RUBICON TECHNOLOGIES, INC. Unless the context otherwise requires, all references in this section to "Holdings LLC" refer to the business and operations ofRubicon Technologies Holdings, LLC (formerly known asRubicon Technologies, LLC ) and its subsidiaries, including those periods prior to the consummation of the Mergers. References to "Rubicon" or "the Company" refer to the business and operations ofRubicon Technologies, Inc. , following the consummation of the Mergers. References to "we," "us" or "our" refer toRubicon and Holdings LLC collectively. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited interim condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, certain statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks, uncertainties and assumptions that could cause Rubicon's actual results to differ materially from management's expectations, including, but not limited to, the risks and uncertainties discussed herein and under the caption "Cautionary Note Regarding Forward-Looking Statements." Overview
We are a digital marketplace for waste and recycling services. Underpinning this marketplace is a cutting-edge, modular platform that powers a modern, digital experience and delivers data-driven insights and transparency for our customers and hauling and recycling partners. We provide our waste generator customers with a platform that delivers pricing transparency, self-service capabilities, and a seamless customer experience while helping them achieve their environmental goals; we enhance our hauling and recycling partners' economic opportunities and help them optimize their businesses; and we help governments provide more advanced waste and recycling services that allow them to serve their local communities more effectively. Over the past decade, this value proposition has allowed us to scale our platform considerably. Our digital marketplace now services over 8,000 customers, including numerous large, blue-chip customers such as Apple, Dollar General, Starbucks, Walmart, Chipotle, and FedEx, and encompasses over 8,000 hauling and recycling partners acrossNorth America . We have also deployed our technology in over 70 municipalities withinthe United States and operate in 20 countries. Furthermore, we have secured a robust portfolio of intellectual property, having been awarded more than 50 patents, with over 100 pending,
and 20 trademarks.
We operate as one segment. See Note 1, Nature of operations and summary of significant accounting policies, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for our discussion about segments. Mergers
OnAugust 15, 2022 , we consummated the Mergers. The Mergers were accounted for akin to a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance withU.S. GAAP. The Mergers had several significant impacts on our reported financial position and results, as a consequence of the reverse recapitalization treatment. At the consummation of the Mergers, holders of 24,178,161 Founder Class A Shares (or approximately 76.5% of the issued and outstanding Founder Class A Shares on such date) exercised their right to redeem those shares for cash at a price of approximately$10.176 per share, resulting in an aggregate redemption payment of approximately$246.0 million from Founder's trust account. Following these redemptions, at the Closing, we received approximately$75.8 million from Founder's trust account, without accounting for the payments of transaction costs, payments under the Forward Purchase Agreement and Cash Transaction Bonuses. As a result of consummation of the Mergers, and accounting for the foregoing redemption payments and receipt of funds from Founder's trust account, the most significant changes in our financial position was a net increase in cash of approximately$73.8 million after accounting for payments of transaction and other costs of$25.3 million , aggregate payments of$68.7 million to theFPA Sellers under the Forward Purchase Agreement, net proceeds of$121.0 million from thePIPE Investment , and the payments by us of aggregate Cash Transaction Bonuses of$28.9 million . See Note 3, Mergers, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information. 29 We expect to incur additional general and administrative expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , and increased expenses for insurance, investor relations, professional and other similar services. General and administrative expenses may fluctuate further as a result of acquisitions or other strategic transactions we undertake in the future. In connection with the Mergers, we entered into a Tax Receivable Agreement with certain of our legacy investors. We may be required to make significant payments in the future under this agreement depending on the extent of certain tax benefits and other factors and these payments could have a material impact on our results of operations and liquidity. See "-Tax Receivable Agreement" below for additional information.
Prior to and following the Closing, we entered into the Forward Purchase Agreement and the SEPA to provide for certain equity financing arrangements. See "-Liquidity and Capital Resources-Other Financing Arrangement" below for additional information regarding these facilities.
COVID-19 The COVID-19 pandemic created significant global economic uncertainty, adversely impacted the business of our customers and partners, impacted our business, results of operations and cash flows and in the future could further impact our business, results of operations and our cash flows. In response to the COVID-19 pandemic, we proactively took steps to put our employees', customers' and partners' needs first to ensure that we could provide our services safely and efficiently. As a result of the pandemic, we experienced customer attrition during the second half of 2020 which caused a decline in service revenue during the first half of 2021 as compared to the same prior-year period; however, our revenues subsequently began to recover and for the second half of 2021, our service revenue increased by$21.7 million as compared to the second half of 2020. This trend has continued into 2022 with our service revenue increasing by$72.2 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Additionally, our sales and marketing activities and spend decreased during 2021 and 2020 as a result of pandemic-related cost-saving initiatives. Some sales and marketing activities, including hiring in the sales and marketing teams and team members' attendance at business development conferences and meetings, resumed beginning in the first quarter of 2022, contributing to an additional$2.7 million in sales and marketing expense for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . See "-Liquidity and Capital Resources-Debt" below for information regarding loans we received and that were forgiven under the Paycheck Protection Program.
