UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification Number) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 20, 2024, shares of Class A Common Stock, par value $0.0001 per share, and shares of Class V Common Stock, par value $0.0001 per share, were issued and outstanding.
Table of Contents
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RUBICON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets, net | ||||||||
| Prepaid expenses | ||||||||
| Current assets of discontinued operations | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating right-of-use assets | ||||||||
| Other noncurrent assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Noncurrent assets of discontinued operations | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Line of credit | ||||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Operating lease liabilities, current | ||||||||
| Warrant liabilities | ||||||||
| Derivative liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities: | ||||||||
| Deferred income taxes | ||||||||
| Debt obligations, net of deferred debt charges | ||||||||
| Related-party debt obligations, net of deferred debt charges | ||||||||
| Derivative liabilities | ||||||||
| Earn-out liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 16) | ||||||||
| Stockholders’ (Deficit) Equity: | ||||||||
| Common stock – Class A, par value of $ per share, shares authorized, and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Common stock – Class V, par value of $ per share, shares authorized, and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Preferred stock – par value of $ per share, shares authorized, issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ deficit attributable to Rubicon Technologies, Inc. | ( |
) | ( |
) | ||||
| Noncontrolling interests | ||||||||
| Total Stockholders’ Deficit | ( |
) | ( |
) | ||||
| Total Liabilities and Stockholders’ (Deficit) Equity | $ | $ | ||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
1
RUBICON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
| Three Months Ended March 31, |
||||||||
| 2024 | 2023 | |||||||
| Revenue: | ||||||||
| Service | $ | $ | ||||||
| Recyclable commodity | ||||||||
| Total revenue | ||||||||
| Costs and Expenses: | ||||||||
| Cost of revenue (exclusive of amortization and depreciation): | ||||||||
| Service | ||||||||
| Recyclable commodity | ||||||||
| Total cost of revenue (exclusive of amortization and depreciation) | ||||||||
| Sales and marketing | ||||||||
| Product development | ||||||||
| General and administrative | ||||||||
| Gain on settlement of incentive compensation | ( |
) | ||||||
| Amortization and depreciation | ||||||||
| Total Costs and Expenses | ||||||||
| Loss from Operations | ( |
) | ( |
) | ||||
| Other Income (Expense): | ||||||||
| Interest earned | ||||||||
| Gain (loss) on change in fair value of warrant liabilities | ( |
) | ||||||
| Gain on change in fair value of earnout liabilities | ||||||||
| Loss on change in fair value of derivatives | ( |
) | ( |
) | ||||
| Gain on service fee settlements in connection with the Mergers | ||||||||
| Loss on extinguishment of debt obligations | ( |
) | ||||||
| Interest expense | ( |
) | ( |
) | ||||
| Related party interest expense | ( |
) | ( |
) | ||||
| Other expense | ( |
) | ( |
) | ||||
| Total other income (expense) | ( |
) | ( |
) | ||||
| Loss from continuing operations before income taxes | ( |
) | ( |
) | ||||
| Income tax expense | ||||||||
| Net loss from continuing operations | ( |
) | ( |
) | ||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations before income taxes | ( |
) | ( |
) | ||||
| Income tax expense | ||||||||
| Net loss from discontinued operations | ( |
) | ( |
) | ||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss from continuing operations attributable to noncontrolling interests | ( |
) | ( |
) | ||||
| Net loss from continuing operations attributable to Class A common stockholders | $ | ( |
) | $ | ( |
) | ||
| Net loss from discontinued operations attributable to noncontrolling interests | ( |
) | ( |
) | ||||
| Net loss from discontinued operations attributable to Class A common stockholders | $ | ( |
) | $ | ( |
) | ||
| Net loss from continuing operations per Class A Common share – basic and diluted | $ | ) | $ | ) | ||||
| Net loss from discontinued operations per Class A Common share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
2
RUBICON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(in thousands, except shares and units data)
| Common Stock – | Common Stock – | Additional | Non | |||||||||||||||||||||||||||||||||||||
| Class A | Class V | Preferred Stock | Paid-in | Accumulated | controlling | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||
| Equity-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services rendered | - | - | ||||||||||||||||||||||||||||||||||||||
| RSU Settlement | ( |
) | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the FPA Termination Agreement Settlement | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Class V Common Stock to Class A Common Stock | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||||
| Exercise and conversion of liability classified warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Reclassification of liability classified warrants to equity | - | - | - | |||||||||||||||||||||||||||||||||||||
| Exercise and conversion of equity classified warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||
3
| Common Stock – | Common Stock – | Additional | Non | |||||||||||||||||||||||||||||||||||||
| Class A | Class V | Preferred Stock | Paid-in | Accumulated | controlling | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||
| Equity-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services rendered | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of equity-classified warrants | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vested RSUs | - | - | ||||||||||||||||||||||||||||||||||||||
| RSUs withheld to pay taxes | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Conversion of debt obligations to common stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Proceeds from issuance of common stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
RUBICON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended March 31, |
||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss from discontinued operations | ||||||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Amortization and depreciation | ||||||||
| Amortization of deferred debt charges | ||||||||
| Amortization of related party deferred debt charges | ||||||||
| Paid-in-kind interest capitalized to principal of debt obligations | ||||||||
| Paid-in-kind interest capitalized to principal of related party debt obligations | ||||||||
| Allowances for accounts receivables and contract assets | ||||||||
| (Gain) Loss on change in fair value of warrant liabilities | ( |
) | ||||||
| Loss on change in fair value of derivatives | ||||||||
| Gain on change in fair value of earn-out liabilities | ( |
) | ( |
) | ||||
| Loss on extinguishment of debt obligations | ||||||||
| Equity-based compensation | ||||||||
| Settlement of accrued incentive compensation | ( |
) | ||||||
| Service fees settled in common stock | ||||||||
| Gain on service fee settlement in connection with the Mergers | ( |
) | ||||||
| Deferred income taxes | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Contract assets | ||||||||
| Prepaid expenses | ( |
) | ||||||
| Other current assets | ( |
) | ( |
) | ||||
| Operating right-of-use assets | ||||||||
| Other noncurrent assets | ( |
) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( |
) | ||||||
| Contract liabilities | ( |
) | ( |
) | ||||
| Operating lease liabilities | ( |
) | ( |
) | ||||
| Other liabilities | ( |
) | ||||||
| Net cash flows from operating activities – continuing operations | ( |
) | ( |
) | ||||
| Net cash flows from operating activities – discontinued operations | ( |
) | ||||||
| Net cash flows from operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Property and equipment purchases | ( |
) | ( |
) | ||||
| Net cash flows from investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowings on Revolving Credit Facility | ||||||||
| Net borrowings on June 2023 Revolving Credit Facility | ||||||||
| Proceeds from debt obligations | ||||||||
| Repayments of debt obligations | ( |
) | ||||||
| Proceeds from related party debt obligations | ||||||||
| Financing costs paid | ( |
) | ||||||
| Proceeds from issuance of common stock | ||||||||
| RSUs withheld to pay taxes | ( |
) | ||||||
| Net cash flows from financing activities | ||||||||
| Net change in cash and cash equivalents | ( |
) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Less: cash and cash equivalents of discontinued operations | $ | $ | ||||||
| Cash and cash equivalents of discontinued operations at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Exchange of warrant liability for common stock | $ | $ | ||||||
| Reclassification of liability classified warrants to equity | $ | $ | ||||||
| Settlement of the FPA Termination Agreement in common stock | $ | $ | ||||||
| Issuance of common stock for services rendered | ||||||||
| Fair value of derivatives issued as debt discount | $ | $ | ||||||
| Fair value of derivatives issued as debt issuance cost | $ | $ | ||||||
| Conversions of debt obligations to common stock | $ | $ | ||||||
| Equity issuance costs settled with common stock | $ | $ | ||||||
| Loan commitment asset reclassed to deferred debt discount | $ | $ | ||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
RUBICON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Nature of operations and summary of significant accounting policies
Description of Business – Rubicon Technologies, Inc. and all subsidiaries are hereafter referred to as “Rubicon” or the “Company.”
Rubicon is a digital marketplace for waste and recycling services and provides cloud-based waste and recycling solutions to businesses and governments. Rubicon’s sustainable waste and recycling solutions provide comprehensive management of customers’ waste streams through a platform that powers a modern, digital experience and delivers data-driven insights and transparency for the customers and hauling and recycling partners.
Rubicon also provides consultation and management services to customers for waste removal, waste management, logistics, and recycling solutions. Consultation and management services include planning, consolidation of billing and administration, cost savings analyses, and vendor performance monitoring and management. The combination of Rubicon’s technology and services provides a holistic audit of customer waste streams. Rubicon also provides logistics services and markets and resells recyclable commodities.
Reverse Stock Split – On September 26, 2023, the Company effected a reverse stock split of its outstanding shares of voting common stock at a ratio of one-for-eight (1:8) pursuant to a Certificate of Amendment to its Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The reverse stock split was reflected on the New York Stock Exchange (the “NYSE”) beginning with the opening of trading on September 27, 2023. Pursuant to the reverse stock split, every eight shares of the Company’s issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the number of authorized shares or the par value per share of the common stock. No fractional shares were issued in connection with the reverse stock split. Any stockholder who would otherwise be entitled to receive a fractional share instead became entitled to receive one whole share of common stock in lieu of such fractional share. Equitable adjustments corresponding to the reverse stock split ratio were made to all (i) issued and outstanding shares of all other classes of stock of the Company, (ii) the exercise prices of and number of shares of common stock underlying the Company’s public and private warrants, (iii) the number of shares of common stock underlying the Company’s outstanding equity awards, and (iv) the number of shares of common stock issuable under the Company’s equity incentive plan. All share and per share amounts of the common stock included in the accompanying condensed consolidated financial statements and these notes to the condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.
Mergers – Rubicon Technologies, Inc. was initially incorporated in the Cayman Islands on April 26, 2021 as a special purposes acquisition company under the name “Founder SPAC” (“Founder”). Founder was formed for the purpose of effectuating a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. On August 15, 2022 (the “Closing Date”), Founder consummated the mergers (the “Mergers”), pursuant to that certain Agreement and Plan of Merger, dated December 15, 2021 (the “Merger Agreement”) (the “Closing”).
In connection with the Mergers, the Company was reorganized into an Up-C structure, in which substantially all of the assets and business of the Company are held by Rubicon Technologies Holdings, LLC (“Holdings LLC”) and continue to operate through Rubicon Technologies Holdings, LLC and its subsidiaries, and Rubicon Technologies, Inc.’s material assets are the equity interests of Rubicon Technologies Holdings, LLC indirectly held by it. Pursuant to the Merger Agreement, the Mergers were accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) (the “Reverse Recapitalization”). Under this method of accounting, Founder was treated as the acquired company and Holdings LLC was treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Holdings LLC issuing stock for the net assets of Founder, accompanied by a recapitalization. Thus, the accompanying condensed consolidated financial statements reflect (i) the historical operating results of Holdings LLC prior to the Mergers; (ii) the results of Rubicon Technologies, Inc. following the Mergers; and (iii) the acquired assets and liabilities of Founder stated at historical cost, with no goodwill or other intangible assets recorded. See Note 3 for additional information regarding Mergers
During the first quarter of 2024, the Company’s Board of Directors ("Board") approved a plan to sell the Software-as-a-Service business (the “SaaS Business”). On May 7, 2024, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) and sold the SaaS Business. As a result, the financial results of the SaaS Business were reflected in the accompanying condensed consolidated statements of operations, retrospectively, as discontinued operations beginning on January 1, 2023; and the related assets and liabilities associated with the discontinued operations in the accompanying condensed consolidated balance sheets are classified, retrospectively, as discontinued operations as of December 31, 2023. See Note 4 for additional information.
6
Basis of Presentation and Consolidation – The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to U.S. generally accepted accounting principles (“U.S. GAAP) and reflect all adjustments which are, in the opinion of management, necessary to a fair presentation of the results of the interim periods presented, under the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). These condensed consolidated financial statements include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. The Company’s condensed consolidated financial statements include the accounts of Rubicon Technologies, Inc., and subsidiaries. The Company’s condensed consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2024. Certain information and note disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes prepared in accordance with U.S. GAAP have been condensed in, or omitted from, these interim financial statements. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements for the fiscal year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2024.
Liquidity and going concern consideration – For the three months ended March 31, 2024, and in each fiscal period 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 March 31, 2024.
