAAP measure is not intended to be a substitute for anyU.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.
We calculate and define Adjusted EBITDA as net loss, adjusted to exclude: (1) interest expense, (2) income tax expense and (3) depreciation and amortization.
Adjusted EBITDA is a financial measure that is not required by or presented in accordance withU.S. GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance withU.S. GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations, or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business and evaluating our operating performance, as well as for internal planning and forecasting purposes. Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance withU.S. GAAP. Some of the limitations of Adjusted EBITDA include that (1) it does not reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures, (3) it does not reflect tax payments that may represent a reduction in cash available to us and (4) does not include certain non-recurring cash expenses that we do not believe are representative of our business on a steady-state basis. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net loss and other results stated in accordance withU.S. GAAP. The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance withU.S. GAAP, to Adjusted EBITDA, for each of the periods presented (in thousands): For the Twelve Months Ended December 31, 2022 2021 2020 Net (loss) income$ (52,726 ) $ (65 ) $ (1,140 ) Interest expense 6,328 926 225 Provision for income taxes (780 ) 1,175 190 Depreciation and amortization 808 520 415 Adjusted EBITDA$ (46,370 ) $ 2,556 $ (310 ) 69
-------------------------------------------------------------------------------- Liquidity and Capital Resources Our primary requirements for short-term liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Our future capital requirements will depend on many factors, including our levels of revenue, the expansion of sales and marketing activities, successful customer acquisitions, the results of business initiatives, the timing of new product introductions and overall economic conditions.
Prior to the Business Combination, the Company's available liquidity and operations were financed through equity contributions, a line of credit, promissory notes and cash flow from operations. Moving forward, the Company expects to fund operations through equity contributions and cash flow from operations.
Because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has sustained recurring losses and negative cash flows from operations. As ofDecember 31, 2022 , the Company has an accumulated deficit of$82.3 million , negative working capital and a cash balance of$15.4 million , which consists of amounts held as bank deposits. These factors and other uncertainties, including compliance with the covenants included in the Indenture governing our Convertible Notes, raise substantial doubt about our ability to continue as a going concern for at least twelve months from the date that these consolidated financial statements were issued. We are currently executing on various strategies to improve available cash balances, liquidity and cash generated from operations to alleviate these conditions, including a comprehensive cost reduction and performance improvement program, reduced headcount and elimination of certain discretionary and general and administrative expenses. We are also in the process of alleviating the inventory supply chain challenges that began in 2021, leading to lower revenue and cash flows, and are taking steps to improve the operational efficiency of our fulfillment center. Further, we expect to seek additional funds through potential securities financings. However, our failure to obtain financing as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, many of which are beyond our control. Indebtedness
Convertible Notes and Indenture
OnApril 19, 2022 , the Company, the Notes Guarantors and the Subscribers entered into the PIPE Subscription Agreements pursuant to which the Company agreed to issue and sell to the Subscribers immediately prior to the closing of the Business Combination (i) up to an aggregate principal amount of$75.0 million of Convertible Notes at the par value of the notes and (ii) up to an aggregate of 1.5 million PIPE Warrants with each whole PIPE Warrant entitling the holder thereof to purchase one share of Common Stock. OnAugust 26, 2022 , immediately prior to the Closing, the Company issued$65.5 million aggregate principal amount of Convertible Notes and, as contemplated by the PIPE Subscription Agreements, the Company, theNote Guarantors andU.S. Bank Trust Company, National Association , as trustee, entered into the Indenture. The Convertible Notes were offered in a private placement under the Securities Act, pursuant to the PIPE Subscription Agreements. The Convertible Notes will mature onSeptember 1, 2026 , unless earlier repurchased, redeemed or converted in accordance with their terms, and will accrue interest at a rate of 7.00% per annum, payable in cash. The Convertible Notes may be converted at any time (in whole or in part) into shares of Common Stock, at the option of the holder of such Convertible Note, based on the applicable conversion rate at such time. The initial conversion price is approximately$11.50 per share of Common Stock, based on an initial conversion rate of 86.9565 shares of 70 -------------------------------------------------------------------------------- Common Stock per$1,000 principal amount of Convertible Notes. For conversions with a conversion date on or after the first anniversary of the closing of the Transactions and prior to the regular record date immediately preceding the Maturity Date, the conversion consideration will also include an interest make-whole payment equal to the remaining scheduled payments of interest on the Convertible Note being converted through the Maturity Date. The Company will be able to elect to make such interest make-whole payment in cash or in Common Stock, subject to certain conditions. The conversion rate is subject to adjustments set forth in the Indenture, including conversion rate resets (x) onAugust 27, 2023 ,September 26, 2023 andSeptember 26, 2024 and (y) following the consummation of certain equity and equity-linked offerings by the Company and sales of certain equity and equity-linked securities by certain shareholders of the Company. Each holder of a Convertible Note will have the right to cause thePost-Combination Company to repurchase for cash all or a portion of the Convertible Notes held by such holder upon the occurrence of a "Fundamental Change" (as defined in the Indenture) at a price equal to (i) on or beforeSeptember 26, 2023 , 100% of the original principal amount of such Convertible Note, and (ii) from and afterSeptember 26, 2023 , 100% of the accreted principal amount applicable at such time pursuant to the terms of the Indenture, in each case, plus accrued and unpaid interest. The Indenture includes restrictive covenants that, among other things, require the Company to maintain a minimum level of liquidity on a consolidated basis and limit the ability of the Company and its subsidiaries to incur indebtedness above certain thresholds or to issue preferred stock, to make certain restricted payments, to dispose of certain material assets and engage in other asset sales, subject to reinvestment rights, to pay certain advisory fees in connection to the Transactions and the transactions contemplated by the PIPE Subscription Agreements above a certain threshold, and other customary covenants with respect to the collateral securing the obligations created by the Convertible Notes and the Indenture, including the entry into security documents (in each case, subject to certain exceptions set forth in the Indenture); provided that the covenants with respect to (i) the making of restricted payments, (ii) the incurrence of indebtedness, (iii) the disposition of certain material assets and asset sales, (iv) liquidity, (v) the payment of advisory fees and (vi) the collateral securing the obligations created by the Convertible Notes and the Indenture shall terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The liquidity covenant would terminate if the Company achieves$175 million in consolidated revenue in the preceding four fiscal quarters. Certain of the Company's subsidiaries will serve as Notes Guarantors that jointly and severally, fully and unconditionally guarantee the obligations under the Convertible Notes and the Indenture. The Indenture also requires certain future subsidiaries of thePost-Combination Company , if any, to become Notes Guarantors. This covenant will terminate once less than 15% of the aggregate principal amount of the Convertible Notes are outstanding. The Indenture also includes customary events of default and related provisions for potential acceleration of the Convertible Notes. The Company did not timely make the payment of the accrued interest on the Convertible Notes due onMarch 1, 2023 as required pursuant to Section 2.05 of the Indenture, resulting in a default. Pursuant to Section 7.01(A)(ii) of the Indenture, a default for thirty (30) consecutive days in the payment when due of interest on any Convertible Note constitutes an Event of Default (as defined in the Indenture). In the event the Company does not make the interest payment on or prior toMarch 31, 2023 and no agreement is otherwise reached with the holders of the Convertible Notes, the trustee or holders of at least 25% in principal amount of the Convertible Notes may declare the principal and any interest immediately due and payable. Although the Company is in active negotiations with the holders of the Convertible Notes to resolve the default, there can be no assurances that an agreement will be reached on terms that are acceptable to us or at all. Line of credit EffectiveJanuary 14, 2015 , the Company entered into a Revolving Credit Agreement with a financial institution that provided maximum borrowing under a revolving loan commitment of up to$2 million , bearing an interest rate of 2% plus prime rate as published by theWall Street Journal . EffectiveJuly 3, 2020 , the Company renewed the line of credit with the financial institution throughMay 31, 2021 that provided maximum borrowing under a revolving loan commitment of up to$5 million . InMay 2021 the maturity date was extended toJune 30, 2021 and then further extended toJuly 31, 2021 . The line was then renewed onJuly 21, 2021 with an expanded credit limit of$8 million , a new maturity date ofJune 30, 2023 and an amended per annum interest rate of the greater of 2.25% plus prime rate as published by theWall Street Journal or 5.50%. The line of credit was repaid at the closing of the Business Combination.