Key Factors Affecting Our Performance
Financial results from our operations and the growth and future success of our business are dependent upon many factors. While each of these factors presents significant opportunities for us, these factors also pose challenges that we must successfully address to sustain and grow our business. See also "-Key Metrics and Non-GAAP Financial Measures" below for a discussion of key business and non-GAAP metrics that we use to help manage and evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Industry trends and customers preference
The waste and recycling industry is highly regulated and complex, and public policy is increasingly focused on improving diversion from landfills and reducing emissions. Current policies tend to encourage and reward reductions in carbon dioxide emissions, and many major cities inthe United States have promulgated climate action plans committing to achieve emissions reductions in line with the Paris Climate Accords. Additionally, the waste generators' awareness of benefits achieved by improved diversion from landfills has been increasing which we believe is and will continue driving preference for recycling over landfills. We view these trends as an opportunity to accelerate the growth of our business, including our revenue and profitability. 30
Commodity nature of our recycling program
Through our recycling program, we market a variety of materials, including fibers such as old corrugated cardboard, old newsprint, aluminum, glass, pallets and other materials. Currently, old corrugated cardboard is the most significant material in our recycling program. Our recyclable commodity revenue is influenced by fluctuations in prices of the recyclable commodities. Periods of increasing prices generally provide the opportunity for higher revenue while periods of declining prices may result in declines in sales. For the reporting periods, the trend of the recyclable commodity prices was overall upward and contributed to higher recyclable commodity revenue in the current year periods as compared to the prior year, though some commodities' prices, including old corrugated cardboard, have declined during more recent periods. For the three months endedSeptember 30, 2022 and 2021, our recyclable commodity revenue was$22.2 million and$22.0 million , respectively, and for the nine months endedSeptember 30, 2022 and 2021, our recyclable commodity revenue was$71.6 million and$54.3 million , respectively. See Item 3 of Part I, "Quantitative and Qualitative Disclosures About Market Risk" and Analysis of Financial Condition and Results of Operations and Item 1A of Part II, "Risk Factors" included in elsewhere in this Quarterly Report on Form 10-Q for further discussion regarding recyclable commodity price risk.
Investment in products We are actively investing in our business to support future growth and we expect this investment to continue. We have built a leading cloud-based digital marketplace that provides a transformational customer experience through an easy-to-use interface, where customers can manage services, track invoices, and view environmental outcomes. We believe that our platform is highly differentiated, and we expect to continue to invest in product development to further develop and enhance our platform's features and functionality to further extend the adoption of our platform. For the three months endedSeptember 30, 2022 and 2021, our product development cost was$9.8 million and$4.8 million , respectively, and for the nine months endedSeptember 30, 2022 and 2021, our product development cost was$28.3 million and$13.4 million , respectively. While we continue to invest in product development, we are focusing on operational efficiencies and cost reduction measures, such as rationalizing redundancies across the organization. We expect product development costs to stay consistent as a percentage of total revenue in the next twelve months.
Components of Results of Operations
Revenue
We generate our revenue from waste removal, waste management and consultation services, platform subscriptions, and the purchase and sale of recyclable commodities.
Service revenue:
Service revenues are comprised of waste removal and consultation services provided to customers for waste, recycling and logistics solutions. Services include planning, consolidation of billing and administration, cost savings analyses, vendor procurement and performance management, and a suite of solutions providing insights into the customers' waste streams.
Recyclable commodity revenue:
We recognize recyclable commodity revenue through the purchase and sale of old corrugated cardboard, old newsprint, aluminum, glass, pallets and other recyclable materials.
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Cost of revenue, exclusive of amortization and depreciation
Cost of service revenues primarily consist of expenses related to delivering our service and providing support, including third-party hauler costs, costs of data center capacity, certain fees paid to various third parties for the use of their technology, services and data, and employee-related costs such as salaries
and benefits.