As of March 31, 2024, cash and cash
equivalents totaled $13.8
million, accounts receivable totaled $52.0
million and unbilled accounts receivable totaled $
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. As a result, there is substantial doubt about the Company’s ability to continue as a going concern.
To address liquidity needs, the Company has been working to execute various initiatives to modify its operations to reduce spending and improve cash flow. Initiatives the Company has undertaken in recent periods 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. Additionally, on May 7, 2024, the Company completed the sale of its SaaS Business and entered into the Rodina SPA (as defined in Note 20) which provided the Company with additional cash (see Note 3 and Note 20 for further information).
The Company believes that additional capital will be needed to provide sufficient liquidity to meet the Company’s known liquidity needs for the next 12 months given that the June 2023 Revolving Credit Facility is scheduled to mature and the borrowings under the facility will become due and payable on the maturity date. However, while management believes the Company will be able to obtain additional capital through debt and equity financing, including sales of Class A Common Stock under the Cantor Sales Agreement, to the extent necessary, the Company has obtained no firm commitment from current or prospective investors to date and no assurance can be provided that such additional financing will be obtained at the level acceptable to the Company within the necessary timeframe, if at all. Failure to secure sufficient additional funding in a timely manner or at all will impact the Company’s liquidity, including its ability to service its debt and other liabilities, and may require the Company to modify, delay, or abandon some of its planned future expansion or development, or to otherwise enact additional operating cost reductions available to management, which could have a material adverse effect on the Company’s business, operating results, financial condition, and could force the Company to limit its business activities or discontinue its operations entirely.
The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
7
Segments – The Company operates in one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assessing performance. The Company’s CODM role is fulfilled by the Executive Leadership Team (“ELT”), who allocates resources and assesses performance based upon consolidated financial information.
Use of Estimates – The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of any contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Emerging Growth Company – The Company is an emerging growth company (“EGC”), as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company did not opt out of such extended transition period which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an EGC, will be required to adopt the new or revised standard at the time the new or revised standard becomes applicable to private companies. The effective dates shown in Note 2 below reflect the election to use the extended transition period.
Revenue Recognition – The Company recognizes service revenue over time, consistent with efforts performed and when the customer simultaneously receives and consumes the benefits provided by the Company’s services. The Company recognizes recyclable commodity revenue at the point in time when the ownership, risks, and rewards transfer. The Company derives its revenue from waste removal, waste management and consultation services, software subscriptions, and the sale of recyclable commodities.
Service Revenue:
Service revenues are primarily derived from long-term contracts with waste generator customers including multiple promises delivered through the Company’s digital marketplace platform. The promises include waste removal, consultation services, billing administration and consolidation, cost savings analyses, and vendor procurement and performance management, each of which constitutes an input to the combined service managed through the digital platform. The digital platform and services are highly interdependent, and accordingly, each contractual promise is not considered a distinct performance obligation in the context of the contract and is combined into a single performance obligation. In general, fees are invoiced, and revenue is recognized over time as control is transferred. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing the service. The Company invoices for certain services prior to performance. These advance invoices are included in contract liabilities and recognized as revenue in the period service is provided.
Service revenues also include software-as-a-service subscription, maintenance, equipment and other professional services, which represent separate performance obligations. Once the performance obligations and the transaction price are determined, including an estimate of any variable consideration, the Company then allocates the transaction price to each performance obligation in the contract using a relative standalone selling price method. The Company determines standalone selling price based on the price at which the good or service is sold separately. The Company invoices for certain services prior to performance. These advance invoices are included in contract liabilities and recognized as revenue in the period service is provided.
Recyclable Commodity Revenue:
The Company recognizes recyclable commodity revenue through the sales of old corrugated cardboard (OCC), old newsprint (ONP), aluminum, glass, pallets, and other recyclable materials at market prices. The Company purchases recyclable commodities from certain waste generator customers and sells the recyclable materials to recycling and processing facilities. Revenue recognized under these agreements is variable in nature based on the market, type and volume or weight of the materials sold. The amount of revenue recognized is based on commodity prices at the time of sale, which are unknown at contract inception. Fees are billed, and revenue is recognized at a point in time when control is transferred to the recycling and processing facilities.
8
Management reviews contracts and agreements the Company has with its waste generator customers and hauling and recycling partners and performs an evaluation to consider the most appropriate manner in accordance with ASC 606-10, Revenue Recognition: Principal Agent Considerations, by which revenue is presented on the condensed consolidated statements of operations.
Judgment is required in evaluating the presentation of revenue on a gross versus net basis based on whether the Company controls the service provided to the end-user and is the principal in the transaction (gross), or the Company arranges for other parties to provide the service to the end-user and is the agent in the transaction (net). Management has concluded that the Company is the principal in most arrangements as it controls the waste removal service and is the primary obligor in the transactions.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) which we recognize revenue at the amount to which the Company has the right to invoice for services performed and (iii) variable consideration which is allocated entirely to a wholly unsatisfied performance obligation. After applying these optional exemptions, the aggregate amount of the transaction price allocated to unsatisfied or partially satisfied performance obligations as of March 31, 2024 and December 31, 2023 was insignificant.
Cost of Revenue, exclusive of amortization and depreciation – Cost of service revenues primarily consists of expenses related to delivering the Company’s 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 primarily consists of expenses related to purchases of OCC, ONP, aluminum, glass, pallets and other recyclable materials, and any associated transportation fees.
The Company recognizes the cost of revenue exclusive of any amortization or depreciation expenses, which are recognized in amortization and depreciation expenses on the condensed consolidated statements of operations.
Cash and Cash Equivalents – The Company considers all highly liquid investments purchased with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times exceed the Federal Deposit Insurance Corporation insurance limits.
Accounts Receivable and Contract Balances
– Accounts receivable consist of trade accounts receivable for services provided to customers. Accounts receivable is stated
at the amount the Company expects to collect. The Company makes estimates of expected credit and collectability trends for the
allowance for credit losses and allowance for unbilled receivables based upon the Company’s assessment of various factors,
including historical experience, the age of the accounts receivable balances, credit quality of customers, current economic
conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the
Company’s ability to collect from customers. Past-due balances and other higher-risk amounts are reviewed individually for
collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability
to make payments, additional allowances would be required. As of March 31, 2024 and December 31, 2023, the allowances for
accounts receivable and contract assets were $
In cases where customers pay for services in
arrears, the Company accrues revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a
contract asset (unbilled receivable). As of March 31, 2024 and December 31, 2023, the Company’s continuing
operations had unbilled receivables of $
Contract liabilities (deferred revenue) consist
of amounts collected prior to having satisfied the performance obligation. The Company periodically invoices customers for recurring
front load services in advance monthly basis. As of March 31, 2024 and December 31, 2023, the Company’s continuing
operations had deferred revenue balances of $
9
Accrued Hauler Expenses – The Company recognizes hauler costs and the cost of recyclable products when services are performed. Accounting for accrued hauler costs and the cost of recyclable commodities requires estimates and assumptions regarding the quantity of waste collected by the vendors and the frequencies of the collections. The Company estimates quantities and frequencies using historical transaction and market data based on the waste stream composition, equipment type, and equipment size. Accrued hauler expenses are presented within accrued expenses on the condensed consolidated balance sheets.
Fair Value Measurements – In accordance with U.S. GAAP, the Company groups its financial assets and financial liabilities at fair value in three levels, based on the markets in which the financial assets and financial liabilities are traded, and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 – Valuations for financial assets and financial liabilities traded in active exchange markets, such as the NYSE.
Level 2 – Valuations are obtained from readily available pricing sources via independent providers for market transactions involving similar financial assets and financial liabilities.
Level 3 – Valuations for financial assets and financial liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such financial assets or financial liabilities.
See Note 16 for further information regarding fair value measurements.
Offering Costs – Offering costs, consisting of legal, accounting, printer, filing and advisory fees related to the Mergers, were deferred and offset against proceeds from the Mergers and additional paid-in capital upon consummation of the Mergers. Deferred offering costs capitalized as of March 31, 2024 and December 31, 2023 were $-
Customer Acquisition Costs – The Company makes certain expenditures related to acquiring contracts for future services. These expenditures are capitalized and amortized in proportion to the expected future revenue from the customer, which in most cases results in straight-line amortization over the estimated life of the customer. Amortization of these customer acquisition costs is presented within amortization and depreciation on the condensed 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 ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 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 Class A common stock, par value $ per share (“Class A 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 in liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a component of other income (expense) on the consolidated statement of operations.
As of March 31, 2024, the Company has both liability-classified and equity-classified warrants outstanding. See Note 10 for further information.
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Earn-out Liabilities – Pursuant to the Merger Agreement, (i) Blocked Unitholders (as defined in Note 3) immediately before the Closing received a right to receive a pro rata portion of shares of Class A Common Stock (the “Earn-Out Class A Shares”) and (ii) Rubicon Continuing Unitholders (as defined in Note 3) immediately before the Closing received a right to receive a pro rata portion of Class B Units (as defined in Note 3) (“Earn-Out Units”) and an equivalent number of shares of the Company’s Class V common stock, par value $ (“Class V Common Stock”) (“Earn-Out Class V Shares”, and together with Earn-Out Class A Shares and Earn-Out Units, “Earn-Out Interests”), in each case, depending upon the performance of Class A Common Stock during the five year period after the Closing (the “Earn-Out Period”), as set forth below upon satisfaction of any of the following conditions (each, an “Earn-Out Condition”).
| (1) | 50% of the Earn-Out Interests if the volume weighted average price (the “VWAP”) of the Class A Common Stock equals or exceeds $112.00 per share (as adjusted for stock splits, stock dividends, reorganizations, and recapitalizations) for twenty (20) of thirty (30) consecutive trading days during the Earn-Out Period; and |
| (2) | 50% of the Earn-Out Interests if the VWAP of the Class A Common Stock equals or exceeds $128.00 per share (as adjusted for stock splits, stock dividends, reorganizations, and recapitalizations) for twenty (20) of any thirty (30) consecutive trading days during the Earn-Out Period. |
Earn-Out Interests were classified as liability transactions at initial issuance, which offset against additional paid-in capital as of the Closing. At each period end, Earn-Out Interests are remeasured to their fair value, with the changes during that period recognized as a component of other income (expense) on the consolidated statement of operations. Upon issuance and release of the shares after each Earn-Out Condition is met, the related Earn-Out Interests will be remeasured to their fair value at that time with the changes recognized as a component of other income (expense), and such Earn-Out Interests will be reclassed to stockholders’ (deficit) equity on the consolidated balance sheet. As of March 31, 2024 and December 31, 2023, the Earn-Out Interests had a fair value of $-
Noncontrolling Interest – Noncontrolling interest represents the Company’s noncontrolling interest in consolidated subsidiaries which are not attributable, directly or indirectly, to the controlling Class A Common Stock ownership of the Company.
Shares of Class V Common Stock are exchangeable into an equal number of Class A Common Stock. Shares of Class V Common Stock are non-economic voting shares in Rubicon Technologies, Inc., where shares of Class V Common Stock each have one vote per share.
The financial results of Holdings LLC were consolidated into Rubicon Technologies, Inc. and 6.8% and 66.1% of Holdings LLC’s net loss during the three months ended March 31, 2024 and 2023 was allocated to noncontrolling interests (“NCI”), respectively.
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.
The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s consolidated balance sheets as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The Company calculates the interim tax provision in accordance with the provisions of ASC Subtopic 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates the annual effective income tax rate (“AETR”) and applies the estimated rate to the year-to-date income or loss before income taxes.
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ASC Topic 740 prescribes a two-step approach for the recognition and measurement of tax benefits associated with the positions taken or expected to be taken in a tax return that affect amounts reported in the financial statements. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. As of March 31, 2024 or December 31, 2023, the Company has no tax positions that met this threshold and, therefore, has not recognized such benefits. The Company has reviewed and will continue to review the conclusions reached regarding uncertain tax positions, which may be subject to review and adjustment at a later date based on ongoing analyses of tax laws, regulations and interpretations thereof. To the extent that the Company’s assessment of the conclusions reached regarding uncertain tax positions changes as a result of the evaluation of new information, such change in estimates will be recorded in the period in which such determination is made. The Company reports income tax-related interest and penalties relating to uncertain tax positions, if applicable, as a component of income tax expense.