Notes Payable
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On August 11, 2021 , the Company entered into a loan and security agreement (the
"Note Agreement") with a financial institution that provided for a borrowing
commitment of $15 million in the form of promissory notes. In August 2021 , the
Company borrowed $10 million under the first tranche ("First Tranche Notes").
The Note Agreement had a commitment for additional second tranche borrowings of
$5 million through June 30, 2022 ("Second Tranche Notes"). In October 2021 the
Company borrowed the remaining $5 million committed under the Note Agreement.
The borrowings under the Note Agreement were secured by substantially all assets
of the Company.
The First Tranche Notes and Second Tranche Notes were due to mature on September
1, 2026 and November 1, 2026 , respectively, and bore interest at a rate per
annum of 6.25% plus the greater of 3.25% or the prime rate as published by the
Wall Street Journal . The Company was required to make interest-only payments on
the first of each month beginning October 1, 2021 and December 1, 2021 ,
respectively. Beginning October 1, 2023 and December 1, 2023 , respectively, the
Company would have been required to make principal payments of $278 thousand and
$139 thousand , respectively, plus accrued interest on the first of each month
through maturity. Upon payment in full of the First Tranche Notes and Second
Tranche Notes, the Company was required to pay exit fees of $600 thousand and
$300 thousand , respectively.
In December 2021 , the Company borrowed an additional $1 million from the same
financial institution, which was repaid in full on December 31, 2021 . In
addition, the Company borrowed an additional $5 million ("Third Tranche Notes")
that bore interest at a rate per annum of 6.25% plus the greater of 3.25% or the
prime rate as published by the Wall Street Journal . The Company was required to
make interest-only payments on the first of each month beginning February 1,
2022 , with the full principal amount due on July 1, 2023 . Upon payment in full,
the Company was required to pay exit fees of $50 thousand .
In connection with the Note Agreement, the Company issued warrants to purchase
up to 33,357 shares of common stock of the Company (the "Legacy Liability
Warrants") at an exercise price of $0.01 per share (Note 8). On the date of
issuance, the Company recorded the fair value of the Legacy Liability Warrants
as a discount to the First Tranche Notes which was being amortized into interest
expense over the term of the First Tranche Notes using the effective interest
method. The issuance costs were deferred over the repayment term of the debt.
Deferred issuance costs relate to the Company's debt instruments, the short-term
and long-term portions are reflected as a deduction from the carrying amount of
the related debt.
In addition, the Company issued additional notes payable in July 2022 for
proceeds of $3.0 million . Such notes payable matured on the earlier of (a)
December 31, 2022 or (b) the close of the Business Combination. The amount due
at maturity was $4.5 million . The Company elected to account for the additional
notes payable under the fair value option of accounting.
The notes payable were repaid at the closing of the Business Combination.
Promissory Notes
During the second quarter of 2022, the Company entered into promissory notes with various individuals (the "Promissory Notes"), including current investors, members of management and other unrelated parties in exchange for cash in an amount equal to$7.0 million (the "Promissory Notes"). The Promissory Notes were due to mature on the earlier of (a) one year from issuance or (b) the closing of the Business Combination (Note 1) and bore per annum interest at the rate of 7.75% plus the greater of 3.50% or the prime rate as published by theWall Street Journal . The Company was required to make nine interest-only payments, followed by three principal and interest payments. In connection with the Promissory Notes, the Company issued warrants ("Promissory Note Warrants") to purchase up to 31,024 shares of common stock of the Company at an exercise price of$0.01 per share (Note 7). Upon payment in full of the Promissory Notes, the Company was required to make an additional final payment ("Final Payment") of$3.5 million . The Company elected to account for the Promissory Notes under the fair value option of accounting upon issuance of each of the Promissory Notes. At issuance the Company recognized the fair value of the Promissory Notes of$6.3 million with the remaining$0.7 million of proceeds received allocated to the Promissory Note Warrants.