As part of our services, we work with our customers to locate opportunities to reduce waste volume and service frequency with the intention to reduce costs for the customers which in turn leads to reduced costs for us. We are typically entitled to bill for a portion of such savings the customers realize as a result of our services in accordance with the terms with our customer contracts. Cost of recyclable commodity revenues primarily consist of expenses related to purchase of old corrugated cardboard, old newsprint, aluminum, glass, pallets and other recyclable materials, and any associated transportation fees. Sales and marketing Sales and marketing expenses consist primarily of compensation costs, including salaries, bonuses, benefits and other incentives to our sales and marketing personnel, advertising expenses, digital marketing expenses, sales commissions and other promotional expenditures. Product development Product development expenses consist primarily of compensation costs, including salaries, bonuses and other benefits to our product development team, contract labor expenses and fees for software licenses, consulting, legal, and other
services. General and administrative General and administrative expenses consist primarily of compensation and benefits related costs, including equity-based compensation expense for our general corporate functions. General and administrative costs also consist of third-party professional service fees for external legal, accounting, and other consulting services, insurance charges, hosting fees and overhead costs. We expect that general and administrative expenses will decrease as a percentage of total revenues over the next several years as a result of our increased focus on operational efficiencies and planned cost reduction measures across the organization. We plan to eliminate redundancies across the organization, which were a byproduct of our growth and expansion phase the past few years. However, we expect certain incremental costs to incur as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange and expenses related to compliance and reporting obligations pursuant to the rules and regulations of theSEC . Equity-based compensation expense in the three and nine months endedSeptember 30, 2022 was approximately$91.0 million and$95.8 million , respectively, an increase of$90.2 million and$92.4 million compared to the three and nine months endedSeptember 30, 2021 , respectively. At the consummation of the Mergers, we incurred approximately$79.7 million of equity-based compensation expense due to the modification and vesting of the "Legacy Rubicon Incentive Units and Phantom Units," which are those units we granted pursuant to the Holdings LLC Profits Participation Plan and Unit Appreciation Rights Plan (the "2014 Plan") and additional$10.9 million for the RSUs granted to certain management members. At the consummation of the Mergers, we also incurred approximately$47.6 million of one-time compensation costs associated with certain Rubicon management rollover consideration, which is payable in cash or equity at our discretion. It is expected we will make certain RSU and deferred stock unit ("DSU") awards as replacement awards for Rubicon management rollover consideration under the Merger Agreement. We expect to issue a variable number of RSUs and DSUs in such an amount equal to$47.6 million based on the fair market value of Class A Common Stock at the time of the awards. These RSUs and DSUs would be subject to certain vesting conditions and will vest into an equivalent number of shares of Class A Common Stock. While the terms of these awards have not yet been finalized, the anticipated equity-based compensation expense for these RSUs and DSUs issued in connection with the replacement awards is expected to be$47.6 million and offset the accrued compensation expenses associated with Rubicon management rollover consideration under the Merger Agreement. 32
OnOctober 19, 2022 , we granted certain RSU and DSU awards pursuant to the Merger Agreement as replacement awards for the Holdings LLC Phantom Units. The number of RSUs and DSUs issuable in exchange of Legacy Rubicon Phantom Units is expected to be approximately 970,389 and 540,032, respectively. These RSUs and DSUs will vest onFebruary 11, 2023 into an equivalent number of Class A Common Stock. The equity-based compensation expense for the RSUs and DSUs issued in exchange for the Legacy Rubicon Phantom Units was approximately$2.2 million and recognized in general and administrative expense for the three months endedSeptember 30, 2022 . Accounting rules require immediate recognition of the equity-based compensation expense as a result of the non-substantive vesting period. Additionally, certain of our employees received a one-time incentive cash payment upon closing of the Mergers. The aggregate Cash Transaction Bonuses paid by us in connection with the Mergers was approximately$28.9 million , as well as additional discretionary bonuses in the amount of$2.8 million paid following the Closing. Historically, we have paid annual cash-based bonuses to our employees. For the years endedDecember 31, 2021 and 2020, the annual cash-based bonuses we incurred were$6.8 million and$6.0 million , respectively. We expect that annual cash-based bonuses will continue to be a component of our employee compensation practices to ensure that we are able to attract and retain employee talent; however, we do not expect that additional cash-based bonuses of a size comparable to the Cash Transaction Bonuses will be awarded or payable in the ordinary course, outside of a change of control or similar significant transaction. Accordingly, our general and administrative expenses increased by the payment of the Cash Transaction Bonuses during the three- and nine-month periods endedSeptember 30, 2022 (the periods in which the Mergers were consummated). Additionally, pursuant to the CEO Transition Agreement, we will make a series of transition payments to Mr.Nate Morris , the Company's former CEO, in the aggregate amount of$1.9 million throughFebruary 10, 2023 and a$0.7 million bonus with respect to his service in 2022 that will be paid byFebruary 10, 2023 . In lieu of any obligation to deliver RSUs toMr. Morris pursuant to his employment agreement, we granted toMr. Morris an award of 8,378,986 RSUs that will vest onFebruary 10, 2023 . See Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of this Part I of this Quarterly Report on Form 10-Q for further information. We expect that equity-based compensation will continue to be a substantial component of employee compensation practices of Rubicon; however, we do not expect that additional equity-based compensation of a size comparable to the grants made in respect of the Legacy Rubicon Incentive Units and Phantom Units or the CEO Transition Agreement will be awarded in the ordinary course, outside of a change of control or similar significant transaction or comparable management transitions. It is anticipated that such equity-based compensation expenses will likely increase our general and administrative expenses, dilute existing Rubicon stockholders, and reduce our earnings per share.
