FiscalNote(NOTE) - 2023 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section outlines the nature of forward-looking statements within the report, highlighting inherent risks and uncertainties that could cause actual results to differ materially from projections - This report contains forward-looking statements regarding FiscalNote's future operations, financial condition, liquidity, growth strategies, and market position. These statements are based on current market material and management's expectations[8] - Key factors that may impact forward-looking statements include managing growth, changes in strategy, future capital requirements, demand for services, ability to attract and retain customers, successful acquisitions, risks of international operations, technological development, data reliability, competition, brand protection, regulatory compliance, personnel retention, R&D, adaptation to new technologies (AI/ML), economic conditions, litigation, internal controls, and intellectual property rights[8][9] PART I. Financial Information (Unaudited) This part presents the unaudited condensed consolidated financial information, including statements and detailed notes, for FiscalNote Holdings, Inc Financial Statements This section presents the unaudited condensed consolidated financial statements for FiscalNote Holdings, Inc., including the Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Changes in Stockholders' Equity (Deficit), and Statements of Cash Flows, providing a snapshot of the company's financial position and performance for the periods ended March 31, 2023 and December 31, 2022 Condensed Consolidated Balance Sheets This chapter provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific reporting dates | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------ | | Cash and cash equivalents | $46,665 | $60,388 | | Total current assets | $76,071 | $86,005 | | Total assets | $440,999 | $433,157 | | Total current liabilities | $70,650 | $62,112 | | Total liabilities | $300,565 | $288,467 | | Total stockholders' equity | $140,434 | $144,690 | - Total assets increased by $7.8 million, from $433.2 million at December 31, 2022, to $441.0 million at March 31, 2023. Total liabilities increased by $12.1 million, from $288.5 million to $300.6 million, while total stockholders' equity decreased by $4.3 million[11] Condensed Consolidated Statements of Operations and Comprehensive Loss This chapter details the company's financial performance, including revenues, expenses, and net loss, for the reported periods | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change ($) | Change (%) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Total revenues | $31,529 | $26,071 | $5,458 | 20.9% | | Total operating expenses | $58,900 | $38,481 | $20,419 | 53.1% | | Operating loss | $(27,371) | $(12,410) | $(14,961) | 120.6% | | Net loss | $(19,273) | $(28,351) | $9,078 | (32.0)% | | Basic and Diluted EPS | $(0.14) | $(1.06) | $0.92 | (86.8)% | - Net loss decreased by $9.1 million, from $(28.4) million in Q1 2022 to $(19.3) million in Q1 2023, primarily due to a significant gain from the change in fair value of financial instruments and lower interest expense, despite a substantial increase in operating expenses[13][231] - Operating expenses increased by 53.1% year-over-year, driven by a $5.8 million goodwill impairment charge in Q1 2023 and higher general and administrative expenses[13][231] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) This chapter tracks changes in the company's equity over time, reflecting net income/loss, stock issuances, and other comprehensive income/loss | Metric | Balance at December 31, 2022 (in thousands) | Balance at March 31, 2023 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :--------------------------------------- | | Additional paid-in capital | $846,205 | $861,793 | | Accumulated other comprehensive loss | $(785) | $(1,144) | | Accumulated deficit | $(700,743) | $(720,228) | | Total stockholders' equity (deficit) | $144,690 | $140,434 | - Total stockholders' equity decreased from $144.7 million at December 31, 2022, to $140.4 million at March 31, 2023, primarily due to a net loss of $19.3 million and foreign currency translation loss of $0.4 million, partially offset by $9.5 million from Class A common stock issuance for business acquisitions and $6.5 million in stock-based compensation expense[16] Condensed Consolidated Statements of Cash Flows This chapter summarizes the cash inflows and outflows from operating, investing, and financing activities, illustrating changes in liquidity | Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | | Operating Activities | $(12,826) | $(10,203) | | Investing Activities | $(6,879) | $(2,128) | | Financing Activities | $6,237 | $19,693 | | Net change in cash | $(13,719) | $7,515 | - Net cash used in operating activities increased by $2.6 million, from $10.2 million in Q1 2022 to $12.8 million in Q1 2023. Net cash used in investing activities increased significantly to $6.9 million in Q1 2023, primarily due to cash paid for business acquisitions[19][278][280] - Net cash provided by financing activities decreased substantially from $19.7 million in Q1 2022 to $6.2 million in Q1 2023, mainly due to lower proceeds from long-term debt[19][281] Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the condensed consolidated financial statements, covering the company's business description, significant accounting policies, the impact of the Business Combination, revenue disaggregation, details of recent acquisitions, lease obligations, intangible assets, goodwill impairment, debt structure, stockholders' equity, earnout awards, warrant liabilities, stock-based compensation, transaction costs, earnings per share, income taxes, fair value measurements, and commitments and contingencies 1. Summary of Business and Significant Accounting Policies This chapter outlines FiscalNote's business model, the accounting treatment of its Business Combination, and key accounting policies - FiscalNote is a technology provider of global policy and market intelligence, leveraging AI and data science to deliver actionable insights to various organizations[20][179] - The Business Combination on July 29, 2022, was accounted for as a reverse recapitalization, with Old FiscalNote identified as the accounting acquirer, meaning its historical financial statements became those of the combined company[22][23] Liquidity Overview | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------------------- | :----------------------------- | :------------------------------ | | Cash, cash equivalents, and restricted cash | $47,504 | $61,223 | | Negative working capital (excluding cash) | $42,100 | N/A | | Accumulated deficit | $720,200 | $700,700 | | Net loss (Q1) | $19,300 | $28,400 | - The company operates as one operating segment, with the Chief Operating Decision Maker evaluating financial information and resources on a consolidated basis, despite offerings in multiple market segments and countries[33] - The company adopted ASC 2016-13 (Credit Losses) on January 1, 2023, resulting in a $212 thousand cumulative-effect adjustment to accumulated deficit and an increase in the allowance for doubtful accounts receivable from $468 thousand to $680 thousand[41] 2. Business Combination with DSAC This chapter details the reverse recapitalization with DSAC, including the issuance of Class B shares and the financial impact of the transaction - The Business Combination on July 29, 2022, involved Old FiscalNote merging into Merger Sub, with DSAC domesticating as FiscalNote Holdings, Inc. (New FiscalNote). Old FiscalNote was the accounting acquirer in a reverse recapitalization[21][47] - In connection with the Closing, New FiscalNote issued Class B shares to Co-Founders Tim Hwang and Gerald Yao, granting them 25 votes per share, subject to certain conditions and expiration after seven years[43] - The Company received $325.0 million in gross proceeds from the Business Combination and New Senior Term Loan, which was offset by $45.2 million in transaction costs and $210.7 million in debt repayments[49] 3. Revenues This chapter disaggregates revenue by type and geographic location, and details changes in deferred revenue Disaggregated Revenue (in thousands) | Revenue Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Subscription | $28,467 | $22,779 | | Advisory | $1,113 | $1,762 | | Advertising | $418 | $618 | | Books | $584 | $331 | | Other revenue | $947 | $581 | | Total | $31,529 | $26,071 | Revenue by Geographic Location (in thousands) | Region | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------- | :-------------------------------- | :-------------------------------- | | North America | $26,152 | $23,199 | | Europe | $4,100 | $2,499 | | Australia | $289 | $258 | | Asia | $988 | $115 | | Total | $31,529 | $26,071 | - Subscription revenue increased by 25% year-over-year, while advisory, advertising, and other revenue decreased by 7%. Revenue from Europe and Asia saw significant increases, primarily due to acquisitions[50][51] Deferred Revenue (in thousands) | Item | Amount | | :------------------------------------------ | :----- | | Balance at December 31, 2022 | $36,487 | | Acquired deferred revenue | $4,013 | | Revenue recognized from prior balance | $(16,610) | | New deferrals, net of amounts recognized | $25,928 | | Effects of foreign currency | $32 | | Balance at March 31, 2023 | $49,850 | 4. Business Combinations This chapter details recent acquisitions, including Dragonfly, Aicel Technologies, and DT-Global, and their impact on goodwill and