The Company’s income tax expense was
$-
During the three months ended March 31, 2024 and the year ended December 31, 2023, the Company recorded a full valuation allowance against its deferred tax assets. The Company intends to maintain this position until there is sufficient evidence to support the reversal of all or some portion of the allowance. The Company also has certain assets with indefinite lives for which the basis is different for book and tax. As a result, the Company is in a net deferred tax liability position of $
Tax Receivable Agreement Obligation – The Company and Holdings LLC entered into a Tax Receivable Agreement (the “Tax Receivable Agreement” or “TRA”) with Rubicon Continuing Unitholders (as defined in Note 3) and Blocked Unitholders (as defined in Note 3) (together, the “TRA Holders”). Pursuant to the Tax Receivable Agreement, among other things, the Company is required to pay to the TRA Holders 85% of certain of the Company’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. The actual tax benefit, as well as the amount and timing of any payments under the TRA, will vary depending 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 the Company’s 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 the Company may have made under the TRA; and the portion of the Company’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis.
The Company accounts for the effects of these increases in tax basis and associated payments under the TRAs if and when exchanges occur as follows:
| a. | recognizes a contingent liability for the TRA obligation when it is deemed probable and estimable, with a corresponding adjustment to additional paid-in-capital, based on the estimate of the aggregate amount that the Company will pay; |
| b. | records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange; |
| c. | to the extent the Company estimates that the full benefit represented by the deferred tax asset will not be fully realized based on an analysis that will consider, among other things, the expectation of future earnings, the Company reduces the deferred tax asset with a valuation allowance; and |
| d. | the effects of changes in any of the estimates and subsequent changes in the enacted tax rates after the initial recognition will be included in the Company’s net loss. |
12
A TRA liability is determined and recorded under ASC 450, “Contingencies”, as a contingent liability; therefore, the Company is required to evaluate whether the liability is both probable and the amount can be estimated. Since the TRA liability is payable upon cash tax savings and the Company has not determined that positive future taxable income is probable based on the Company’s historical loss position and other factors that make it difficult to rely on forecasts, the Company has not recorded the TRA liability as of March 31, 2024 or December 31, 2023. The Company will evaluate this on a quarterly basis, which may result in an adjustment in future periods.
Diluted income (loss) per share is computed giving effect to all potential weighted-average dilutive shares for the period. The dilutive effect of outstanding awards or financial instruments, if any, is reflected in diluted income (loss) per share by application of the treasury stock method or if converted method, as applicable. Stock awards are excluded from the calculation of diluted EPS in the event they are antidilutive or subject to performance conditions for which the necessary conditions have not been satisfied by the end of the reporting period. See Note 15 for additional information on dilutive securities.
Prior to the Mergers, the membership structure of Holdings LLC included units with liquidation preferences. 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. As a result, loss per share information has not been presented for periods prior to the Closing.
Derivative Financial Instruments – From time to time, the Company utilizes derivative instruments as part of our overall strategy. The Company’s derivative instruments are recorded at fair value on the consolidated balance sheets. These derivative instruments have not been designated as hedges; therefore, both realized and unrealized gains and losses are recognized in earnings. For the purposes of cash flow presentation, realized and unrealized gains or losses are included under cash flows from operating activities. Upfront cash payments received upon the issuance of derivative instruments are included within cash flows from financing activities, while the prepayments made upon the issuance of derivative instruments are included within cash flows from investing activities within the consolidated statements of cash flows.
The Company accounts for nonemployee stock-based transactions using the fair value of the consideration received (i.e., the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.
Note 2—Recent accounting pronouncements
Accounting pronouncements issued, but not adopted as of March 31, 2024
In November 2023, the FASB issued Accounting Standard Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced disclosure of significant segment expenses on an annual and interim basis. This ASU will be effective for the annual periods beginning the year ended December 31, 2024, and for interim periods beginning January 1, 2025. Early adoption is permitted. Upon adoption, this ASU should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. This ASU will be effective for the annual periods beginning the year ended December 31, 2026. Early adoption is permitted. Upon adoption, this ASU can be applied prospectively or retrospectively. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements.
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Note 3—Mergers
As further discussed in Note 1, on August 15, 2022, the Mergers were consummated pursuant to the Merger Agreement. In connection with the Closing, the following occurred in addition to the disclosures in Note 1:
| - | (a) Each then-issued and outstanding Class A ordinary share, par value $0.0001 per share, of Founder (“Founder Class A Shares”) automatically converted into one share of Class A Common Stock, (b) each then-issued and outstanding Class B ordinary share, par value $0.0001 per share, of Founder (“Founder Class B Shares” and, together with Founder Class A Shares, “Founder Ordinary Shares”), converted into one share of Class A Common Stock, pursuant to the Sponsor Agreement, dated December 15, 2021, by and among Founder, Founder SPAC Sponsor LLC (“Sponsor”), Holdings LLC, and certain insiders of Founder, (c) each then-issued and outstanding public warrant of Founder, |
| - | The Company was issued Class A Units in Holdings LLC (“Class A Units”) and all preferred units, common units, and incentive units of Holdings LLC (including such convertible instruments, the “Rubicon Interests”) outstanding were automatically recapitalized into Class A Units and Class B Units of Holdings LLC (“Class B Units”), as authorized by the Eighth Amended and Restated Limited Liability Company Agreement of Holdings LLC (“A&R LLCA”) that was adopted on the Closing Date. On the Closing Date, (a) holders of the Rubicon Interests immediately before the Closing, other than Boom Clover Business Limited, NZSF Frontier Investments Inc., and PLC Blocker A LLC (collectively, the “Blocked Unitholders”), were issued Class B Units (the “Rubicon Continuing Unitholders”), (b) the Rubicon Continuing Unitholders were issued a number of shares of Class V Common Stock equal to the number of Class B Units issued to the Rubicon Continuing Unitholders, (c) the Blocked Unitholders were issued shares of Class A Common Stock, and (d) following the adoption of the equity incentive award plan of Rubicon adopted at the Closing (the “2022 Plan”) and the effectiveness of a registration statement on Form S-8 filed on October 19, 2022, holders of phantom units of Holdings LLC immediately prior to the Closing (“Rubicon Phantom Unitholders”) and those current and former directors, officers and employees of Holdings LLC entitled to certain cash bonuses (the “Rubicon Management Rollover Holders”) are to receive restricted stock units (“RSUs”) and deferred stock units (“DSUs”), and such RSUs and DSUs will vest into shares of Class A Common Stock. In addition to the securities issuable at the Closing and the RSUs and DSUs, certain of the Rubicon Management Rollover Holders received one-time cash payments (the “Cash Transaction Bonuses”). In addition, pursuant to the Merger Agreement, (i) the Blocked Unitholders immediately before the Closing received a right to receive a pro rata portion of the Earn-Out Class A Shares and (ii) the Rubicon Continuing Unitholders immediately before the Closing received a right to receive a pro rata portion of the Earn-Out Units and an equivalent number of shares of Class V Common Stock, in each case, depending upon the performance of Class A Common Stock during the five year period after the Closing, as discussed in greater detail in Note 1. |
| - | Certain investors (the “PIPE Investors”) purchased, and the Company sold to such PIPE Investors an aggregate of shares of Class A Common Stock at a price of $ per share pursuant to and as set forth in the subscription agreements against payment by such PIPE Investors of the respective amounts set forth therein. |
14
| - | Certain investors (the “FPA Sellers”) purchased, and the Company issued and sold to such FPA Sellers, an aggregate of shares of Class A Common Stock pursuant to and as set forth in the Forward Purchase Agreement entered into between Founder and ACM ARRT F LLC (“ACM Seller”) on August 4, 2022, against payment by such FPA Sellers of the respective amounts set forth therein. The Forward Purchase Agreement was subsequently terminated on November 30, 2022. See Note 11 for further information. |
| - | The Company (a) caused to be issued to certain investors Class B Units pursuant to the Merger Agreement, (b) issued shares of Class A Common Stock to certain investors, and (c) Sponsor forfeited shares of Class A Common Stock. |
| - | Blocked Unitholders and Rubicon Continuing Unitholders retained aggregate shares of Class A Common Stock and shares of Class V Common Stock at the Closing. |
| - | The Company and Holdings LLC entered into the Tax Receivable Agreement with the TRA Holders. See Note 1 for further information. |
| - | The Company contributed approximately $ |
| - | The Company incurred $ |
Note 4— Discontinued operations of the SaaS Business
During the three months ended March 31, 2024,
the Company commenced a strategic evaluation of its SaaS Business. As of March 31, 2024, the Company had committed to a plan to sell
the business within one year and was actively marketing it in its current condition. The SaaS Business met the held for sale criteria
and represented a strategic shift in the Company’s operations. As a result, the SaaS Business have been presented as discontinued
operations and, as such, have been excluded from both continuing operations for all periods and the notes to the condensed consolidated
financial statements have been adjusted on a retrospective basis. On May 7, 2024, the Company entered into an agreement to sell the
SaaS Business to an entity affiliated with Andres Chico, 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 purchase price
of $
The Company only has one reporting unit. The SaaS Business met the criteria for classification as held for sale and discontinued operations, therefore, goodwill is allocated to noncurrent assets of discontinued operations on the accompanying balance sheets as of March 31, 2024 and December 31, 2023 based on the relative fair value of the SaaS Business and the remaining business.
15
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations of SaaS Business:
| Assets and Liabilities of Discontinued Operations | March 31, 2024 | December 31, 2023 | ||||||
| Accounts receivable, net | $ | $ | ||||||
| Contract assets, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Current assets of discontinued operations | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total assets of discontinued operations | $ | $ | ||||||
| Accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Current liabilities of discontinued operations | $ | $ | ||||||
The results of operations are recorded as net loss from discontinued operations, net of tax on the accompanying condensed consolidated statements of operations for all periods presented. The following table presents the aggregate results of discontinued operations of the SaaS Business:
| Results of Discontinued Operations | March 31, 2024 | March 31, 2023 | ||||||
| Revenue: Service | $ | $ | ||||||
| Cost of revenue (exclusive of amortization and depreciation): Service | ||||||||
| Sales and marketing | ||||||||
| Product development | ||||||||
| General and administrative | ( | ) | ||||||
| Amortization and depreciation | ||||||||
| Total costs and expense | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income taxes expenses (benefits) | ||||||||
| Net loss from discontinued operations, net of taxes | $ | ( | ) | $ | ( | ) | ||
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Note 5—Property and equipment
Property and equipment, net is comprised of the following as of March 31, 2024 and December 31, 2023 (in thousands):
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Property and equipment of continuing operations: | ||||||||
| Computers, equipment and software | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Total property and equipment | ||||||||
| Less accumulated amortization and depreciation | ( |
) | ( |
) | ||||
| Total property and equipment, net | $ | $ | ||||||
| Property and equipment of discontinued operations: | ||||||||
| Customer equipment | $ | $ | ||||||
| Less accumulated amortization and depreciation | ( |
( |
||||||
| Total property and equipment, net | $ | $ | ||||||
Property and equipment amortization and
depreciation expense of continuing operations for the three months ended March 31, 2024 and 2023 was $
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Note 6—Debt
Revolving Credit Facilities
Revolving Credit Facility – On December 14, 2018, the Company entered into a $
The Revolving Credit Facility required a lockbox arrangement, which provided for receipts to be swept daily to reduce borrowings outstanding at the discretion of the lender. This arrangement, combined with the existence of the subjective acceleration clause in the “Line of Credit” agreement, necessitated the Line of Credit be classified as a current liability on the consolidated balance sheets. The acceleration clause allowed for amounts borrowed under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, change of management, or change in control.
On June 7, 2023, the Company fully prepaid the borrowing under the Revolving Credit Facility in the amount of $
June 2023 Revolving Credit Facility – On June 7, 2023, the Company entered into a $
The June 2023 Revolving Credit Facility requires a lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at the discretion of the lender. This arrangement, combined with the existence of the subjective acceleration clause in the Line of Credit agreement, necessitates the Line of Credit be classified as a current liability on the consolidated balance sheets. The acceleration clause allows for amounts borrowed under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, change of management, or change in control.
On September 22, 2023, an entity affiliated with Andres Chico and Jose Miguel Enrich issued a standby letter of credit in the amount of $
18
On December 5, 2023, the Company entered into an amendment to the June 2023 Revolving Credit Facility. The amendment temporally modified the calculation methodology of the borrowing base collateral, resulting in its increase by $5.0 million through January 15, 2024, which was subsequently extended to March 15, 2024 with an option to be further extended to June 15, 2024. To date, the modified calculation methodology of the borrowing base has been extended on a month-to-month basis.
