UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2022 | ||
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from __________ to __________ | ||
Commission File Number: 001-39157
AgileThought, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 001-39157 | 87-2302509 | ||||||||||||
| (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||||||||||||
222 W. Las Colinas Blvd. Suite 1650E, Irving, Texas | (971) 501-1140 | 75039 | ||||||||||||
| (Address of Principal Executive Offices) | (Registrant's telephone number, including area code) | (Zip 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 | ||||||||||||
| Class A Common Stock, $0.0001 par value per share | AGIL | NASDAQ Capital Market | ||||||||||||
| Warrants, each whole warrant exercisable for one share of Class A Common Stock at an exercise price of $11.50 per share | AGILW | NASDAQ Capital Market | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| Non-accelerated filer | x | Smaller reporting company | x | ||||||||
| Emerging growth company | x | ||||||||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 48,243,382 shares of common stock as of November 9, 2022.
| TABLE OF CONTENTS | ||||||||
| AgileThought, Inc. - Quarterly Report on Form 10-Q | ||||||||
| September 30, 2022 | ||||||||
| Page | ||||||||
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections regarding future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements.
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding:
•the financial and business performance of the Company;
•our ability to repay and/or continue to service our indebtedness;
•our future capital requirements and sources and uses of cash;
•our ability to obtain funding for our future operations;
•our business, expansion plans and opportunities;
•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
•our ability to develop, maintain and expand client relationships, including relationships with our largest clients;
•changes in domestic and foreign business, market, financial, political, regulatory and legal conditions;
•our ability to recognize the anticipated benefits of the business combination, which may be affected by, among other things, competition and our ability to grow and manage growth profitably;
•costs related to the business combination;
•our ability to successfully identify and integrate any future acquisitions;
•our ability to attract and retain highly skilled information technology professionals;
•our ability to maintain favorable pricing, utilization rates and productivity levels for our information technology professionals and their services;
•our ability to innovate successfully and maintain our relationships with key vendors;
•our ability to provide our services without security breaches and comply with changing regulatory, legislative and industry standard developments regarding privacy and data security matters;
•our ability to operate effectively in multiple jurisdictions in Latin America and in the United States in the different business, market, financial, political, legal and regulatory conditions in the different markets;
•developments and projections relating to our competitors and industry;
•the impact of health epidemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto;
•expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, as amended;
•changes in applicable laws or regulations;
•the outcome of any known and unknown litigation or legal proceedings and regulatory proceedings involving us; and
•our ability to maintain the listing of our securities.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. In addition, in light of the risks and uncertainties described in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not occur. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AgileThought, Inc. Unaudited Condensed Consolidated Balance Sheets | ||
| (in thousands USD, except share data) | September 30, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 10,361 | $ | 8,640 | |||||||
| Accounts receivable, net | 33,261 | 31,387 | |||||||||
| Prepaid expenses and other current assets | 4,145 | 7,490 | |||||||||
| Current VAT receivables | 7,535 | 9,713 | |||||||||
| Total current assets | 55,302 | 57,230 | |||||||||
| Property and equipment, net | 3,198 | 3,107 | |||||||||
| Goodwill and indefinite-lived intangible assets | 86,563 | 86,694 | |||||||||
| Finite-lived intangible assets, net | 61,999 | 66,233 | |||||||||
| Operating lease right of use assets, net | 5,578 | 6,434 | |||||||||
| Other noncurrent assets | 642 | 1,612 | |||||||||
| Total noncurrent assets | 157,980 | 164,080 | |||||||||
| Total assets | $ | 213,282 | $ | 221,310 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 10,619 | $ | 20,970 | |||||||
| Accrued liabilities | 11,547 | 9,778 | |||||||||
| Income taxes payable | 100 | 97 | |||||||||
| Other taxes payable | 8,651 | 9,733 | |||||||||
| Current portion of operating lease liabilities | 1,953 | 2,834 | |||||||||
| Deferred revenue | 2,690 | 1,789 | |||||||||
| Purchase price obligation note payable | 9,364 | 8,791 | |||||||||
| Current portion of long-term debt and financing obligations | 11,689 | 14,838 | |||||||||
| Embedded derivative liabilities | 25 | — | |||||||||
| Other current liabilities | 3,452 | — | |||||||||
| Total current liabilities | 60,090 | 68,830 | |||||||||
| Long-term debt and financing obligations, net of current portion | 66,291 | 42,274 | |||||||||
| Deferred tax liabilities, net | 2,753 | 2,762 | |||||||||
| Operating lease liabilities, net of current portion | 2,717 | 3,759 | |||||||||
| Warrant liability | 2,250 | 2,137 | |||||||||
| Long-term, embedded derivative liabilities | 6,083 | — | |||||||||
| Other noncurrent liabilities | — | 6,900 | |||||||||
| Total liabilities | 140,184 | 126,662 | |||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Stockholders' Equity | |||||||||||
Class A common stock $0.0001 par value, 210,000,000 shares authorized, 48,243,382 and 50,402,763 shares issued as of September 30, 2022 and December 31, 2021, respectively | 5 | 5 | |||||||||
Treasury stock, 2,675,288 and 181,381 shares at cost as of September 30, 2022 and December 31, 2021, respectively | (655) | (294) | |||||||||
| Additional paid-in capital | 203,565 | 198,649 | |||||||||
| Accumulated deficit | (111,229) | (86,251) | |||||||||
| Accumulated other comprehensive loss | (18,572) | (17,362) | |||||||||
| Total stockholders' equity attributable to the Company | 73,114 | 94,747 | |||||||||
| Noncontrolling interests | (16) | (99) | |||||||||
| Total stockholders' equity | 73,098 | 94,648 | |||||||||
| Total liabilities and stockholders' equity | $ | 213,282 | $ | 221,310 | |||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Operations | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD, except share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net revenues | $ | 43,395 | $ | 40,420 | $ | 133,785 | $ | 116,573 | |||||||||||||||
| Cost of revenue | 28,517 | 29,666 | 89,692 | 82,709 | |||||||||||||||||||
| Gross profit | 14,878 | 10,754 | 44,093 | 33,864 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 13,097 | 11,188 | 37,323 | 30,145 | |||||||||||||||||||
| Depreciation and amortization | 1,777 | 1,746 | 5,268 | 5,239 | |||||||||||||||||||
| Change in fair value of purchase price obligation | — | — | — | (2,200) | |||||||||||||||||||
| Change in fair value of embedded derivative liabilities | (2,906) | (1,884) | (2,906) | (4,406) | |||||||||||||||||||
| Change in fair value of warrant liability | (843) | (759) | 113 | (759) | |||||||||||||||||||
| Loss on debt extinguishment | 11,708 | — | 17,894 | — | |||||||||||||||||||
| Equity-based compensation expense | 2,018 | 6,469 | 4,555 | 6,481 | |||||||||||||||||||
| Restructuring expense (income) | 471 | (135) | 1,386 | (113) | |||||||||||||||||||
| Other operating expenses (income), net | 1,213 | (96) | 2,409 | 1,011 | |||||||||||||||||||
| Total operating expenses | 26,535 | 16,529 | 66,042 | 35,398 | |||||||||||||||||||
| Loss from operations | (11,657) | (5,775) | (21,949) | (1,534) | |||||||||||||||||||
| Interest expense, net | (3,143) | (4,065) | (9,235) | (12,117) | |||||||||||||||||||
| Other (expense) income | (154) | (851) | 6,653 | (436) | |||||||||||||||||||
| Loss before income taxes | (14,954) | (10,691) | (24,531) | (14,087) | |||||||||||||||||||
| Income tax expense (benefit) | 135 | 96 | 358 | (13) | |||||||||||||||||||
| Net loss | (15,089) | (10,787) | (24,889) | (14,074) | |||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (3) | (188) | 89 | (21) | |||||||||||||||||||
| Net loss attributable to the Company | $ | (15,086) | $ | (10,599) | $ | (24,978) | $ | (14,053) | |||||||||||||||
| Loss earning per share (Note 16): | |||||||||||||||||||||||
| Basic and Diluted Class A common stock | $ | (0.33) | $ | (0.28) | $ | (0.54) | $ | (0.39) | |||||||||||||||
| Weighted average number of shares: | |||||||||||||||||||||||
| Basic and Diluted Class A common stock | 46,182,392 | 37,633,267 | 46,080,399 | 35,612,677 | |||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Loss | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net loss | $ | (15,089) | $ | (10,787) | $ | (24,889) | $ | (14,074) | |||||||||||||||
| Actuarial loss | — | — | 3 | — | |||||||||||||||||||
| Foreign currency translation adjustments | (626) | (886) | (1,219) | (122) | |||||||||||||||||||
| Comprehensive loss | (15,715) | (11,673) | (26,105) | (14,196) | |||||||||||||||||||
| Less: Comprehensive (loss) income attributable to noncontrolling interests | (5) | (154) | 83 | (15) | |||||||||||||||||||
| Comprehensive loss attributable to the Company | $ | (15,710) | $ | (11,519) | $ | (26,188) | $ | (14,181) | |||||||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Stockholders' Equity | ||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands USD, except share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | 50,402,763 | $ | 5 | 181,381 | $ | (294) | $ | 198,649 | $ | (86,251) | $ | (17,362) | $ | (99) | $ | 94,648 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (6,347) | — | 49 | (6,298) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | 87,999 | — | — | — | 518 | — | — | — | 518 | |||||||||||||||||||||||||||||||||||||||||||||||
| Employee withholding taxes paid related to net share settlements | (17,359) | — | 17,359 | (97) | 97 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of public warrants | 20 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive expense | — | — | — | — | — | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | 344 | (3) | 341 | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | 50,473,423 | 5 | 198,740 | (391) | 199,264 | (92,598) | (17,014) | (53) | 89,213 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (3,545) | — | 43 | (3,502) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | 161,398 | — | — | — | 2,019 | — | — | — | 2,019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Employee withholding taxes paid related to net share settlements | (40,117) | — | 40,117 | (206) | 206 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Monroe share settlement | (2,423,204) | — | 2,423,204 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (933) | (1) | (934) | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | 48,171,500 | 5 | 2,662,061 | (597) | 201,489 | (96,143) | (17,948) | (11) | 86,795 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (15,086) | — | (3) | (15,089) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | 85,109 | — | — | — | 2,018 | — | — | — | 2,018 | |||||||||||||||||||||||||||||||||||||||||||||||
| Employee withholding taxes paid related to net share settlements | (13,227) | — | 13,227 | (58) | 58 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (624) | (2) | (626) | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | 48,243,382 | $ | 5 | 2,675,288 | $ | (655) | $ | 203,565 | $ | (111,229) | $ | (18,572) | $ | (16) | $ | 73,098 | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | 34,557,480 | $ | 3 | 151,950 | $ | — | $ | 101,494 | $ | (66,181) | $ | (16,981) | $ | (137) | $ | 18,198 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (3,865) | — | 30 | (3,835) | |||||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | 12 | — | — | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (223) | 5 | (218) | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | 34,557,480 | 3 | 151,950 | — | 101,506 | (70,046) | (17,204) | (102) | 14,157 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 411 | — | 137 | 548 | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | 1,015 | (33) | 982 | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2021 | 34,557,480 | 3 | 151,950 | — | 101,506 | (69,635) | (16,189) | 2 | 15,687 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (10,599) | — | (188) | (10,787) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | 6,469 | — | — | — | 6,469 | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (920) | 34 | (886) | |||||||||||||||||||||||||||||||||||||||||||||||
| Business combination | 7,413,435 | 1 | — | — | 65,840 | — | — | — | 65,841 | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | 41,970,915 | $ | 4 | 151,950 | $ | — | $ | 173,815 | $ | (80,234) | $ | (17,109) | $ | (152) | $ | 76,324 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Cash Flows | ||
| Nine Months Ended September 30, | |||||||||||
| (in thousands USD) | 2022 | 2021 | |||||||||
| Operating activities | |||||||||||
| Net loss | $ | (24,889) | $ | (14,074) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Accretion of interest from convertible notes | 1,922 | 3,068 | |||||||||
| Gain on forgiveness of debt | (7,280) | (1,306) | |||||||||
| Loss on debt extinguishment | 17,894 | — | |||||||||
| Recoveries of bad debt expense | (47) | (78) | |||||||||
| Equity-based compensation | 4,555 | 6,481 | |||||||||
| Right of use asset amortization | 2,222 | 1,709 | |||||||||
| Foreign currency remeasurement | 106 | 1,216 | |||||||||
| Deferred income tax provision | (55) | 120 | |||||||||
| Obligations for purchase price | 546 | (1,648) | |||||||||
| Embedded derivative liabilities | (2,906) | (4,406) | |||||||||
| Warrant liability | 113 | (759) | |||||||||
| Amortization of debt issuance costs | 2,490 | 1,479 | |||||||||
| Depreciation and amortization | 5,268 | 5,239 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (1,600) | (15,953) | |||||||||
| Prepaid expenses and other current assets | 3,313 | (5,616) | |||||||||
| Accounts payable | (10,829) | 7,927 | |||||||||
| Accrued liabilities | 1,407 | (2,909) | |||||||||
| Deferred revenue | 721 | (929) | |||||||||
| Current VAT receivables and other taxes payable | 1,134 | (437) | |||||||||
| Income taxes payable | 3 | 1,430 | |||||||||
| Operating lease liabilities | (2,215) | (1,717) | |||||||||
| Net cash used in operating activities | (8,127) | (21,163) | |||||||||
| Investing activities | |||||||||||
| Purchase of property and equipment | (681) | (732) | |||||||||
| Net cash used in investing activities | (681) | (732) | |||||||||
| Financing activities | |||||||||||
| Proceeds from loans | 58,000 | 3,873 | |||||||||
| Repayments of borrowings | (37,018) | (27,517) | |||||||||
| Payment of debt issuance costs | (10,002) | — | |||||||||
| Cash paid for shares withheld from a grantee to satisfy tax withholding | (361) | — | |||||||||
| Payments for finance leases | (81) | — | |||||||||
| Payments for PIPE transactions costs | — | (13,033) | |||||||||
| Proceeds from PIPE investors | — | 27,600 | |||||||||
| Proceeds from capital contributions | — | 25,749 | |||||||||
| Net cash provided by financing activities | 10,538 | 16,672 | |||||||||
| Effect of exchange rates on cash | (9) | (83) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 1,721 | (5,306) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | 8,640 | 9,432 | |||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 10,361 | $ | 4,126 | |||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements
Note 1 – Organization and Basis of Consolidation and Presentation
Organization
AgileThought, Inc. (“AgileThought”) is a global provider of agile-first, end-to-end digital transformation services in the North American market using on-shore and near-shore delivery. The Company’s headquarters is in Irving, Texas. AgileThought’s Class A common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “AGIL.”
On August 23, 2021 (the “Closing Date”), LIV Capital Acquisition Corp. (“LIVK”), a special purpose acquisition company, and AgileThought (“Legacy AgileThought”) consummated the transactions contemplated by the definitive agreement and plan of merger (“Merger Agreement”), dated May 9, 2021 (“Business Combination”). Pursuant to the terms, Legacy AgileThought merged with and into LIVK, whereupon the separate corporate existence of Legacy AgileThought ceased, with LIVK surviving such merger (the “Surviving Company”). On the Closing Date, the Surviving Company changed its name to AgileThought, Inc. (the “Company”, “AgileThought”, “we” or “us”).
Basis of Consolidation and Presentation
The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). For interim financial reporting not all disclosures normally required in annual Consolidated Financial Statements prepared in accordance with U.S. GAAP are required.
The Business Combination was accounted for as a reverse capitalization in accordance with U.S. GAAP (the “Recapitalization”). Under this method of accounting, LIVK is treated as the acquired company and Legacy AgileThought is treated as the accounting acquirer for financial reporting purposes, resulting in no change in the carrying amount of the Company's assets and liabilities. The consolidated assets, liabilities and results of operations prior to the Recapitalization are those of Legacy AgileThought. The shares and corresponding capital amounts and losses per share, prior to the Business Combination, have been retroactively restated based on shares reflecting the exchange ratio established in the Business Combination.
In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of normal and recurring nature, have been made for the interim periods reported. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. The balance sheet as of December 31, 2021 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements for the year ended December 31, 2021 that are included in our annual report on Form 10-K filed with the SEC on March 31, 2022 ("Annual Report"). All intercompany transactions and balances have been eliminated in consolidation. The ownership interest of noncontrolling investors of the Company's subsidiaries are recorded as noncontrolling interest.
The Company evaluated subsequent events, if any, that would require an adjustment to the Company's Unaudited Condensed Consolidated Financial Statements or require disclosure in the notes to the Unaudited Condensed Consolidated Financial Statements through the date of issuance of the condensed consolidated financial statements. Where applicable, the notes to these Unaudited Condensed Consolidated Financial Statements have been updated to discuss all significant subsequent events which have occurred.
Note 2 – Summary of Significant Accounting Policies
Refer to Note 2, Summary of Significant Accounting Policies, within our annual Consolidated Financial Statements included in our Annual Report for the full listing of significant accounting policies.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the Unaudited Condensed Consolidated Financial Statements. Further, certain estimates and assumptions include the direct and indirect impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations. We make significant estimates with respect to intangible assets, goodwill, depreciation, amortization, income taxes, equity-based compensation, contingencies, fair value of assets and liabilities acquired, purchase price obligations in connection with business combinations, fair value of embedded derivative liabilities, and fair value of warrant liability. To the extent the actual results differ materially from these estimates and assumptions, the Company’s future financial statements could be materially affected.
Accounting Pronouncements
The authoritative bodies release standards and guidance, which are assessed by management for impact on the Company’s Unaudited Condensed Consolidated Financial Statements. Accounting Standards Updates (“ASUs”) not listed below were assessed and determined to be not applicable to the Company’s Unaudited Condensed Consolidated Financial Statements.
The following standards were recently adopted by the Company:
•In May 2021, the FASB issued ASU 2021-04, Earnings Per Share, Debt-Modifications and Extinguishments, Compensation-Stock Compensation, and Derivatives and Hedging-Contracts in Entity’s Own Equity. This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU is effective for fiscal years beginning after December 15, 2021 on a prospective basis. Early adoption is permitted for all entities, including adoption in an interim period. The ASU was adopted by the Company on January 1, 2022, resulting in no material impact to the Unaudited Condensed Consolidated Financial Statements.
•In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Asset and Contract Liabilities from Contracts with Customers. This ASU requires an entity to recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers. This ASU is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. This standard is effective for annual periods beginning after December 15, 2022, including interim periods therein, with early adoption permitted. The ASU was adopted by the Company on January 1, 2022, resulting in no material impact to the Unaudited Condensed Consolidated Financial Statements.
Note 3 – Business Combination
As discussed in Note 1, Organization and Basis of Consolidation and Presentation, the Company consummated the Business Combination on August 23, 2021, pursuant to the Merger Agreement dated May 9, 2021. In connection with the Business Combination, the following occurred:
• On August 20, 2021, LIVK changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware by deregistering as an exempted company in the Cayman Islands and domesticating and continuing as a corporation formed under the laws of the State of Delaware. As a result, each of LIVK’s issued and outstanding Class A ordinary shares and Class B ordinary shares automatically converted by operation of law, on a one-for-one basis, into shares of Class A common stock. Similarly, all of LIVK’s outstanding warrants became warrants to acquire shares of Class A common Stock.
