Forge(FRGE) - 2022 Q4 - Annual Report

Part I Item 1. Business Forge Global Holdings, Inc. operates a financial services platform for private markets, offering trading, custody, and data solutions - Forge provides a trusted trading platform, proprietary data, and custody services to enhance accessibility, transparency, and liquidity in private markets[20] - Key solutions include Forge Markets (trading), Forge Trust (custody), and Forge Data (data and insights)[20][21] - Challenges in private markets include lack of liquidity, limited access for most investors, and insufficient transparency[23][24][26] - Forge Markets facilitates secondary purchases and sales of private company securities, with a standard minimum transaction size of $100,000 as of December 31, 2022[32][34] - Forge Trust serves primarily as a custodian for self-directed individual retirement accounts (SDIRAs) holding alternative assets, with $14.9 billion of assets under custody through 1.9 million accounts as of December 31, 2022[43][47] - Forge Intelligence (Data Solutions) offers subscription-based access to over a decade of secondary trading data across more than 1,000 private companies as of December 31, 2022[48][49] - Growth strategies include scaling existing solutions, developing new products, forming partnerships (e.g., Forge Europe with Deutsche Börse), international expansion, exploring new asset classes, and pursuing inorganic opportunities[51][52] - Since inception, Forge has facilitated over $12 billion in transaction volume across approximately 23,000 transactions in over 500 companies, with approximately 568,000 registered users[56] - The company is subject to extensive U.S. federal and state securities laws, including regulation of its broker-dealer (Forge Securities LLC), investment adviser (Forge Global Advisors LLC), and trust company (Forge Trust Co.) subsidiaries[72][74][75][76][77] - Forge Europe GmbH was formed in September 2022 with Deutsche Börse to expand into the European private market, targeting a launch in Germany in 2023[51][419] Item 1A. Risk Factors Forge faces significant risks from losses, competition, macroeconomic conditions, and complex regulatory challenges - Forge has a history of net losses ($111.9 million in 2022, $18.5 million in 2021) and an accumulated deficit of $190.4 million as of December 31, 2022, with no assurance of future profitability[92] - The company faces intense and increasing competition from established enterprises, global banks, and early-stage companies, which may have greater resources or offer more competitive pricing[94][95] - Customers investing through Forge's platform face risks including lack of information on private companies, illiquidity of securities, and potential transfer restrictions[96][99] - Macroeconomic conditions (high inflation, rising interest rates, geopolitical conflicts like the Russia-Ukraine war) and the trailing effects of the COVID-19 pandemic create economic uncertainty, increased volatility, and liquidity risks in private equity markets, potentially harming Forge's business[116][117][118][119][120] - Forge is subject to extensive and complex U.S. and non-U.S. laws and regulations for broker-dealers, investment advisers, and alternative trading systems, requiring significant expense and resources for compliance[133][135][136] - Proposed legislation, such as potential SEC requirements for more private company disclosures or limits on IRA investments, could negatively impact Forge's business model and revenue streams[138][139][140] - International expansion, including Forge Europe, exposes the company to new regulatory compliance risks, difficulties in managing international operations, and foreign exchange rate fluctuations[146][147][148] - The company is subject to stringent data privacy and security laws (e.g., GDPR, CCPA, CPRA), and any failure to protect customer information could lead to significant fines, litigation, and reputational harm[162][164][168][169][170] - Reliance on third-party service providers for operational functions and IT applications creates risks of disruption, breaches, or loss of services, potentially harming business operations and financial results[188][189][190] - As a public company, Forge faces increased legal, accounting, and compliance costs, and its management team has limited prior experience in managing a publicly traded company, potentially diverting attention from growth strategies[198][201] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments[219] Item 2. Properties Forge's corporate headquarters is in San Francisco, with additional leased offices, and anticipates future