financial structure - On January 27, 2023, FiscalNote acquired Dragonfly Eye Limited, a UK-based geopolitical and security intelligence provider, for an aggregate purchase price of $25.2 million, consisting of cash, Class A Common Stock, and subordinated convertible promissory notes[57][58][59] Dragonfly Acquisition Purchase Price Allocation (in thousands) | Item | Amount | | :-------------------------- | :----- | | Cash | $5,617 | | Fair value of Class A common stock | $9,539 | | Fair value of Seller Convertible Notes | $8,635 | | Fair value of contingent consideration | $1,445 | | Total Purchase Price | $25,236 | - In 2022, FiscalNote acquired Aicel Technologies for $8.7 million and certain assets of DT-Global Business Consulting for $0.6 million, expanding its market intelligence and data insights offerings[67][74] - Goodwill of $19.7 million was recorded for the Dragonfly acquisition, primarily attributed to future economic benefits, expected synergies, and assembled workforce[62] 5. Leases This chapter details the composition of lease expenses, cash payments for lease liabilities, and impairment charges related to operating leases Lease Expense Composition (in thousands) | Lease Cost Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $2,585 | $2,442 | | Variable lease cost | $155 | $88 | | Short-term lease cost | $178 | $321 | | Total lease costs | $2,918 | $2,851 | | Sublease income | $(1,364) | $(1,338) | - Cash payments related to operating lease liabilities were $4.8 million in Q1 2023, including a $1.7 million lease termination fee, compared to $2.9 million in Q1 2022[79][81] - In Q1 2022, the Company recognized a $378 thousand impairment expense for an operating lease asset related to unoccupied office space[80] 6. Intangible Assets This chapter presents the net carrying amounts of various intangible assets and their associated amortization expenses Intangible Assets, Net (in thousands) | Intangible Asset Class | March 31, 2023 (Net Carrying Amount) | December 31, 2022 (Net Carrying Amount) | | :--------------------- | :----------------------------------- | :------------------------------------ | | Customer relationships | $61,750 | $56,348 | | Developed technology | $18,098 | $17,677 | | Databases | $20,455 | $21,020 | | Tradenames | $8,541 | $8,264 | | Expert network | $1,688 | $1,759 | | Patents | $518 | $500 | | Content library | $513 | $528 | | Total | $111,563 | $106,096 | - Total net intangible assets increased by $5.5 million from December 31, 2022, to March 31, 2023, primarily driven by an increase in customer relationships[82] Amortization Expense (in thousands) | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Amortization of intangible assets (excluding developed technology) | $2,814 | $2,608 | | Amortization of developed technology (cost of revenues) | $1,316 | $1,252 | | Amortization of capitalized software development costs (cost of revenues) | $1,281 | $571 | 7. Goodwill This chapter details changes in goodwill carrying amounts, including acquisitions and impairment charges Changes in Goodwill Carrying Amounts (in thousands) | Item | Amount | | :------------------------------ | :----- | | Balance at December 31, 2022 | $194,362 | | Acquisition | $19,658 | | Impairment | $(5,837) | | Impact of foreign currency fluctuations | $(127) | | Balance at March 31, 2023 | $208,056 | - Goodwill increased to $208.1 million at March 31, 2023, from $194.4 million at December 31, 2022, primarily due to the Dragonfly acquisition, partially offset by an impairment charge[87] - A quantitative goodwill impairment assessment as of March 31, 2023, resulted in a $5.8 million impairment charge for the ESG reporting unit, driven by a decline in the company's stock price and underperformance compared to internal projections[87][304] 8. Debt This chapter outlines the company's debt structure, including the New Senior Term Loan, convertible notes, and compliance with financial covenants Carrying Value of Debt (in thousands) | Debt Type | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | New Senior Term Loan | $157,024 | $150,647 | | Convertible Notes | $12,654 | $12,219 | | Dragonfly Seller Convertible Notes | $8,281 | $- | | Aicel Convertible Note | $1,138 | $1,174 | | PPP loan | $224 | $251 | | Debt issuance costs | $(2,575) | $(2,243) | | Total | $176,746 | $162,048 | - The New Senior Term Loan increased to $157.0 million at March 31, 2023, following an incremental term loan of $6.0 million received on March 31, 2023. The loan bears interest at Prime Rate plus 5.0% (or 9.0% minimum) cash interest, plus 1.00% paid-in-kind interest[93][94][95] - The Company was in compliance with all financial covenants of the New Senior Term Loan as of March 31, 2023, including minimum cash balance, minimum annual recurring revenue, and capital expenditure