•LIVK entered into subscription agreements with certain investors pursuant to which such investors collectively subscribed for 2,760,000 shares of the Company's Class A common stock at $10.00 per share for aggregate proceeds of $27,600,000 (the “PIPE Financing”).
•Holders of 7,479,065 of LIVK’s Class A ordinary shares originally sold in LIVK's initial public offering, or 93% of the shares with redemption rights, exercised their right to redeem their shares for cash at a redemption price of approximately $10.07 per share, for an aggregate redemption amount of $75.3 million.
•The Business Combination was effected through the merger of Legacy AgileThought with and into LIVK, whereupon the separate corporate existence of Legacy AgileThought ceased and LIVK was the surviving corporation.
•On the Closing Date, the Company changed its name from LIV Capital Acquisition Corp. to AgileThought, Inc.
•An aggregate of 34,557,480 shares of Class A common stock were issued to holders of Legacy AT common stock and 2,000,000 shares of Class A common stock were issued to holders of Legacy AT preferred stock as merger consideration.
•After adjusting its embedded derivative liabilities to fair value, upon conversion of the preferred stock, the Company's embedded derivative liabilities were extinguished during the third quarter of 2021. Refer to Note 4, Fair Value Measurements, for additional information.
•The Company's private placement warrants meet the criteria for liability classification. For additional information on our warrants, refer to Note 14, Warrants, and Note 4, Fair Value Measurements.
The following table reconciles the elements of the Business Combination to the additional paid-in capital in the Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2021:
| (in thousands USD) | Business Combination | ||||
| Cash - LIVK trust and cash, net of redemptions | $ | 5,749 | |||
| Cash - PIPE Financing | 27,600 | ||||
| Less: Transaction costs | (13,033) | ||||
| Net proceeds from the Business Combination | 20,316 | ||||
| Less: Initial fair value of warrant liabilities recognized in the Business Combination | (15,123) | ||||
| Equity classification of Public Warrants | 8,292 | ||||
| Surrender of related party receivables | (1,359) | ||||
| Debt conversion | 38,120 | ||||
Conversion of mezzanine equity(a) | 15,594 | ||||
| Net adjustment to total equity from the Business Combination | $ | 65,840 | |||
_________________
(a)Relates to the transfer from mezzanine equity to permanent equity of the preferred contribution received from LIV Capital on February 2, 2021, which was considered part of the PIPE financing and upon the transaction close, was reclassified to permanent equity of the Company.
The number of shares of Class A common stock issued immediately following the consummation of the Business Combination:
| Number of Shares | |||||
| Class A ordinary shares of LIVK outstanding prior to the Business Combination | 8,050,000 | ||||
| Less: redemption of LIVK's Class A ordinary shares | (7,479,065) | ||||
| Shares of LIVK's Class A ordinary shares | 570,935 | ||||
| Shares held by LIVK's sponsor and its affiliates | 2,082,500 | ||||
| Shares issued in the PIPE Financing | 2,760,000 | ||||
| Shares issued to convert Legacy AgileThought's preferred stock to Class A common stock | 2,000,000 | ||||
| Shares issued to Legacy AgileThought's common stockholders | 34,557,480 | ||||
| Total shares of Class A common stock immediately after the Business Combination | 41,970,915 | ||||
Note 4 – Fair Value Measurements
The carrying amount of assets and liabilities including cash, cash equivalents, and restricted cash, accounts receivable and accounts payable approximated their fair value as of September 30, 2022 and December 31, 2021, due to the relative short maturity of these instruments.
Long-term Debt
Our debt is not actively traded and the fair value estimate is based on discounted estimated future cash flows or a fair value in-exchange assumption, which are significant unobservable inputs in the fair value hierarchy. As such, these estimates are classified as Level 3 in the fair value hierarchy.
The following table summarizes our instruments where fair value differs from carrying value:
| Fair Value Hierarchy Level | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
| (in thousands USD) | Carry Amount | Fair Value | Carry Amount | Fair Value | |||||||||||||||||||||||||
Bank credit agreement | Level 3 | $ | — | $ | — | $ | 31,882 | $ | 31,897 | ||||||||||||||||||||
New Second Lien Facility | Level 3 | 20,228 | 17,617 | 16,120 | 16,214 | ||||||||||||||||||||||||
| Blue Torch Credit Facility | Level 3 | 55,000 | 52,302 | — | — | ||||||||||||||||||||||||
| Purchase Price Obligation Note Payable | Level 3 | 9,364 | 7,292 | 8,791 | 8,791 | ||||||||||||||||||||||||
The above table excludes our revolving credit facilities, subordinated promissory note payable, and subordinated zero-coupon loan as these balances approximate fair value due to the short-term nature of our borrowings. The above table also excludes our Paycheck Protection Program loans (“PPP loans”) as the carrying value of the Company’s PPP loans approximates fair value based on the current yield for debt instruments with similar terms. Refer to Note 8, Long-term Debt, for additional information.
Warrant Liability
As of September 30, 2022, the Company has private placement warrants, which are liability classified, as discussed in Note 14, Warrants. The Company's private placement warrants are classified as Level 3 of the fair value hierarchy due to use of significant inputs that are unobservable in the market. Private placement warrants are fair valued using the Black-Scholes model, which require a risk-free rate assumption based upon constant-maturity treasury yields. Other significant inputs and assumptions in the model are the stock price, exercise price, volatility, and term or maturity. The volatility input was determined using the historical volatility of comparable publicly traded companies which operate in a similar industry or compete directly against the Company.
The following table presents the changes in the fair value of the private warrant liability at September 30, 2022:
| (in thousands USD) | Private Placement Warrants | ||||
| Beginning balance, January 1, 2022 | $ | 2,137 | |||
| Change in valuation inputs and other assumptions | 113 | ||||
Ending balance, September 30, 2022 | $ | 2,250 | |||
Embedded Derivative Liability
In connection with the amendment to the New Second Lien Facility on August 10, 2022, the Company bifurcated embedded derivatives associated with conversion features for Mexican peso-denominated tranches. Embedded derivative liabilities are carried at fair value and classified as Level 3 in the fair value hierarchy. The Company determined the fair values of the bifurcated embedded derivatives by using a scenario-based analysis that estimated the fair value of each embedded derivative based on a probability-weighted present value of all possible outcomes related to the features.
The significant unobservable inputs used in the fair value of the Company’s embedded derivative liabilities include the implied volatility, the period in which the outcomes are expected to be achieved and the discount rate.
The following table presents the changes in the fair value of the embedded derivative liabilities at September 30, 2022:
| (in thousands USD) | Embedded Derivative Liability | ||||
| Beginning balance, January 1, 2022 | $ | — | |||
| Recognition of embedded derivative liability | 9,014 | ||||
| Change in valuation inputs and other assumptions | (2,906) | ||||
Ending balance, September 30, 2022 | $ | 6,108 | |||
| Less: Current Portion | 25 | ||||
| Embedded derivative liability, net of current portion | $ | 6,083 | |||
Note 5 – Balance Sheet Details
The following table provides detail of selected balance sheet items:
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| Cash and cash equivalents | $ | 10,165 | $ | 8,463 | |||||||
| Restricted cash | 196 | 177 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 10,361 | $ | 8,640 | |||||||
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| Accounts receivables | $ | 15,003 | $ | 19,173 | |||||||
| Unbilled accounts receivables | 17,748 | 11,716 | |||||||||
| Other receivables | 652 | 686 | |||||||||
| Allowance for doubtful accounts | (142) | (188) | |||||||||
| Total accounts receivable, net | $ | 33,261 | $ | 31,387 | |||||||
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| Income tax receivables | $ | 2,900 | $ | 2,369 | |||||||
| Prepaid expenses and other current assets | 1,245 | 5,121 | |||||||||
| Total prepaid expenses and other current assets | $ | 4,145 | $ | 7,490 | |||||||
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| Accrued wages, vacation & other employee related items | $ | 6,160 | $ | 2,387 | |||||||
| Accrued interest | 868 | 381 | |||||||||
| Accrued incentive compensation | 894 | 654 | |||||||||
| Receipts not vouchered | 2,904 | 5,872 | |||||||||
| Accrued liabilities - Related Party | — | 17 | |||||||||
| Other accrued liabilities | 721 | 467 | |||||||||
| Total accrued liabilities | $ | 11,547 | $ | 9,778 | |||||||
The following table is a rollforward of the allowance for doubtful accounts:
| Nine Months Ended September 30, | |||||||||||
| (in thousands USD) | 2022 | 2021 | |||||||||
| Beginning balance, January 1 | $ | 188 | $ | 267 | |||||||
| Charges (recoveries) to expense | (47) | 78 | |||||||||
| Foreign currency translation | 1 | (24) | |||||||||
| Ending balance | $ | 142 | $ | 321 | |||||||
The Company records any obligations for contingent purchase price at fair value. The Company recorded the 2019 acquisition-date fair value of a contingent liability based on the likelihood of contingent earn-out payments through the year ended December 31, 2021 subject to the underlying agreement terms. As of December 31, 2021, the obligation now relates to a
known and fixed amount due and is no longer a contingent obligation recorded at fair value. The amount due accrues interest at 12%. The following table provides a roll-forward of the obligation related to the 2019 acquisition due to the seller:
| (in thousands USD) | Purchase Price Obligation Note Payable | ||||
Opening balance, December 31, 2021 | $ | 8,791 | |||
| Cash payments | — | ||||
| Accrued interest | 546 | ||||
| Effect of exchange rate fluctuations | 27 | ||||
Ending balance, September 30, 2022 | 9,364 | ||||
| Less: Current portion | 9,364 | ||||
| Purchase price obligation note payable, net of current portion | $ | — | |||
Note 6 – Property and Equipment, Net
Property and equipment, net consist of the following:
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| Computer equipment | $ | 4,214 | $ | 4,210 | |||||||
| Leasehold improvements | 1,265 | 2,179 | |||||||||
| Furniture and equipment | 1,336 | 1,691 | |||||||||
| Computer software | 2,935 | 2,240 | |||||||||
| Transportation equipment | 21 | 55 | |||||||||
| Finance lease right-of-use assets | 616 | — | |||||||||
| 10,387 | 10,375 | ||||||||||
| Less: accumulated depreciation | (7,189) | (7,268) | |||||||||
| Property and equipment, net | $ | 3,198 | $ | 3,107 | |||||||
Depreciation expense was $0.2 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $0.4 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively. The Company did not recognize any impairment expense related to property and equipment during the nine months ended September 30, 2022 or 2021.
Note 7 – Goodwill and Intangible Assets, Net
The Company performs an assessment each year to test goodwill and indefinite-lived intangible assets for impairment, or more frequently in certain circumstances where impairment indicators arise.
The following table presents changes in the goodwill balances as of September 30, 2022:
| (in thousands USD) | LATAM | USA | Total | ||||||||||||||
| December 31, 2021 | $ | 39,651 | $ | 30,694 | $ | 70,345 | |||||||||||
| Foreign currency translation | (165) | — | (165) | ||||||||||||||
| September 30, 2022 | $ | 39,486 | $ | 30,694 | $ | 70,180 | |||||||||||
Summary of our finite-lived intangible assets is as follows:
As of September 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands USD) | Gross Carrying Amount | Currency Translation Adjustment | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life (Years) | ||||||||||||||||||||||||
| Customer relationships | $ | 89,915 | $ | (591) | $ | (28,117) | 61,207 | 11.4 | |||||||||||||||||||||
| Tradename | 1,234 | (17) | (425) | 792 | 3.3 | ||||||||||||||||||||||||
| Total | $ | 91,149 | $ | (608) | $ | (28,542) | $ | 61,999 | 10.9 | ||||||||||||||||||||
As of December 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands USD) | Gross Carrying Amount | Currency Translation Adjustment | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life (Years) | ||||||||||||||||||||||||
| Customer relationships | $ | 89,915 | $ | (973) | (23,669) | $ | 65,273 | 11.8 | |||||||||||||||||||||
| Tradename | 1,234 | (31) | (243) | 960 | 3.9 | ||||||||||||||||||||||||
| Total | $ | 91,149 | $ | (1,004) | $ | (23,912) | $ | 66,233 | 11.7 | ||||||||||||||||||||
In 2021, the Company changed the estimated life of a certain tradename from indefinite to finite-lived and began amortizing it over the average remaining economic life of five years. See Note 2, Summary of Significant Accounting Policies. No impairment charges were recognized related to finite-lived intangible assets during the three and nine months ended September 30, 2022 and 2021.
The Company’s indefinite-lived intangible assets relate to trade names acquired in connection with business combinations. The trade names balance was $16.4 million and $16.3 million as of September 30, 2022 and December 31, 2021, respectively. No impairment charges were recognized related to infinite-lived intangible assets during the three and nine months ended September 30, 2022 and 2021.
Note 8 – Long-term Debt
Long-term debt as of September 30, 2022 and December 31, 2021 consists of the following:
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
Borrowings under revolving credit agreement, principal due May 27, 2026 | $ | 3,000 | $ | — | |||||||
Borrowings under term loan, principal due May 27, 2026 | 55,000 | — | |||||||||
Unamortized debt issuance costs(a) | (5,119) | — | |||||||||
Blue Torch Credit Facility, net of unamortized debt issuance costs | 52,881 | — | |||||||||
Borrowings under bank revolving credit agreement, principal due Nov. 10, 2023 | — | 5,000 | |||||||||
Borrowings under bank credit agreement, principal due Nov. 10, 2023 | — | 31,882 | |||||||||
Unamortized debt issuance costs and debt premium(a) | — | (6,915) | |||||||||
Borrowing under bank credit agreements, net of unamortized debt issuance costs | — | 29,967 | |||||||||
Paycheck Protection Program loans, 1% interest, due May 2, 2025 | 257 | 7,673 | |||||||||
Subordinated promissory note payable with a related party, 20% effective December 21, 2021, principal due January 31, 2023 | 673 | 673 | |||||||||
| Subordinated debt, guaranteed by a related party, principal due January 26, 2023 | 3,700 | 3,700 | |||||||||
Unamortized debt issuance costs(a) | (317) | (76) | |||||||||
| Subordinated debt, guaranteed by a related party, net of unamortized debt issuance costs | 3,383 | 3,624 | |||||||||
Borrowings under convertible note payable with a related party, 11% interest capitalized every three months, principal due September 15, 2026 | 3,316 | 3,037 | |||||||||
Borrowings under convertible note payable with a related party, 17.41% interest capitalized every three months, principal due September 15, 2026 | 6,818 | 5,894 | |||||||||
Borrowings under convertible note payable with a related party, 11% interest capitalized every three months, principal due June 15, 2023 | 3,623 | 3,336 | |||||||||
Borrowings under convertible note payable with a related party, 17.41% interest capitalized every three months, principal due June 15, 2023 | 4,457 | 3,853 | |||||||||
Unamortized debt issuance costs, premium, and discount(a) | 2,014 | (945) | |||||||||
| New Second Lien Facility, net of unamortized debt issuance costs, premium, and discount | 20,228 | 15,175 | |||||||||
Total debt | 77,422 | 57,112 | |||||||||
Less: current portion of debt | 11,054 | 14,838 | |||||||||
Long-term debt, net of unamortized debt issuance costs, debt premium and current portion | $ | 66,368 | $ | 42,274 | |||||||
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(a)Debt issuance costs, premium, and discount are presented as a reduction, addition, and reduction to the Company’s debt, respectively in the Unaudited Condensed Consolidated Balance Sheets. $2.5 million and $1.5 million of debt issuance cost amortization was charged to interest expense for the nine months ended September 30, 2022 and 2021.
Blue Torch Credit Facility
On May 27, 2022, the Company entered into a financing agreement ("Blue Torch Credit Facility") by and among the Company, AN Global LLC, certain subsidiaries of the Company, as guarantors (the “Guarantors”), the financial institutions party thereto as lenders, and Blue Torch Finance LLC (“Blue Torch”), as the administrative agent and collateral agent. The Blue Torch Credit Facility is secured by substantially all of the Company’s and the Guarantors’ properties and assets and provides for a term loan of $55.0 million and a revolving credit facility with an aggregate principal limit not to exceed $3.0 million at any time outstanding. On May 27, 2022, the Company borrowed the full $55.0 million under the term loan. On June 28, 2022, the Company borrowed $3.0 million under the revolving credit facility. The Company has agreed to make quarterly payments on the term loan of approximately $0.7 million starting December 31, 2023. The remaining principal balance under the term loan and any loans drawn under the revolving credit facility will be due on May 27, 2026, the maturity date. The revolving credit facility bears a 2.00% annual usage fee on the undrawn portion of the facility. Interest is paid
quarterly for both loans, and is calculated based on the Adjusted Term SOFR (the three-month Term Secured Overnight Financing Rate, plus 0.26161%) plus a margin of 7.0% to 9.0% depending on the Total Leverage Ratio. Interest on each loan shall be payable on the last day of the then effective interest period applicable to such loan and at maturity. The Company recognized $5.0 million in debt issuance costs.
On August 10, 2022, the Company entered into a waiver and amendment to the Blue Torch Credit Facility to provide for an extension of the period of time which the Company has to satisfy certain post-closing obligations under the Blue Torch Credit Facility. The amendment also provides for an acceleration of the maturity of the loans made by the lenders thereunder to May 1, 2023 if the Company does not obtain regulatory approval to convert certain loans outstanding under the New Second Lien Facility into common stock of the Company. The Company recognized $0.6 million in debt issuance costs related to the wavier and amendment.
As of November 1, 2022, the Company entered into an amendment to the Blue Torch Credit Facility to provide for an extension of the period of time which the Company has to satisfy certain reporting and post-closing obligations under the Blue Torch Credit Facility.
Credit Agreements
In 2018, the Company entered into a revolving credit agreement with Monroe Capital Management Advisors LLC that permits the Company to borrow up to $1.5 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing limit to $5.0 million. Also in 2018, the Company entered into a term loan credit agreement with Monroe Capital Management Advisors LLC that permits the Company to borrow up to $75.0 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing amount to $98.0 million. Interest on the revolving credit agreement and term loan agreement (“First Lien Facility”) are paid monthly and calculated as LIBOR plus a margin of 8.0% to 9.0%, based on the Total Leverage Ratio as calculated in the most recent Compliance Certificate. An additional 2.0% interest may be incurred during periods of loan covenant default.
On March 22, 2021, the Company used $20.0 million from proceeds of issuance of preferred stock to partially pay the First Lien Facility. Refer to Note 15, Stockholders’ Equity, for additional information on issuance of preferred stock.
On June 24, 2021, an amendment was signed to modify the debt covenants for the periods June 30, 2021 and thereafter. In addition to the covenant modifications, the amendment also established the deferral of the monthly $1.0 million principal payments previously due in April and May, along with the $1.0 million payments due in June and July to September 30, 2021. As a result, the regular quarterly principal installments resumed, and the First Lien lenders charged a $4.0 million fee paid upon the end of the term loan in exchange for the amended terms. The amendment resulted in a debt modification, thus the fees payable to the First Lien lenders were capitalized and were being amortized over the remaining life of the First Lien Facility.