The Promissory Notes were repaid at the closing of the Business Combination.
Paycheck Protection Program Loan
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On April 14, 2020 , the Company received loan proceeds of $2.3 million pursuant
to the Paycheck Protection Program (the "PPP Loan") under the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act") and administered by the U.S.
Small Business Administration ("SBA"). The PPP Loan had a maturity date of April
22, 2022 and bore interest at a rate of 1% per annum. The balance as of December
31, 2020 of $2.3 million is included in Paycheck Protection Program loan payable
on the consolidated balance sheets. On September 17, 2021 , the PPP Loan was
forgiven in full including accrued interest thereon. As such, the Company
recorded a gain on loan forgiveness during the twelve months ended December 31,
2021 of $2.3 million included in other income in the consolidated statement of
operations.
Cash Flows
The following table summarizes our cash flows for the periods presented:
For the Twelve Months
Ended December 31,
2022 2021 2020
Cash flow used in operating activities$ (26,588 ) $ (21,373 ) $ 1,579 Cash flow used in investing activities (2,385 ) (10,422 ) (1,578 ) Cash flow provided by financing activities 39,787 20,198 2,266 Operating Activities Our cash flows from operating activities are primarily driven by the activities associated with our CaaS revenue stream, offset by the cash cost of operations, and are significantly influenced by the timing of and fluctuations in receipts from buyers and related payments to our clients. We typically receive cash from the end users of products sold prior to remitting back to our clients. Our collection and payment cycles can vary from period to period. In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year. During the twelve months endedDecember 31, 2022 , net cash used in operating activities increased by$5.2 million to$26.6 million , compared to net cash used in operating activities of$21.4 million during the twelve months endedDecember 31, 2021 . The primary driver of the change was the increase in net loss and the sale of existing inventory. During the year endedDecember 31, 2021 , net cash used in operating activities was$21.4 million , compared to net cash provided by operating activities of$1.6 million during the year endedDecember 31, 2020 . The primary driver of the change was a result of the timing of payments due to our clients and purchase of inventory in 2021. Investing Activities
Our primary investing activities have consisted of purchases of property and equipment and software.
During the twelve months endedDecember 31, 2022 , net cash used in investing activities decreased by$8.0 million to$2.4 million compared to net cash used in investing activities of$10.4 million during the twelve months endedDecember 31, 2021 . The primary drivers of the decrease was cash used to purchase the remaining equity in an affiliate, compared to cash used in the prior year for the two joint venture investments. During the year endedDecember 31, 2021 , net cash used in investing activities was$10.4 million compared to net cash used in investing activities of$1.6 million during the year endedDecember 31, 2020 . The increase in cash used in investing activities is primarily related to the equity contribution as part of the formation of joint ventures in 2021.
Financing Activities
Our financing activities consisted primarily of borrowings and repayments of debt as well as activity related to the Business Combination.
During the twelve months endedDecember 31, 2022 , net cash provided by financing activities increased by$19.6 million to$39.8 million , compared to net cash provided by financing activities of$20.2 million for the twelve months endedDecember 31, 2021 . The change was primarily driven by the activity related to the Business Combination.
During the year ended
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--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
We do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements as ofDecember 31, 2022 or 2021.