limitation[98] - The Dragonfly Seller Convertible Notes, issued as part of the Dragonfly acquisition, had a fair value of $8.3 million at March 31, 2023, and are accounted for using the fair value option due to embedded conversion features[101][104][105] - The PPP Loan had a remaining balance of $224 thousand at March 31, 2023, with $7.7 million forgiven in Q1 2022[112] 9. Stockholders' Equity This chapter details the company's authorized and outstanding common stock, including voting rights and dividend policy - The Company's charter authorizes 1,809,000,000 shares, including Class A common stock, Class B common stock, and preferred stock[117] Common Stock Outstanding | Class | Shares Outstanding at March 31, 2023 | | :---------------- | :----------------------------------- | | Class A Common Stock | 125,576,069 | | Class B Common Stock | 8,290,921 | - Class B common stock, held by Co-Founders, carries 25 votes per share, while Class A common stock has one vote per share[43][143] - No shares of preferred stock were issued and outstanding as of March 31, 2023. The Company has not paid any cash dividends on common stock to date and plans to retain future earnings for business development[121][122] 10. Earnout Shares and RSUs This chapter describes the contingent Earnout Awards for Old FiscalNote equity holders and related compensation expense - Old FiscalNote equity holders are entitled to receive up to 19,195,100 additional shares of Class A common stock (Earnout Awards) in five tranches, contingent on the Class A common stock price reaching specific Triggering Events ($10.50, $12.50, $15.00, $20.00, or $25.00) within five years of the Business Combination Closing Date[123] - As of March 31, 2023, no Earnout Shares or Earnout RSUs have been issued as no Triggering Events have occurred[128] - The Company recognized $1.1 million of share-based compensation expense related to Earnout Awards during the three months ended March 31, 2023, with $1.6 million of unrecognized compensation expense remaining[126][128] 11. Warrant Liabilities This chapter details the outstanding public and private placement warrants, their fair value, and exercise terms - As of March 31, 2023, the Company had 8,358,964 public warrants and 7,000,000 private placement warrants outstanding, with a total fair value of $4.9 million[130][131] - Public warrants are exercisable for 1.571428 shares of Class A common stock at $7.32 per share and expire on July 29, 2027. They are redeemable by the Company for cash or shares under specific conditions[132][133][134] - Private placement warrants are not redeemable by the Company as long as held by the DSAC sponsor or permitted transferees, but have identical terms to public warrants otherwise[134] 12. Stock-Based Compensation This chapter outlines the company's equity incentive plans, shares reserved, and recognized stock-based compensation expenses - The 2022 Long-Term Incentive Plan reserved 20,285,600 shares of Class A common stock for various equity awards. As of March 31, 2023, 7,185,245 shares were available for issuance[136][137] - The Company recognized $6.4 million in stock-based compensation expense during the three months ended March 31, 2023, a significant increase from $0.3 million in the prior year[139] - The 2022 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase shares at a discount, resulting in a $102 thousand stock-based compensation charge in Q1 2023[140] 13. Transaction (Gains) Costs, net This chapter details the net transaction costs and gains, primarily related to business acquisitions and contingent consideration Transaction Costs (Gains), Net (in thousands) | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Transaction costs related to acquired businesses | $1,222 | $72 | | Non-capitalizable Business Combination costs | $184 | $203 | | Change in contingent consideration liabilities | $(156) | $(1,366) | | Contingent compensation expense | $158 | $46 | | Total transaction costs (gains), net | $1,408 | $(1,045) | - The Company reported net transaction costs of $1.4 million in Q1 2023, a significant change from a net transaction gain of $1.0 million in Q1 2022, primarily due to increased costs related to business acquisitions (Dragonfly) and a reversal of prior year contingent compensation gains[142][245] 14. Earnings (Loss) Per Share This chapter presents the basic and diluted earnings per share, along with the impact of anti-dilutive securities Earnings (Loss) Per Share (in thousands, except per share data) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss used to compute basic and diluted loss per share | $(19,273) | $(19,956) | | Weighted average common stock outstanding, basic and diluted | 133,082,639 | 18,757,067 | | Net loss per share, basic and diluted | $(0.14) | $(1.06) | - Basic and diluted net loss