From September 30, 2021 to October 29, 2021, the Company entered into various amendments to extend the due date of the $4.0 million in principal payments previously due September 30, 2021 to November 19, 2021.
On November 29, 2021, the Company made a $20.0 million principal prepayment, which included the $4.0 million principal payment originally due September 30, 2021. The Company paid with proceeds from the New Second Lien Facility (defined below). Furthermore, on December 29, 2021, the Company issued 4,439,333 shares of Class A Common Stock to the administrative agent for the First Lien Facility (the “First Lien Shares”), which subject to certain terms and regulatory restrictions, may sell the First Lien Shares upon the earlier of August 29, 2022 and an event of default and apply the proceeds to the outstanding balance of the loan. In addition, the Company agreed to issue warrants to the administrative agent to purchase $7.0 million worth of the Company’s Class A Common Stock for nominal consideration. The warrants will be issued on the earlier of full repayment of outstanding deferred fees or August 29, 2023. In addition, the Company may be required to pay the First Lien lenders cash to the extent that we cannot issue some or all of the warrants due to regulatory restrictions. The First Lien lenders charged an additional $2.9 million fee paid upon the end of the term loan in exchange for the amended terms.
On November 22, 2021, the Company entered into an amendment that required sixty percent (60%) of proceeds from equity issuances be used to repay the outstanding balance on the First Lien Facility. On December 27, 2021, the Company closed a follow on stock offering resulting in $21.8 million of net proceeds, of which $13.7 million was used as payment of the outstanding principal and interest balances for the First Lien Facility.
On March 30, 2022, the Company entered into an amendment with the First Lien and Second Lien Facility Lenders to waive the Fixed Charge Coverage Ratio for March 31, 2022. In addition, the Total Leverage Ratio covenant for the quarterly period of March 31, 2022 was reset. As consideration for entering into this amendment, the Company agreed to pay the First Lien Facility’s administrative agent a fee equal to $0.5 million. The fee would be fully earned as of March 30, 2022 and due and payable upon the end of the term loan. However, the agreement provided that the fee shall be waived in its entirety if final payment in full occurred prior to or on May 30, 2022. This modification triggered by this new amendment was determined to be
substantially different to the old instrument, therefore the modification was accounted for as an extinguishment and the debt instrument was adjusted to fair value as of the March 31, 2022. The Company recognized a loss on debt extinguishment of $7.1 million in the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2022.
On May 27, 2022, the Company paid approximately $40.2 million to settle the outstanding principal, interest, and a portion of the $6.9 million deferred fees related to amendments on the First Lien Facility. The First Lien Lenders waived the $0.5 million fee related to the March 30, 2022 amendment and returned 2,423,204 First Lien Shares as part of the deferred fees settlement. Beginning on August 29, 2022 the First Lien Lenders may sell the remaining First Lien Shares and apply 100% of the net proceeds to the outstanding fees obligation. The First Lien Lenders shall return any of the remaining unsold First Lien Shares upon full payment of the remaining fees. At September 30, 2022, total deferred fees payable on or before May 25, 2023, including fees recognized from prior amendments, totaled $3.5 million. These fees are recognized in Other current liabilities in the Unaudited Condensed Consolidated Balance Sheet and Other noncurrent liabilities in the Audited Consolidated Balance Sheet at September 30, 2022 and December 31, 2021, respectively. The Company recognized a gain on debt extinguishment of $1.0 million for the three months ended June 30, 2022 and a loss on debt extinguishment of $6.2 million for the nine months ended September 30, 2022.
Second Lien Facility
On July 18, 2019, the Company entered into separate credit agreements with Nexxus Capital and Credit Suisse (“the Creditors”) that permitted the Company to borrow $12.5 million from each bearing 13.73% interest. On January 31, 2020, the agreements were amended to increase the borrowing amount by $2.05 million under each agreement. Interest was capitalized every six months and payable when the note was due. Immediately prior to the Business Combination, the Creditors exercised their option to convert their combined $38.1 million of debt outstanding (including interest) into 115,923 shares of the Company's Class A ordinary shares, which were converted into the Company's Class A common stock as a result of the Business Combination. Concurrently with the conversion, the Company amortized the remaining $0.1 million of unamortized debt issuance costs and recognized incremental interest expense in the Unaudited Condensed Consolidated Statements of Operations.
New Second Lien Facility
On November 22, 2021, the Company entered into a new Second Lien Facility (the “New Second Lien Facility”) with Credit Suisse and Nexxus Capital (both of which are existing AgileThought shareholders and have representation on AgileThought’s Board of Directors), Manuel Senderos, Chief Executive Officer and Chairman of the Board of Directors, and Kevin Johnston, Global Chief Operating Officer. The New Second Lien Facility provides for a term loan facility, with Tranches for each of the aforementioned lenders, in an initial aggregate principal amount of approximately $20.7 million, accruing interest at a rate per annum from 11.00% for the US denominated loan and 17.41% for the Mexican Peso denominated loan. The New Second Lien Facility had an original maturity date of March 15, 2023; provided that if the Blue Torch Credit Facility, as the first lien facility, remained outstanding on December 15, 2022, the maturity date of the New Second Lien Facility would have been extended to May 10, 2024. As the Company does not intend to pay the outstanding balance under the Blue Torch Credit Facility prior to the maturity of the New Second Lien Facility on March 15, 2023, the amounts outstanding under the New Second Lien Facility were classified as non current in the Audited Consolidated Balance Sheet at December 31, 2021. The Company recognized $0.9 million in debt issuance costs with the issuance.
On August 10, 2022, the Company entered into an amendment to the New Second Lien Facility to extend the maturity date of the Tranche A (Credit Suisse), Tranche C (Senderos), Tranche D (Senderos) and Tranche E (Johnston) loans to September 15, 2026, and provide for potential increases, that step up over time from one percent to five percent, in the interest rate applicable to the Tranche A loans. The amendment also extends the maturity date of the Tranche B (Nexxus Capital) loans thereunder to June 15, 2023, and provides for a mandatory conversion of the Tranche B loans thereunder, including interest and fees, into equity securities of the Company upon the maturity of said loans at a conversion price equal to $4.64 per share, subject to regulatory approval. The amendment also provided for the covenants and certain other provisions of the New Second Lien Facility to be made consistent with those in the Blue Torch Credit Facility (and in certain cases for those covenants to be made less restrictive than those in the Blue Torch Credit Facility). This amendment was determined to substantially alter the debt agreement such that extinguishment accounting would be applied. The Company recognized a loss on debt extinguishment of $11.7 million for the three months ended September 30, 2022. As part of the reassessment of the debt instrument, the Company bifurcated the conversion option on the Mexican peso-dominated loans and recognized an embedded derivative liability of $9.0 million as of the amendment date. See Note 4, Fair Value Measurements, for additional information.
Each lender under the New Second Lien Facility has the option to convert all or any portion of its outstanding loans into AgileThought Class A Common Stock at any time at a conversion price equal to $4.64 per share, subject to regulatory approval.
On December 27, 2021, Manuel Senderos and Kevin Johnston exercised the conversion options for their respective principal amounts of $4.5 million and $0.2 million, respectively. See Note 15, Stockholders’ Equity, for additional information.
As of November 1, 2022, the Company entered into an amendment to the New Second Lien Facility to provide for an extension of the period of time which the Company has to satisfy certain reporting obligations under the New Second Lien Facility.
Paycheck Protection Program Loans
On April 30, 2020 and May 1, 2020, the Company received PPP loans through four of its subsidiaries for a total amount of $9.3 million. The PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the United States federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company submitted its forgiveness applications to the Small Business Administration (“SBA”) between November 2020 and January 2021. The monthly repayment terms were established in the notification letters with the amount of loan forgiveness. On December 25, 2020, $0.1 million of a $0.2 million PPP loan was forgiven. On March 9, 2021, $0.1 million of a $0.3 million PPP loan was forgiven. On June 13, 2021, $1.2 million of a $1.2 million PPP loan was forgiven. On January 19, 2022, $7.3 million of a $7.6 million PPP loan was forgiven resulting in a remaining PPP Loan balance of $0.3 million of which $0.1 million is due within the next year. The remaining payments will be made quarterly until May 2, 2025. All loan forgiveness was recognized in Other (expense) income, net of the Unaudited Condensed Consolidated Statements of Operations.
Subordinated Promissory Note
On June 24, 2021, the Company entered into a credit agreement with AGS Group LLC (“AGS Group”) for a principal amount of $0.7 million. The principal amount outstanding under this agreement matured on December 20, 2021 (“Original Maturity Date”) and was extended until May 19, 2022 (“May 2022 Maturity Date”). On August 4, 2022, the Company entered into an amendment with the AGS Group to extend the maturity date of the Subordinated Debt to January 31, 2023 ("January 2023 Maturity Date"). Interest is due and payable in arrears on the Original Maturity Date at a 14.0% per annum until and including December 20, 2021, and at 20.0% per annum from the Original Maturity Date to the January 2023 Maturity Date, in each case calculated on the actual number of days elapsed. The Subordinated Promissory Note can only be repaid after the settlement of the Blue Torch Credit Facility.
Exitus Capital Subordinated Debt
On July 26, 2021, the Company agreed with existing lenders and Exitus Capital (“Subordinated Creditor”) to enter into a zero-coupon subordinated loan agreement with Exitus Capital in an aggregate principal amount equal to $3.7 million (“Subordinated Debt”). Net loan proceeds totaled $3.2 million, net of $0.5 million in debt discount. No periodic interest payments are currently required and the loan was due on January 26, 2022, with an option to extend up to two additional six month terms. On January 25, 2022, the Company exercised the first option to extend the loan an additional six months to July 26, 2022 and recognized an additional $0.5 million in debt issuance costs related to the loan extension. On July 26, 2022, the Company exercised the second option to extend the loan an additional six months to January 26, 2023 and recognized an additional $0.5 million in debt issuance costs related to the second loan extension. Payment of any and all of the Subordinated Debt is subordinate of all existing senior debt, including the Blue Torch Credit Facility and the New Second Lien Facility. In the event of any liquidation, dissolution, or bankruptcy proceedings, all senior debt shall first be paid in full before any distribution shall be made to the Subordinated Creditor. The loan is subject to a 36% annual interest moratorium if full payment is not made upon the maturity date.
Financial Covenants
The Blue Torch Credit Facility establishes the following financial covenants for the consolidated group:
Revenue. Requires the Company's trailing annual aggregate revenue to exceed $150.0 million as of the end of each computation period as described below.
| Computation Period Ending | Revenue | |||||||
| September 30, 2022, and December 31, 2022 | $ | 150,000,000 | ||||||
| March 31, 2023 and each fiscal month ending thereafter | 150,000,000 | |||||||
Liquidity. Requires the Company's liquidity to be above $5.0 million at any time during the effective duration of the agreement. Liquidity is defined as the remaining capacity under the Blue Torch Credit Facility plus the total unrestricted cash on hand.
Leverage Ratio. The First Lien Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. It is calculated as of the last day of any Computation Period as the ratio of (a) total debt (as defined in credit agreement) to (b) EBITDA for the Computation Period ending on such day.
| Computation Period Ending | First Lien Leverage Ratio | |||||||
| December 31, 2022 | 4.00:1.00 | |||||||
| March 31, 2023 | 3.75:1.00 | |||||||
| June 30, 2023 and each quarter ending thereafter | 3.50:1.00 | |||||||
The New Second Lien Facility establishes the following financial covenants for the consolidated group:
Revenue. Requires the Company's trailing annual aggregate revenue to exceed $130.0 million as of the end of each computation period as described below.
| Computation Period Ending | Revenue | |||||||
| September 30, 2022, and December 31, 2022 | $ | 130,000,000 | ||||||
| March 31, 2023 and each fiscal month ending thereafter | 130,000,000 | |||||||
Liquidity. Requires the Company's liquidity to be above $3.0 million at any time during the effective duration of the agreement. Liquidity is defined as the remaining capacity under the Blue Torch Credit Facility plus the total unrestricted cash on hand.
Leverage Ratio. The Second Lien Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. It is calculated as of the last day of any Computation Period as the ratio of (a) total debt (as defined in credit agreement) to (b) EBITDA for the Computation Period ending on such day.
| Computation Period Ending | Second Lien Leverage Ratio | |||||||
| December 31, 2022 | 4.80:1.00 | |||||||
| March 31, 2023 | 4.50:1.00 | |||||||
| June 30, 2023 and each quarter ending thereafter | 4.20:1.00 | |||||||
The Company was compliant with all debt covenants as of September 30, 2022.
Note 9 – Other (Expense) Income
Items included in other (expense) income in the Unaudited Condensed Consolidated Statements of Operations are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Foreign exchange loss | $ | (100) | $ | (790) | $ | (106) | $ | (1,530) | |||||||||||||||
| Forgiveness of PPP loans | — | — | 7,280 | 1,306 | |||||||||||||||||||
| Other interest income | — | 20 | — | 66 | |||||||||||||||||||
| Other non-operating expense | (54) | (81) | (521) | (278) | |||||||||||||||||||
| Total other (expense) income | $ | (154) | $ | (851) | $ | 6,653 | $ | (436) | |||||||||||||||
Note 10 – Income Taxes
Income tax expense (benefit) and effective income tax rate were as follows for the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Income tax expense (benefit) | $ | 135 | $ | 96 | $ | 358 | $ | (13) | |||||||||||||||
| Effective tax rates | (0.9 | %) | (0.9 | %) | (1.5 | %) | 0.1 | % | |||||||||||||||
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period.
For the three months ended September 30, 2022, the Company reported a tax expense of $0.1 million on a pretax loss of $15.0 million which resulted in an negative effective tax rate of 0.9%. The Company’s effective tax rate differs from the U.S. statutory rate of 21% due to losses incurred in jurisdictions for which no tax benefit is recognized.
For the three months ended September 30, 2021, the Company reported a tax expense of less than $0.1 million on a pretax loss of $10.7 million, which resulted in an negative effective tax rate of 0.9%. The Company’s effective tax rate differs from the U.S. Statutory rate of 21% due to the mix of earnings in international jurisdictions with relatively higher tax rates and losses incurred in jurisdictions for which no tax benefit is recognized.
For the nine months ended September 30, 2022, the Company recorded a tax expense of $0.4 million on a pretax loss of $24.5 million which resulted in an negative effective tax rate of 1.5%. The Company’s effective tax rate differs from the U.S. statutory rate of 21% due to the losses incurred in jurisdictions for which no tax benefit is recognized.
For the nine months ended September 30, 2021, the Company reported a nominal tax benefit on a pretax loss of $14.1 million, which resulted in an effective tax rate of 0.1%. The Company’s effective tax rate differs from the U.S. Statutory rate of 21% due to losses incurred in jurisdictions for which no tax benefit is recognized.
Note 11 – Net Revenues
Disaggregated revenues by contract type and the timing of revenue recognition are as follows:
| (in thousands USD) | Timing of Revenue Recognition | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
| Revenues by Contract Type | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Time and materials | over time | $ | 29,955 | $ | 33,858 | $ | 96,057 | $ | 96,650 | ||||||||||||||||||||
| Fixed price | over time | 13,440 | 6,562 | 37,728 | 19,923 | ||||||||||||||||||||||||
| Total | $ | 43,395 | $ | 40,420 | $ | 133,785 | $ | 116,573 | |||||||||||||||||||||
Liabilities by contract related to contracts with customers
As of September 30, 2022 and December 31, 2021, deferred revenues were $2.7 million and $1.8 million, respectively. During the nine months ended September 30, 2022 and 2021, the Company recognized revenue of $5.1 million and $1.3 million, respectively, that was deferred in the previous period.
Major Customers
The Company derived 16% of its revenues for the three months ended September 30, 2022 from one significant customer, as well as 13% and 10% of our revenues for the three months ended September 30, 2021 from two significant customers. Sales to these customers occur at multiple locations and the Company believes that the loss of these customers would have only a short-term impact on our operating results. There is risk, however, that the Company would not be able to identify and access a replacement market at comparable margins.
The Company derived 14% of its revenues for the nine months ended September 30, 2022 from one significant customer, as well as 13% and 10% and of our revenues for the nine months ended September 30, 2021 from two significant customers. Sales to these customers occur at multiple locations and the Company believes that the loss of these customers would have only a short-term impact on our operating results. There is risk, however, that the Company would not be able to identify and access a replacement market at comparable margins.
Note 12 – Segment Reporting and Geographic Information
The Company operates as a single operating segment. The Company's chief operating decision maker is the CEO, who reviews financial information presented on a consolidated basis, for purposes of making operating decisions, assessing financial performance and allocating resources.
The following table presents the Company's geographic net revenues based on the geographic market where revenues are accumulated, as determined by customer location:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| United States | $ | 27,410 | $ | 26,925 | $ | 85,695 | $ | 76,868 | |||||||||||||||
| Latin America | 15,985 | 13,495 | 48,090 | 39,705 | |||||||||||||||||||
| Total | $ | 43,395 | $ | 40,420 | $ | 133,785 | $ | 116,573 | |||||||||||||||
The following table presents certain of our long-lived assets by geographic area, which includes property and equipment, net and operating lease right of use assets, net:
| (in thousands USD) | September 30, 2022 | December 31, 2021 | |||||||||
| United States | $ | 4,431 | $ | 5,837 | |||||||
| Latin America | 4,345 | 3,704 | |||||||||
| Total long-lived assets | $ | 8,776 | $ | 9,541 | |||||||
Note 13 – Restructuring
Restructuring expenses consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts.
In November 2021, we communicated efforts to streamline our operating model further by reducing layers of management and reducing our cost structure. These restructuring efforts included consolidating the Chief Revenue Officer’s responsibilities with the Global Chief Operating Officer position, consolidating span of control of sales managers from eight to four, and a reduction of underutilized bench personnel. The Company exited employees in the last half of the three months ended December 31, 2021.
During the first half of 2022 the Company incurred additional restructuring costs related to additional terminations and consolidation of our marketing department. Furthermore, during the third quarter of 2022 the Company consolidated additional roles throughout various back office functions.
The following table summarizes the Company’s restructuring activities included in accrued liabilities:
| (in thousands USD) | Organization Restructuring | ||||
Balance as of December 31, 2021 | $ | 552 | |||
| Restructuring charges | 1,386 | ||||
| Payments | (1,115) | ||||
Balance as of September 30, 2022 | $ | 823 | |||
Note 14 - Warrants
The Company reviewed the accounting for both its public warrants and private warrants and determined that its public warrants should be accounted for as equity while the private warrants should be accounted for as liabilities in the Unaudited Condensed Consolidated Balance Sheets.
In connection with the Business Combination, each public and private placement warrant of LIVK was assumed by the Company and represents the right to purchase one share of the Company's Class A common stock upon exercise of such warrant. The fair value of private placement warrants was remeasured as of September 30, 2022. During the three and nine
months ended September 30, 2022, the Company recognized a gain of $0.8 million and a loss of $0.1 million respectively on private placement warrants to reflect the change in fair value. Refer to Note 4, Fair Value Measurements, for additional information.