Amortization and depreciation
Amortization and depreciation consist of all depreciation and amortization expenses associated with our property and equipment, acquired intangible assets and customer acquisition costs.
Interest expense
Interest expense consists primarily of interest expense associated with our outstanding debt, including accretion of debt issuance costs.
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Results of Operations
The following tables show our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Comparison of the three months ended
Three Months Ended
September 30,
2022 2021 Change $ Change %
(in thousands, except changes in percentage)
Revenue
Service $ 162,789 $ 127,256 $ 35,533 27.9 %
Recyclable commodity 22,194 21,952 242 1.1 %
Total revenue 184,983 149,208 35,775 24.0 %
Costs and expenses:
Cost of revenue (exclusive of
amortization and depreciation)
Service 157,504 122,771 34,733 28.3 %
Recyclable commodity 20,234 20,340 (106 ) (0.5 )%
Total cost of revenue (exclusive of
amortization and depreciation) 177,738 143,111 34,627 24.2 % Sales and marketing 4,840 3,808 1,032 27.1 % Product development 9,803 4,827 4,976 103.1 % General and administrative 186,640 11,561 175,079 NM %
Amortization and depreciation 1,439 1,344
95 7.1 %
Total costs and expenses 380,460 164,651 215,809 131.1 %
Loss from operations (195,477 ) (15,443 ) (180,034 ) NM %
Other income (expense):
Interest earned 1 - 1 NM %Gain on change in fair value of warrants 74 - 74 NM % Gain on change in fair value of earn-out liabilities 67,100 - 67,100 NM % Loss on change in fair value of forward purchase option derivative (76,919 ) - (76,919 ) NM % Excess fair value over the consideration received for SAFE - - - NM % Other expense (1,307 ) (326 ) (981 ) 300.9 % Interest expense (4,578 ) (2,611 ) (1,967 ) 75.3 % Total other income (expense) (15,629 ) (2,937 ) (12,692 ) 432.1 % Loss before income taxes (211,106 ) (18,380 ) (192,726 ) NM % Income tax expense (benefit) 19 (252 ) 271 (107.5 )% Net loss (211,125 ) (18,128 ) (192,997 ) NM % Net loss attributable toHoldings LLC unitholders prior to the Mergers (176,384 ) (18,128 ) (158,256 ) 873.0 % Net loss attributable to noncontrolling interests (16,933 ) - (16,933 ) NM % Net Loss Attributable to Class A Common Stockholders (17,808 ) - (17,808 ) NM % NM - not meaningful 34 Revenue
Total revenue increased by
Service revenue increased by$35.5 million , or 27.9%, primarily due to$22.5 million generated from our new customers since the end of the prior year quarter and a$17.1 million increase driven by higher prices charged for the services provided to our existing customers, partially offset by a$3.9 million decrease as a result of lower volume and frequency of the services provided for the existing customers.
Revenues from sales of recyclable commodities increased by
Cost of revenue, exclusive of amortization and depreciation
Total cost of revenue increased by
Cost of service revenue increased by$34.7 million or 28.3%, primarily attributable to a$20.8 million increase in connection with servicing our new customers including nonrecurring costs incurred for onboarding a new significant customer, and a$16.2 million increase driven by price increase for the services provided to our existing customers, partially offset by a$2.5 million decrease as a result of lower volume and frequency of the services provided to the existing customers. Cost of recyclable commodity revenue decreased by$0.1 million or 0.5% primarily due to a decrease in prices of certain commodities, including old corrugated cardboard, during the three-month endedSeptember 30, 2022 as compared to prior year quarter. Sales and marketing Sales and marketing expenses increased by$1.0 million or 27.1% for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to higher costs of$0.9 million for sales and marketing activities that we recommenced in 2022 following a temporary suspension as a result of the pandemic, including meetings, conferences and other business development activities. Product development
Product development expenses increased by$5.0 million , or 103.1%, for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to higher product development support costs of$4.3 million , which was mainly driven by higher software subscription costs to support our product development team, and higher payroll related costs of$0.6 million , which increased primarily due to the headcount increase in our product development team to support our growth. We expect product development costs to continue to be higher for next twelve months. The increase is expected to be driven by the Palantir Technologies, Inc. software services subscription, which provides advanced data analytics capabilities to enhance the data security, visibility, models, and algorithms of our digital platform. See "Contractual Obligations." However, the increase from the Palantir Technologies, Inc. software services agreement is expected to be offset, at least partially, by planned cost reduction measures as a result of our increased focus on operational efficiencies. We also plan to eliminate any redundancies within the organization, including in product development, which were a byproduct of our growth and expansion phase the past few years. 35 General and administrative General and administrative of$186.6 million expenses increased by$175.1 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to an increase of stock-based compensation expense by$90.2 million and cash payments and RSU and DSU issuances in connection with Rubicon management rollover consideration under the Merger Agreement increasing expense by$82.1 million . The majority of these stock-based compensation expenses were incurred in connection with vesting ofHoldings LLC's incentive units and phantom units granted under the 2014 Plan as well as bonuses and incentives in connection with the consummation of the Mergers. Additionally, payroll cost increased by$1.3 million due to headcount increases.