As of March 31, 2024, the Company’s total outstanding borrowings under the Line of Credit were $
The Company capitalized $2.9 million in deferred debt charges related to the June 2023 Revolving Credit Facility during the year ended December 31, 2023, which has been recorded to prepaid expenses on the accompanying condensed consolidated balance sheet and are amortized over the remaining term of the June 2023 Revolving Credit Facility. The deferred debt charges balances as of March 31, 2024 and December 31, 2023 were $
Term Loan Facilities
Term Loan – On March 29, 2019, the Company entered into a $
On November 18, 2022, 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 (as defined below) agreement. 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 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 an amendment to the Term Loan agreement, which (i) amended the interest rate the Term Loan bears to SOFR plus
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 $
Subordinated Term Loan – On December 22, 2021, the Company entered into a $
19
On December 12, 2022, the Subordinated Term Loan Warrants were exercised and converted into Class A Common Stock. On December 30, 2022, the Company entered into an agreement with the lender of the Subordinated Term Loan, pursuant to which the Company agreed to compensate, in cash or shares of Class A Common Stock, the lender for the calculated amount between (a) the closing share price of Class A Common Stock on the business day immediately prior to the lender’s exercise of the Subordinated Term Loan Warrants on December 12, 2022 multiplied by the number of shares of Class A Common Stock issued for such exercise (the “December 2022 Warrant Shares”) and (b) the closing share price of Class A Common Stock on the business day immediately prior to the lender’s sale of the December 2022 Warrant Shares multiplied by the number of the December 2022 Warrant Shares sold by the lender (the “Subordinated Term Loan Warrants Make-Whole Agreement”). The Subordinated Term Loan Warrants Make-Whole Agreement expires on December 12, 2027.
The maturity of the Subordinated Term Loan was subsequently extended to December 31, 2023 with the amendment entered into on November 18, 2022. On March 22, 2023, the Company entered into an amendment to the Subordinated 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 amendments to the Subordinated Term Loan Warrants agreements (see Note 10 for further information regarding the Subordinated Term Loan Warrants and the Subordinated Term Loan Warrants Make-Whole Agreement).
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% is to be paid in cash and 4% is to 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 10 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 $12.5 million in deferred debt charges related to the Subordinated Term Loan during the year ended December 31, 2023. Balance of deferred debt charges as of March 31, 2024 and December 31, 2023 was $
June 2023 Term Loan – On June 7, 2023, the Company entered into a $
20
The Company capitalized $
Convertible Debentures
YA Convertible Debentures – As part of the security purchase agreement (the “YA SPA”) (see Note 12), the Company issued convertible debentures (collectively, the “YA Convertible Debentures”) to YA II PN, Ltd. (the “Yorkville Investor”) on November 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 $
During the three months ended March 31, 2023, the Yorkville Investor converted $
On August 8, 2023, the Yorkville Investor assigned the YA Convertible Debentures to certain existing investors of the Company affiliated with Andres Chico and 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 August 25, 2023, the assignees converted all of the remaining principal of $
21
Insider Convertible Debentures – 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 $
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. 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.
On September 15, 2023, the Company entered into an amendment to the Insider Convertible Debentures held by three entities affiliated with Andres Chico and Jose Miguel Enrich. The amendment lowered the conversion price of these three debentures to $10.00 per share of Class A Common Stock. In accordance with ASC 470-50, Debt – Modifications and Extinguishments, the Company concluded that the amendment was a debt extinguishment. Accordingly, as of the amendment date, the Company (i) derecognized the net carrying amount of these three Insider Convertible Debentures of $7.6 million and the remaining capitalized deferred debt charges of $0.6 million, (ii) recognized the three Insider Convertible Debentures at their fair value of $6.7 million and the debt discount of $1.5 million on consolidated balance sheet and (iii) recognized $0.9 million of loss on debt extinguishment on the consolidated statement of operations. Concurrently, the Company issued a warrant to an entity affiliated with Andres Chico and Jose Miguel Enrich which granted the right to purchase 498,119 shares of Class A Common Stock (the “Rodina Warrant”) (See Note 10 for further information regarding the Rodina Warrant).
The Company recorded the principal of the Insider Convertible Debentures, including interest incurred between the origination through March 31, 2024, which the Company elected to capitalize to the principal, in related-party debt obligations, net of deferred debt charges on the accompanying condensed consolidated balance sheet as of March 31, 2024. The Company capitalized $
Third Party Convertible Debentures – On February 1, 2023, the Company issued convertible debentures to certain third parties for a total principal amount of $
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. 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 March 31, 2024 which the Company elected to capitalize to the principal, in debt obligations, net of deferred debt charges on the accompanying condensed consolidated balance sheet as of March 31, 2024. The Company capitalized insignificant amount of accrued interest to the principal of the Third Party Convertible Debentures during the three months ended March 31, 2024. Amortization of deferred debt charges related to the Third Party Convertible Debentures was insignificant for the three ended March 31, 2024. Neither principal nor accrued interest of the Third Party Convertible Debentures was converted from the origination through March 31, 2024.
22
NZ Superfund Convertible Debenture – On February 1, 2023, the Company issued a convertible debenture to Guardians of New Zealand Superannuation (the “NZ Superfund”), a then 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 $
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 March 31, 2024 which the Company elected to capitalize to the principal, in related party debt obligations, net of deferred debt charges on the accompanying condensed consolidated balance sheet as of March 31, 2024. The Company capitalized $
Components of the Company’s debt obligations were as follows (in thousands):
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Term loan balance | $ | $ | ||||||
| Convertible debt balance | ||||||||
| Related-party convertible debt balance | ||||||||
| Less unamortized deferred debt charges | ( |
) | ( |
) | ||||
| Total borrowed | ||||||||
| Less short-term debt obligation balance | ||||||||
| Long-term debt obligation balance | $ | $ | ||||||
At March 31, 2024, the future aggregate maturities of long-term debt for the remainder of 2024 and subsequent periods are as follows (in thousands):
| Fiscal Years Ending December 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
The total interest expense related to the Revolving Credit Facilities, Term Loan Facilities, and Convertible Debentures was $
23
Note 7—Accrued expenses
Accrued expenses consist of the following as of March 31, 2024 and December 31, 2023 (in thousands):
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued expenses of continuing operations: | ||||||||
| Accrued hauler expenses | $ | $ | ||||||
| Accrued compensation | ||||||||
| FPA Settlement Liability (as defined in Note 11) | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
| Accrued expenses of discontinued operations: | ||||||||
| Accrued expenses | $ | $ | ||||||
During the three months ended March 31, 2023, the Company granted certain RSU awards, valued at $
During the year ended December 31, 2023, the Company settled with certain Rubicon Management Rollover Holders on a portion of the accrued management rollover consideration and the Company agreed to make quarterly cash payments to these Rubicon Management Rollover Holders through December 31, 2026. As a result, the Company recognized related liabilities of $
As further described in Note
4, $
24
Note 8—Goodwill and other intangibles
There were no additions to goodwill during the
three months ended March 31, 2024 or the year ended December 31, 2023. No impairment of goodwill was identified for the three
or three months ended March 31, 2024 or the year ended December 31, 2023. As of March 31, 2024, the Company allocated $
Intangible assets consisted of the following (in thousands, except years):
| March 31, 2024 | |||||||||||||||
| Useful Life (in years) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||
| Intangible assets of continuing operations: | |||||||||||||||
| Trade Name | $ | $ | ( |
) | $ | ||||||||||
| Customer and hauler relationships | ( |
) | |||||||||||||
| Non-competition agreements | ( |
) | |||||||||||||
| Technology | ( |
) | |||||||||||||
| Total finite-lived intangible assets | ( |
) | |||||||||||||
| Domain Name | Indefinite | ||||||||||||||
| Total intangible assets | $ | $ | ( |
) | $ | ||||||||||
| Intangible assets of discontinued operations: | |||||||||||||||
| Technology | $ | $ | ( |
) | $ | ||||||||||
| Total intangible assets of discontinued operations | $ | $ | ( |
) | $ | ||||||||||
|
|
December 31, 2023 | ||||||||||||||
| Useful Life (in years) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||
| Intangible assets of continuing operations: | |||||||||||||||
| Trade Name | $ | $ | ( |
) | $ | ||||||||||
| Customer and hauler relationships | ( |
) | |||||||||||||
| Non-competition agreements | ( |
) | |||||||||||||
| Technology | ( |
) | |||||||||||||
| Total finite-lived intangible assets | ( |
) | |||||||||||||
| Domain Name | Indefinite | ||||||||||||||
| Total intangible assets | $ | $ | ( |
) | $ | ||||||||||
| Intangible assets of discontinued operations: | |||||||||||||||
| Technology | $ | $ | ( |
) | $ | ||||||||||
| Total intangible assets of discontinued operations | $ | $ | ( |
) | $ | ||||||||||
25
Amortization expense for intangible assets of
continuing operations was $
| Fiscal Years Ending December 31, | ||||
| 2024 | $ | ( |
) | |
| 2025 | ( |
) | ||
| 2026 | ( |
) | ||
| Total future amortization of intangible assets | $ | ( |
) | |
As further described in Note 4, $
Note 9—Stockholders’ (deficit) equity
The table set forth below reflects information about the Company’s equity as of March 31, 2024.
| Authorized | Issued | Outstanding | ||||||||||
| Class A Common Stock | ||||||||||||
| Class V Common Stock | ||||||||||||
| Preferred Stock | ||||||||||||
| Total shares as of March 31, 2024 | ||||||||||||
The table set forth below reflects information about the Company’s equity as of December 31, 2023.
| Authorized | Issued | Outstanding | ||||||||||
| Class A Common Stock | ||||||||||||
| Class V Common Stock | ||||||||||||
| Preferred Stock | ||||||||||||
| Total shares as of December 31, 2023 | ||||||||||||
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.
During the three months ended March 31, 2024,
26
Note 10—Warrants
Public Warrants and Private Warrants – In connection with the Closing, on August 15, 2022, the
The Company may redeem the IPO Warrants:
| - | in whole and not in part; |
| - | at a price of $0.08 per 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 $144.00 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. |
Rodina Warrant – On September 15, 2023, the Company issued the Rodina Warrant, which granted the holder the right to purchase 498,119 shares of Class A Common Stock at the exercise price of $0.08 per share any time prior to September 15, 2026. 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 Rodina Warrant is 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. Accordingly, the Rodina Warrant was recognized at its fair value of $1.7 million in additional paid-in capital on the consolidated balance sheet upon issuance. The Rodina Warrant has not been exercised and remains outstanding as of March 31, 2024.
Subordinated Term Loan Warrants – Pursuant to the Subordinated Term Loan agreement entered on December 22, 2021 (see Note 6), the Company concurrently entered into warrant agreements and issued the Subordinated Term Loan Warrants under the condition that if the Company did not repay the Subordinated Term Loan on or prior to the original maturity date of December 22, 2022, the lender would receive the right to purchase up to the number of shares of Class A Common Stock worth $2.0 million at the exercise price of $0.08 per share at any time after the original 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, and the tenth anniversary of the issuance date. Additionally, if the Company did not repay the Subordinated Term Loan on or prior to the original maturity date, the Subordinated Term Loan Warrants would 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 (the “Additional Subordinated Term Loan Warrants”). If the Company repaid the Subordinated Term Loan on or prior to the original maturity date, the Subordinated Term Loan Warrants would automatically terminate and be voided, and no Subordinated Term Loan Warrant would be exercisable.
27
On November 18, 2022, the Company entered into an amendment to the Subordinated Term Loan Warrants agreements, which (i) increased the number of shares 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 $
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 $
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 $
The Company determined that the Subordinated Term Loan Warrants required liability classification pursuant to ASC 480. As such, the outstanding 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 other income (expense) on the consolidated statements of operations. On December 12, 2022, the outstanding Subordinated Term Loan Warrants in amount of $
On December 30, 2022, the Company entered into the Subordinated Term Loan Warrants Make-Whole Agreement. During the year ended December 31, 2023, the Additional Subordinated Term Loan Warrants in amount of $
Pursuant to ASC 815, the Company determined that the Additional Subordinated Term Loan Warrants and the Subordinated Term Loan Warrants Make-Whole Agreement are derivatives. These derivatives, referred to throughout as the “Additional Subordinated Term Loan Warrants Derivative” and the “Subordinated Term Loan Warrants Make-Whole Derivative”, respectively, are recorded in derivative liabilities on the accompanying condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023. The Company performed fair value measurements for the Additional Subordinated Term Loan Warrants Derivative and the Subordinated Term Loan Warrants Make-Whole Derivative, which are described in Note 17. The fair value of the Additional Subordinated Term Loan Warrants Derivative and the Subordinated Term Loan Warrants Make-Whole Derivative are remeasured at each reporting period.