As of September 30, 2022, there were 8,049,980 public warrants and 2,811,250 private placement warrants outstanding.
As part of LIVK's initial public offering, 8,050,000 public warrants (“Public Warrants”) were sold. The Public Warrants entitle the holder to purchase one share of Class A common stock at a price of $11.50 per share. Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants became exercisable when the Company completed an effective registration statement. The Public Warrants will expire five years from the completion of a Business Combination or earlier upon redemption or liquidation.
Additionally, LIVK consummated a private placement of 2,811,250 warrants (“Private Placement Warrants”). The Private Placement Warrants entitle the holder to purchase one share of Class A common stock at a price of $11.50 per share. The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants were not transferable, assignable or salable until 30 days after the completion of the Business Combination. Additionally, the Private Placement Warrants are exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants are redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company will not be obligated to deliver any Class A common stock pursuant to the exercise of a Public Warrant and will have no obligation to settle such Public Warrant exercise unless a registration statement under the Securities Act covering the issuance of the Class A common stock issuable upon exercise of the Public Warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. The Company filed a Form S-1 to register the shares issuable upon exercise of the Public Warrants which was declared effective on September 27, 2021. No Public Warrant will be exercisable for cash or on a cashless basis, and the Company will not be obligated to issue any shares to holders seeking to exercise their Public Warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, or an exemption from registration is available.
Once the warrants become exercisable, the Company may redeem the Public Warrants:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon not less than 30 days’ prior written notice of redemption to each warrant holder and if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations), for any 20 trading days within a 30 trading day period commencing after the warrants become exercisable and ending on the third business day prior to the notice of redemption to warrant holders; and
•if, and only if, there is a current registration statement in effect with respect to the Class A common stock underlying such warrants.
If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of ordinary shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, the Public Warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Public Warrants.
Note 15 – Stockholders’ Equity
As a result of the Business Combination, the Company authorized two classes of common stock: Class A common stock and preferred stock.
Class A Common Stock
As of September 30, 2022, the Company has 210,000,000 shares of Class A common stock authorized, and 48,243,382 shares issued and outstanding. Class A common stock has par value of $0.0001 per share. Holders of Class A common stock are entitled to one vote per share.
On December 21, 2021, AgileThought, Inc. entered into an underwriting agreement with A.G.P./Alliance Global Partners as representatives of the underwriters (the “Underwriters”), relating to the sale and issuance of 3,560,710 shares of the Company’s Class A common stock. The offering price to the public of the shares was $7.00 per share, and the Underwriters agreed to purchase the shares from the Company pursuant to the underwriting agreement at a price of $6.51 per share. The Company’s net proceeds from the offering were approximately $21.8 million.
On December 27, 2021, the Company issued 461,236 shares of Class A Common Stock (the “Conversion Shares”) to Mr. Senderos and Mr. Johnston upon conversion of the principal amount of their loans under the New Second Lien Facility in the amount of $4,500,000 and $200,000, respectively. Mr. Senderos received 441,409 Conversion Shares, and Mr. Johnston received 19,827 Conversion Shares.
On December 28, 2021, the Company issued 4,439,333 shares of Class A Common Stock to the administrative agent for the First Lien Facility in accordance with the amendment dated November 15, 2021. As these common shares have been issued to and are held by the lender, and are contingently returnable to the Company under certain conditions, such shares are considered as issued and outstanding on the Company’s balance sheet, but are not included in earnings per share calculations for all periods presented. On June 3, 2022, the lenders returned 2,423,204 shares as part of the extinguishment of the First Lien Facility. See Note 9, Long-Term Debt, for further information.
On January 27, 2022, the Company issued 2,228,000 Restricted Stock Units (“RSU”) to senior employees and directors under the 2021 Equity Incentive Plan, of which 228,000 RSUs are subject to a service vesting condition and 2,000,000 RSUs are subject to market vesting requirement. See Note 17, Equity-based Arrangements, for further information.
On May 9, 2022, the Company issued an additional 2,208,960 RSUs to senior employees, directors, and board members, of which 1,197,180 RSUs are subject to a service vesting condition and 1,011,780 RSUs are subject to market vesting requirements. See Note 17, Equity-based Arrangements, for further information.
On August 9, 2022, the Company issued an additional 179,580 RSUs to senior employees, directors, and board members, of which 119,820 RSUs are subject to a service vesting condition and 59,760 RSUs are subject to market vesting requirements. See Note 17, Equity-based Arrangements, for further information.
On September 30, 2022, the Company issued an additional 32,508 RSUs to sales incentive commissions subject to a service vesting condition. See Note 17, Equity-based Arrangements, for further information.
Preferred Stock
Under the Company's certificate of incorporation, the Company is authorized to issue 10,000,000 shares of preferred stock having par value of $0.0001 per share. The Company's Board of Directors has the authority to issue shares of preferred stock in one or more series and to determine preferences, privileges, and restrictions, including voting rights, of those shares. As of September 30, 2022, no shares were issued and outstanding.
Prior to the Business Combination, the Company had three classes of equity: Class A ordinary shares, Class B ordinary shares and redeemable convertible preferred stock.
Legacy Class A and Class B Shares
As of December 31, 2020, the capital stock is represented by 431,682 Class A Shares and 37,538 Class B Shares. Holders of Class A Shares were entitled to one vote per share and Holders of Class B Shares are not entitled to vote. The common shares have no preemptive, subscription, redemption or conversion rights. In connection with the Business Combination, the Company converted its Class A and Class B ordinary shares outstanding into shares of the Company's Class A common stock. As of September 30, 2022, no shares of Class A and Class B ordinary shares were outstanding.
Redeemable Convertible Preferred Stock
On February 2, 2021, LIV Capital Acquisition Corp (“LIVK”), related parties to LIVK (and together with LIVK, the “Equity Investors”) and the Company entered into an equity contribution agreement. Per the agreement, the Equity Investors purchased 2 million shares of a newly created class of preferred stock at a purchase price of $10 per share for an aggregate purchase price of $20 million.
The redeemable convertible preferred stock would be redeemable for an amount in cash equal to the greater of $15 per share (the “Required Price”), or $10 per share of redeemable convertible preferred stock plus 18% interest if the Business Combination did not occur (defined in the agreement as the “Required Return”), other than as a result of LIVK’s failure to negotiate in good faith or failure to satisfy or perform any of its obligations under the merger agreement.
Additionally, the redeemable convertible preferred stock would be convertible into common shares of the Company either on a one to one basis in the event of the closing of the merger agreement, or if the merger agreement were terminated and the Company subsequently consummated an initial public offering, into a number of common shares of the Company equal to the Required Return divided by 0.9, or $16.6667, multiplied by the price at which the shares of voting common stock of the Company are initially priced in such initial public offering.
The redeemable convertible preferred stock had no voting and dividend rights until converted into common stock and had a liquidation preference equal to the amount of the Required Return.
The Company concluded that because the redemption and conversion features of the Preferred Stock were outside of the control of the Company, the instrument was recorded as temporary or mezzanine equity in accordance with the provisions of Accounting Series Release No. 268, Presentation in Financial Statements of Redeemable Preferred Stocks.
In connection with the Business Combination, all redeemable convertible preferred stock was converted into shares of Class A common stock on a one for one basis. As of September 30, 2022, no shares of redeemable convertible preferred stock were outstanding.
Note 16 – Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share, retroactively restated based on the Business Combination, attributable to common stockholders:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD, except share and loss per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (15,086) | $ | (10,599) | $ | (24,978) | $ | (14,053) | |||||||||||||||
| Weighted average number of common stock - basic and diluted | 46,182,392 | 37,633,267 | 46,080,399 | 35,612,677 | |||||||||||||||||||
| Loss per common share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | (0.33) | $ | (0.28) | $ | (0.54) | $ | (0.39) | |||||||||||||||
| Diluted | (0.33) | (0.28) | (0.54) | (0.39) | |||||||||||||||||||
The following table presents securities that are excluded from the computation of diluted net loss per common stock as of the periods presented because including them would have been antidilutive:
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Public and private warrants | 10,861,230 | 10,861,250 | |||||||||
Class A common stock held by administrative agent with restricted resale rights | 2,016,129 | — | |||||||||
| Unvested 2021 Plan awards for Class A shares with a service condition | 1,233,002 | — | |||||||||
| Unvested 2021 Plan awards for Class A shares with a market condition | 3,061,730 | — | |||||||||
Unvested stock based compensation awards for Class A common stock with service and performance vesting conditions | — | 1,500 | |||||||||
Note 17 – Equity-based Arrangements
The Company has granted various equity-based awards to its employees and board members as described below. The Company issues, authorized but unissued shares, for the settlement of equity-based awards.
2021 Equity Incentive Plan
In connection with the Business Combination, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”) on August 18, 2021, which became effective immediately upon the Closing. The 2021 Plan provides the Company with flexibility to use various equity-based incentive awards as compensation tools to motivate and retain the Company’s workforce. The Company initially reserved 5,283,216 shares of Class A common stock for the issuance of awards under the 2021 Plan. The number of shares of Class A common stock available for issuance under the 2021 Plan automatically increases on the first day of each calendar year, beginning January 1, 2022 and ending on and including January 1, 2031, in an amount equal to 5% of the total number of shares of Class A common stock outstanding on December 31 of the preceding year; provided that the Board may act prior to January 1 of a given year to provide that the increase of such year will be a lesser amount of shares of Class A common stock.
On January 27, 2022, the Company issued 2,228,000 Restricted Stock Units ("RSU") to senior employees and directors, of which 228,000 RSUs are subject to a service vesting condition and 2,000,000 RSUs are subject to market vesting requirements.
The awards subject to a service vesting requirement will vest over a three year period until 2023. The portion of the awards related to the 2021 service period immediately vested on the grant date. The remaining awards vest and are expensed on a graded basis each year. The grant date fair value for the service vested RSUs under the 2021 Plan was approximately $1.0 million. On January 27, 2022, 87,999 RSUs subject to service vesting conditions vested, of which 13,462 were withheld for taxes. Expense during the three and nine months ended September 30, 2022 related to the service vested RSUs was $0.1 million and $0.7 million respectively. The Company also cancelled 10,000 awards during the three and nine months ended September 30, 2022.
The awards subject to a market vesting condition will expire after 6-10 years. The market condition is met if the volume-weighted average stock price reaches the specified stock price during the specified period. The grant date fair value for these RSUs was approximately $4.3 million. The Company recognized $0.3 million and $0.7 million of expense during the three and nine months ended September 30, 2022 using straight line amortization over a derived service period of 3-7 years.
On May 9, 2022, the Company issued an additional 2,208,960 RSUs to senior employees, directors, and board members, of which 1,197,180 RSUs are subject to a service vesting condition and 1,011,780 RSUs are subject to market vesting requirements.
Of the RSUs subject to a service vesting condition, 1,103,180 awards will vest over a three year period until June 1, 2025. The remaining 94,000 awards will vest quarterly until December 31, 2022. The grant date fair value for all the service vested RSUs was approximately $5.4 million. For the nine months ended September 30, 2022, 208,398 shares vested, of which 41,748 shares were withheld for taxes. Expense for the three and nine months ended September 30, 2022 was $0.5 million and $1.9 million.
The awards subject to a market vesting condition will vest over a period of five years from date of grant if a market condition is met. The market condition is met if the volume-weighted average stock price reaches the specified stock price during the specified period. The grant date fair value for these RSUs was approximately $2.9 million. Expense for the three and nine months ended September 30, 2022 was $0.3 million and $0.5 million using straight-line amortization over a derived service period of 1-4 years.
On August 9, 2022, the Company issued an additional 179,580 RSUs to newly hired senior employees, of which 119,820 RSUs are subject to a service vesting condition and 59,760 RSUs are subject to market vesting requirements.
Of the RSUs subject to a service vesting condition, 71,760 awards will vest over four year period until June 1, 2026. The remaining 48,060 awards will vest on December 31, 2022. The grant date fair value for all the service vested RSUs was approximately $0.6 million. No awards have vested for the nine months ended September 30, 2022. Expense for the nine months ended September 30, 2022 was $0.1 million.
The awards subject to a market vesting condition will vest over a period of five years from date of grant if a market condition is met. The market condition is met if the volume-weighted average stock price reaches the specified stock price during the specified period. The grant date fair value for these RSUs was approximately $0.2 million. Expense for the nine
months ended September 30, 2022 was less than $0.1 million using straight-line amortization over a derived service period of 1-4 years.
On September 30, 2022, the Company issued an additional 32,508 RSUs for sales incentive commissions, all of these RSUs are subject to a service vesting condition.
Of the RSUs subject to a service vesting condition, 7,752 awards will vest after a one year period on September 30, 2023. The remaining 24,756 awards immediately vested on September 30, 2022, of which 6,731 shares were withheld for taxes. The grant date fair value for all the service vested RSUs was approximately $0.1 million. Expense for the nine months ended September 30, 2022 was less than $0.1 million.
Employee Stock Purchase Plan
In connection with the Business Combination, on August 18, 2021, the Company adopted the 2021 Employee Stock Purchase Plan (the “ESPP”) for the issuance of up to a total of 1,056,643 shares of Class A common stock. The number of shares reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2022 through January 1, 2031, by the lesser of (i) 1% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, and (ii) the number of shares equal to 200% of the initial share reserve, unless a smaller number of shares may be determined by the Board. The purchase price of Class A Common Stock will be 85% of the lesser of the fair market value of Class A Common Stock on the first trading date or on the date of purchase. No purchases have been made under the ESPP during the nine months ended September 30, 2022.
2020 Equity Plan
On August 4, 2020, the Company adopted the 2020 Equity Plan with the intent to encourage and retain certain of the Company’s senior employees, as well as board members. Pursuant to the 2020 Equity Plan, senior employees may receive up to 7,465 of Class A RSUs subject to time-based vesting and the occurrence of a liquidity event while board members may receive up to 300 Class A RSUs subject to time-based vesting. The awards were granted on August 4, 2020 and generally vest ratably over a three-year service period on each successive August 4th. The grant date fair value for the RSUs under the 2020 Equity Plan was approximately $5.8 million.
On May 9, 2021, the Company announced the acceleration of 1,372 performance-based RSUs that the Board previously granted which covered shares of the Company’s Class A common stock pursuant to the Company’s 2020 Equity Plan. The liquidity requirement of the accelerated of RSU's was removed per the Board approval on August 19, 2021. The acceleration of RSUs became effective immediately prior to the Business Combination. During the year ended December 31, 2021, the Company recognized $1.0 million of equity-based compensation expense related to acceleration of RSUs pursuant to the 2020 Equity Plan.
On May 9, 2021 and August 16, 2021, the Company entered into RSU cancellation agreements with existing shareholders, cancelling a total of 4,921 RSUs. The RSU cancellation agreements were effective immediately prior to the Business Combination. Additionally, the remaining 1,472 RSUs were forfeited.
Additionally, concurrently with the Business Combination, the Company granted additional fully vested stock awards covering shares of Class A common stock pursuant to the 2020 Equity Incentive Plan. The compensation expense related to this award recognized during the August 2021 was $5.5 million.
AgileThought, LLC PIP
In connection with the AgileThought, LLC acquisition in July 2019, the Company offered a performance incentive plan (“AT PIP”) to key AgileThought, LLC employees. Pursuant to the AT PIP, participants may receive up to an aggregate of 3,150 Class A shares based on the achievement of certain EBITDA-based performance metrics during each of the fiscal years as follows: up to 1,050 shares for 2020, up to 1,050 shares for 2021, and up to 1,050 shares for 2022. The EBITDA-based performance metrics were not met in 2021 or 2020 and the related awards were cancelled. The AT PIP was cancelled in August 2021.
4th Source Performance Incentive Plan
On November 15, 2018, the Company acquired 4th Source and offered shares to key 4th Source employees under a Performance Incentive Plan (“the 4th Source PIP”). Pursuant to the 4th Source PIP, participants may receive up to an aggregate of 8,394 shares based on the achievement of certain EBITDA-based performance metrics during each of the fiscal years as follows: up to 3,222 shares for 2018, up to 4,528 shares for 2019, and up to 644 shares for 2020. The EBITDA-based
performance metric was not met in 2021 and the related PSUs were cancelled. The 4th Source PIP was cancelled in August 2021.
AgileThought Inc. Management Performance Share Plan
In 2019, the Company adopted the Management Performance Share Plan, which provides for the issuance of PSUs. These awards representing an aggregate of 1,232 Class A shares vest upon the occurrence of a liquidity event, attainment of certain performance metrics and service-based vesting criteria. On May 9, 2021 and August 16, 2021, the Company entered into RSU cancellation agreements with existing shareholders, cancelling a total of 1,232 RSUs pursuant to the 2019 AN Management Compensation Plan. The RSU cancellation agreements were effective immediately prior to the Business Combination.
2017 AN Management Stock Compensation Plan
On May 9, 2021 and August 16, 2021, the Company entered into RSU cancellation agreements with existing shareholders, cancelling a total of 1,880 RSUs pursuant to the 2017 AN Management Compensation Plan. The RSU cancellation agreements were effective immediately prior to the Business Combination.
The following table summarizes all of our equity-based awards activity for the plans described above:
| Number of Awards | Weighted Average Grant Date Fair Value | ||||||||||
Awards outstanding as of December 31, 2021 | — | $ | — | ||||||||
| Granted | 4,662,401 | 3.45 | |||||||||
| Forfeited / cancelled | (33,163) | 4.42 | |||||||||
| Vested | (334,506) | 4.39 | |||||||||
Awards outstanding as of September 30, 2022 | 4,294,732 | 3.34 | |||||||||
As of September 30, 2022, the Company had $10.0 million of unrecognized stock-based compensation expense related to the 2021 Plan RSUs. The unrecognized stock-based compensation expense related to the RSUs is expected to be recognized over a weighted-average period of 2.6 years.
Note 18 – Commitments and Contingencies
The Company is, from time to time, involved in certain legal proceedings, inquiries, claims and disputes, which arise in the ordinary course of business. Although management cannot predict the outcomes of these matters, management does not believe these actions will have a material, adverse effect on the Company’s Unaudited Condensed Consolidated Balance Sheets, Unaudited Condensed Consolidated Statements of Operations or Unaudited Condensed Consolidated Statements of Cash Flows. As of September 30, 2022 and December 31, 2021, the Company had labor lawsuits in process, whose resolution is pending. As of September 30, 2022 and December 31, 2021, the Company has recorded liabilities for labor lawsuits and/or litigation of $0.7 million and $1.4 million, respectively.