Contractual Obligations and Known Future Cash Requirements
Our principal commitments consist of operating lease for the office and warehouses located inCalifornia andPennsylvania . Our five monthly lease commitment payments range from approximately$24 thousand to approximately$189 thousand . Each of our five lease commitments expire at various times throughNovember 2028 . Some of the leases contain renewal options. As ofDecember 31, 2022 , the expected future obligations of the Company are as follows: Total 2023 2024 2025 2026 2027 Thereafter Operating lease obligations$ 22,682 $ 5,580 $ 5,173 $ 5,279 $ 3,529 $ 2,222 $ 899
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Our Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. Below is a discussion of the policies that we believe may involve a high degree of judgment and complexity. We believe that the accounting policies disclosed below include estimates and assumptions critical to our business and their application could have a material impact on our consolidated financial statements. In addition to these critical policies, our significant accounting policies are included within Note 2 of our "Notes to Consolidated Financial Statements" included elsewhere in this filing.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, do not bear interest, and primarily represent receivables from consumers and credit card receivables from merchant processors, after performance obligations have been fulfilled. Amounts collected on accounts receivable are included in operating activities in the statements of cash flows. The Company maintains an allowance for credit losses, as deemed necessary, for estimated losses inherent in its accounts receivable portfolio. In estimating this reserve, management considers historical losses adjusted to take into account current market conditions and customers' financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any customers with off-balance-sheet credit exposure. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible.
Fair value measurements
Joint Ventures
The Company accounts for joint ventures in accordance with ASC 810-10,
"Consolidations," ASC 323-10, "
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Company's joint ventures meet the criteria to be accounted for as an equity
method investment using the fair value method. As such, the difference between
fair value and cash contribution is recorded as a gain to other income in the
Company's consolidated statement of operations. The joint ventures are subject
to fair value assessment each reporting period and the changes in fair value is
booked to the Company's consolidated statement of operations. In valuing joint
venture investments, we utilized the valuation from an independent third-party
specialist, with input from management, which used a combination of net income
and market approaches, with 50% weight to the discounted cash flow method and
25% weigh to each of the guideline public company and transaction methods.
Changes in these estimates and assumptions or the relationship between those
assumptions impact our valuation as of the valuation date and may have a
material impact on the valuation.
Convertible notes
The Company accounts for the convertible notes in accordance with ASC 825-10, "Financial Instruments," under which the Company's convertible notes meet the criteria to be accounted for using the fair value method. The Convertible Notes are subject to fair value assessment each reporting period. As such, changes to fair value are recorded in the consolidated income statements to change in fair value of the Convertible Notes. In valuing the Convertible Notes, we utilized the valuation from an independent third-party specialist, which uses a binomial lattice valuation model. Changes in these estimates and assumptions or the relationship between those assumptions impact our valuation as of the valuation date and may have a material impact on the valuation.
Standby Agreement
The Company has entered into a Standby Agreement and the Equity PIPE Subscription Agreement with aFinancial Institution (note 8) which is accounted for as a derivative in its entirety in accordance with ASC 815-10, and the structured payments within the Equity PIPE Subscription Agreement was considered an embedded feature in the Equity PIPE Subscription Agreement that met the definition of a derivative and required bifurcation from the Equity PIPE Subscription Agreement, as it is not clearly and closely related to the Equity PIPE Subscription Agreement and would be accounted for in accordance with ASC 815-10 (together the "Standby Agreement Derivative"). The Company accounted for the Standby Agreement Derivative acquired at fair value upon the closing of the Business Combination. The Company will continue to account for the Standby Agreement Derivative at fair value each reporting period in accordance with ASC 815-10. The Company engages a third-party valuation specialist to assist with the fair value assessment. The fair value changes is recorded in change in fair value of derivatives on the consolidated statements of operations.
Warrants
The Company accounts for warrants as either equity-classified or
liability-classified instruments based on an assessment of the warrant's
specific terms and applicable authoritative guidance in FASB ASC 480 and ASC
Topic 815, "Derivatives and Hedging" ("ASC 815"). The assessment considers
whether the warrants are freestanding financial instruments pursuant to ASC 480,
meet the definition of a liability pursuant to ASC 480, and whether the warrants
meet all of the requirements for equity classification under ASC 815, including
whether the warrants are indexed to the Company's own shares of common stock,
among other conditions for equity classification. This assessment, which
requires the use of professional judgment, is conducted at the time of warrant
issuance and as of each subsequent quarterly period end date while the warrants
are outstanding. For issued or modified warrants that meet all of the criteria
for equity classification, the warrants are required to be recorded as a
component of additional paid-in capital at the time of issuance. For issued or
modified warrants that do not meet all the criteria for equity classification,
the warrants are required to be recorded at their initial fair value on the date
of issuance, and each balance sheet date thereafter until settlement. Changes in
the estimated fair value of the warrants are recognized as a non-cash gain or
loss on the consolidated statements of operations.