Amortization and depreciation
Amortization and depreciation expenses for the three months endedSeptember 30, 2022 were relatively unchanged compared to the three months ended September
30, 2021. Other income (expense) Other expense increased by$12.7 million or 432.1% for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to a$76.9 million loss from change in fair value of forward purchase option derivative incurred in connection with the Forward Purchase Agreement and a$2.0 million increase in interest expense, partially offset by a$67.1 million gain from change in fair value of earn-out liabilities.
See Note 15, Fair Value Measurements, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for further information regarding the changes in fair value.
Income tax expense (benefit)
Income tax expense for the three months endedSeptember 30, 2022 increased by$0.3 million compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to the current state tax expenses. 36
Comparison of the nine months ended
Nine Months Ended
September 30,
2022 2021 Change $ Change %
(in thousands, except changes in percentage)
Revenue
Service $ 437,755 $ 365,511 $ 72,244 19.8 %
Recyclable commodity 71,640 54,251 17,389 32.1 %
Total revenue 509,395 419,762 89,633 21.4 %
Costs and expenses:
Cost of revenue (exclusive of
amortization and depreciation)
Service 423,382 351,287 72,095 20.5 %
Recyclable commodity 65,856 51,098 14,758 28.9 %
Total cost of revenue (exclusive of
amortization and depreciation) 489,238 402,385
86,853 21.6 %
Sales and marketing 13,336 10,604 2,732 25.8 %
Product development 28,336 13,350 14,986 112.3 %
General and administrative 212,520 34,968 177,552 507.8 %Amortization and depreciation 4,331 4,958 (627 ) (12.6 )% Total costs and expenses 747,761 466,265 281,496 60.4 % Loss from operations (238,366 ) (46,503 ) (191,863 ) 412.6 % Other income (expense): Interest earned 1 2 (1 ) (50.0 )% Gain on forgiveness of debt - 10,900 10,900 (100.0 )% Loss on change in fair value of warrants (436 ) - (436 ) NM % Gain on change in fair value of earn-out liabilities 67,100 - 67,100 NM % Loss on change in fair value of forward purchase option derivative (76,919 ) - (76,919 ) NM % Excess fair value over the consideration received for SAFE (800 ) - (800 ) NM % Other expense (1,994 ) (730 ) (1,264 ) 173.2 % Interest expense (12,264 ) (7,461 ) (4,803 ) 64.4 % Total other income (expense) (25,312 ) 2,711 (28,023 ) NM % Loss before income taxes (263,678 ) (43,792 ) (219,886 ) 502.1 % Income tax expense (benefit) 60 (961 ) 1,021 (106.2 )% Net loss (263,738 ) (42,831 ) (220,907 ) 515.8 % Net loss attributable toHoldings LLC unitholders prior to the Mergers (228,997 ) (42,831 ) (186,166 ) 434.7 % Net loss attributable to noncontrolling interests (16,933 ) - (16,933 ) NM % Net Loss Attributable to Class A Common Stockholders (17,808 ) - (17,808 ) NM % NM - not meaningful 37 Revenue
Total revenue increased by
Service revenue increased by$72.2 million , or 19.8%, primarily due to$41.1 million generated from our new customers since the end of the prior year period and an increase of$64.0 million driven by higher prices charged for the services provided to our existing customers, partially offset by a$32.9 million decrease as a result of lower volume and frequency of the services provided
to the existing customers. Revenues from sales of recyclable commodities increased by$17.4 million , or 32.1%, primarily due to an increase in the sales prices for recyclable commodities, especially old corrugated cardboard, which contributed to a$10.3 million increase driven by the higher average price per ton by 26.2%, and pallets, which contributed to a$6.0 million increase as a result of the higher average price per unit by 49.3%, in each case as compared to the average price in the prior year period.
Cost of revenue, exclusive of amortization and depreciation
Total cost of revenue increased by
Cost of service revenue increased by$72.1 million or 20.5%, primarily attributable to a$40.9 million increase in connection with servicing our new customers, including nonrecurring costs for onboarding a new significant customer, and a$63.6 million increase driven by price increase from our hauling and recycling partners for servicing our existing customers, partially offset by a$31.4 million decrease as a result of lower volume and frequency of the services provided for the existing customers.