YA Warrant – On November 30, 2022, the Company issued a pre-funded warrant for a purchase price of $
28
The Company determined that the YA Warrant required liability classification pursuant to ASC 480 until the 6-month Reset Price was set on February 28, 2024. While the YA Warrant was liability classified, the outstanding YA Warrant was 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 being recorded as a component of other income (expense) on the consolidated statements of operations. During the year ended December 31, 2023, the Company issued 499,975 shares of Class A Common Stock for partial exercise of the YA Warrant. The Company measured the fair value of the YA Warrant as of December 31, 2023 and recognized $
Advisor Warrant – Pursuant to the YA SPA executed with the Yorkville Investor on November 30, 2022 (See Note 12), the Company committed 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
June 2023 Term Loan Warrants – Pursuant to the June 2023 Term Loan agreement entered into on June 7, 2023 (see Note 6), the Company concurrently entered into warrant agreements and issued the June 2023 Term Loan Warrants, which granted the holders the right to purchase up to shares of Class A Common Stock (the June 2023 Term Loan Warrants Shares) at the exercise price of $0.08 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 March 31, 2024 and December 31, 2023, and recognized $
29
Note 11—Forward Purchase Agreement
On August 4, 2022, the Company and
Note 12—Yorkville SPA
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 were 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 $
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 10 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 $
30
Note 13—Cantor Sales Agreement
On September 5, 2023, the Company entered into a Controlled Equity Offering Sales Agreement (the “Cantor Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) pursuant to which the Company may offer and sell, from time to time through Cantor, shares of Class A Common Stock for aggregate gross proceeds up to $
During the three months ended March 31, 2024 and 2023, the Company recorded stock-based compensation related to the 2022 Plans (as defined below).
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, shares of Class A Common Stock were authorized to be issued. Upon approval by the Company’s board of directors, additional shares of Class A Common Stock became 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 the three months ended March 31, 2024:
| Units | Weighted Average Grant Date Fair Value |
|||||||
| Nonvested – December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited/redeemed | ( |
) | ||||||
| Nonvested – March 31, 2024 | $ | |||||||
The remaining RSUs will vest over the requisite service periods ranging from six to thirty-six months from the grant date.
The Company recognized $ million and $ million in total equity compensation costs for the three months ended March 31, 2024 and 2023, respectively.
Some of RSUs settled during the three months ended March 31, 2023 were net share settled such that the Company withheld shares with a value equivalent to the 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 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 March 31, 2024, there were
As of March 31, 2024, the total unrecognized compensation cost related to outstanding RSUs was $ million, which the Company expects to recognize over a weighted-average period of years.
31
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 three months ended March 31, 2024. 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.
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 the three months ended March 31, 2024 are as follows (amounts in thousands, except for share and per share amounts):
| Three Months Ended March 31, 2024 |
||||
| Numerator: | ||||
| Net loss from continuing operations | $ | ( |
) | |
| Less: Net loss from continuing operations attributable to noncontrolling interests | ( |
) | ||
| Net loss attributable to continuing operations of Rubicon Technologies, Inc. | $ | ( |
) | |
| Net loss from discontinued operations | $ | ( |
) | |
| Less: Net loss from discontinued operations attributable to noncontrolling interests | ( |
) | ||
| Net loss attributable to discontinued operations of Rubicon Technologies, Inc. | $ | ( |
) | |
| Denominator: | ||||
| Weighted average shares of Class A Common Stock outstanding – Basic and diluted | ||||
| Net loss from continuing operations per share attributable to Class A Common Stock – Basic and diluted | $ | ) | ||
| Net loss from discontinued operations per share attributable to Class A Common Stock – Basic and diluted | $ | ) | ||
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 the three months ended March 31, 2023 are as follows (amounts in thousands, except for share and per share amounts):
| Three Months Ended March 31, 2023 |
||||
| Numerator: | ||||
| Net loss from continuing operations | $ | ( |
) | |
| Less: Net loss from continuing operations attributable to noncontrolling interests | ( |
) | ||
| Net loss attributable to continuing operations of Rubicon Technologies, Inc. | $ | ( |
) | |
| Net loss from discontinued operations | $ | ( |
) | |
| Less: Net loss from discontinued operations attributable to noncontrolling interests | ( |
) | ||
| Net loss attributable to discontinued operations of Rubicon Technologies, Inc. | $ | ( |
) | |
| Denominator: | ||||
| Weighted average shares of Class A Common Stock outstanding – Basic and diluted | ||||
| Net loss from continuing operations per share attributable to Class A Common Stock – Basic and diluted | $ | ) | ||
| Net loss from discontinued operations per share attributable to Class A Common Stock – Basic and diluted | $ | ) | ||
32
The Company’s potentially dilutive securities below were excluded from the computation of diluted loss per share as their effect would be anti-dilutive:
| - | IPO Warrants, Additional Subordinated Term Loan Warrants, Advisor Warrant, June 2023 Term Loan Warrants, YA Warrant and Rodina Warrant. |
| - | Earn-Out Interests. |
| - | RSUs and DSUs. |
| - | Exchangeable Class V Common Stock. |
| - | Potential settlements in Class A Common Stock of the Insider Convertible Debentures, the Third Party Convertible Debentures, the NZ Superfund Convertible Debentures, the June 2023 Term Loan, the Subordinated Term Loan Warrants Make-Whole Agreement and portion of fees for the PIPE Software Services Subscription (as defined in Note 18). |
Note 16—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):
| As of March 31, 2024 | ||||||||||||
| Liabilities | Level 1 | Level 2 | Level 3 | |||||||||
| Warrant liabilities | $ | $ | ( |
) | $ | |||||||
| Additional Subordinated Term Loan Warrants Derivative | ( |
) | ||||||||||
| Subordinated Term Loan Warrants Make-Whole Derivative | ( |
) | ||||||||||
| Total | $ | $ | ( |
) | $ | ( |
) | |||||
| As of December 31, 2023 | ||||||||||||
| Liabilities | Level 1 | Level 2 | Level 3 | |||||||||
| Warrant liabilities | $ | $ | ( |
) | $ | |||||||
| Additional Subordinated Term Loan Warrants Derivative | ( |
) | ||||||||||
| Subordinated Term Loan Warrants Make-Whole Derivative | ( |
) | ||||||||||
| Total | $ | $ | ( |
) | $ | ( |
) | |||||
| Level 3 Rollfoward | Additional Subordinated Term Loan Warrants Derivative |
Subordinated Term Loan Warrants Make-Whole Derivative |
||||||
| December 31, 2023 balances | $ | ( |
) | $ | ( |
) | ||
| Additions | ||||||||
| Changes in fair value | ( |
) | ( |
) | ||||
| Reclassified to level 2 | ||||||||
| March 31, 2024 balances | $ | ( |
) | $ | ( |
) | ||
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.
33
Warrant liabilities – The warrant
liabilities were classified to level 2 as of March 31, 2024. The outstanding warrants which were classified as warrant
liabilities as of March 31, 2024 were the June 2023 Term Loan Warrants and the Subordinated Term Loan Warrant. The sole
underlying asset of the outstanding warrant liabilities as of March 31, 2024 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 warrant
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 March 31, 2024 were minimal
($
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 $
Subordinated Term Loan Warrants Make-Whole Derivative – The Subordinated Term Loan Warrants Make-Whole Derivative’s fair value was estimated using Black Scholes Merton model. The value the Subordinated Term Loan Warrants Make-Whole Agreement is primarily based on the make-whole provision amount between (a) the closing share price of Class A Common Stock on the business day immediately prior to the lender’s exercise of the Subordinated Term Loan Warrants on December 12, 2022 multiplied by the number of the December 2022 Warrant Shares and (b) the closing share price of Class A Common Stock on the business day immediately prior to the lender’s sale of the December 2022 Warrant Shares multiplied by the number of the December 2022 Warrant Shares sold by the lender.
The following table provides quantitative information of the key assumptions utilized in the Subordinated Term Loan Warrants Make-Whole Derivative fair value measurements as of measurement dates:
| As of | As of | |||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Price of Class A Common Stock | $ | $ | ||||||
| Strike Price of Class A Common Stock | $ | $ | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expiration Date | ||||||||
The Company measured and recognized fair value for the Subordinated Term Loan Warrants Make-Whole Derivative at the end of each reporting period 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.
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Note 17—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.
On March 22, 2024, a lawsuit was filed against the Company by Cass Information Systems, Inc. (“Cass”) in the Circuit Court of St. Louis County, Missouri (Cass Information Systems, Inc. v. Rubicon Technologies, Inc.) alleging the Company’s nonpayment of $14.3 million in total of reimbursements of vendor invoices prepaid by Cass and certain fees for Cass’ services. The Company subsequently filed a response by disputing Cass’ allegations.
The Company makes a provision for liabilities 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 consolidated statements of operations, cash flows or 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.
Management Rollover Settlement
As further described in Note 7, during the year ended December 31, 2023, the Company settled with certain Rubicon Management Rollover Holders a portion of the accrued management rollover consideration and the Company agreed to make quarterly cash payments to these Rubicon Management Rollover Holders through December 31, 2026, of which $
Leases
The Company leases its office facilities under operating lease agreements expiring in 2024. 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 accompanying condensed consolidated balance sheet as of March 31, 2024 (in thousands).
| Years Ending December 31, | ||||
| 2024 | $ | |||
| Total minimum lease payments | ||||
| Less: Imputed interest | ( |
) | ||
| Total operating lease liabilities | $ | |||
Operating lease amounts above do not include sublease income. The Company has a sublease agreement with a third party and expects to receive sublease income of approximately $0.1 million through May 2024.
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Note 18—Related party transactions
PIPE Software services subscription
– The Company entered into a software services subscription agreement with Palantir Technologies Inc., a 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, March 6, 2023, March 28, 2023, June 27, 2023,
and September 30, 2023. The term of the amended agreement is through December 31, 2024. As of March 31, 2024, $
Convertible debentures – On December 16, 2022, the Company issued the Insider Convertible Debentures, which were subsequently amended, with certain members of the Company’s management team and board of directors, and certain other existing investors of the Company.
On February 1, 2023, the Company issued the NZ Superfund Convertible Debenture, which was subsequently amended, with NZ Superfund.
See Note 6 for further information regarding these convertible debentures.
Rodina Warrant – On September 15, 2023, the Company issued a warrant to an entity affiliated with Andres Chico and Jose Miguel Enrich which granted the right to purchase
September 2023 Rodina Letter of
Credit – On September 22, 2023, an entity affiliated with Andres Chico and Jose Miguel Enrich issued a standby letter
of credit in the amount of $15.0 million to the lender of the June 2023 Revolving Credit Facility on behalf of the Company,
which increased the Company’s borrowing capacity under the facility by $
Rodina Sponsor Capital Contribution Agreement – On January 24, 2024, the Company entered into a sponsor capital contribution agreement with an entity affiliated with Andres Chico and Jose Miguel Enrich, pursuant to which the entity agreed to make a cash contribution to the Company equal to the lesser of (i) $5.0 million or (ii) the amount necessary to cause the Company’s available funds equal to $16.0 million, in case the temporally modified calculation methodology of the borrowing base collateral which went effective with the amendment to the June 2023 Revolving Credit Facility entered into on December 5, 2023 is extended to June 15, 2024. If the entity makes any contributions pursuant to the sponsor capital contribution agreement, the Company will issue a number of Class A Common Stock shares at similar value to the entity’s contribution in exchange.