expansion - Corporate headquarters: San Francisco, California (10,800 sq ft, lease expires Dec 2023)[220] - Additional offices: San Francisco, San Mateo, Sioux Falls, South Dakota, and New York, New York[220] - Existing facilities are considered sufficient for current needs, with plans for future expansion[221] Item 3. Legal Proceedings Forge is involved in legal proceedings, including a lawsuit regarding the SharesPost Merger Agreement, which it will defend - Forge is a defendant in a lawsuit filed by Erika McKiernan, Stockholder Representative for former SharesPost stockholders, alleging breaches of the SharesPost Merger Agreement[223] - The lawsuit claims Forge failed to issue and deliver warrants as agreed and seeks indemnification for alleged losses[223] - Forge denies the allegations and intends to vigorously defend, believing the action will not materially impact operations or financial position[223] - The company is also subject to various actions, inquiries, investigations, and proceedings by regulatory and governmental agencies[224] Item 4. Mine Safety Disclosures The company has no disclosures related to mine safety - No mine safety disclosures[225] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Forge's common stock trades on NYSE, has 115 stockholders, has never paid dividends, and repurchased shares - Common stock is traded on the New York Stock Exchange (NYSE) under the symbol "FRGE"[228] - As of December 31, 2022, there were approximately 115 stockholders of record[229] - The company has never paid cash dividends and does not intend to in the foreseeable future, planning to retain earnings for business development and expansion[217][230] - During the three months ended December 31, 2022, Forge repurchased 163,054 shares of common stock, representing early exercised but unvested stock options from a former employee[233] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forge experienced a significant revenue decrease and net loss in 2022 due to lower private market trading volumes, but maintains strong liquidity - Forge's business model is centered on three key solutions: Trading (Forge Markets), Custody (Forge Trust), and Data (Forge Data), aiming for an accessible, transparent, and liquid private market[240] - The Business Combination, a reverse recapitalization with Legacy Forge as the accounting acquirer, was consummated on March 21, 2022[241][243] - Key factors affecting performance include growing the customer base, expanding relationships with existing customers, investing in the platform, and adapting to private market trends, consumer behavior, and macroeconomic events[244][245][246][247][248] Key Business Metrics (2020-2022) | Dollars in thousands | 2022 | 2021 | 2020 | 2022 Over 2021 Change ($) | 2022 Over 2021 Change (%) | 2021 Over 2020 Change ($) | 2021 Over 2020 Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | TRADING BUSINESS | | | | | | | | | Trades | 2,184 | 4,890 | 3,448 | (2,706) | (55)% | 1,442 | 42% | | Volume | $1,222,879 | $3,180,257 | $1,863,333 | $(1,957,378) | (62)% | $1,316,924 | 71% | | Net Take Rate | 3.3% | 3.3% | 2.6% | —% | —% | 0.7% | 27% | | Placement fee revenues, less transaction-based expenses | $40,182 | $104,689 | $48,864 | $(64,507) | (62)% | $55,825 | 114% | | CUSTODY BUSINESS | | | | | | | | | Total Custodial Accounts | 1,871,146 | 2,124,677 | N/A | (253,531) | (12)% | N/A | N/A | | Assets Under Custody | $14,870,257 | $14,334,527 | N/A | $535,730 | 4% | N/A | N/A | Consolidated Statements of Operations Summary (2020-2022) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues: | | | | | Placement fees | $40,665 | $107,723 | $29,240 | | Custodial administration fees | $28,718 | $20,333 | $22,404 | | Total revenues | $69,383 | $128,056 | $51,644 | | Total revenues, less transaction-based expenses | $68,900 | $125,022 | $47,756 | | Operating expenses: | | | | | Compensation and benefits | $145,514 | $94,654 | $37,330 | | Professional services | $14,265 | $12,450 | $3,371 | | Acquisition-related transaction costs | $5,113 | $882 | $3,289 | | Advertising and market development | $4,754 | $5,090 | $1,528 | | Rent and occupancy | $5,455 | $3,744 | $2,381 | | Technology and communications | $11,489 | $8,243 | $4,616 | | General and administrative | $11,324 | $4,358 | $452 | | Depreciation and amortization | $6,026 | $5,390 | $2,406 | | Total operating expenses | $203,940 | $134,811 | $55,373 | | Operating loss | $(135,040) | $(9,789) | $(7,617) | | Interest income (expenses), net | $2,681 | $(2,307) | $(2,405) | | Change in fair value of warrant liabilities | $19,836 | $(6,064) | $(292) | | Other income (expenses), net | $945 | $47 | $(201) | | Loss before provision for income taxes | $(111,578) | $(18,113) | $(10,515) | | Provision for (benefit from) income taxes | $327 | $386 | $(803) | | Net loss | $(111,905) | $(18,499) | $(9,712) | | Net loss attributable to Forge Global Holdings, Inc. | $(111,859) | $(18,499) | $(9,712) | Revenue Breakdown and Changes (2020-2022) | (in thousands) | 2022 | 2021 | 2020 | 2022 Over 2021 Change ($) | 2022 Over 2021 Change (%) | 2021 Over 2020 Change ($) | 2021 Over 2020 Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Placement fees | $40,665 | $107,723 | $29,240 | $(67,058) | (62)% | $78,483 | 268% | | Custodial administration fees | $28,718 | $20,333 | $22,404 | $8,385 | 41% | $(2,071) | (9)% | | Total revenues | $69,383 | $128,056 | $51,644 | $(58,673) | (46)% | $76,412 | 148% | Adjusted EBITDA Reconciliation (2020-2022) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net loss | $(111,905) | $(18,499) | $(9,712) | | Add: | | | | | Interest (income) expense, net | $(2,681) | $2,307 | $2,405 | | Provision for (benefit from) income taxes | $327 | $386 | $(803) | | Depreciation and amortization | $6,026 | $5,390 | $2,406 | | Loss on impairment of long lived assets | $446 | — | — | | Share-based compensation expense | $57,924 | $12,231 | $4,906 | | Change in fair value of warrant liabilities | $(19,836) | $6,064 | $292 | | Acquisition-related transaction costs | $5,113 | $882 | $3,289 | | Transaction bonus | $17,735 | — | — | | Adjusted EBITDA | $(46,851) | $8,761 | $2,783 | - Cash and cash equivalents totaled $193.1 million as of December 31, 2022, providing sufficient liquidity for the foreseeable future, primarily from the Business Combination proceeds[335][336] Cash Flow Summary (2020-2022) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in): | | | | | Operating activities | $(68,806) | $10,901 | $(2,528) | | Investing activities | $(6,650) | $(3,256) | $(23,373) | | Financing activities | $192,862 | $26,581 | $39,380 | - Operating cash flow was negative $68.8 million in 2022, primarily due to the net loss, partially offset by non-cash charges like share-based compensation[340] - Financing activities provided $192.9 million in 2022, mainly from PIPE Investment and A&R FPA investors, and Public Warrants exercise, offset by offering costs[347] Contractual Obligations as of December 31, 2022 (in thousands) | | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $7,973 | $4,220 | $3,753 | $— | $— | | Non-cancelable purchase obligations | $10,095 | $2,699 | $3,940 | $3,456 | $— | | Total contractual obligations | $18,068 | $6,919 | $7,693 | $3,456 | $— | Item 7A. Quantitative and Qualitative Disclosures About Market Risk Forge is exposed to market risks from interest rate and foreign currency fluctuations, impacting custodial fees and net assets - Interest rate changes can significantly impact custodial administration fees; a hypothetical 50 basis point change would affect 2022 revenues by $3.4 million[377][378] - Substantially all revenue and expenses are denominated in U.S. dollars, but international expansion introduces foreign exchange rate risk[380][381] - A hypothetical 10% change in foreign currency exchange rates would have affected net assets by approximately $1.5 million as of December 31, 2022[381] Item 8. Financial Statements and Supplementary Data This section presents Forge's audited consolidated financial statements for 2020-2022, including balance sheets, income statements, and cash flows - The consolidated financial statements include the Balance Sheets, Statements of Operations, Comprehensive Loss, Changes in Convertible Preferred Stock and Stockholders' Equity (Deficit), and Cash Flows for the years ended December 31, 2022, 2021, and 2020[384] - The financial statements were audited by Ernst & Young LLP, who issued an unqualified opinion[387] - A critical audit matter identified was the impairment assessment of goodwill, which involved significant assumptions and subjectivity[393][394] Consolidated Balance Sheets (in thousands) | | December 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $193,136 | $74,781 | | Total current assets | $206,888 | $88,085 | | Property and equipment, net | $359 | $497 | | Internal-use software, net | $7,640 | $2,691 | | Goodwill and other intangible assets, net | $133,887 | $137,774 | | Operating lease right-of-use assets | $5,706 | $7,881 | | Total assets | $363,729 | $257,895 | | Liabilities, convertible preferred stock and stockholders' equity (deficit) | | | | Accounts payable | $2,797 | $1,920 | | Accrued compensation and benefits | $13,271 | $21,240 | | Total current liabilities | $26,385 | $38,023 | | Warrant liabilities | $606 | $7,844 | | Total liabilities | $38,268 | $64,479 | | Convertible preferred stock, net of issuance costs | $— | $246,056 | | Total stockholders' equity (deficit) | $325,461 | $(52,640) | | Total liabilities, convertible preferred stock and stockholders' equity (deficit) | $363,729 | $257,895 | Consolidated Statements of Cash Flows (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in): | | | | | Operating activities | $(68,806) | $10,901 | $(2,528) | | Investing activities | $(6,650) | $(3,256) | $(23,373) | | Financing activities | $192,862 | $26,581 | $39,380 | | Net increase in cash and cash equivalents | $118,561 | $34,226 | $13,479 | | Cash, cash equivalents and restricted cash, end of the period | $194,965 | $76,404 | $42,178 | - The Business Combination on March 21, 2022, was accounted for as a reverse recapitalization, with Legacy Forge as the accounting acquirer[416][417][494] - Forge Europe GmbH was formed in September 2022 with Deutsche Börse, with Forge having a majority ownership and consolidating the subsidiary[419][420] - The company adopted ASU 2016-13 (Credit Losses) and ASU 2017-04 (Goodwill Impairment) in 2022, with immaterial impact[484][485] - Goodwill and other intangible assets, net, were $133.9 million as of December 31, 2022. An impairment test was performed due to market conditions, but no impairment loss was recorded for goodwill[393][394][399][445] - Total share-based compensation expense was $57.9 million in 2022, significantly higher than $12.2 million in 2021, primarily due to RSU grants and cumulative catch-up expense for performance/market-based options[296][297][401] - As of December 31, 2022, the company had federal net operating loss carryforwards of $31.0 million and state NOLs of $38.6 million (California) and $12.7 million (other states), subject to annual limitations[604][605] - Related party transactions include fees paid to Financial Technology Partners ($18.3 million in 2022), investments by a director and Temasek in the PIPE Investment, and banking relationships with First Republic Bank[615][618][619][620] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reported no changes in or disagreements with accountants on accounting and financial disclosures - No changes in or disagreements with accountants on accounting and financial disclosures[624] Item 9A. Controls and Procedures Forge's disclosure controls and procedures were effective as of December 31, 2022, with no material changes in internal control - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2022[625] - No material changes in internal control over financial reporting occurred during the period[626] - Management acknowledges inherent limitations in control systems, meaning they provide reasonable, not absolute, assurance against errors and fraud[627] Item 9B. Other Information The company reported no other information required under this item - No other information to report[628] Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent Inspections. The company reported no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[629] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be incorporated by reference from the 2023 Proxy Statement - Information will be incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[632][633] Item 11. Executive Compensation Information regarding executive compensation will be incorporated by reference from the 2023 Proxy Statement - Information will be incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[632][634] Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters will be incorporated by reference from the 2023 Proxy Statement - Information will be incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[632][635] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be incorporated by reference from the 2023 Proxy Statement - Information will be incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[632][636] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services will be incorporated by reference from the 2023 Proxy Statement - Information will be incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[632][637] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the 10-K report, many incorporated by reference - Lists exhibits and financial statement schedules, including the Merger Agreement, Certificate of Incorporation, Bylaws, and various stock plans[639][641] - Many exhibits are incorporated by reference from previous SEC filings[641] Item 16. Form 10-K Summary The company did not provide a Form 10-K summary under this item - No Form 10-K Summary provided[645]