Cost of recyclable commodity revenue increased by
Sales and marketing Sales and marketing expenses increased by$2.7 million or 25.8% for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to higher costs for sales and marketing activities that we recommenced in 2022 following a temporary suspension as a result of the pandemic, including meetings, conferences and other business development activities in the amount of$1.5 million and higher payroll related costs of$0.9 million due to headcount increases. Product development
Product development expenses increased by$15.0 million , or 112.3%, for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to higher product development support costs of$12.9 million , which was mainly driven by higher software subscription costs to support our product development team, and higher payroll related costs of$1.9 million , which increased primarily due to the headcount increases in our product development team to support our growth. We expect product development costs to continue to be higher for next twelve months. The increase is expected to be driven by the Palantir Technologies, Inc. software services subscription, which provides advanced data analytics capabilities to enhance the data security, visibility, models, and algorithms of our digital platform. See "Contractual Obligations." However, the increase from the Palantir Technologies, Inc. software services agreement is expected to be offset, at least partially, by planned cost reduction measures as a result of our increased focus on operational efficiencies. We also plan to eliminate any redundancies within the organization, including in product development, which were a byproduct of our growth and expansion phase the past few years. 38 General and administrative
General and administrative expenses increased by$177.6 million , or 507.8%, for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to an increase of stock-based compensation expense by$92.4 million and cash payments and RSU and DSU issuances in connection with Rubicon management rollover consideration under the Merger Agreement increasing expense by$82.3 million . The majority of these stock-based compensation expenses were incurred in connection with vesting ofHoldings LLC's incentive units and phantom units granted under the 2014 Plan as well as bonuses and incentives in connection with the consummation of the Mergers. Additionally, an increase of outside services by$3.0 million including professional service fees to operate as a publicly traded company, an increase of$3.5 million in payroll cost due to the headcount increase, partially offset by a$5.2 million decrease in bad debt expense due to improved cash collection of amounts for which reserves had previously been established.
Amortization and depreciation
Amortization and depreciation expenses for the nine months endedSeptember 30, 2022 were relatively unchanged compared to the nine months ended September
30, 2021. Other income (expense) Other expense of$25.3 million increased by$28.0 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to a$76.9 million loss on change in fair value of forward purchase option derivative incurred in connection with the Forward Purchase Agreement, a$10.9 million debt forgiveness in 2021 which did not repeat, a$4.8 million increase in interest expense, an$0.8 million loss related to the excess fair value over the consideration received for the SAFE executed inMay 2022 and an$0.8 million expense incurred for commitment shares issued in connection of SEPA, partially offset by a$67.1 million gain on change in fair value of earn-out liabilities.
See Note 15, Fair Value Measurements, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for further information regarding the changes in fair value and "Liquidity and Capital Resources - Other Financing Arrangements below" for further information regarding the SAFE.
Income tax expense (benefit)
Income tax expense for the nine months endedSeptember 30, 2022 increased by$1.0 million compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to the deferred tax expenses related to book and tax basis difference in goodwill and the current state tax expenses. 39
Key Metrics and Non-GAAP Financial Measures
In addition to the measures presented in our condensed consolidated financial statements, we use the following key business and non-GAAP metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. Revenue net retention
We believe our ability to retain customers is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We calculate revenue net retention as a year-over-year comparison that measures the percentage of revenue recognized in the current quarter from customers retained from the corresponding quarter in the prior year. We believe that our revenue net retention rate is an important metric to measure overall client satisfaction and the general quality of our service offerings as it is a composition of revenue expansion or contraction within our customer accounts.
Our revenue net retention rate was 118.3% and 109.0% as of
Adjusted gross profit and adjusted gross profit margin
Adjusted gross profit is a non-GAAP financial measure which is calculated by adding back amortization and depreciation for revenue generating activities and platform support costs to GAAP gross profit, the most comparable GAAP measurement. Adjusted gross profit margin is calculated as adjusted gross profit divided by total GAAP revenue. We believe adjusted gross profit and adjusted gross profit margin are important measures and useful to investors because they show the progress in scaling our digital platform by quantifying the markup and margin we charge our customers that are incremental to our marketplace vendor costs. These measures demonstrate this progress because changes in these measures are driven primarily by our ability to optimize services for our customers, improve our hauling and recycling partners' efficiency and achieve economies of scale on both sides of the marketplace. Our management team uses these non-GAAP measures as one of the means to evaluate the profitability of our customer accounts, exclusive of certain costs that are generally fixed in nature, and to assess how successful we are in achieving our pricing strategies. However, it is important to note that other companies, including companies in our industry, may calculate and use these measures differently or not at all, which may reduce their usefulness as a comparative measure. Further, these measures should not be read in isolation from or without reference to our results prepared in accordance with GAAP.