Sale of the SaaS Business – As further
disclosed under Note 4 and Note 20, on May 7, 2024, the Company entered into an agreement with an entity affiliated with Andres Chico
and Jose Miguel Enrich, to sell the SaaS Business for a purchase price of $
Rodina Securities Purchase Agreement –
As further disclosed under Note 4 and Note 20, on May 7, 2024, the Company entered into a Securities Purchase Agreement (the “Rodina
SPA”) with an entity affiliated Andres Chico and Jose Miguel Enrich. Pursuant to the Rodina SPA, the Company issued and sold
shares of Rubicon’s Series A Convertible Perpetual Preferred Stock, par value $ per share (the “Preferred Stock”)
for an aggregate purchase price of $
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Note 19—Concentrations
During the three months ended March 31, 2024, the Company had two customers who individually accounted for 10% or more of the Company’s total revenue and together accounted for approximately
Note 20—Subsequent events
As disclosed under Note 4, on May 7, 2024,
the Company entered into an agreement with an entity affiliated with Andres Chico and Jose Miguel Enrich to sell the SaaS Business
for a purchase price of $
On May 7, 2024, the Company entered into
the Rodina SPA with an entity affiliated with Andres Chico and Jose Miguel Enrich. Pursuant to the Rodina SPA, the Company issued
and sold
shares of Rubicon’s Series A Convertible Perpetual Preferred Stock, par value $
per share (the “Preferred Stock”) for an aggregate purchase price of $
On May 7, 2024, the Company entered into an amendment to the June 2023 Revolving Credit Facility. Pursuant to the amendment, (i) the lender consented to the SaaS Business sale and (ii) the Company agreed to make a partial prepayment of $11.4 million upon close of the sale of SaaS Business sale. Concurrently, the Company executed a side letter with the lender of the June 2023 Revolving Credit Facility, which included additional non-financial covenants for certain time-based milestones in relation to potential transactions the Company may enter into in future periods, including an agreement of a sale of all or substantially all of the Company’s assets or a merger. If any of the milestones are not met and such failure is not cured by the Company in accordance with such terms, the June 2023 Revolving Credit Facility will become due in full within ten months of May 7, 2024.
On May 7, 2024, the Company entered into an amendment to the June 2023 Term Loan agreement. Pursuant to the amendment, the lender consented to the sale of SaaS Business and (ii) the Company agreed to make a partial prepayment of $45.6 million upon close of the SaaS Business sale. Concurrently, the Company executed a side letter with the lender of the June 2023 Term Loan, which included additional non-financial covenants for certain time-based milestones in relation to potential transactions the Company may enter into in future periods, including an agreement of a sale of all or substantially all of the Company’s assets or a merger. If any of the milestones are not met and such failure is not cured by the Company in accordance with such terms, the June 2023 Term Loan will become due in full within ten months of May 7, 2024.
On May 7, 2024, the Company entered into an amendment to the Subordinated Term Loan agreement. Pursuant to the amendment, the lender consented to the sale of the SaaS Business. Concurrently, the Company executed a side letter with the lender of the Subordinated Term Loan, which included additional non-financial covenants for certain time-based milestones in relation to potential transactions the Company may enter into in future periods, including an agreement of a sale of all or substantially all of the Company’s assets or a merger. If any of the milestones are not met and such failure is not cured by the Company in accordance with such terms, the Subordinated Term Loan will become due in full within ten months of May 7, 2024.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Rubicon Technologies, Inc., a Delaware corporation (“Rubicon,” “we,” “us,” and “our”), should be read together with our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements. Words 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 relate to future 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 might cause future results to differ materially from 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” 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 serves 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 100 municipalities in the United States and operate in 20 countries. Furthermore, we have secured a robust portfolio of intellectual property, having been awarded more than 60 patents and 15 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 this report for our discussion about segments.
Recent Developments
Rodina Sponsor Capital Contribution Agreement
On January 24, 2024, we entered into a sponsor capital contribution agreement with an entity affiliated with Andres Chico and Jose Miguel Enrich. See “Contractual Obligations” and “Liquidity and Capital Resources—Other Financing Arrangements” below.
Discontinued Operations
As disclosed in Note 4 – Discontinued operations of SaaS Business and Note 20 – Subsequent events, to our unaudited interim condensed consolidated financial statements included elsewhere in this report, on May 7, 2024, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) to sell the SaaS Business to an entity affiliated with Andres Chico and Jose Miguel Enrich, for a purchase price of $68.2 million. The agreement also provides a potential earn-out payment to us of $12.5 million if the SaaS Business sales achieves a certain annual recurring revenue target on or prior to December 31, 2024.
Rodina Security Purchase Agreement
On May 7, 2024, we entered into a Securities Purchase Agreement (the “Rodina SPA”) with an entity affiliated with Andres Chico and Jose Miguel Enrich. Pursuant to the Rodina SPA, we agreed to issue and sell 20,000 shares of Rubicon’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Preferred Stock”) for an aggregate purchase price of $20.0 million. See “Liquidity and Capital Resources—Other Financing Arrangements” below.
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Amendment to the June 2023 Revolving Credit Facility
On May 7, 2024, we entered into an amendment to the June 2023 Revolving Credit Facility. Pursuant to the amendment, (i) the lender consented to the SaaS Business sale and (ii) we agreed to make a partial prepayment of $11.4 million upon close of the SaaS Business sale, which was completed on May 7, 2024. See “Liquidity and Capital Resources—Debt” below.
Amendment to the June 2023 Term Loan
On May 7, 2024, we entered into an amendment to the June 2023 Term Loan agreement. Pursuant to the amendment, (i) the lender consented to the SaaS Business sale and (ii) we agreed to make a partial prepayment of $45.6 million upon close of the SaaS Business sale, which was completed on May 7, 2024. See “Liquidity and Capital Resources—Debt” below.
Amendment to the Subordinated Term Loan
On May 7, 2024, we entered into an amendment to the Subordinated Term Loan agreement. Pursuant to the amendment, (i) the lender consented to the SaaS Business sale, which was completed on May 7, 2024. See “Liquidity and Capital Resources—Debt” 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, they 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. Additionally, the waste generators’ awareness of benefits achieved by improved diversion from landfills has been increasing, which we believe is and will continue to 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, OCC 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 generally upward and contributed to higher recyclable commodity revenue in recent periods. For the three months ended March 31, 2024 and 2023, our recyclable commodity revenue was $15.8 million and $14.7 million, respectively.
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 purposes and are not a party to any leveraged derivatives. As of March 31, 2024, we were not a party to any recyclable commodity hedging agreements.
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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. 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 March 31, 2024 and 2023, our product development cost was $7.3 million and $8.1 million, respectively. We expect product development costs to decrease as a percentage of total revenues in the next 12 months.
Components of Results of Operations
Revenue
We generate our revenue from waste removal, waste management and consultation services, platform subscriptions, and the 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 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 consists 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 of our customer contracts.
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.
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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, planned cost reduction measures across the organization and the sale of our SaaS Business. We are working to eliminate redundancies across the organization, which were a byproduct of our growth and expansion phase the past few years.
Gain on settlement of incentive compensation
Gain on settlement of incentive compensation consists of a gain from settlements of the management rollover bonuses in connection with the Mergers.
Amortization and depreciation
Amortization and depreciation consist of 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.
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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 March 31, 2024 and 2023
| Three Months Ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2024 | 2023 | Change $ | Change % | |||||||||||||
| (in thousands, except changes in percentage) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Service | $ | 147,252 | $ | 164,324 | $ | (17,072 | ) | (10.4 | )% | |||||||
| Recyclable commodity | 15,810 | 14,733 | 1,077 | 7.3 | % | |||||||||||
| Total revenue | 163,062 | 179,057 | (15,995 | ) | (8.9 | )% | ||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue (exclusive of amortization and depreciation) | ||||||||||||||||
| Service | 140,347 | 157,514 | (17,167 | ) | (10.9 | )% | ||||||||||
| Recyclable commodity | 14,055 | 13,187 | 868 | 6.6 | % | |||||||||||
| Total cost of revenue (exclusive of amortization and depreciation) | 154,402 | 170,701 | (16,299 | ) | (9.5 | )% | ||||||||||
| Sales and marketing | 1,688 | 2,445 | 757 | ) | (31.0 | )% | ||||||||||
| Product development | 6,625 | 7,441 | (816 | ) | (11.0 | )% | ||||||||||
| General and administrative | 13,086 | 18,188 | (5,102 | ) | (28.1 | )% | ||||||||||
| Gain on settlement of incentive compensation | - | (18,622 | ) | 18,622 | (100.0 | )% | ||||||||||
| Amortization and depreciation | 931 | 1,113 | (182 | ) | (16.4 | )% | ||||||||||
| Total costs and expenses | 176,732 | 181,266 | (4,534 | ) | (2.5 | )% | ||||||||||
| Loss from operations | (13,670 | ) | (2,209 | ) | (11,461 | ) | NM | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest earned | 32 | 1 | 31 | NM | ||||||||||||
| Gain (loss) on change in fair value of warrant liabilities | 10,577 | (55 | ) | 10,632 | NM | |||||||||||
| Gain on change in fair value of earn-out liabilities | 111 | 4,820 | (4,709 | ) | (97.7 | )% | ||||||||||
| Loss on change in fair value of derivatives | (1,299 | ) | (2,198 | ) | 899 | (40.9 | )% | |||||||||
| Gain on service fee settlements in connection with the Mergers | - | 632 | (632 | ) | (100.0 | )% | ||||||||||
| Loss on extinguishment of debt obligations | - | (2,103 | ) | 2,103 | (100.0 | )% | ||||||||||
| Interest expense | (10,750 | ) | (7,176 | ) | (3,574 | ) | 49.8 | % | ||||||||
| Related party interest expense | (522 | ) | (593 | ) | 71 | (12.0 | )% | |||||||||
| Other expense | (951 | ) | (421 | ) | (530 | ) | 125.9 | % | ||||||||
| Total other income (expense) | (2,802 | ) | (7,093 | ) | 4,291 | (60.5 | )% | |||||||||
| Loss from continuing operations before income taxes | (16,472 | ) | (9,302 | ) | (7,170 | ) | 77.1 | % | ||||||||
| Income tax expense | 12 | 16 | (4 | ) | (25.0 | )% | ||||||||||
| Net loss from continuing operations | $ | (16,484 | ) | $ | (9,318 | ) | $ | (7,166 | ) | 76.9 | % | |||||
| Discontinued operations: | ||||||||||||||||
| Loss from discontinued operations before income taxes | (669 | ) | (133 | ) | (536 | ) | NM | |||||||||
| Income tax expense | - | - | - | NM | ||||||||||||
| Net loss from discontinued operations | (669 | ) | (133 | ) | (536 | ) | NM | |||||||||
| Net loss | $ | (17,153 | ) | $ | (9,451 | ) | $ | (7,702 | ) | 81.5 | % | |||||
| Net loss from continuing operations attributable to noncontrolling interests | (1,437 | ) | (6,234 | ) | 4,797 | (76.9 | )% | |||||||||
| Net Loss from continuing operations attributable to Class A common stockholders | $ | (15,047 | ) | $ | (3,084 | ) | $ | (11,963 | ) | NM | ||||||
| Net loss from discontinued operations attributable to noncontrolling interests | (45 | ) | (88 | ) | 43 | (48.9 | )% | |||||||||
| Net loss from discontinued operations attributable to Class A common stockholders | $ | (624 | ) | $ | (45 | ) | $ | (579 | ) | NM | ||||||
NM – not meaningful
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Revenue
Total revenue from continuing operations decreased by $16.0 million, or 8.9%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Service revenue decreased by $17.1 million, or 10.4%, primarily due to the loss of revenue from canceled customer contracts in the amount of $34.9 million, which was partially offset by increased services and volume with existing customers in the amount of $12.2 million, additional revenue from new customers of $3.4 million and higher prices charged to existing customers in the amount of $2.2 million.
Revenue from sales of recyclable commodities increased by $1.1 million, or 7.3%, primarily due to a $4.9 million increase driven by higher sales prices of recyclable commodities, especially in OCC, partially offset by a $3.8 million decrease related to canceled customers and a decrease in volume for the remaining customers.
Total revenue from discontinued operations increased by $1.0 million to $3.0 million from $2.0 million, or 47.6%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase is primarily due to additional revenue from new customers.
Cost of revenue, exclusive of amortization and depreciation
Total cost of revenue from continuing operations decreased by $16.3 million, or 9.5%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Cost of service revenue decreased by $17.2 million, or 10.9%, primarily due to a $32.7 million decrease in hauling-related costs, as we did not incur costs associated with canceled customer contracts, and a $0.5 million decrease in the customer operations costs driven by lower workforce costs. The decrease in cost of service revenue was partially offset by service expansion and higher volumes from existing and new customers which increased by $7.0 million and $3.7 million, respectively, and an increase of $5.6 million driven by higher vendor prices.