Note 19 – Supplemental Cash Flows
The following table provides detail of non-cash activity and cash flow information:
| (in thousands USD) | Nine Months Ended September 30, | ||||||||||
| Supplemental disclosure of non-cash investing activities & cash flow information | 2022 | 2021 | |||||||||
| Assumption of merger warrants liability | — | 15,123 | |||||||||
| Deferred offering cost during the period included in accounts payable | — | 2,605 | |||||||||
| Cash paid during the year for income tax | 900 | — | |||||||||
| Forgiveness of PPP loans | 7,280 | 1,306 | |||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | 1,533 | 981 | |||||||||
| Assets obtained in exchange for a finance lease obligation | 616 | — | |||||||||
| Cash paid during the period for interest | 3,017 | 6,252 | |||||||||
| Fees due to creditor | — | 4,000 | |||||||||
Note 20 – Subsequent Events
Management has evaluated all subsequent events until November 14, 2022, when the unaudited condensed consolidated financial statements were issued. Accordingly, where applicable, the notes to these unaudited condensed consolidated financial statements have been updated and adjustments to the Company's unaudited condensed consolidated financial statements have been reflected.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in Part II, Item 8 "Financial Statements and Supplementary Data" on our Annual Report on Form 10-K filed on March 31, 2022. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly under the captions “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
For purposes of this item only, “AgileThought”,“the Company,” “we,” “us” or “our” refer to AgileThought, Inc. and its subsidiaries, unless the context otherwise requires.
Overview
We are a leading provider of agile-first, end-to-end digital transformation services using onshore and nearshore delivery. We offer client-centric, onshore and nearshore agile-first digital transformation services that help our clients transform by building, improving and running new solutions at scale. Our services enable our clients to leverage technology more effectively to focus on better business outcomes. From consulting to application development and cloud services to data management and automation, we strive to create a transparent, collaborative, and responsive experience for our clients.
For the three months ended September 30, 2022, we had 110 active clients, in the nine months ended September 30, 2022, we had 130 active clients, and for the twelve months ended September 30, 2022, we had 157 active clients.
As of September 30, 2022 we had 5 delivery centers across the United States, Mexico, Brazil, and Argentina from which we deliver services to our clients. As of September 30, 2022, we had 2,222 billable employees providing services remotely, from our talent centers or directly at client locations in the United States and Latin America. The breakdown of our employees by geography is as follows for the dates presented:
As of September 30, | As of December 31, | |||||||||||||||||||
Employees by Geography | 2022 | 2021 | 2021 | |||||||||||||||||
United States | 269 | 376 | 355 | |||||||||||||||||
Latin America | 2,307 | 2,228 | 2,315 | |||||||||||||||||
Total | 2,576 | 2,604 | 2,670 | |||||||||||||||||
Total headcount decreased by 28 people from September 30, 2021 to September 30, 2022 mainly driven by the voluntary and involuntary attrition observed over the last twelve months, primarily within the US region. While our Latin America based headcount increased by 79 people from September 30, 2021 to September 30, 2022 as a result of our focus to expand our talent footprint and become an employer of choice within the region, our United States based headcount decreased by 107 people during the same period due to voluntary and involuntary exits.
The following table presents our revenue by geography for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Revenue by Geography (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| United States | $ | 27,410 | $ | 26,925 | $ | 85,695 | $ | 76,868 | ||||||||||||||||||
| Latin America | 15,985 | 13,495 | 48,090 | 39,705 | ||||||||||||||||||||||
| Total | $ | 43,395 | $ | 40,420 | $ | 133,785 | $ | 116,573 | ||||||||||||||||||
For the three months ended September 30, 2022, our revenue was $43.4 million as compared to $40.4 million for the three months ended September 30, 2021. We generated 63.2% and 66.6% of our revenue from clients located in the United States and 36.8% and 33.4% of our revenue from clients located in Latin America for the three months ended September 30, 2022 and 2021, respectively.
The following table presents our loss before income taxes for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Loss before income taxes | $ | (14,954) | $ | (10,691) | $ | (24,531) | $ | (14,087) | ||||||||||||||||||
Our loss before income taxes was $15.0 million and $10.7 million for the three months ended September 30, 2022 and 2021, respectively, and, for the same periods, our loss as a percentage of revenue was 34.5% and 26.7%, respectively.
Our loss before income taxes was $24.5 million and $14.1 million for the nine months ended September 30, 2022 and 2021, respectively, and for the same periods, our loss as percentage of revenue was 18.3% and 12.1%, respectively.
Factors Affecting Our Performance
We believe that the key factors affecting our performance and results of operations include our ability to:
Expand Our Client Footprint in the United States
We are focused on growing our client footprint in the United States and furthering the application of our proven business capabilities in the U.S. market. We are currently working towards gradually exiting non-core engagements to focus on a highly strategic client base, requiring purely next-gen digital services, which are more aligned with our ideal client profile which targets clients with an average annual revenue potential of +$10 million and consumes our highly specialized Guild delivery model . We acquired 4th Source in 2018 and AgileThought, LLC in 2019, both U.S. headquartered and operated companies. For the three months ended September 30, 2022 and 2021, we had 54 and 59 active clients in the United States, respectively, for the nine months ended September 30, 2022 and 2021, respectively, we had 65 and 75 active clients in the United States, and for the twelve month period ended September 30, 2022 and September 30, 2021 we had 74 and 82 active clients in the United States, respectively. We define an active client at a specific date as a client with whom we have recognized revenue for our services during the preceding 12-month period. As of September 30, 2022, we had 269 employees located in the United States. We believe we have a significant opportunity to penetrate the U.S. market further and expand our U.S. client base. Our ability to expand our footprint in the United States will depend on several factors, including the U.S. market perception of our services, our ability to increase nearshore delivery successfully, our ability to successfully integrate acquisitions, as well as pricing, competition and overall economic conditions, and to a lesser extent our ability to complete future complementary acquisitions.
Penetrate Existing Clients via Cross-Selling
We seek to strengthen our relationships with existing clients by cross-selling additional services. We have a proven track record of expanding our relationship with clients by offering a wide range of complementary services. Our ten largest active clients based on revenue accounted for $26.8 million, or 61.7%, and $26.3 million, or 65.1%, of our total revenue in the three months ended September 30, 2022 and 2021, respectively. Our ten largest active clients based on revenue accounted for $81.9 million, or 61.2%, and $76.3 million, or 65.5%, of our total revenue in the nine months ended September 30, 2022 and 2021, respectively. The average revenue from our ten largest clients was $2.7 million and $2.6 million for the three months ended
September 30, 2022 and 2021, respectively, and was $8.2 million and $7.6 million in the nine months ended September 30, 2022 and 2021, respectively. The following table shows the active client concentration from the top client to the top twenty clients, for the periods presented:
Percent of Revenue for the Three Months Ended September 30, | Percent of Revenue for Nine Months Ended September 30, | |||||||||||||||||||||||||
| Client Concentration | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
Top client | 16.2 | % | 13.0 | % | 13.7 | % | 13.2 | % | ||||||||||||||||||
Top five clients | 44.2 | % | 45.5 | % | 42.3 | % | 44.7 | % | ||||||||||||||||||
Top ten clients | 61.7 | % | 65.1 | % | 61.2 | % | 65.5 | % | ||||||||||||||||||
Top twenty clients | 79.0 | % | 79.8 | % | 77.9 | % | 79.4 | % | ||||||||||||||||||
The following table shows the number of our active clients by revenue for the periods presented:
Three Months Ended September 30, | For Nine Months Ended September 30, | For Twelve Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
| Active Clients by Revenue | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
>$5 Million | 1 | 1 | 7 | 8 | 9 | 9 | ||||||||||||||||||||||||||||||||
>$2 – $5 Million | 4 | 5 | 11 | 3 | 13 | 5 | ||||||||||||||||||||||||||||||||
>$1 – $2 Million | 5 | 3 | 9 | 13 | 7 | 14 | ||||||||||||||||||||||||||||||||
<$1 Million | 100 | 129 | 103 | 157 | 128 | 176 | ||||||||||||||||||||||||||||||||
Total | 110 | 138 | 130 | 181 | 157 | 204 | ||||||||||||||||||||||||||||||||
| Greater than $1 million | 10 | 9 | 27 | 24 | 29 | 28 | ||||||||||||||||||||||||||||||||
The decrease in the total number of active clients from September 30, 2021 to September 30, 2022 is mainly related to the completion of smaller customer projects and maintenance engagements in 2021 that were not subsequently renewed as a result of the remaining effects of the COVID-19 pandemic combined with our gradual efforts, starting during the second quarter of 2022, to de-emphasize non-core projects and to focus on strategic digital projects.
We believe we have the opportunity to further cross-sell our clients with additional services that we have enhanced through recent acquisitions. However, our ability to increase sales to existing clients will depend on several factors, including the level of client satisfaction with our services, changes in clients’ strategic priorities and changes in key client personnel or strategic transactions involving clients, as well as pricing, competition and overall economic conditions.
Attract, Develop, Retain and Utilize Highly Skilled Employees
We believe that attracting, training, retaining and utilizing highly skilled employees with capabilities in next-generation technologies will be key to our success. As of September 30, 2022, we had 2,576 employees. We continuously invest in training our employees and offer regular technical and language training, as well as other professional advancement programs. These programs not only help ensure our employees are well trained and knowledgeable, but also help enhance employee retention.
Strengthen Onshore and Nearshore Delivery with Diversification in Regions
In order to drive digital transformation initiatives for our clients, we believe that we need to be near the regions in which our clients are located and in similar time zones. We have established a strong base for our onshore and nearshore delivery model across Mexico. We also have offices in Argentina, Brazil, Costa Rica and the United States to source diverse talent and be responsive to clients in our core markets. Since January 1, 2018, we have added 4 offices, including one in the United States (Tampa, Florida) and three in Mexico (one in Mexico City and the other two in Merida and Colima as a result of the acquisitions). From December 31, 2021 to September 30, 2022, our delivery headcount remained flat, mainly driven by the voluntary and involuntary attrition observed during the first half of 2022. As we continue to grow our relationships, we will expand our presence in other cities in Mexico and other countries in similar time zones, such as Argentina and Costa Rica. While we believe that we currently have sufficient delivery center capacity to address our near-term needs and opportunities, as the recovery from the COVID-19 pandemic continues, and with our goal to expand our relationships with existing clients, attract new clients and expand our footprint in the United States, we will need to expand our teams through remote work
opportunities and at existing and new delivery centers in nearshore locations with an abundance of technical talent. As we do so, we compete for talented individuals with other companies in our industry and companies in other industries.
Key Business Metrics
We regularly monitor several financial and operating metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our key non-GAAP and business metrics may be calculated in a different manner than similarly titled metrics used by other companies. See “Non-GAAP Measures” for additional information on non-GAAP financial measures and a reconciliation to the most comparable GAAP measures.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Gross Profit Margin | 34.3 | % | 26.6 | % | 33.0 | % | 29.0 | % | |||||||||||||||
Adjusted Operating Income (Loss) (in thousands) | $ | 1,699 | $ | (608) | $ | 6,334 | $ | 3,140 | |||||||||||||||
Adjusted Net (Loss) Income (in thousands) | $ | (347) | $ | (3,154) | $ | 1,148 | $ | (4,345) | |||||||||||||||
| Adjusted Diluted EPS | $ | (0.01) | $ | (0.08) | $ | 0.02 | $ | (0.12) | |||||||||||||||
Number of large active clients (at or above $1.0 million of revenue in prior 12-month period) as of end of period | 29 | 28 | 29 | 28 | |||||||||||||||||||
Revenue concentration with top 10 clients as of end of period | 61.7 | % | 65.1 | % | 61.2 | % | 65.5 | % | |||||||||||||||
Gross Profit Margin
We monitor gross profit margin to understand the profitability of the services we provide to our clients. Gross profit margin is calculated as net revenues for the period minus cost of revenue for the period, divided by net revenues.
Adjusted Operating Income (Loss)
We define and calculate Adjusted Operating Income (Loss) as (Loss) income from operations adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of contingent consideration obligation, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus impairment charges, plus restructuring expenses, plus (gain) loss on business dispositions, plus (gain) loss on debt extinguishment, plus intangible assets amortization, plus certain transaction costs and certain other operating expense (income), net.
Adjusted Net (Loss) Income
We define and calculate Adjusted Net (Loss) Income as Net (loss) income adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of purchase price obligations, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus impairment charges, plus restructuring expenses, plus (gain) loss on business dispositions, plus foreign exchange loss (gain), plus (gain) loss on debt extinguishment and debt forgiveness, plus intangible assets amortization, plus certain transaction costs, plus paid in kind interest expenses and amortization of debt issuance cost and certain other expense, net.
Adjusted Diluted EPS
We define and calculate Adjusted EPS as Adjusted Net (Loss) Income, divided by the diluted weighted-average number of common shares outstanding for the period.
Number of Large Active Clients
We monitor our number of large active clients to better understand our progress in winning large contracts on a period-over-period basis. We define the number of large active clients as the number of active clients from whom we generated more than $1.0 million of revenue in the prior 12-month period. For comparability purposes, we include the clients of the acquired businesses that meet these criteria to properly evaluate total client spending evolution.
Revenue Concentration with Top 10 clients
We monitor our revenue concentration with top 10 clients to understand our dependence on large clients on a period-over-period basis and to monitor our success in diversifying our revenue base. We define revenue concentration as the percent of our total revenue derived from our ten largest active clients.
See “Non-GAAP Measures” for additional information and a reconciliation of Loss from operations to Adjusted Operating Income (Loss) and Net Loss to Adjusted Net (Loss) Income and Adjusted Diluted EPS.
Components of Results of Operations
Our business is organized into a single reportable segment. The Company's chief operating decision maker is the CEO, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
Net Revenues
Revenue is derived from the several types of integrated solutions we provide to our clients. Revenue is organized by contract type and geographic location. The type of revenue we generate from customers is classified based on: (i) time and materials, and (ii) fixed price contracts. Time and materials are transaction-based, or volume-based contracts based on input method such as labor hours incurred. Fixed price contracts are contracts where price is contractually predetermined. Revenue by geographic location is derived from revenue generated in the United States and Latin America, which includes Mexico, Argentina, Brazil, and Costa Rica.
Cost of Revenue
Cost of revenue consists primarily of employee-related costs associated with our personnel and fees from third-party vendors engaged in the delivery of our services, including: salaries, bonuses, benefits, project related travel costs, software licenses and any other costs that relate directly to the delivery of our services.
Gross Profit
Gross profit represents net revenues less cost of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists primarily of employee-related costs associated with our sales, marketing, legal, accounting and administrative personnel. Selling, general and administrative expenses also includes legal costs, external professional fees, brand marketing, provision for doubtful accounts, as well as expenses associated with our back-office facilities and office infrastructure, information technology, and other administrative expenses.
Depreciation and Amortization
Depreciation and amortization consist of depreciation and amortization expenses related to customer relationships, computer equipment, leasehold improvements, furniture and equipment, and other assets.
Change in Fair Value of Purchase Price Obligation
Changes in fair value of purchase price obligation consist of changes in estimated fair value of earnouts arrangements entered into as part of our business acquisition process.
Change in Fair Value of Embedded Derivative Liabilities
Changes in fair value of embedded derivative liabilities consists of changes in the fair value of redemption and conversion features embedded within our debt.
Change in Fair Value of Warrant Liability
Changes in fair value of warrant liability consist of changes to the outstanding public and private placement warrants assumed upon the consummation of the Business Combination.
Loss on Debt Extinguishment
Loss on debt extinguishment represents the difference between the net carrying value of the old debt instrument and the fair value of the new debt instrument.
Equity-based Compensation Expense
Equity-based compensation expense consists of compensation expenses recognized in connection with performance incentive awards granted to our employees and board members.
Restructuring Expense (Income)
Restructuring expense (income) consists of costs associated with business realignment efforts and strategic transformation costs resulting from value creation initiatives following business acquisitions, which primarily relate to severance costs from back-office headcount reductions.
Other Operating Expenses (Income), Net
Other operating expenses (income), net consists primarily of acquisition related costs and transaction costs related, including legal, accounting, valuation and investor relations advisors, and compensation consultant fees, as well as other operating expenses.
Interest Expense, net
Interest expense consists of interest incurred in connection with our debt obligations, and amortization of debt issuance costs.
Other (Expense) Income
Other (expense) income consists of interest (expense) income on invested funds, impacts from foreign exchange transactions, gain on loan forgiveness and other non-operating expenses.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents expenses or benefits associated with our operations based on the tax laws of the jurisdictions in which we operate. Our calculation of income tax expense (benefit) is based on tax rates and tax laws at the end of each applicable reporting period.
Results of Operations
The following table sets forth our unaudited condensed consolidated statements of operations for the presented periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net revenues | $ | 43,395 | $ | 40,420 | $ | 133,785 | $ | 116,573 | |||||||||||||||
Cost of revenue | 28,517 | 29,666 | 89,692 | 82,709 | |||||||||||||||||||
Gross profit | 14,878 | 10,754 | 44,093 | 33,864 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Selling, general and administrative expenses | 13,097 | 11,188 | 37,323 | 30,145 | |||||||||||||||||||
Depreciation and amortization | 1,777 | 1,746 | 5,268 | 5,239 | |||||||||||||||||||
Change in fair value of purchase price obligation | — | — | — | (2,200) | |||||||||||||||||||
Change in fair value of embedded derivative liabilities | (2,906) | (1,884) | (2,906) | (4,406) | |||||||||||||||||||
| Change in fair value of warrant liability | (843) | (759) | 113 | (759) | |||||||||||||||||||
| Loss on debt extinguishment | 11,708 | — | 17,894 | — | |||||||||||||||||||
Equity-based compensation expense | 2,018 | 6,469 | 4,555 | 6,481 | |||||||||||||||||||
Restructuring expense (income) | 471 | (135) | 1,386 | (113) | |||||||||||||||||||
Other operating expenses (income), net | 1,213 | (96) | 2,409 | 1,011 | |||||||||||||||||||
Total operating expenses | 26,535 | 16,529 | 66,042 | 35,398 | |||||||||||||||||||
Loss from operations | (11,657) | (5,775) | (21,949) | (1,534) | |||||||||||||||||||
Interest expense, net | (3,143) | (4,065) | (9,235) | (12,117) | |||||||||||||||||||
Other (expense) income | (154) | (851) | 6,653 | (436) | |||||||||||||||||||
Loss before income tax | (14,954) | (10,691) | (24,531) | (14,087) | |||||||||||||||||||
Income tax expense (benefit) | 135 | 96 | 358 | (13) | |||||||||||||||||||
Net loss | (15,089) | (10,787) | (24,889) | (14,074) | |||||||||||||||||||
Net (loss) income attributable to noncontrolling interests | (3) | (188) | 89 | (21) | |||||||||||||||||||
Net loss attributable to the Company | $ | (15,086) | $ | (10,599) | $ | (24,978) | $ | (14,053) | |||||||||||||||
The following table sets forth our unaudited condensed consolidated statements of operations information expressed as a percentage of net revenues for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Cost of revenue | 65.7 | % | 73.4 | % | 67.0 | % | 71.0 | % | |||||||||||||||
Gross profit | 34.3 | % | 26.6 | % | 33.0 | % | 29.0 | % | |||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Selling, general and administrative expenses | 30.2 | % | 27.7 | % | 27.9 | % | 25.9 | % | |||||||||||||||
Depreciation and amortization | 4.1 | % | 4.3 | % | 3.9 | % | 4.5 | % | |||||||||||||||
Change in fair value of purchase price obligation | — | % | — | % | — | % | (1.9) | % | |||||||||||||||
Change in fair value of embedded derivative liabilities | (6.7) | % | (4.7) | % | (2.2) | % | (3.8) | % | |||||||||||||||
| Change in fair value of warrant liability | (1.9) | % | (1.9) | % | 0.1 | % | (0.7) | % | |||||||||||||||
| Loss on debt extinguishment | 27.0 | % | — | % | 13.4 | % | — | % | |||||||||||||||
Equity-based compensation expense | 4.7 | % | 16.0 | % | 3.4 | % | 5.6 | % | |||||||||||||||
Restructuring expense (income) | 1.1 | % | (0.3) | % | 1.0 | % | (0.1) | % | |||||||||||||||
Other operating expenses (income), net | 2.8 | % | (0.2) | % | 1.8 | % | 0.9 | % | |||||||||||||||
Total operating expenses | 61.1 | % | 40.9 | % | 49.4 | % | 30.4 | % | |||||||||||||||
Loss from operations | (26.9) | % | (14.3) | % | (16.4) | % | (1.3) | % | |||||||||||||||
Interest expense, net | (7.2) | % | (10.1) | % | (6.9) | % | (10.4) | % | |||||||||||||||
Other (expense) income | (0.4) | % | (2.1) | % | 5.0 | % | (0.4) | % | |||||||||||||||
Loss before income tax | (34.5) | % | (26.4) | % | (18.3) | % | (12.1) | % | |||||||||||||||
Income tax expense (benefit) | 0.3 | % | 0.2 | % | 0.3 | % | — | % | |||||||||||||||
Net loss | (34.8) | % | (26.7) | % | (18.6) | % | (12.1) | % | |||||||||||||||
Net (loss) income attributable to noncontrolling interests | — | % | (0.5) | % | 0.1 | % | — | % | |||||||||||||||
Net loss attributable to the Company | (34.8) | % | (26.2) | % | (18.7) | % | (12.1) | % | |||||||||||||||
Comparison of the three months ended September 30, 2022 and 2021
Net revenues
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
Net Revenues | $ | 43,395 | $ | 40,420 | 7.4 | % | |||||||||||
Net revenues for the three months ended September 30, 2022 increased $3.0 million, or 7.4%, to $43.4 million from $40.4 million for the three months ended September 30, 2021. The increase was mainly due to increased services and expanded scope in projects with existing clients, and the commencement of new projects with new clients during the third quarter of 2022.