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The following table shows the calculation of GAAP gross profit and a
reconciliation of (i) GAAP gross profit to non-GAAP adjusted gross profit and
GAAP gross profit margin to non-GAAP adjusted gross profit margin, (ii)
amortization and depreciation for revenue generating activities to total
amortization and depreciation and (iii) platform support costs to total cost of
revenue (exclusive of amortization and depreciation) for each of the periods
presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands, except percentages)
Total revenue $ 184,983 $ 149,208 $ 509,395 $ 419,762
Less: total cost of revenue (exclusive
of amortization and depreciation) 177,738 143,111 489,238 402,385
Less: amortization and depreciation for
revenue generating activities 657 450 1,886 2,012
Gross profit $ 6,588 $ 5,647 $ 18,271 $ 15,365
Gross profit margin 3.6 % 3.8 % 3.6 % 3.7 %
Gross profit $ 6,588 $ 5,647 $ 18,271 $ 15,365
Add: amortization and depreciation for
revenue generating activities 657 450 1,886 2,012
Add: platform support costs(1) 6,884 5,787 19,761 16,026
Adjusted gross profit $ 14,129 $ 11,884 $ 39,918 $ 33,403
Adjusted gross profit margin 7.6 % 8.0 % 7.8 % 8.0 %
Amortization and depreciation for revenue generating activities$ 657 $ 450 $ 1,886 $ 2,012 Amortization and depreciation for sales, marketing, general and administrative activities 782 894 2,445 2,946 Total amortization and depreciation$ 1,439 $ 1,344 $ 4,331 $ 4,958 Platform support costs(1)$ 6,884 $ 5,787 $ 19,761 $ 16,026 Marketplace vendor costs(2) 170,854 137,324 469,477 386,359 Total cost of revenue (exclusive of amortization and depreciation)$ 177,738 $ 143,111 $ 489,238 $ 402,385
(1) We define platform support costs as costs to operate our revenue generating
platforms that do not directly correlate with volume of sales transactions
procured through our digital marketplace. Such costs include employee costs,
data costs, platform hosting costs and other overhead costs.
(2) We define marketplace vendor costs as direct costs charged by our hauling and
recycling partners for services procured through our digital marketplace.
41
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure and GAAP net loss is its most
comparable GAAP measurement. We define adjusted EBITDA as GAAP net loss adjusted
to exclude interest expense and income, income tax expense and benefit,
amortization and depreciation, equity-based compensation, phantom unit expense,
gain or loss on change in fair value of warrant liabilities, gain or loss on
change in fair value of earn-out liabilities, gain or loss on change in fair
value of forward purchase option derivative, excess fair value over the
consideration received for SAFE, other non-operating income and expenses, and
unique non-recurring income and expenses.
We have included adjusted EBITDA because it is a key measure used by our
management team to evaluate our operating performance, generate future operating
plans, and make strategic decisions, including those relating to operating
expenses. Further, we believe it is helpful in highlighting trends in our
operating results because it allows for more consistent comparisons of financial
performance between periods by excluding gains and losses that are
non-operational in nature or outside the control of management, as well as items
that may differ significantly depending on long-term strategic decisions
regarding capital structure, the tax jurisdictions in which we operate and
capital investments. It is also often used by analysts, investors and other
interested parties in evaluating and comparing our results to other companies
within our industry. Accordingly, we believe that adjusted EBITDA provides
useful information to investors and others in understanding and evaluating our
operating results in the same manner as our management team and board of
directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of net loss or our other results as reported under GAAP. Some of these limitations are:
? adjusted EBITDA does not reflect our cash expenditures, future
requirements for capital expenditures, or contractualcommitments;
? adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
? adjusted EBITDA does not reflect our tax expense or the cash
requirements to pay our taxes;
? although amortization and depreciation are non-cash charges, the assets
being amortized and depreciated will often have to be replaced in the
future and adjusted EBITDA does not reflect any cashrequirements for
such replacements;
? adjusted EBITDA should not be construed as an inference that our future
results will be unaffected by unusual or non-recurring items for which
we may make adjustments in historical periods; and
? other companies in our industry may calculate adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
42
The following table presents a reconciliation of net loss, the most directly
comparable financial measure calculated in accordance with GAAP, to adjusted
EBITDA for each of the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands, except percentages)
Total revenue $ 184,983 $ 149,208 $ 509,395 $ 419,762
Net loss $ (211,125 ) $ (18,128 ) $ (263,738 ) $ (42,831 )
Adjustments:
Interest expense 4.578 2,611 12,264 7,461
Interest earned (1 ) - (1 ) (2 )Income tax expense (benefit) 19 (252 ) 60 (961 ) Amortization and depreciation 1,439 1,344
4,331 4,958 Equity-based compensation 88,793 122 88,977 486 Phantom unit expense 2,213 641 6,783 2,907
Deferred compensation expense 1,250 - 1,250 - (Gain) Loss on change in fair value of warrant liabilities (74 ) - 436 - Gain on change in fair value of earn-out liabilities (67,100 ) - (67,100 ) - Loss on change in fair value of forward purchase option derivative 76,919 - 76,919 - Excess fair value over the consideration received for SAFE - - 800 - Nonrecurring merger transaction expenses(3) 80,712 - 80,712 - Other expenses(4) 1,307 326 1,994 730 Gain on forgiveness of debt - - - (10,900 ) Adjusted EBITDA$ (21,070 ) $ (13,336 ) $ (56,313 ) $ (38,152 ) Net loss as a percentage of total revenue (114.1 )% (12.1 )% (51.8 )% (10.2 )% Adjusted EBITDA as a percentage of total revenue (11.4 )% (8.9 )% (11.1 )% (9.1 )%
(3) Nonrecurring merger transaction expenses primarily consist of management
bonus payments of
subsequent to the Closing Date, accrual for Rubicon management rollover
consideration under the Merger Agreement of
payroll tax expense of
losses, taxes, penalties, commitment fee for SEPA, and gains and losses on
sale of property and equipment.