per share improved to $(0.14) in Q1 2023 from $(1.06) in Q1 2022, despite a higher net loss, due to a substantial increase in weighted average common shares outstanding following the Business Combination[145][146] Anti-Dilutive Securities Excluded from Diluted Loss Per Share | Security Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Anti-dilutive Earnout Awards | 19,195,100 | - | | Anti-dilutive stock options | 2,033,574 | 8,407,614 | | Anti-dilutive Convertible Notes | 2,075,225 | 24,301,372 | | Anti-dilutive restricted stock units | 7,022,744 | 727,526 | | Total anti-dilutive securities | 31,779,466 | 102,039,346 | 15. Provision (Benefit) from Income Taxes This chapter details the income tax provision or benefit and the effective tax rate, explaining deviations from the statutory rate Income Tax Provision (Benefit) and Effective Tax Rate | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Pre-tax loss | $(19,243) | $(28,725) | | Provision (benefit) from income taxes | $30 | $(374) | | Effective tax rate | (0.16)% | 1.30% | - The effective tax rate for Q1 2023 was (0.16)%, differing from the U.S. statutory rate of 21% primarily due to state taxes, a valuation allowance on deferred tax assets, and other nondeductible expenses[148] - The Company reported an uncertain tax position totaling $639 thousand relating to a state tax filing position as of March 31, 2023[150] 16. Fair Value Measurements and Disclosures This chapter provides fair value measurements for financial liabilities, including warrants and contingent consideration, and related gains/losses Fair Value of Financial Liabilities (in thousands) - March 31, 2023 | Liability Type | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------ | :------ | :------ | :------ | :------ | | Public warrants | $2,675 | $- | $- | $2,675 | | Private placement warrants | $- | $2,240 | $- | $2,240 | | Contingent liabilities from acquisitions | $- | $- | $2,790 | $2,790 | | Liability classified warrants | $- | $- | $52 | $52 | | Dragonfly Seller Convertible Notes | $- | $- | $8,281 | $8,281 | - The Company recognized a $7.6 million non-cash gain from the change in fair value of public warrants and a $6.4 million non-cash gain from private placement warrants during Q1 2023[154][155] - The Dragonfly Seller Convertible Notes, initially valued at $8.6 million, had a fair value of $8.3 million at March 31, 2023, resulting in a $573 thousand non-cash gain[156] - Contingent liabilities from acquisitions, primarily related to Dragonfly, Curate, and FrontierView, totaled $2.8 million at March 31, 2023, and are classified as Level 3 fair value measurements[158][159] 17. Commitments and Contingencies This chapter addresses legal and regulatory matters, including a significant dispute with GPO FN Noteholder LLC and related loss contingency - The Company is involved in various legal and regulatory matters in the ordinary course of business, but does not expect any current litigation to have a material adverse effect[165][320] - A significant legal proceeding involves a dispute with GPO FN Noteholder LLC regarding additional Class A common stock shares. A non-binding term sheet was entered into on January 27, 2023, proposing the return of 5,881,723 shares for cancellation and the issuance of a $46.8 million subordinated convertible promissory note (New Note)[166][167][168] - As of March 31, 2023, the Company accrued an $11.7 million loss contingency related to the estimated fair value of the proposed New Note, reflecting the difference between the estimated fair value of the New Note and the value of shares to be returned[174] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on FiscalNote's financial condition and results of operations, including an overview of the business, the impact of the Business Combination, factors affecting comparability, key performance indicators, non-GAAP financial measures, detailed analysis of revenue and expenses, liquidity, and critical accounting estimates Overview This chapter provides a high-level description of FiscalNote's business as a technology provider of global policy and market intelligence - FiscalNote is a leading technology provider of global policy and market intelligence, utilizing AI and data science to deliver actionable legal and policy insights to help customers manage policy, regulatory developments, and global risk[179] Business Combination Impact This chapter discusses the significant financial impacts of the Business Combination, including changes in cash, warrant liabilities, and compensation expenses - The Business Combination, accounted for as a reverse recapitalization with Old FiscalNote as the accounting acquirer, significantly impacted financial position and results, including a $65.6 million increase in net cash from $325.0 million gross