Net Revenues by Geographic Location
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
United States | $ | 27,410 | $ | 26,925 | 1.8 | % | |||||||||||
Latin America | 15,985 | 13,495 | 18.5 | % | |||||||||||||
Total | $ | 43,395 | $ | 40,420 | 7.4 | % | |||||||||||
Net revenues from our United States operations for the three months ended September 30, 2022 increased $0.5 million, or 1.8%, to $27.4 million from $26.9 million for the three months ended September 30, 2021. The change was mainly driven by a $0.5 million increase in new projects with new clients and expanded scope of work with existing clients.
Net revenues from our Latin America operations for the three months ended September 30, 2022 increased $2.5 million, or 18.5%, to $16.0 million from $13.5 million for the three months ended September 30, 2021. The change was driven by an increase of $2.4 million related to three major customers and $0.5 million comprised of multiple smaller projects, offset by a $0.4 million decrease in scope reduction of existing projects.
Revenues by Contract Type
The following table sets forth net revenues by contract type and as a percentage of our revenues for the periods indicated:
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Time and materials | $ | 29,955 | $ | 33,858 | (11.5) | % | |||||||||||
Fixed price | 13,440 | 6,562 | 104.8 | % | |||||||||||||
Total | $ | 43,395 | $ | 40,420 | 7.4 | % | |||||||||||
Net revenues from our time and materials contracts for the three months ended September 30, 2022 decreased approximately $3.9 million, or 11.5%, to $30.0 million from $33.9 million for the three months ended September 30, 2021. The main driver of the net variation is related to the decrease in service volume with existing and new customers under the time and materials revenue model towards fixed-price engagements. Net revenues from our fixed price contracts for the three months ended September 30, 2022 increased $6.9 million, or 104.8%, to 13.4 million from $6.6 million for the three months ended September 30, 2021. The main driver of the net increase is related to the shift to fixed price core delivery teams with two major clients from the financial services industry in Latin America, combined with additional revenues coming from fixed price engagements with other major existing customers.
Cost of revenue
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
Cost of revenue | $ | 28,517 | $ | 29,666 | (3.9) | % | |||||||||||
% of net revenues | 65.7 | % | 73.4 | % | |||||||||||||
Cost of revenue for the three months ended September 30, 2022 decreased $1.2 million, or 3.9%, to $28.5 million from $29.7 million for the three months ended September 30, 2021. The decrease was primarily related to efficiencies in corporate bench driven by the adoption of a Guild delivery model from September 30, 2021 to September 30, 2022.
Selling, general and administrative expenses
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Selling, general and administrative expenses | $ | 13,097 | $ | 11,188 | 17.1 | % | |||||||||||
| % of net revenues | 30.2 | % | 27.7 | % | |||||||||||||
Selling, general and administrative expenses for the three months ended September 30, 2022 increased $1.9 million, or 17.1%, to $13.1 million from $11.2 million for the three months ended September 30, 2021. The increase was primarily due to an increase of $1.8 million related to increased headcount and salaries, and an increase of $0.6 million of software and equipment rent offset by a decrease of $0.5 million in professional fees.
Depreciation and amortization
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Depreciation and amortization | $ | 1,777 | $ | 1,746 | 1.8 | % | |||||||||||
| % of net revenues | 4.1 | % | 4.3 | % | |||||||||||||
Depreciation and amortization for three months ended September 30, 2022 and 2021, was $1.8 million and $1.7 million, respectively.
Change in fair value of embedded derivative liabilities
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Change in fair value of embedded derivative liabilities | $ | (2,906) | $ | (1,884) | 54.2 | % | |||||||||||
| % of net revenues | (6.7) | % | (4.7) | % | |||||||||||||
Change in fair value of embedded derivative liabilities for the three months ended September 30, 2021 resulted in a gain of $1.9 million. The gain was primarily driven by the change in the discount rate used estimate the fair value of embedded derivative liabilities from June 30, 2021 to August 23, 2021. The change in fair value of embedded derivative liabilities for three months ended September 30, 2022 was primarily driven by a decline in the Company's stock price between August 10, 2022 (inception date) to September 30, 2022.
Change in fair value of warrant liability
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Change in fair value of warrant liability | $ | (843) | $ | (759) | 11.1 | % | |||||||||||
| % of net revenues | (1.9) | % | (1.9) | % | |||||||||||||
Change in fair value of warrant liability for the three months ended September 30, 2022 increased less than $0.1 million or 11.1% to $0.8 million from $0.8 million for the three months ended September 30, 2021. The gain was primarily driven by a decrease in the market price of our public warrants, changes in the risk-free rate of return and volatility used to estimate the fair value of our warrant liability from June 30, 2022 to September 30, 2022.
Loss on debt extinguishment
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Loss on debt extinguishment | $ | 11,708 | $ | — | 100.0 | % | |||||||||||
| % of net revenues | 27.0 | % | — | % | |||||||||||||
Loss on debt extinguishment for the three months ended September 30, 2022 increased $11.7 million due to the amendment signed on August 10, 2022 for the New Second Lien Facility, refer to Note 8, Long-Term Debt, for further information.
Equity-based compensation expense
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Equity-based compensation expense | $ | 2,018 | $ | 6,469 | (68.8) | % | |||||||||||
| % of net revenues | 4.7 | % | 16.0 | % | |||||||||||||
Equity-based compensation expense for the three months ended September 30, 2022 decreased $4.5 million, or 68.8% to $2.0 million from $6.5 million for the three months ended September 30, 2021. The Company issued 225,441 RSUs during the three months ended September 30, 2022 under the 2021 Equity plan and recognized $2.0 million equity-based compensation expense. In connection with the Business Combination, the Company granted stock awards covering shares of Class A common stock and accelerated previously granted restricted stock units, which resulted in $6.5 million equity-based compensation expense that was recognized during the three months ended September 30, 2021. Refer to Note 17, Equity-based Arrangements, for further information.
Restructuring expense (income)
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Restructuring expense (income) | $ | 471 | $ | (135) | (448.9) | % | |||||||||||
| % of net revenues | 1.1 | % | (0.3) | % | |||||||||||||
Restructuring expense (income) for the three months ended September 30, 2022 increased $0.6 million, or over 448.9%, to $0.5 million from $(0.1) million for the three months ended September 30, 2021. The increase was primarily due to additional costs related to changes and consolidation in our back office functions implemented during the third quarter of 2022.
Other operating expenses (income), net
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Other operating expense (income), net | $ | 1,213 | $ | (96) | (1363.5) | % | |||||||||||
| % of net revenues | 2.8 | % | (0.2) | % | |||||||||||||
Other operating expense (income), net for three months ended September 30, 2022 increased $1.3 million, or 1363.5%, to $1.2 million from and $(0.1) million for the three months ended September 30, 2021. This was mainly driven by increased fees for tax audit consultants, legal fees, and loss on asset disposals.
Interest expense, net
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Interest expense, net | $ | (3,143) | $ | (4,065) | (22.7) | % | |||||||||||
| % of net revenues | (7.2) | % | (10.1) | % | |||||||||||||
Interest expense for the three months ended September 30, 2022 decreased $0.9 million, or 22.7%, to $3.1 million from $4.1 million for the three months ended September 30, 2021. The decrease was primarily due to the reduction in principal debt obligations occurring from June to December 2021.
Other expense
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Other expense | $ | (154) | $ | (851) | (81.9) | % | |||||||||||
| % of net revenues | (0.4) | % | (2.1) | % | |||||||||||||
Other expense for the three months ended September 30, 2022 decreased $0.7 million, or 81.9%, to $0.2 million from $0.9 million for the three months ended September 30, 2021. The change was primarily driven by a $0.7 million decrease in net foreign currency exchange losses.
Income tax expense
| Three Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Income tax expense | $ | 135 | $ | 96 | 40.6 | % | |||||||||||
| Effective income tax rate | (0.9) | % | (0.9) | % | |||||||||||||
Income tax expense for the three months ended September 30, 2022 increased less than $0.1 million, or 40.6%, for the three months ended September 30, 2021 due to differences in losses incurred in jurisdictions for which no tax benefit is recognized. For additional information, see Note 10, Income Taxes, to our unaudited condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
Comparison of the nine months ended September 30, 2022 and 2021
Net revenues
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
Net Revenues | $ | 133,785 | $ | 116,573 | 14.8 | % | |||||||||||
Net revenues for the nine months ended September 30, 2022 increased $17.2 million, or 14.8%, to $133.8 million from $116.6 million for the nine months ended September 30, 2021. The increase was mainly due to increased services and expanded scope in projects with existing clients, and the commencement of new projects with new clients during the nine months ended September 30, 2022.
Net Revenues by Geographic Location
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
United States | $ | 85,695 | $ | 76,868 | 11.5 | % | |||||||||||
Latin America | 48,090 | 39,705 | 21.1 | % | |||||||||||||
Total | $ | 133,785 | $ | 116,573 | 14.8 | % | |||||||||||
Net revenues from our United States operations for the nine months ended September 30, 2022 increased $8.8 million, or 11.5%, to $85.7 million from $76.9 million for the nine months ended September 30, 2021. The change was mainly driven by a $14.6 million increase in new projects with new clients and expanded scope of work with existing customers. This was offset by $5.8 million of decreased scope with two of our existing clients.
Net revenues from our Latin America operations for the nine months ended September 30, 2022 increased $8.4 million, or 21.1%, to $48.1 million from $39.7 million for the nine months ended September 30, 2021. The change was mainly driven by a $10.0 million increase in new projects and expanded scope of work with existing customers. This was offset by $1.6 million of decreased scope with four of our existing clients.
Revenues by Contract Type
The following table sets forth net revenues by contract type and as a percentage of our revenues for the periods indicated:
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Time and materials | $ | 96,057 | $ | 96,650 | (0.6) | % | |||||||||||
Fixed price | 37,728 | 19,923 | 89.4 | % | |||||||||||||
Total | $ | 133,785 | $ | 116,573 | 14.8 | % | |||||||||||
Net revenues from our time and materials contracts for the nine months ended September 30, 2022 decreased approximately $0.6 million, or 0.6%, to $96.1 million from $96.7 million for the nine months ended September 30, 2021. The main driver of the net variation is related to the decrease in service volume with existing and new customers under the time and materials revenue model towards fixed price engagements. Net revenues from our fixed price contracts for the nine months ended September 30, 2022 increased $17.8 million, or 89.4%, to $37.7 million from $19.9 million for the nine months ended September 30, 2021. The main driver of the net increase is related to the shift to fixed price core delivery teams with two major clients from the financial services industry in Latin America, combined with additional revenues coming from fixed price engagements with other major existing customers.
Cost of revenue
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
Cost of revenue | $ | 89,692 | $ | 82,709 | 8.4 | % | |||||||||||
% of net revenues | 67.0 | % | 71.0 | % | |||||||||||||
Cost of revenue for the nine months ended September 30, 2022 increased $7.0 million, or 8.4%, to $89.7 million from $82.7 million for the nine months ended September 30, 2021. The increase was primarily driven by the increase in scope of work from an existing client and new scope of work from new clients consistent with our revenue growth from September 30, 2021 to September 30, 2022.
Selling, general and administrative expenses
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Selling, general and administrative expenses | $ | 37,323 | $ | 30,145 | 23.8 | % | |||||||||||
| % of net revenues | 27.9 | % | 25.9 | % | |||||||||||||
Selling, general and administrative expenses for the nine months ended September 30, 2022 increased approximately $7.2 million, or 23.8%, to $37.3 million from $30.1 million for the nine months ended September 30, 2021. The increase was primarily due to an increase of $4.6 million related to increased headcount and salaries, an increase of $2.2 million of software and equipment rent, and an increase of $1.0 million in insurance expense, offset by a decrease of $0.6 million professional fees.
Depreciation and amortization
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Depreciation and amortization | $ | 5,268 | $ | 5,239 | 0.6 | % | |||||||||||
| % of net revenues | 3.9 | % | 4.5 | % | |||||||||||||
Depreciation and amortization for nine months ended September 30, 2022 and 2021, was $5.3 million, respectively.
Change in fair value of purchase price obligation
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Change in fair value of purchase price obligation | $ | — | $ | (2,200) | (100.0) | % | |||||||||||
| % of net revenues | — | % | (1.9) | % | |||||||||||||
Change in fair value of purchase price obligation for the nine months ended September 30, 2021 resulted in a gain of $2.2 million. The gain was primarily driven by the change in the discount rate used to estimate the fair value of purchase price obligation. As of December 31, 2021, the obligation now relates to a known and fixed amount due and is no longer a contingent obligation recorded at fair value. There was no change in fair value of purchase price obligation for nine months ended September 30, 2022.
Change in fair value of embedded derivative liabilities
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Change in fair value of embedded derivative liabilities | $ | (2,906) | $ | (4,406) | (34.0) | % | |||||||||||
| % of net revenues | (2.2) | % | (3.8) | % | |||||||||||||
Change in fair value of embedded derivative liabilities for the nine months ended September 30, 2021 resulted in a gain of $4.4 million. The gain was primarily driven by the change in the discount rate used to estimate the fair value of embedded derivative liabilities from February 2, 2021 (inception date) to August 23, 2021. The change in fair value of embedded derivative liabilities for nine months ended September 30, 2022 was primarily driven by a decline in the Company's stock price during from August 10, 2022 (inception date) to September 30, 2022.
Change in fair value of warrant liability
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Change in fair value of warrant liability | $ | 113 | $ | (759) | 114.9 | % | |||||||||||
| % of net revenues | 0.1 | % | (0.7) | % | |||||||||||||
Change in fair value of warrant liability for the nine months ended September 30, 2022 increased $0.9 million or 114.9% to $0.1 million from $(0.8) million for the nine months ended September 30, 2021. The loss was primarily driven by an increase in the market price of our public warrants, changes in the risk-free rate of return and volatility used to estimate the fair value of our warrant liability from December 31, 2021 to September 30, 2022.
Loss on debt extinguishment
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Loss on debt extinguishment | $ | 17,894 | $ | — | 100.0 | % | |||||||||||
| % of net revenues | 13.4 | % | — | % | |||||||||||||
Loss on debt extinguishment for the nine months ended September 30, 2022 of $17.9 million was due to an amendment signed on March 30, 2022 for the First Lien Facility resulting in a $7.1 million loss offset by the $0.9 million gain on debt extinguishment recognized on May 27, 2022 when the Company extinguished the First Lien Facility. In addition, the loss on debt extinguishment increased due to the amendment signed on August 10, 2022 for the New Second Lien Facility resulting in an $11.7 million loss, refer to Note 8, Long-Term Debt, for further information.
Equity-based compensation expense
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Equity-based compensation expense | $ | 4,555 | $ | 6,481 | (29.7) | % | |||||||||||
| % of net revenues | 3.4 | % | 5.6 | % | |||||||||||||
Equity-based compensation expense for the nine months ended September 30, 2022 decreased $1.9 million, or 29.7%, to $4.6 million from $6.5 million for the nine months ended September 30, 2021. The Company issued 4,436,960 RSUs during nine months ended September 30, 2022 under the 2021 Equity Incentive Plan. In total, the awards under the 2021 Equity Incentive Plan resulted in $4.6 million equity-based compensation expense that was recognized during the nine months ended September 30, 2022. In connection with the Business Combination, the Company granted stock awards covering shares of Class A common stock and accelerated previously granted restricted stock units, which resulted in $6.5 million equity-based compensation expense that was recognized during the three months ended September 30, 2021. Refer to Note 17, Equity-based Arrangements, for further information.
Restructuring expense (income)
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Restructuring expense (income) | $ | 1,386 | $ | (113) | 1326.5 | % | |||||||||||
| % of net revenues | 1.0 | % | (0.1) | % | |||||||||||||
Restructuring expenses for the nine months ended September 30, 2022 increased $1.5 million, or 1326.5%, to $1.4 million from $(0.1) million for the nine months ended September 30, 2021. The increase was primarily due to additional organization restructuring activities implemented during 2022.
Other operating expenses, net
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Other operating expense, net | $ | 2,409 | $ | 1,011 | 138.3 | % | |||||||||||
| % of net revenues | 1.8 | % | 0.9 | % | |||||||||||||
Other operating expense, net for nine months ended September 30, 2022 increased $1.4 million, or 138.3%, to $2.4 million from $1.0 million for the nine months ended September 30, 2021. This was mainly driven by increased fees for tax audit consultants, legal fees, and executive recruitment costs.
Interest expense, net
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Interest expense, net | $ | (9,235) | $ | (12,117) | (23.8) | % | |||||||||||
| % of net revenues | (6.9) | % | (10.4) | % | |||||||||||||
Interest expense for the nine months ended September 30, 2022 decreased $2.9 million, or 23.8%, to $9.2 million from $12.1 million for the nine months ended September 30, 2021. The decrease was primarily due to the reduction in principal debt obligations occurring from June to December 2021.