Cost of recyclable commodity revenue increased by $0.9 million, or 6.6%, primarily due to a $4.9 million increase in the cost of recyclable commodities sold, mainly driven by increase in the price of OCC, partially offset by a decrease in volume of $3.5 million related to canceled customers, and a decrease in volume of $0.6 million for the remaining customers.
Total cost of revenue from discontinued operations increased by $0.5 million to $1.0 million from $0.5 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase is primarily due to costs incurred for the new customers.
Sales and marketing
Sales and marketing expenses from continuing operations for the three months ended March 31, 2024 decreased $0.8 million, or 31.0% compared to the three months ended March 31, 2023. The decrease was primarily attributable to a decrease in marketing content activities by $0.1 million, a decrease in consulting services costs by $0.1 million, and a decrease in stock based compensation expense by $0.2 million.
Sales and marketing expenses from discontinued operations increased by $0.7 million to $1.5 million from $0.8 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase is primarily due to larger spending on marketing and demand generation activities.
Product development
Product development expenses from continuing operations decreased by $0.8 million, or 11%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was primarily attributable to lower workforce related costs of $0.4 million due to lower headcount from the product development group and lower software development costs of $0.2 million as the result of the ongoing cost saving initiatives.
Product development expenses from discontinued operations for the three months ended March 31, 2024 were $0.7 million and relatively unchanged compared to the three months ended March 31, 2023 of $0.7 million.
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General and administrative
General and administrative expenses from continuing operations decreased by $5.1 million, or 28.1%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was primarily attributable to a lower severance costs by $3.6 million mainly due to the departure of executives during the three months ended March 31, 2023 that did not repeat in 2024, a decrease in payroll-related cost by $0.8 million due to lower headcount, as well as a decrease in legal service costs by $0.6 million.
General and administrative expenses from discontinued operations for the three months ended March 31, 2024 were $0.2 million and relatively unchanged compared to the three months ended March 31, 2023 of $0.1 million.
Gain on settlement of incentive compensation
Gain on settlement of incentive compensation decreased by $18.6 million, or 100%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The $18.6 million gain on settlement of incentive compensation for the three months ended March 31, 2023 was entirely attributable to replacing the accrued management rollover consideration valued at $26.8 million with RSU awards which were valued at $8.2 million during the period, which did not repeat in 2024.
Amortization and depreciation
Amortization and depreciation expenses from continuing operations decreased by $0.2 million, or 16.4%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was primarily attributable to a decrease of $0.2 million in depreciation expense due to fewer assets to be depreciated after the termination of our Kentucky office lease and the downsizing of our Atlanta office lease during the second half of 2023.
Amortization and depreciation expenses from discontinued operations for the three months ended March 31, 2024 were $0.3 million and relatively unchanged compared to the three months ended March 31, 2023 of $0.2 million.
Other income (expense)
Other expense decreased by $4.3 million, or 60.5%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was primarily attributable to a $10.6 million increase in gain on change in fair value of warrants liabilities and a $2.1 million decrease in loss on extinguishment of debt obligations, offset by a $4.7 million decrease in gain on change in fair value of earn-out liabilities and a $3.5 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 for the three months ended March 31, 2024.
Income tax expense
Income tax expense for the three months ended March 31, 2024 were relatively unchanged compared to the three months ended March 31, 2023.
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. Key metrics and non-GAAP financial measures presented below include the results from both the continuing and discontinued operations. See Note 4 – Discontinued operations of the SaaS Business, to our unaudited interim condensed consolidated financial statements included elsewhere in this report for the further information regarding the discontinued operations.
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 90.0% and 110.1% as of March 31, 2024 and 2023, respectively.
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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 | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Total revenue | $ | 166,075 | $ | 181,098 | ||||
| Less: total cost of revenue (exclusive of amortization and depreciation) | 155,402 | 171,188 | ||||||
| Less: amortization and depreciation for revenue generating activities | 573 | 574 | ||||||
| Gross profit | $ | 10,100 | $ | 9,336 | ||||
| Gross profit margin | 6.1 | % | 5.2 | % | ||||
| Gross profit | $ | 10,100 | $ | 9,336 | ||||
| Add: amortization and depreciation for revenue generating activities | 573 | 574 | ||||||
| Add: platform support costs(1) | 6,430 | 6,236 | ||||||
| Adjusted gross profit | $ | 17,103 | $ | 16,146 | ||||
| Adjusted gross profit margin | 10.3 | % | 8.9 | % | ||||
| Amortization and depreciation for revenue generating activities | $ | 573 | $ | 574 | ||||
| Amortization and depreciation for sales, marketing, general and administrative activities | 640 | 787 | ||||||
| Total amortization and depreciation | $ | 1,213 | $ | 1,361 | ||||
| Platform support costs(1) | $ | 6,430 | $ | 6,236 | ||||
| Marketplace vendor costs(2) | 148,972 | 164,952 | ||||||
| Total cost of revenue (exclusive of amortization and depreciation) | $ | 155,402 | $ | 171,188 | ||||
| (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. |
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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, 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 derivatives, executive severance charges, gain or loss on settlement of the 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. |
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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 | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Total revenue | $ | 166,075 | $ | 181,098 | ||||
| Net loss | $ | (17,153 | ) | $ | (9,451 | ) | ||
| Adjustments: | ||||||||
| Interest expense | 10,750 | 7,176 | ||||||
| Related party interest expense | 522 | 593 | ||||||
| Interest earned | (111 | ) | (1 | ) | ||||
| Income tax expense | 12 | 16 | ||||||
| Amortization and depreciation | 1,213 | 1,361 | ||||||
| Loss on extinguishment of debt obligations | - | 2,103 | ||||||
| Equity-based compensation | 563 | 9,302 | ||||||
| (Gain) loss on change in fair value of warrant liabilities | (10,577 | ) | 55 | |||||
| Gain on change in fair value of earn-out liabilities | (32 | ) | (4,820 | ) | ||||
| Loss on change in fair value of derivatives | 1,299 | 2,198 | ||||||
| Executive severance charges | 1,532 | 4,553 | ||||||
| Gain on settlement of Management Rollover Bonuses | - | (26,826 | ) | |||||
| Gain on service fee settlements in connection with the Mergers | - | (632 | ) | |||||
| Other expenses(3) | 951 | 421 | ||||||
| Adjusted EBITDA | $ | (11,031 | ) | $ | (13,952 | ) | ||
| Net loss as a percentage of total revenue | (10.3 | )% | (5.2 | )% | ||||
| Adjusted EBITDA as a percentage of total revenue | (6.6 | )% | (7.7 | )% | ||||
| (3) | Other expenses primarily consist of foreign currency exchange gains and losses, taxes, penalties, fees for certain financing arrangements 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 credit facilities, proceeds from the issuance of equity and warrant exercises and cash generated by operating activities. Our primary cash needs are for day-to-day operations, to fund working capital requirements, to fund our growth strategy, and to service our debt obligations.
Our principal uses of cash in recent periods have been funding operations and 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.
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During the three months ended March 31, 2024, 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 March 31, 2024. Our total current liabilities as of March 31, 2024 were $226.0 million.
As of March 31, 2023, cash and cash equivalents totaled $13.8 million, accounts receivable totaled $52.0 million and unbilled accounts receivable totaled $60.0 million. Availability under our June 2023 Revolving Credit Facility, which provided the ability to borrow up to $90.0 million, was $-0-. Our outstanding indebtedness includes the June 2023 Revolving Credit Facility, the June 2023 Term Loan, the Subordinated Term Loan and the convertible debentures, under which the principal of $72.0 million, $89.5 million, $20.9 million and $20.3 million, respectively, were outstanding as of March 31, 2024. Pursuant to the Cantor Sales Agreement, we may offer and sell up to $50.0 million of shares of Class A Common Stock through Cantor. However, it is uncertain how quickly Cantor will be able to sell such shares of Class A Common Stock at the price that we requests to deliver additional liquidity to the Company.
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. As a result, there is substantial doubt about our ability to continue as a going concern.
To address liquidity needs, we have executed various initiatives to modify our operations to reduce spending and improve cash flow. Initiatives we have undertaken in recent periods include (i) increased focus on operational efficiencies and cost reduction measures, (ii) eliminating redundancies that have been the 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. Additionally, on May 7, 2024, we have completed the sale of certain assets and entered into the Rodina SPA which provided the Company with additional cash, a portion of which were used to make partial payments to the June 2023 Revolving Credit Facility and the June 2023 Term Loan.
We believe that additional capital will be needed to provide sufficient liquidity to meet the Company’s known liquidity needs for the next 12 months given that the June 2023 Revolving Credit Facility is scheduled to mature and the borrowings under the facility will become due and payable on the maturity date. However, while we believe the Company will be able to obtain additional capital through debt and equity financing, including sales of Class A Common Stock under the Cantor Sales Agreement, to the extent necessary, we have obtained no firm commitment from current or prospective investors to date and no assurance can be provided that such additional financing will be obtained at the level acceptable to the Company within the necessary timeframe, if at all. Failure to secure sufficient additional funding in a timely manner or at all will impact our liquidity, including its ability to service its debt and other liabilities, and may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact additional operating cost reductions available to management, which could have a material adverse effect on the our business, operating results, financial condition, and could force us to limit its business activities or discontinue its operations entirely.
If we raise funds by issuing equity securities, including under the Cantor Sales Agreement, 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, these debt securities could have rights, preferences, and privileges senior to those of common stockholders. The terms of debt securities or borrowings could impose significant restrictions on our operations and 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. It is possible that we will not enter into all of financing contemplated and that no additional funding will be available at all in the capital markets. In addition, recent and any 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.
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.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Cash activities for continuing operations: | ||||||||
| Net cash used in operating activities | $ | (6,112 | ) | $ | (12,113 | ) | ||
| Net cash used in investing activities | (26 | ) | (325 | ) | ||||
| Net cash provided by financing activities | 857 | 13,205 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (5,281 | ) | $ | 767 | |||
| Cash activities for discontinued operations: | ||||||||
| Net cash used in operating activities | $ | 432 | $ | (303 | ) | |||
| Net cash used in investing activities | - | - | ||||||
| Net cash provided by financing activities | - | - | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 432 | $ | (303 | ) | |||
Cash flows used in operating activities
Net cash used in operating activities for continuing operations decreased by $6.0 million to $6.1 million for the three months ended March 31, 2024, compared to $12.1 million for the three months ended March 31, 2023. The decrease in cash used in operating activities was driven by:
| ● | a $11.8 million net decrease in non-cash gains which was primarily attributable to a $26.8 million decrease in settlement of accrued incentive compensation, a $4.7 million decrease in gain on change in fair value of earn-out liabilities and $2.4 million increase in amortization of deferred debt charges, including related party deferred debt charges, partially offset by a $10.6 million increase in gain on change in fair value of warrant liabilities, a $8.7 million decrease in equity-based compensation, and a $2.1 million decrease in loss on extinguishment of debt obligations; and |
| ● | a $1.3 million favorable impact attributable to changes in operating assets and liabilities, primarily driven by an increase in favorable impact from contract assets by $13.9 million, accounts receivable by $12.5 million, and accounts payable by $2.5 million, partially offset by an increase in unfavorable impact from accrued expenses by $20.3 million, and prepaid expenses by $7.4 million; |
| ● | partially offset by a $7.2 million increase in net loss. |
Net cash provided by operating activities for discontinued operations increased by $0.7 million to $0.4 million for the three months ended March 31, 2024, compared to $(0.3) million for the three months ended March 31, 2023. The increase in cash used in operating activities was driven by:
| ● | a $1.1 million favorable impact attributable to changes in operating assets and liabilities, primarily driven by an increase in favorable impact from accrued expenses by $1.6 million and contract liabilities by $0.9 million partially offset by an increase in unfavorable impact from accounts receivable by $1.4 million; |
| ● | offset in part by a $0.5 million increase in net loss. |
Cash flows used in investing activities
Net cash used in investing activities decreased by $0.3 million to $-0-million for the three months ended March 31, 2024 compared to $0.3 million for the three months ended March 31, 2023. The decrease in cash used in investing activities was driven by $0.3 million decrease in property and equipment purchases.