Revenue
Revenue is accounted for usingFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. In accordance with ASC Topic 606, the Company recognizes revenue when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps:
•
Identification of a contract with a customer,
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Identification of the performance obligations in the contract,
•
Determination of the transaction price,
•
Allocation of the transaction price to the performance obligations in the contract, and
•
Recognition of revenue when or as the performance obligations are satisfied.
A performance obligation is a promise in a contract to transfer a distinct product. Performance obligations promised in a contract are identified based on the goods that will be transferred that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. Performance obligations include establishing and maintaining customer online stores, providing access to the Company's e-commerce platform, customer service support, photography services, warehousing, and fulfillment. The Company has concluded the sale of goods and related shipping and handling on behalf of our customers are accounted for as a single performance obligation, while the expenses incurred for actual shipping charges are included in cost of sales. The Company's revenue is mainly commission fees derived from contractually committed gross revenue processed by customers on the Company's e-commerce platform. Customers do not have the contractual right to take possession of the Company's software. Revenue is recognized in an amount that reflects the consideration that the Company expects to ultimately receive in exchange for those promised goods, net of expected discounts for sales promotions and customary allowances. Commerce-as-a-Service Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged primarily in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers' inventory or any credit risks relating to the products sold. Variable consideration is included in revenue for potential product returns. The Company uses a reserve to constrain revenue for the expected variable consideration at each period end. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and expected levels of returns. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company's influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. Payment terms and conditions are generally consistent for customers, including credit terms to customers ranging from seven days to 60 days, and the Company's contracts do not include any significant financing component. The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales in the statements of operations. Commerce-as-a-Service The Company's main revenue stream is "Commerce-as-a-Service" revenue in which they receive commission fees derived from contractually committed gross revenue processed by customers on the Company's e-commerce platform. Consideration for online sales is collected directly from the shopper by the Company and amounts not owed to the Company are remitted to the client. Revenue is recognized on a net basis from maintaining e-commerce platforms and online orders, as the Company is engaged in an agency relationship with its customers and earns defined amounts based on the individual contractual terms for the customer and the Company does not take possession of the customers' inventory or any credit risks relating to the products sold.
Product revenue
Under one of the Company's Master Services Agreements, the Company is the owner
of inventory and reseller of record. As a result, the Company is the principal
in sales to end customers and records these revenues on a gross basis a point in
time.
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Revenue for business-to-business ("B2B") fulfillment services is recognized on a
gross basis either at a point in time or over a point in time. For example,
inbound and outbound services are recognized when the service is complete, while
monthly storage services are recognized over the service period.
Marketing
Revenue for marketing services is recognized on a gross basis as marketing services are complete. Performance obligations include providing marketing and program management such as procurement and implementation.
Shipping
Revenue for shipping services is recognized on a gross basis as shipments are completed and products are shipped to end customers.
Other services
Revenue for other services such as photography, business to customer ("B2C")
fulfillment, customer service, development and web design are reimbursable costs
and recognized on the gross basis, and are services rendered as part of the
performance obligations to clients for which an online platform and online
orders are managed. All reimbursable costs are the responsibility of the Company
as the Company uses such services to fulfill its performance obligations.
Set up and implementation
The Company provides set up and implementation services for new clients. The revenue is recognized on a gross basis at the completion of the service, with the unearned amounts received for incomplete services recorded as deferred revenue, if any. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales in the statements of operations
Recently Issued Accounting Pronouncements
We discuss the potential impact of recent accounting pronouncements in Note 2 to our "Notes to Consolidated Financial Statements" under the caption "Summary of Significant Accounting Policies".
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