Other income (expense)
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Other income (expense) | $ | 6,653 | $ | (436) | >1000.0 | % | |||||||||||
| % of net revenues | 5.0 | % | (0.4) | % | |||||||||||||
Other income (expense) for the nine months ended September 30, 2022 increased $7.1 million, or over 1000.0%, to $6.7 million from $(0.4) million for the nine months ended September 30, 2021. The change was driven by a $1.5 million decrease in net foreign currency exchange losses, an increase of the $6.0 million gain related to the PPP loan forgiveness, and an increase of $0.5 million of other income.
Income tax expense (benefit)
| Nine Months Ended September 30, | % Change | ||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Income tax expense (benefit) | $ | 358 | $ | (13) | >1000.0 | % | |||||||||||
| Effective income tax rate | (1.5) | % | 0.1 | % | |||||||||||||
Income tax expense (benefit) for the nine months ended September 30, 2022 increased $0.4 million, or over 1000.0%, to $0.4 million from a nominal tax benefit for the nine months ended September 30, 2021 due to discrete tax items recorded in the first half of 2021 and differences in losses incurred in jurisdictions for which no tax benefit is recognized. For additional information, see Note 10, Income Taxes, to our unaudited condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
Non-GAAP Measures
To supplement our consolidated financial data presented on a basis consistent with U.S. GAAP, we present certain non-GAAP financial measures, including Adjusted Operating Income (Loss), Adjusted Net (Loss) Income and Adjusted Diluted EPS. We have included the non-GAAP financial measures because they are financial measures used by our management to evaluate our core operating performance and trends, to make strategic decisions regarding the allocation of capital and new investments and are among the factors analyzed in making performance-based compensation decisions for key personnel. The measures exclude certain expenses that are required under U.S. GAAP. We exclude certain non-cash expenses and certain items that are not part of our core operations.
We believe these supplemental performance measurements are useful in evaluating operating performance, as they are similar to measures reported by our public industry peers and those regularly used by security analysts, investors and other interested parties in analyzing operating performance and prospects. The non-GAAP financial measures are not intended to be a substitute for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.
There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies. We compensate for these limitations by providing investors and other users of our financial information a reconciliation of our non-GAAP measures to the related GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP measures in conjunction with GAAP financial measures.
We define and calculate our non-GAAP financial measures as follows:
•Adjusted Operating Income (Loss): Loss from operations adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of purchase price obligation, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus impairment charges, plus restructuring expenses (income), plus (gain) loss on
business dispositions, plus (gain) loss on debt extinguishment, plus intangible assets amortization, plus certain transaction costs and certain other operating expense (income), net.
The following table presents the reconciliation of our Adjusted Operating Income (Loss) to our Loss from operations, the most directly comparable GAAP measure, for the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Loss from operations | $ | (11,657) | $ | (5,775) | $ | (21,949) | $ | (1,534) | |||||||||||||||
| Change in fair value of embedded derivative liability | (2,906) | (1,884) | (2,906) | (4,406) | |||||||||||||||||||
| Change in fair value of purchase price obligation | — | — | — | (2,200) | |||||||||||||||||||
| Change in fair value of warrant liability | (843) | (759) | 113 | (759) | |||||||||||||||||||
| Equity-based compensation expense | 2,018 | 6,469 | 4,555 | 6,481 | |||||||||||||||||||
Restructuring expenses (income)1 | 471 | (135) | 1,386 | (113) | |||||||||||||||||||
| Loss on debt extinguishment | 11,708 | — | 17,894 | — | |||||||||||||||||||
| Intangible assets amortization | 1,695 | 1,573 | 4,922 | 4,660 | |||||||||||||||||||
| Transaction costs | — | (177) | 9 | 618 | |||||||||||||||||||
Other operating expense, net2 | 1,213 | 80 | 2,310 | 393 | |||||||||||||||||||
| Adjusted Operating Income (Loss) | $ | 1,699 | $ | (608) | $ | 6,334 | $ | 3,140 | |||||||||||||||
1 - Represents restructuring expenses associated with the ongoing reorganization of our business operations and realignment efforts. Refer to Note 13, Restructuring, within our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
2 - Represents professional service fees primarily comprised of legal fees in connection with debt modifications, tax consulting fees in connection with review advisory and corporate consolidation project assessments, as well as a non-recurring recruiting fee.
•Adjusted Net (Loss) Income: Net loss adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of purchase price obligation, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus impairment charges, plus restructuring expenses (income), plus (gain) loss on business dispositions, plus foreign exchange loss (gain), plus (gain) loss on debt extinguishment and debt forgiveness, plus intangible assets amortization, plus certain transaction costs, plus paid in kind interest and amortization of debt issuance cost and certain other expense, net.
•Adjusted Diluted EPS: Adjusted Net income (loss), divided by the diluted weighted-average number of common shares outstanding for the period.
The following table presents the reconciliation of our Adjusted Net (Loss) Income to our Net loss, the most directly comparable GAAP measure, for the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands USD, except share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net loss | $ | (15,089) | $ | (10,787) | $ | (24,889) | $ | (14,074) | |||||||||||||||
| Change in fair value of embedded derivative liability | (2,906) | (1,884) | (2,906) | (4,406) | |||||||||||||||||||
| Change in fair value of purchase price obligation | — | — | — | (2,200) | |||||||||||||||||||
| Change in fair value of warrant liability | (843) | (759) | 113 | (759) | |||||||||||||||||||
| Equity-based compensation expense | 2,018 | 6,469 | 4,555 | 6,481 | |||||||||||||||||||
| Restructuring expenses (income) | 471 | (135) | 1,386 | (113) | |||||||||||||||||||
Foreign exchange loss (gain)1 | 99 | 790 | 106 | 1,530 | |||||||||||||||||||
| Loss/ (Gain) on debt extinguishment and debt forgiveness | 11,708 | — | 10,614 | (1,306) | |||||||||||||||||||
| Intangible assets amortization | 1,695 | 1,573 | 4,922 | 4,660 | |||||||||||||||||||
| Transaction costs | — | (177) | 9 | 618 | |||||||||||||||||||
| Paid in kind interests and amortization of debt issuance cost | 1,233 | 1,593 | 4,410 | 4,552 | |||||||||||||||||||
Other expense, net2 | 1,267 | 163 | 2,828 | 672 | |||||||||||||||||||
Adjusted Net (Loss) Income | $ | (347) | $ | (3,154) | $ | 1,148 | $ | (4,345) | |||||||||||||||
| Number of shares used in Adjusted Diluted EPS | 46,182,392 | 37,633,267 | 46,354,675 | 35,612,677 | |||||||||||||||||||
| Adjusted Diluted EPS | $ | (0.01) | $ | (0.08) | $ | 0.02 | $ | (0.12) | |||||||||||||||
1 - Represents foreign exchange loss (gain) due to foreign currency transactions
2 - Represents professional service fees primarily comprised of legal fees in connection with debt modifications as well as other miscellaneous non-operating/ non-recurring items.
Liquidity and Capital Resources
Our main sources of liquidity have been our cash and cash equivalents, cash generated from operations, and proceeds from issuances of stock and debt. Our main uses of cash are funds to operate our business, make principal and interest payments on our outstanding debt, capital expenditures, and business acquisitions.
Our future capital requirements will depend on many factors, including our growth rate. Over the past several years, operating expenses have increased as we have invested in growing our business. Payments of principal and interest on our debt and earnout cash payments following our acquisitions have also been cash outflows. Our operating cash requirements may increase in the future as we continue to invest in the growth of our Company.
As of September 30, 2022, we had $10.2 million of available cash and cash equivalents, an increase of $1.7 million from December 31, 2021. We believe that we will have sufficient financial resources to fund our operations for the next 12 months. We are continuously looking to implement strategies to improve our profitability and reduce expenses.
Debt
Blue Torch Credit Facility
On May 27, 2022, the Company entered into a financing agreement ("Blue Torch Credit Facility") by and among the Company, AN Global LLC, certain subsidiaries of the Company, as guarantors (the “Guarantors”), the financial institutions party thereto as lenders, and Blue Torch Finance LLC (“Blue Torch”), as the administrative agent and collateral agent. The Blue Torch Credit Facility is secured by substantially all of the Company’s and the Guarantors’ properties and assets and provides for a term loan of $55.0 million and a revolving credit facility with an aggregate principal limit not to exceed $3.0 million at any time outstanding. On May 27, 2022, the Company borrowed the full $55.0 million under the term loan. On June 28, 2022, the Company borrowed $3.0 million under the revolving credit facility. The Company has agreed to make quarterly payments on the term loan of approximately $0.7 million starting December 31, 2023. The remaining principal balance under the term loan and any loans drawn under the revolving credit facility will be due on May 27, 2026, the maturity date. The revolving credit facility bears a 2.00% annual usage fee on the undrawn portion of the facility. Interest is paid quarterly for both loans, and is calculated based on the Adjusted Term SOFR (the three-month Term Secured Overnight Financing Rate, plus 0.26161%) plus a margin of 7.0% to 9.0% depending on the Total Leverage Ratio. Interest on each loan shall be payable on the
last day of the then effective interest period applicable to such loan and at maturity. The Company recognized $5.0 million in debt issuance costs.
On August 10, 2022, the Company entered into a waiver and amendment to the Blue Torch Credit Facility to provide for an extension of the period of time which the Company has to satisfy certain post-closing obligations under the Blue Torch Credit Facility. The amendment also provides for an acceleration of the maturity of the loans made by the lenders thereunder to May 1, 2023 if the Company does not obtain regulatory approval to convert certain loans outstanding under the New Second Lien Facility into common stock of the Company. The Company recognized $0.6 million in debt issuance costs related to the waiver and amendment.
As of November 1, 2022, the Company entered into an amendment to the Blue Torch Credit Facility to provide for an extension of the period of time which the Company has to satisfy certain reporting and post-closing obligations under the Blue Torch Credit Facility.
New Second Lien Facility
On November 22, 2021, the Company entered into a new Second Lien Facility (the “New Second Lien Facility”) with Credit Suisse and Nexxus Capital (both of which are existing AgileThought shareholders and have representation on AgileThought’s Board of Directors), Manuel Senderos, Chief Executive Officer and Chairman of the Board of Directors, and Kevin Johnston, Global Chief Operating Officer. The New Second Lien Facility provides for a term loan facility, with Tranches for each of the aforementioned lenders, in an initial aggregate principal amount of approximately $20.7 million, accruing interest at a rate per annum from 11.00% for the US denominated loan and 17.41% for the Mexican Peso denominated Loan. The New Second Lien Facility had an original maturity date of March 15, 2023; provided that if the Blue Torch Credit Facility, as the first lien facility, remained outstanding on December 15, 2022, the maturity date of the New Second Lien Facility would have been extended to May 10, 2024. As the Company does not intend to pay the outstanding balance under the Blue Torch Credit Facility prior to the maturity of the New Second Lien Facility on March 15, 2023, the amounts outstanding under the New Second Lien Facility were classified as non current in the Audited Consolidated Balance Sheet at December 31, 2021. The Company recognized $0.9 million in debt issuance costs with the issuance.
On May 27, 2022, the Company entered into an amendment and ratified the New Second Lien Facility and replaced references to the First Lien Facility with the Blue Torch Credit Facility.
On August 10, 2022, the Company entered into an amendment to the New Second Lien Facility to extend the maturity date of the Tranche A (Credit Suisse), Tranche C (Senderos), Tranche D (Senderos) and Tranche E (Johnston) loans to September 15, 2026, and provide for potential increases, that step up over time from one percent to five percent, in the interest rate applicable to the Tranche A loans. The amendment also extends the maturity date of the Tranche B (Nexxus Capital) loans thereunder to June 15, 2023, and provides for a mandatory conversion of the Tranche B loans thereunder, including interest and fees, into equity securities of the Company upon the maturity of said loans at a conversion price equal to $4.64 per share, subject to regulatory approval. The amendment also provided for the covenants and certain other provisions of the New Second Lien Facility to be made consistent with those in the Blue Torch Credit Facility (and in certain cases for those covenants to be made less restrictive than those in the Blue Torch Credit Facility). This amendment was determined to substantially alter the debt agreement such that extinguishment accounting would be applied. The Company recognized a loss on debt extinguishment of $11.7 million for the three months ended September 30, 2022. As part of the reassessment of the debt instrument, the Company bifurcated the conversion option on the Mexican peso-dominated loans and recognized an embedded derivative liability of $9.0 million as of the amendment date. See Note 4, Fair Value Measurements, for additional information.
Each lender under the New Second Lien Facility has the option to convert all or any portion of its outstanding loans into AgileThought Class A Common Stock at any time at a conversion price equal to $4.64 per share, subject to regulatory approval. On December 27, 2021, Manuel Senderos and Kevin Johnston exercised the conversion options for their respective principal amounts of $4.5 million and $0.2 million, respectively. See Note 15, Stockholders’ Equity, for additional information.
As of November 1, 2022, the Company entered into an amendment to the New Second Lien Facility to provide for an extension of the period of time which the Company has to satisfy certain reporting obligations under the New Second Lien Facility.
First Lien Facility
In 2018, the Company entered into a revolving credit agreement with Monroe Capital Management Advisors LLC that permits the Company to borrow up to $1.5 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing limit to $5.0 million. Also in 2018, the Company entered into a term loan credit agreement with Monroe
Capital Management Advisors LLC that permits the Company to borrow up to $75.0 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing amount to $98.0 million. Interest on the revolving credit agreement and term loan agreement (“First Lien Facility”) are paid monthly and calculated as LIBOR plus a margin of 8.0% to 9.0%, based on the Total Leverage Ratio as calculated in the most recent Compliance Certificate. An additional 2.0% interest may be incurred during periods of loan covenant default.
On March 22, 2021, the Company used $20.0 million from proceeds of issuance of preferred stock to partially pay the First Lien Facility. Refer to Note 15, Stockholders’ Equity, for additional information on issuance of preferred stock.
On June 24, 2021, an amendment was signed to modify the debt covenants for the periods June 30, 2021 and thereafter. In addition to the covenant modifications, the amendment also established the deferral of the monthly $1.0 million principal payments previously due in April and May, along with the $1.0 million payments due in June and July to September 30, 2021. As a result, the regular quarterly principal installments resumed, and the First Lien lenders charged a $4.0 million fee paid upon the end of the term loan in exchange for the amended terms. The amendment resulted in a debt modification, thus the fees payable to the First Lien lenders were capitalized and were being amortized over the remaining life of the First Lien Facility.
From September 30, 2021 to October 29, 2021, the Company entered into various amendments to extend the due date of the $4.0 million in principal payments previously due September 30, 2021 to November 19, 2021.
On November 29, 2021, the Company made a $20.0 million principal prepayment, which included the $4.0 million principal payment originally due September 30, 2021. The Company paid with proceeds from the New Second Lien Facility (defined below). Furthermore, on December 29, 2021, the Company issued 4,439,333 shares of Class A Common Stock to the administrative agent for the First Lien Facility (the “First Lien Shares”), which subject to certain terms and regulatory restrictions, may sell the First Lien Shares upon the earlier of August 29, 2022 and an event of default and apply the proceeds to the outstanding balance of the loan. In addition, the Company agreed to issue warrants to the administrative agent to purchase $7.0 million worth of the Company’s Class A Common Stock for nominal consideration. The warrants will be issued on the earlier of full repayment of outstanding deferred fees or August 29, 2023. In addition, the Company may be required to pay the First Lien lenders cash to the extent that we cannot issue some or all of the warrants due to regulatory restrictions. The First Lien lenders charged an additional $2.9 million fee paid upon the end of the term loan in exchange for the amended terms.
On November 22, 2021, the Company entered into an amendment that required sixty percent (60%) of proceeds from equity issuances be used to repay the outstanding balance on the First Lien Facility. On December 27, 2021, the Company closed a follow on stock offering resulting in $21.8 million of net proceeds, of which $13.7 million was used as payment of the outstanding principal and interest balances for the First Lien Facility.
On March 30, 2022, the Company entered into an amendment with the First Lien and Second Lien Facility Lenders to waive the Fixed Charge Coverage Ratio for March 31, 2022. In addition, the Total Leverage Ratio covenant for the quarterly period of March 31, 2022 was reset. As consideration for entering into this amendment, the Company agreed to pay the First Lien Facility’s administrative agent a fee equal to $0.5 million. The fee would be fully earned as of March 30, 2022 and due and payable upon the end of the term loan. However, the agreement provided that the fee shall be waived in its entirety if final payment in full occurred prior to or on May 30, 2022. This modification triggered by this new amendment was determined to be substantially different to the old instrument, therefore the modification was accounted for as an extinguishment and the debt instrument was adjusted to fair value as of the March 31, 2022. The Company recognized a loss on debt extinguishment of $7.1 million in the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2022.
On May 27, 2022, the Company paid approximately $40.2 million to settle the outstanding principal, interest, and a portion of the $6.9 million deferred fees related to amendments on the First Lien Facility. The First Lien Lenders waived the $0.5 million fee related to the March 30, 2022 amendment and returned 2,423,204 First Lien Shares as part of the deferred fees settlement. Beginning on August 29, 2022 the First Lien Lenders may sell the remaining First Lien Shares and apply 100% of the net proceeds to the outstanding fees obligation. The First Lien Lenders shall return any of the remaining unsold First Lien Shares upon full payment of the remaining fees. At September 30, 2022, total deferred fees payable on or before May 25, 2023, including fees recognized from prior amendments, totaled $3.5 million. These fees are recognized in Other current liabilities in the Unaudited Condensed Consolidated Balance Sheet and Other noncurrent liabilities in the Audited Consolidated Balance Sheet at September 30, 2022 and December 31, 2021, respectively. The Company recognized a gain on debt extinguishment of $1.0 million for the three months ended June 30, 2022 and a loss on debt extinguishment of $6.2 million for the nine months ended September 30, 2022.
Second Lien Facility
On July 18, 2019, the Company entered into separate credit agreements with Nexxus Capital and Credit Suisse (“the Creditors”) that permitted the Company to borrow $12.5 million from each bearing 13.73% interest. On January 31, 2020, the agreements were amended to increase the borrowing amount by $2.05 million under each agreement. Interest was capitalized
every six months and payable when the note was due. Immediately prior to the Business Combination, the Creditors exercised their option to convert their combined $38.1 million of debt outstanding (including interest) into 115,923 shares of the Company's Class A ordinary shares, which were converted into the Company's Class A common stock as a result of the Business Combination. Concurrently with the conversion, the Company amortized the remaining $0.1 million of unamortized debt issuance costs and recognized incremental interest expense in the Unaudited Condensed Consolidated Statements of Operations.