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Cash flows from financing activities
Net cash provided by financing activities was $0.9 million for the three months ended March 31, 2024 and $13.2 million for the three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024 resulted from net proceeds from borrowings of line of credits of $0.9 million. Net cash provided by financing activities for the three months ended March 31, 2023 primarily driven by proceeds from the third party and related party debts of $25.7 million and $1.1 million proceeds from issuance of common stock, offset in part by $11.5 million repayments of debt obligations, $1.3 million of financing costs paid, and $1.1 million cash outflow for RSUs withheld to pay taxes.
Tax Receivable Agreement
In connection with the consummation of the Mergers, Rubicon entered into the Tax Receivable Agreement with the TRA Holders, whereby Rubicon is obligated to pay to the TRA Holders 85% of certain of Rubicon’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 Rubicon, assuming Holdings LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by Holdings LLC, the 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 Rubicon will make under the Tax Receivable Agreement are outside of its control, Rubicon expects that the payments it will make under the Tax Receivable Agreement will be substantial. Rubicon generally expects 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 Rubicon 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.
Rubicon 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) Rubicon 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) Rubicon elects to terminate the Tax Receivable Agreement early, in each case, Rubicon’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 Rubicon’s other costs of capital. In certain situations, including upon the occurrence of the events described above, Rubicon 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, Rubicon’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 Rubicon’s and Holdings LLC’s future results of operations and liquidity, as any payments required under the Tax Receivable Agreement will arise directly from 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 Rubicon. Additionally, Rubicon will receive the benefit of 15% of any such tax savings.
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Debt
On December 22, 2021, we entered into a Subordinated Term Loan agreement which provides for $20.0 million of term loan with a maturity date of May 23, 2024. The Subordinated Term Loan bore interest at 14% until the agreement was amended on June 7, 2023. On June 7, 2023, we entered into an amendment to the Subordinated Term Loan agreement, 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 bears to 15.0%, of which 11.0% is paid in cash and 4.0% is 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 agreement, 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 we repay the Subordinated Term Loan in full. On May 7, 2024, we entered into an amendment to the Subordinated Term Loan agreement. Pursuant to the amendment, the lender consented to the SaaS Business sale, which was completed on May 7, 2024.
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 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 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 three months ended March 31, 2024, the First Closing Insider Investors did not convert any amount of the principal or accrued interest of the First Closing Insider 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 September 15, 2023 we entered into an amendment which lowered the conversion price of these three debentures to $10.00 per share of Class A Common Stock.
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 Convertible Debentures and NZ Superfund Convertible Debenture (collectively “Second Closing Insider Convertible Debentures”) in the aggregate principal amount of $6.5 million and purchase price of $5.7 million. The Second Closing Insider Convertible Debentures had 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. Since the origination through March 31, 2024, the Second Closing Insider Investors did not convert any amount of the principal or accrued interest of the Second Closing Insider 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%.
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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) (9.7% as of March 31, 2024). As of March 31, 2024, we had $72.0 million of borrowings under the Revolving Credit Facility and no amount remained available to draw. The borrowing capacity is calculated based on our borrowing base collateral, which is comprised of qualified billed and unbilled receivables and the September 2023 Rodina Letter of Credit. 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 September 22, 2023, an entity affiliated with Andres Chico and Jose Miguel Enrich issued the September 2023 Rodina Letter of Credit in the amount of $15.0 million to the lender of the June 2023 Revolving Credit Facility on our behalf, which increased our borrowing base collateral under the facility by $15.0 million. The expiration date of the September 2023 Rodina Letter of Credit is September 30, 2024 with an automatic renewal option for one additional year through September 30, 2025. On December 5, 2023, we entered into an amendment to the Credit Facility. The amendment temporally modified the calculation methodology of the borrowing base collateral, resulting in its increase by $5.0 million through January 15, 2024, which was subsequently extended to March 15, 2024 with an option to be further extended to June 15, 2024. To date, the modified calculation methodology of the borrowing base has been extended on a month-to-month basis. On May 7, 2024, we entered into an amendment to the June 2023 Revolving Credit Facility. Pursuant to the amendment, (i) the lender consented to the sale of SaaS Business and (ii) we agreed to make a partial prepayment of $11.4 million upon close of the sale SaaS Business, which was completed on May 7, 2024.
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 had the option to pay the interest in kind each month in arrears by capitalizing such interest which accrues through August 31, 2023 as additional principal, and in such instance, the margin applicable for the interest rate was 10.25%. We elected to pay the interest accrued through August 31, 2023 in kind. We also have the option to pay in kind any excess interest over 13.5% after paying the first 13.5% in cash from September 1, 2023 through the maturity. We paid the first 13.5% of interest in cash and elected to pay the rest in kind through April 30, 2024. As of March 31, 2024, the applicable interest rate of the June 2023 Term Loan was 16.8%. At the time of any repayment of the June 2023 Term Loan, we are required to pay a fee in the amount of 12% of the principal 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 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 2,121,605 shares of Class A Common Stock (the June 2023 Term Loan Warrants Shares) at the exercise price of $0.08 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 March 31, 2024, none of the June 2023 Term Loan Warrants were exercised. On May 7, 2024, we entered into an amendment to the June 2023 Term Loan agreement. Pursuant to the amendment, (i) the lender consented to the SaaS Business sale and (ii) we agreed to make a partial prepayment of $45.6 million upon close of the SaaS Business sale, which was completed on May 7, 2024.
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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 covenants, which reduce the available borrowing base collateral under the June 2023 Revolving Credit Facility initially by $19.0 million. During the terms of the agreements, such Minimum Excess Availability Reserve could be decreased by up to $9.0 million, which will make the Minimum Excess Availability Reserve $10.0 million, if we achieve certain financial conditions defined in the agreements. As of March 31, 2024, the Minimum Excess Availability Reserve was $19.0 million. Furthermore, the June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan agreements require us to maintain a $2.0 million letter of credit, which could be eliminated upon our achievement of certain financial conditions defined in the agreements.
See Note 5 – Debt and Note 9 – Warrants to our unaudited interim condensed consolidated financial statements included elsewhere in this report for a more detailed description of our indebtedness.
We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.
Other Financing Arrangements
On November 30, 2022, we entered into the YA Warrant, which is exercisable at a price of $0.0008 per share for a number of shares 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. During the three months ended March 31, 2024, the Company issued 4,104,797 shares of Class A Common Stock for partial exercise of the YA Warrant. On February 28, 2024, the number of shares of Class A Common Stock the YA Warrant is exercisable for was fixed, and as of March 31, 2024, 14,000,000 shares of Class A Common Stock remained to be exercised. For more information regarding the YA Warrant, see Note 9 – Warrants and Note 11 – Yorkville SPA, to our unaudited interim condensed consolidated financial statements included elsewhere in this report.
On September 5, 2023, we entered into the Cantor Sales Agreement with Cantor, pursuant to which we may offer and sell, from time to time through Cantor, shares of Class A Common Stock for aggregate gross proceeds up to $50.0 million. Pursuant to the Cantor Sales Agreement, Cantor may sell shares of Class A Common Stock in sales deemed to be “at the market offerings” as defined in Rule 415(a)(4) under the Securities Act. We have no obligation to sell any shares of Class A Common Stock under the Cantor Sales Agreement. Cantor will act as sales agent and use commercially reasonable efforts to sell on our behalf all of the shares of Class A Common Stock requested to be sold by us. Under the terms of the Cantor Sales Agreement, we have agreed to pay Cantor a commission equal to 3.0% of the aggregate gross proceeds from any shares of Class A Common Stock sold pursuant to the Cantor Sales Agreement. The Cantor Sales Agreement will remain in effect until the aggregate gross proceeds of our sales of shares of Class A Common Stock reach $50.0 million in total unless terminated pursuant to the terms of the Cantor Sales Agreement. We did not sell any shares of Class A Common Stock under the Cantor Sales Agreement through March 31, 2024.
On May 7, 2024, we entered into the Rodina SPA with an entity affiliated with Andres Chico and Jose Miguel Enrich. Pursuant to the Rodina SPA, we issued and sold 20,000 shares of Rubicon’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Preferred Stock”) for an aggregate purchase price of $20.0 million. The Preferred Stock is entitled to receive, whether or not declared, dividends at the rate of 8.0% per annum of the stated value per share of the Preferred Stock. On the second anniversary of the closing date and each anniversary thereafter, the dividend rate on the Preferred Stock will increase by 1.0% per annum, up to a maximum dividend rate not to exceed 11.0% per annum. Each holder of the Preferred Stock has the right, at its option, to convert its Preferred Stock, in whole or in part, into shares of Class A Common Stock. The conversion price is $0.35 per share. As of the issuance date, the Preferred Stock was convertible into 57,142,857 shares of Class A Common Stock. The Preferred Stock will rank senior to Class A Common Stock and any other capital stock of Rubicon, with respect to dividend rights and rights upon voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company. The Preferred Stock will vote on an as-converted basis with Class A and Class V Common Stock. The issuance of the Rodina SPA met change in control provisions in certain agreements of ours. We are currently evaluating any potential impact this matter may have. In relation to this matter, we received waivers from the lenders of the June 2023 Revolving Credit Facility, the June 2023 Term Loan and the Subordinated Term Loan. For more information, see Note 20 – Subsequent events, to our unaudited interim condensed consolidated financial statements included elsewhere in this report.
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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 – Commitments and contingencies, to our unaudited interim condensed consolidated financial statements included elsewhere in this report.
As of March 31, 2024, our software services subscription agreement with a certain PIPE Investor requires us to pay an aggregate of $15 million through December 2024. The agreement was subsequently amended and provides us with the option, in our sole discretion, to settle the $7.5 million of fees which are scheduled to become due through June 2024 (i) in cash or (ii) Class A Common Stock if we satisfy certain conditions as defined within the amended agreement. See Note 17 – Related party transactions, to our unaudited interim condensed consolidated financial statements included elsewhere in this report for more information regarding our software services subscription agreement with the PIPE Investor.
In 2023, we settled with certain Rubicon Management Rollover Holders a portion of the accrued management rollover consideration and the Company agreed to make quarterly cash payments to these Rubicon Management Rollover Holders through December 31, 2026, of which $2.8 million is coming due in the next 12 months of March 31, 2024 and $3.0 million thereafter. See Note 6 – Accrued expenses and Note 16 – Commitments and Contingencies, to our unaudited interim condensed consolidated financial statements included elsewhere in this report for more information regarding this settlement.
We could also be required to make certain significant payments under the Tax Receivable Agreement discussed above.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and 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.
For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2023 as well as Note 1, Nature of operations and summary of significant accounting policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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 this report.
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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 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 Mergers; 2) the Company’s ability to meet the NYSE’s listing standards following the consummation of the Mergers; 3) the risk that the Mergers disrupt current plans and operations of the Company as a result of consummation of the Mergers; 4) the ability to recognize the anticipated benefits of the 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 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 Annual Report on Form 10-K, as filed with the SEC on 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and in Item 10(f)(1) of Regulation S-K and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specific in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Per Rules 13a-15(e) and 15d-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer (“certifying officers”) have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2024. Our certifying officers concluded that, as a result of the material weakness in internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of March 31, 2024.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud due to inherent limitations of internal controls. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our certifying officers concluded that the Company did not have an effective internal control over the review of the complex transactions related to the equity due to the lack of sufficient and effective review processes. The material weakness resulted in a restatement of our financial statements as described in the Explanatory Note to the amendment to the Company’s Annual Report on Form 10-K filed on May 20, 2024. Furthermore, the control deficiency described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.
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Remediation Status of Material Weakness in Internal Control over Financial Reporting
We plan to enhance our processes by designing and implementing controls to review the equity transactions, including the completeness and accuracy of relevant information. We also plan to engage additional qualified resources and/or hire additional staff to ensure these incremental controls are properly implemented.
Management continues to be actively engaged to take steps to remediate the material weakness, including enhanced processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our consolidated financial statements, providing enhanced access to accounting literature, research materials and documents, and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications.
Changes in Internal Control Over Financial Reporting
Management will continue to take action to remediate the material weakness. However, the material weakness will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.
Other than described above, there has not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the quarter to which this Report relates that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. 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
As of the date of this quarterly report, other than as set forth below, there have been no material changes with respect to those risk factors previously disclosed in our 10-K Annual Report as filed with the SEC on March 28, 2024. Any of these factors could result in a significant or material adverse effect on our results of operations 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 March 31, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
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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: May 20, 2024 | By: | /s/ Philip Rodoni |
| Philip Rodoni | ||
| Chief Executive Officer | ||
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