proceeds[180][181] - The Company recognized a $34.9 million warrant liability and expects recurring non-cash gains or losses from fair value re-measurement of these warrants[183] - The Business Combination led to $28.9 million in incremental stock-based compensation, $45.3 million loss on debt extinguishment, and a $32.1 million interest charge related to derecognition of beneficial conversion features[185] Factors Impacting the Comparability of Our Operating Results This chapter identifies key factors, such as acquisitions and non-cash amortization, that influence the comparability of financial results - Acquisitions, including Dragonfly (2023), Aicel (2022), and DT-Global (2022), significantly affect the comparability of financial statements due to their impact on revenue and expenses[187][194] - The Company incurs significant non-cash amortization expense related to purchased intangibles, which reduced operating income by approximately $2.2 million in Q1 2023 and $1.7 million in Q1 2022[188] - FiscalNote continues to invest in growth levers such as cross-selling, expanding its client base (enterprise and government), entering adjacent markets, and strategic acquisitions, which may incur upfront costs[190][191] Key Performance Indicators This chapter presents key metrics like Annual Recurring Revenue (ARR) and Net Revenue Retention (NRR) to assess business performance - Approximately 90% of revenues are subscription-based, providing high revenue predictability. Annual Recurring Revenue (ARR) is a key indicator of future revenue from existing recurring subscription contracts[195] Key Performance Indicators (in millions) | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------------ | :------------- | :---------------- | | ARR (including acquisitions) | $118.9 | $113.3 | | ARR (excluding 2022 and 2023 acquisitions) | $109.6 | $100.0 | | Run-Rate Revenue (including acquisitions) | $133.6 | $126.7 | | Run-Rate Revenue (excluding 2022 and 2023 acquisitions) | $122.5 | $112.0 | | Net Revenue Retention (NRR) | 96% | 101% | - Net Revenue Retention (NRR) was 96% for the three months ended March 31, 2023, down from 101% in the prior year, indicating a slight contraction in recurring revenue from existing customers[199] Non-GAAP Financial Measures This chapter defines and reconciles non-GAAP financial measures used by management to evaluate performance and facilitate comparisons - The Company uses non-GAAP financial measures such as Adjusted Revenue, Adjusted Gross Profit, Adjusted Gross Profit Margin, EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin to evaluate performance and aid in period-to-period comparisons[200][207] Adjusted Revenues (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Subscription revenue | $28,467 | $22,779 | | Deferred revenue adjustment | $- | $993 | | Adjusted subscription revenue | $28,467 | $23,772 | | Advisory, advertising, and other revenue | $3,062 | $3,292 | | Adjusted Revenues | $31,529 | $27,064 | Adjusted Gross Profit and Margin (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Adjusted Revenues | $31,529 | $27,064 | | Costs of revenue | $(8,937) | $(7,170) | | Amortization of intangible assets | $2,597 | $1,823 | | Adjusted Gross Profit | $25,189 | $21,717 | | Adjusted Gross Profit Margin | 80% | 80% | Adjusted EBITDA and Margin (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(19,273) | $(28,351) | | EBITDA | $(6,815) | $(1,485) | | Stock-based compensation | $6,506 | $260 | | Change in fair value of financial instruments | $(14,680) | $1,338 | | Other non-cash (gains) charges | $5,873 | $(8,609) | | Adjusted EBITDA | $(6,967) | $(6,805) | | Adjusted EBITDA Margin | (22.1)% | (25.1)% | Key Components of Results of Operations This chapter defines the primary revenue streams, cost of revenues, operating expenses, and non-operating items impacting financial results - Revenues are primarily derived from subscription arrangements (approx. 90%) and advisory, advertising, and other services. Subscription revenues are recognized ratably over contract terms, while advisory revenues are recognized upon specific deliverables[209][210][211][212] - Cost of revenues includes hosting, data center costs, amortization of developed technology and capitalized software, third-party fees, compensation for professional services, and direct production costs[216] - Operating expenses include Research and Development, Sales and Marketing, Editorial, General and Administrative, Amortization of Intangible Assets, Impairment of Goodwill, and Transaction Costs, net[217][218][220][221][222][223][224] - Non-operating items include Interest expense, net, Change in fair value of financial instruments, Gain on PPP loan upon extinguishment, and Income taxes[225][226][227] Results of Operations Comparison (Q1 2023 vs Q1 2022) This chapter