Paycheck Protection Program Loans
On April 30, 2020 and May 1, 2020, the Company received PPP loans through four of its subsidiaries for a total amount of $9.3 million. The PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the United States federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company submitted its forgiveness applications to the Small Business Administration (“SBA”) between November 2020 and January 2021. The monthly repayment terms were established in the notification letters with the amount of loan forgiveness. On December 25, 2020, $0.1 million of a $0.2 million PPP loan was forgiven. On March 9, 2021, $0.1 million of a $0.3 million PPP loan was forgiven. On June 13, 2021, $1.2 million of a $1.2 million PPP loan was forgiven. On January 19, 2022, $7.3 million of a $7.6 million PPP loan was forgiven resulting in a remaining PPP Loan balance of $0.3 million of which $0.1 million is due within the next year. The remaining payments will be made quarterly until May 2, 2025. All loan forgiveness was recognized in Other income (expense), net of the Unaudited Condensed Consolidated Statements of Operations.
Subordinated Promissory Note
On June 24, 2021, the Company entered into a credit agreement with AGS Group LLC (“AGS Group”) for a principal amount of $0.7 million. The principal amount outstanding under this agreement matures on December 20, 2021 (“Original Maturity Date”) and was extended until May 19, 2022 (“May 2022 Maturity Date”). On August 4, 2022, the Company entered into an amendment with the AGS Group to extend the maturity date of the Subordinated Debt to January 31, 2023 ("January 2023 Maturity Date"). Interest is due and payable in arrears on the Original Maturity Date at a 14.0% per annum until and including December 20, 2021, and at 20.0% per annum from the Original Maturity Date to the January 2023 Maturity Date, in each case calculated on the actual number of days elapsed. The Subordinated Promissory Note can only be repaid after the settlement of the Blue Torch Credit Facility. The Company plans to further extend the maturity date or substitute the Subordinated Promissory Note as per the conditions permitted under the Blue Torch Credit Facility.
Exitus Capital Subordinated Debt
On July 26, 2021, the Company agreed with existing lenders and Exitus Capital (“Subordinated Creditor”) to enter into a zero-coupon subordinated loan agreement with Exitus Capital in an aggregate principal amount equal to $3.7 million (“Subordinated Debt”). Net loan proceeds totaled $3.2 million, net of $0.5 million in debt discount. No periodic interest payments are currently required and the loan was due on January 26, 2022, with an option to extend up to two additional six month terms. On January 25, 2022, the Company exercised the first option to extend the loan an additional six months to July 26, 2022 and recognized an additional $0.5 million in debt issuance costs related to the loan extension. On July 26, 2022, the Company exercised the second option to extend the loan an additional six months to January 26, 2023 and recognized an additional $0.5 million in debt issuance costs related to the second loan extension. The loan is subject to a 36% annual interest moratorium if full payment is not made upon the maturity date. Payment of any and all of the Subordinated Debt is subordinate of all existing senior debt, including the Blue Torch Credit Facility and the New Second Lien Facility. In the event of any liquidation, dissolution, or bankruptcy proceedings, all senior debt shall first be paid in full before any distribution shall be made to the Subordinated Creditor. The Company plans to further extend the maturity date or substitute the Subordinated Debt as per the conditions permitted under the Blue Torch Credit Facility.
Cash Flows
The following table summarizes our consolidated cash flows for the periods presented:
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
Net cash used in operating activities | $ | (8,127) | $ | (21,163) | |||||||
Net cash used in investing activities | (681) | (732) | |||||||||
Net cash provided by financing activities | 10,538 | 16,672 | |||||||||
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2022 decreased by approximately $13.0 million to $8.1 million from $21.2 million for the nine months ended September 30, 2021. The decrease was mainly driven by an increase of $10.1 million resulting from changes in our operating assets and liabilities and an increase of $13.6 million in non-cash items offset by an increase of $10.8 million in net loss.
The increase of $10.1 million resulting from changes in our operating assets and liabilities was primarily driven by (i) a decrease of $14.4 million in accounts receivable, (ii) a decrease of $8.9 million in prepaid assets and guarantee deposits, (iii) an increase of $4.3 million in accrued liabilities, (iv) an increase of $1.7 in deferred revenues, and (v) an increase of $1.6 million in current VAT receivables and other taxes payable offset by (i) a decrease of $18.7 million in accounts payable, (ii) a $1.4 million decrease of income taxes payable, and (iii) a $0.7 million change in lease liability.
The increase of $13.6 million in non-cash items was driven by (i) a $17.9 million loss on debt extinguishment, (ii) an increase of $0.9 million from the change in fair value of privately held warrants, (iii) an increase of $1.0 million of debt issuance costs, (iv) an increase of $1.4 million due to the change in embedded derivative liability, (v) a $2.2 million increase in obligations for contingent purchase price offset, and (viii) a $0.5 million increase in right of use asset amortization offset by (i) the increase on gain on the forgiveness of the PPP loan of $6.0 million, (ii) the decrease in accretion from convertible notes of $1.1 million, (iii) a $1.9 million decrease in equity-based compensation expense, (iv) a decrease of $1.1 million in foreign currency remeasurement, and (v) a $0.2 million decrease in deferred taxes,
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2022 decreased less than $0.1 million to $0.7 million from $0.7 million for the nine months ended September 30, 2021 as a result of a decrease in capital expenditures.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 decreased $6.1 million to $10.5 million from $16.7 million for the nine months ended September 30, 2021. The decrease in net cash provided was primarily driven by (i) an increase in repayment of borrowings of $9.4 million, (ii) a decrease in $27.6 million in share capital received due to the issuance of preferred stock in 2021, (iii) an increase of $0.4 million of tax withholding for equity-based compensation, (iv) a decrease in $25.7 million decrease in capital contributions, (v) an increase in $0.1 million of finance lease payments, and (vi) an increase of $10.0 million in payments for debt issuance costs offset by (i) an increase of proceeds of $54.1 million and (ii) a decrease in PIPE transaction costs of $13.0 million.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of September 30, 2022:
| Payments Due By Period | |||||||||||||||||||||||||||||
| (in thousands) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||||||||||
Debt obligations | $ | 84,296 | $ | 16,000 | $ | 10,296 | $ | 58,000 | $ | — | |||||||||||||||||||
| Lease obligations | 5,814 | 2,396 | 3,346 | 72 | — | ||||||||||||||||||||||||
Total | $ | 90,110 | $ | 18,396 | $ | 13,642 | $ | 58,072 | $ | — | |||||||||||||||||||
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.
For additional information, see Note 8, Long-term Debt, to our unaudited condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition
and results of our operations. See Note 2, Summary of Significant Accounting Policies, to our audited consolidated financial statements included in our Annual Report on Form 10-K, as well as unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a description of our other significant accounting policies. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standards Board’s (“FASB”) Account Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
Revenue is recognized when or as control of promised products or services are transferred to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. In instances where revenue is recognized over time, the Company uses an appropriate input or output measurement method, typically based on the contract or labor volume.
The Company applies judgment in determining the customer’s ability and intention to pay based on a variety of factors, including the customer’s historical payment experience. If there is uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. Our payment terms are based on customary business practices and can vary by region and customer type, but are generally 30-90 days. Since the term between invoicing and expected payment is less than a year, we do not adjust the transaction price for the effects of a financing component.
The Company may enter into arrangements that consist of any combination of our deliverables. To the extent a contract includes multiple promised deliverables, the Company determines whether promised deliverables are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a single performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. The standalone selling price is the price at which we would sell a promised good or service on an individual basis to a customer. When not directly observable, the Company generally estimates standalone selling price by using the expected cost plus a margin approach. The Company reassesses these estimates on a periodic basis or when facts and circumstances change.
Revenues related to software maintenance services are recognized over the period the services are provided using an output method that is consistent with the way in which value is delivered to the customer.
Revenues related to cloud hosting solutions, which include a combination of services including hosting and support services, and do not convey a license to the customer, are recognized over the period as the services are provided. These arrangements represent a single performance obligation.
For software license agreements that require significant customization of third-party software, the software license and related customization services are not distinct as the customization services may be complex in nature or significantly modify or customize the software license. Therefore, revenue is recognized as the services are performed in accordance with an output method which measures progress towards satisfaction of the performance obligation.
Revenues related to our non-hosted third-party software license arrangements that do not require significant modification or customization of the underlying software are recognized when the software is delivered as control is transferred at a point in time.
Revenues related to consulting services (time-and-materials), transaction-based or volume-based contracts are recognized over the period the services are provided using an input method such as labor hours incurred.
The Company may enter into arrangements with third party suppliers to resell products or services, such as software licenses and hosting services. In such cases, the Company evaluates whether the Company is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). In doing so, the Company first evaluates whether it controls the good or service before it is transferred to the customer. In instances where the Company controls the good or service before it is transferred to the customer, the Company is the principal; otherwise, the Company is the agent. Determining whether we control the good or service before it is transferred to the customer may require judgment.
Some of our service arrangements are subject to customer acceptance clauses. In these instances, the Company must determine whether the customer acceptance clause is substantive. This determination depends on whether the Company can independently confirm the product meets the contractually agreed-upon specifications or if the contract requires customer review and approval. When a customer acceptance is considered substantive, the Company does not recognize revenue until customer acceptance is obtained.
Client contracts sometimes include incentive payments received for discrete benefits delivered to clients or service level agreements and volume rebates that could result in credits or refunds to the client. Such amounts are estimated at contract inception and are adjusted at the end of each reporting period as additional information becomes available only to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur.
Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations, by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Contingent consideration is included within the acquisition cost and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Acquisition-related costs are expensed as incurred within other operating expenses, net.
Equity-Based Compensation
We recognize and measure compensation expense for all equity-based awards based on the grant date fair value.
For performance share units (“PSUs”), we are required to estimate the probable outcome of the performance conditions in order to determine the equity-based compensation cost to be recorded over the vesting period. Vesting is tied to performance conditions that include the achievement of EBITDA-based metrics and/or the occurrence of a liquidity event.
The grant date fair value is determined based on the fair market value of the Company’s shares on the grant date of such awards. Because there is no public market for the Company’s equity prior to the Business Combination, the Company determines the fair value of shares by using an income approach, specifically a discounted cash flow method, and in consideration of a number of objective and subjective factors, including the Company’s actual operating and financial performance, expectations of future performance, market conditions and liquidation events, among other factors.
Determining the fair value of equity-based awards requires estimates and assumptions, including estimates of the period the awards will be outstanding before they are exercised and future volatility in the price of our common shares. We periodically assess the reasonableness of our assumptions and update our estimates as required. If actual results differ significantly from our estimates, equity-based compensation expense and our results of operations could be materially affected. The Company’s accounting policy is to account for forfeitures of employee awards as they occur.
Warrants
We account 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 and ASC 815, Derivatives and Hedging.
For warrants that meet all of the criteria for equity classification, the warrants are recorded as a component of additional paid-in capital at the time of issuance. For warrants that do not meet all the criteria for equity classification, the warrants are recorded as liabilities. At the end of each reporting period, changes in fair value during the period are recognized as a component of results of operations. The Company will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) the redemption of the warrants.
Our public warrants meet the criteria for equity classification and accordingly, are reported as a component of stockholders’ equity while our private warrants do not meet the criteria for equity classification and are thus classified as a liability.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our audited consolidated financial statements included in our Annual Report on Form 10-K filed March 31, 2022, as well as our unaudited condensed consolidated financial statements
appearing in this Quarterly Report on Form 10-Q, for a description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain 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”)), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
In addition to the previously disclosed material weakness related to the proper application of revenue recognition related to our Latin America, during the quarter ending September 30, 2022, a material weakness was identified related to the proper accounting for complex financial instruments.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022.
Management's Plan to Remediate the Material Weakness
We are taking steps to remediate the remaining material weaknesses. We will not be able to remediate these material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 26, 2022, AnovoRx Holdings, Inc. (“Anovo”) filed a complaint against us in the United States District Court for the Western District of Tennessee, captioned AnovoRx Holdings, Inc. v. AgileThought, Inc. (Case No. 2:22-cv-02557), regarding a contract entered into in March 2019 for the Company to design and build a custom software solution for Anovo. The Company terminated the contract on April 29, 2022 for non-payment by Anovo of certain fees incurred and invoiced, and the complaint alleges that we breached the agreement and includes claims for breach of contract, anticipatory breach of contract, fraud in the inducement and conversion. The plaintiff seeks damages of $2.5 million, an award of unspecified appropriate damages, an award of interest and costs and expenses and other and further relief as the court may deem just and proper. On November 11, 2022, we filed a counterclaim against Anovo for Anovo’s failure to pay fees incurred and invoiced for services requested by Anovo during the period from March 2021 through April 2022. Our counterclaim seeks damages of up to $1.7 million and an award of interest and costs and expenses and other and further relief as the court may deem just and proper. We believe that the allegations in the complaint are without merit, and we intend to vigorously defend ourselves in this matter.
In addition to the foregoing, we are currently and have in the past been subject to legal proceedings and regulatory actions in the ordinary course of business. We do not anticipate that the ultimate liability, if any, arising out of any such ordinary course matters will have a material effect on our financial condition, results of operations or cash flows. In the future, we may be subject to further legal proceedings and regulatory actions in the ordinary course of business and we cannot predict whether any such proceeding or matter will have a material effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In the course of conducting our business operations, we are exposed to a variety of risks. Any of the risk factors we described in Part I, Item 1A of our Annual Report on Form 10-K filed March 31, 2022 have affected or could materially adversely affect our business, prospects, operating results and financial condition. Certain statements in “Risk Factors” are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Other than as set forth below, there have been no material changes to the Company's risk factors since the Annual Report.
We are from time to time involved in, or may in the future be subject to, claims, suits, government investigations, and other proceedings that may result in adverse outcomes.
We are from time to time involved in, or may in the future be subject to, claims, suits, government investigations, and proceedings arising from our business, including actions with respect to intellectual property, privacy, consumer protection, information security, , data protection or law enforcement matters, tax matters, labor and employment, and commercial claims, as well as actions involving our customers, shareholder derivative actions, purported class action lawsuits, and other matters. For example, a customer recently filed a claim against us alleging that we breached our agreement to provide the customer with a software product. See “Item 1. Legal Proceedings” in this Quarterly Report for additional information.
Such claims, suits, government investigations, and proceedings are inherently uncertain, and their results cannot be predicted with certainty. Regardless of the outcome, any such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, negative publicity and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results and financial condition.
Tax authorities may examine or audit our tax returns, disagree with our positions and conclusions regarding certain tax positions, or may apply existing rules in an unforeseen manner, resulting in unanticipated costs, taxes or non-realization of expected benefits.
We are subject to the continuous examination of our tax returns by the United States Internal Revenue Service and other tax authorities around the world. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provisions for taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on our business, financial condition, results of operations and prospects. For example, as a result of examinations by applicable tax authorities, we may be subject to an indirect tax liability relating to our previous acquisition of 4th Source and may have a contingent sales tax obligation in Tennessee which in aggregate total approximately $70,000 and each of which, if applicable, we anticipate paying in 2022.
In addition, U.S. state and local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. Further, these jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, we could face the possibility of audits that could result in tax assessments, including associated interest and penalties. A successful assertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we have not historically done so could result in substantial tax liabilities and related penalties for past transactions, discourage customers from using our services or otherwise harm our business, financial condition, results of operations and prospects. For example, Mexican authorities recently issued assessments against us with potential exposure in the range of $1.5 million to $3 million based on the latest assessment of our advisors, in additional income tax, value added taxes, penalties and interest that we are currently analyzing with the assistance of outside expert advisors. We regularly assess our returns for possible additional value added or other tax liability.
A tax authority may also disagree with tax positions that we have taken, which could result in increased tax liabilities. For example, the U.S. Internal Revenue Service, the Mexican taxing authorities or another tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies, including methodologies for valuing developed technology and amounts paid with respect to our intellectual property development. Similarly, a tax authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. Due to uncertainty in the application and interpretation of applicable tax laws in various jurisdictions, we may be exposed to sales and use, value added or other transaction tax liability, including with respect to transactions of the businesses we have acquired.
Tax authorities may take the position that material income tax liabilities, interest and penalties are payable by us, where there has been a technical violation of contradictory laws and regulations that are relatively new and have not been subject to extensive review or interpretation, in which case we expect that we might contest such assessment. High-profile companies can be particularly vulnerable to aggressive application of unclear requirements. Many companies must negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide. Contesting such an assessment may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could increase our anticipated effective tax rate, where applicable. These uncertainties with respect to the application of tax laws, as well as the outcomes of tax examinations and audits and related tax assessments and liabilities, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of proceeds
LIVK raised a total net proceeds of $72,575,000, comprised of $70,000,000 of the proceeds from its initial public offering and $2,575,000 of the proceeds from the sale of the private warrants. On December 18, 2019, LIVK consummated the sale of an additional 1,050,000 units that were subject to the underwriter’s over-allotment option at $10.00 per unit, generating gross proceeds of $10,500,000. Simultaneously with the closing of the sale of additional units, LIVK consummated the sale of an additional 236,250 private warrants at a price of $1.00 per private warrant, generating total proceeds of $236,250. Transaction cost amounted to approximately $2,250,000. Following the closing of the over-allotment option and sale of additional private warrants, net of transaction cost an aggregate amount of $81,060,244 was placed in the trust account established in connection with LIVK’s initial public offering.
On August 23, 2021, the Company (f/k/a LIVK) consummated the previously announced merger, by and among LIVK and Legacy AT. The Company’s shareholders approved the Business Combination and the change of LIVK’s jurisdiction of incorporation from the Cayman Islands to the State of Delaware by deregistering as an exempted company in the Cayman Islands and domesticating and continuing as a corporation formed under the laws of the State of Delaware at a special meeting of stockholders held on August 18, 2021 (the “Special Meeting”). In connection with the Special Meeting and the Business Combination, holders of 7,479,065 of LIVK’s Class A ordinary shares, or 93% of the shares with redemption rights, exercised their right to redeem their shares for cash at a redemption price of approximately $10.07 per share, for an aggregate redemption amount of $75,310,929.45.
In connection with the closing of the transaction, the Company obtained $5.7 million from the trust account, $27.6 million from the private sale of Class A Common Stock. The Company paid $4.3 million to the First Lien Facility lenders and $14 million transactions costs to a total remaining cash balance of $15 million available without restriction and available for general corporate purposes. Since the Business Combination, the Company has used the proceeds to fund operating expenses in combination with cash generated from operations. As of September 30, 2022, the Company had no remaining proceeds from the transaction on the balance sheet.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1+ | ||||||||
| 10.2* | ||||||||
| 10.3+ | First Amendment to the Blue Torch Financing Agreement, dated August 10, 2022, by and between AgileThought, Inc., and AN Global LLC, the financial institutions party thereto as lenders, and Blue Torch Finance LLC as administrative agent and collateral agent (incorporated by reference to Exhibit 10.8 to the Quarterly Report filed on August 12, 2022) | |||||||
| 10.4* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | |||||||
| + | The schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. | |||||||
| # | Indicates management contract or compensatory plan or arrangement. | |||||||
| * | Filed Herewith | |||||||
| ** | Furnished Herewith | |||||||
SIGNATURE
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.
Dated: November 14, 2022
AGILETHOUGHT, INC. | ||||||||
By: | /s/ Amit Singh | |||||||
| Amit Singh | ||||||||
Chief Financial Officer | ||||||||