provides a detailed comparative analysis of the company's revenues, expenses, and net loss between Q1 2023 and Q1 2022 Consolidated Results of Operations (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change ($) | Change (%) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Total revenues | $31,529 | $26,071 | $5,458 | 20.9% | | Subscription revenue | $28,467 | $22,779 | $5,688 | 25.0% | | Advisory, advertising, and other revenue | $3,062 | $3,292 | $(230) | (7.0)% | | Cost of revenues | $8,937 | $7,170 | $1,767 | 24.6% | | Research and development | $5,120 | $6,018 | $(898) | (14.9)% | | Sales and marketing | $12,298 | $9,497 | $2,801 | 29.5% | | General and administrative | $18,221 | $10,557 | $7,664 | 72.6% | | Impairment of goodwill | $5,837 | $- | $5,837 | 100% | | Transaction costs (gains), net | $1,408 | $(1,045) | $2,453 | (234.7)% | | Operating loss | $(27,371) | $(12,410) | $(14,961) | 120.6% | | Interest expense, net | $6,681 | $22,523 | $(15,842) | (70.3)% | | Change in fair value of financial instruments | $(14,680) | $1,338 | $(16,018) | NM% | | Net loss | $(19,273) | $(28,351) | $9,078 | (32.0)% | - Total revenues increased by 20.9% to $31.5 million, driven by a 25% increase in subscription revenue, with organic business growth contributing $3.2 million and acquisitions adding $1.6 million[231][233] - Operating expenses increased by 53.1% to $58.9 million, primarily due to a $5.8 million goodwill impairment, a $7.7 million increase in general and administrative expenses (including $5.5 million in stock-based compensation), and a $2.8 million increase in sales and marketing expenses[231][237][239][241][242] - Net loss improved by 32.0% to $(19.3) million, largely due to a $15.8 million decrease in interest expense and a $16.0 million positive swing in the fair value of financial instruments (from a loss to a gain)[231][246][247] Liquidity and Capital Resources This chapter assesses the company's cash position, working capital, debt, and cash flow activities, and management's outlook on future liquidity - The Company's cash, cash equivalents, and restricted cash decreased to $47.5 million at March 31, 2023, from $61.2 million at December 31, 2022. It also reported a negative working capital balance of $42.1 million (excluding cash) and an accumulated deficit of $720.2 million[258][259] - Management believes current cash, expected product sales, and available borrowings under the New Senior Term Loan will be sufficient to meet short-term and long-term operating expenses and capital expenditures for at least the next twelve months[260] Principal Debt Outstanding (in thousands) | Debt Type | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | New Senior Term Loan | $157,024 | $150,647 | | Convertible Notes | $12,654 | $12,219 | | Dragonfly Seller Convertible Notes | $11,044 | $- | | Aicel Convertible Note | $1,138 | $1,174 | | PPP Loan | $224 | $251 | | Total Principal Outstanding | $182,084 | $164,291 | - Net cash used in operating activities was $12.8 million in Q1 2023, an increase of $2.6 million from Q1 2022, primarily due to the net loss and changes in working capital[278] - Net cash used in investing activities was $6.9 million in Q1 2023, mainly for business acquisitions ($5.0 million) and capital expenditures ($1.9 million)[280] Off-Balance Sheet Arrangements This chapter confirms the absence of material off-balance sheet financing activities or arrangements during the reporting periods - The Company did not engage in any off-balance sheet financing activities or other arrangements that have a material effect on its financial condition or results of operations during the periods presented[283] Recently Issued Accounting Pronouncements This chapter refers to Note 1 for details on new accounting pronouncements and their impact on the financial statements - Information regarding new accounting pronouncements and their impact is detailed in Note 1 of the financial statements[285] Critical Accounting Estimates and Policies This chapter highlights key accounting policies and estimates requiring significant management judgment, such as revenue recognition, business combinations, goodwill, and warrant liabilities - Key accounting policies requiring significant judgment include revenue recognition (determining distinct performance obligations and standalone selling price), costs capitalized to obtain revenue contracts (estimating average period of benefit), and business combinations (fair value allocation of acquired assets and liabilities)[290][291][292][293] - Significant estimates in valuing intangible assets and goodwill include future cash flows, customer attrition rates, discount rates, and fair value of earnout consideration[296] - Goodwill is tested annually for impairment, with the ESG reporting unit experiencing a $5.8 million impairment in Q1 2023 due to stock price decline and underperformance[298][304] - Warrant liabilities are accounted for at fair value and re-measured each reporting period, with changes recognized in the consolidated statement of operations[306] - Deferred taxes and valuation allowances require judgment on future profitability, and the incremental borrowing rate for leases is estimated quarterly based on market and capital structure conditions[308][309] Item 3. Quantitative and Qualitative Disclosures About Market Risks This section discusses the Company's exposure to market risks, including foreign currency exchange risk, interest rate risk, and inflation risk, and their potential impact on financial condition and results of operations - The Company is exposed to foreign currency exchange rate risk, particularly from fluctuations in the Euro, British Pound Sterling, and Australian Dollar, which negatively impacted total revenue by approximately 1.0% in Q1 2023 compared to Q1 2022[311][312] - Interest rate risk is associated with the variable rate New Senior Term Loan. A hypothetical one percentage point increase in the Prime Rate would increase annual cash interest expense by approximately $1.6 million, based on the $157.0 million outstanding balance at March 31, 2023[313][314] - Inflation has not had a material impact on the Company's financial condition or results to date, but a high rate of inflation in the future could have an adverse effect[315] Item 4. Controls and Procedures This section addresses the effectiveness of the Company's disclosure controls and procedures, noting a material weakness but affirming fair presentation of financial statements - As of March 31, 2023, the Company's disclosure controls and procedures were not effective due to a material weakness identified in the prior year[317] - Despite the material weakness, management concluded that the financial statements present fairly, in all material respects, the Company's financial position, results of operations, and cash flows in conformity with GAAP[318] - There were no changes in internal control over financial reporting during Q1 2023 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, other than remediation activities for the identified material weakness[319] Part II. OTHER INFORMATION This part contains miscellaneous disclosures, including legal proceedings, risk factors, equity sales, defaults, mine safety, and a list of exhibits Item 1. Legal Proceedings This section states that the Company is not currently a party to any litigation or regulatory proceeding that is expected to have a material adverse effect on its business, results of operations, financial conditions, or cash flows - The Company is not currently involved in any legal or regulatory proceedings that are expected to have a material adverse effect on its business, results of operations, financial conditions, or cash flows[320] Item 1A. Risk Factors This section indicates that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 28, 2023 - No material changes to the risk factors disclosed in the Company's Current Report on Form 10-K filed on March 28, 2023, have occurred as of the date of this Quarterly Report[321] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered sales of equity securities and confirms that the Company did not repurchase any shares of its common stock during the three months ended March 31, 2023 - The Company had no unregistered sales of equity securities during the three months ended March 31, 2023, other than those reported on Form 8-K filings on January 27, 2023, and March 20, 2023[322] - The Company did not repurchase any shares of its common stock during the three months ended March 31, 2023[323] Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[324] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[325] Item 5. Other Information This section states that there is no other information to report - No other information to report[326] Item 6. Exhibits This section lists the exhibits required by Item 601 of Regulation S-K, including the Agreement and Plan of Merger, Certificate of Incorporation, Bylaws, Warrant Agreement, and other key agreements and certifications - The report includes exhibits such as the Agreement and Plan of Merger, Certificate of Incorporation, Bylaws, Warrant Agreement, Form of Restricted Stock Agreement, Form of 8% Convertible Note, Amendment No. 1 to Credit and Guaranty Agreement, Form of Warrant, Executive Severance Plan, and various certifications[328][329][330][331][332][333] SIGNATURES This chapter confirms the official signing of the report by the Chief Financial Officer and Chief Executive Officer on May 15, 2023 - The report is signed by Jon Slabaugh, Chief Financial Officer, and Timothy Hwang, Chief Executive Officer, on May 15, 2023[335]