43
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows in the short- and long-term to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions and investments, and other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, and their sufficiency to fund our operating and investing activities. Our principal sources of liquidity have been borrowings under our current and prior credit facilities, proceeds from the issuance of equity and warrant exercises and cash generated by operating activities. More recently, we received cash proceeds from the Mergers and thePIPE Investment , and have entered into the SEPA to provide additional liquidity (see "-Other Financing Arrangements" below). Our primary cash needs are for day-to-day operations, to fund working capital requirements, to fund our growth strategy, including investments and acquisitions, to pay interest and principal on our indebtedness and to pay$34.3 million under our software subscription agreement with Palantir Technologies, Inc., throughOctober 2024 (see "-Contractual Obligations" below). Our principal uses of cash in recent periods have been funding operations and paying expenses associated with the Mergers, including amounts paid under the Forward Purchase Agreement. Our long-term future capital requirements will depend on many factors, including revenue growth rate, achieving higher profitability on our revenue contracts, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support investments, including research and development efforts and the continuing market adoption of our products, and the terms on which we refinance our existing indebtedness. During the nine months endedSeptember 30, 2022 , and in each fiscal year since the Company's inception, we have incurred losses from operations and generated negative cash flows from operating activities. We also have negative working capital and stockholders' deficit as ofSeptember 30, 2022 . Our total current liabilities as ofSeptember 30, 2022 are$258.7 million . As ofSeptember 30, 2022 , cash and cash equivalents totaled$4.5 million , accounts receivable totaled$58.7 million and unbilled accounts receivable totaled$62.8 million . Availability under our Revolving Credit Facility, which provides the ability to borrow up to$60.0 million , was$21.2 million . As ofNovember 15, 2022 , we had approximately$5.1 million in cash and cash equivalents and$23.8 million available under our Revolving Credit Facility. Our outstanding indebtedness includes the Revolving Credit Facility, the Term Loan and the Subordinated Term Loan, under which the principal of$36.2 million ,$51.0 million and$20.0 million , respectively, were outstanding as ofNovember 15, 2022 and are scheduled to mature inDecember 2023 . Pursuant to the SEPA, we have the right to sell up to$200.0 million of shares of Class A Common Stock to the Yorkville Investor, subject to certain limitations and conditions set forth in the SEPA. However, because shares issued under the SEPA are sold at a discount to the then-current market price, in light of the current market price and the NYSE rules limiting the number of shares that can be issued without shareholder approval, the amount that could be raised pursuant to the SEPA is significantly lower than$200.0 million without first obtaining shareholder approval. Furthermore, the amended Term Loan agreement entered into onNovember 18, 2022 requires us to repay the Term Loan with any net proceeds provided by the SEPA until such time that the Term Loan is repaid in full. We currently project that we will not have sufficient cash on hand or available liquidity under existing arrangements to meet our projected liquidity needs for the next 12 months. In the absence of additional capital, there is substantial doubt about our ability to continue as a going concern. To address projected liquidity needs for the next 12 months, we have negotiated and received a binding commitment for$30.0 million of additional financing (the "Financing Commitment"), pursuant to which certain existing investors have agreed to contribute cash up to the$30.0 million commitment amount to the extent other equity capital of an equivalent amount has not been provided to the Company byJanuary 15, 2023 . See "-Financing Arrangements" below for additional information regarding the Financing Commitment. In addition to the proceeds from the Financing Commitment, we have begun to execute our plan to modify our operations to further reduce spending. Initiatives we have undertaken in the fourth quarter of 2022 include (i) increased focus on operational efficiencies and cost reduction measures, (ii) eliminating redundancies that have been the natural byproduct of our recent growth and expansion, (iii) evaluating our portfolio and less profitable accounts to better ensure we are deploying resources efficiently, and (iv) exercising strict capital discipline for future investments, such as requiring investments to meet minimum hurdle rates. 44
We believe that the extended maturity of the Revolving Credit Facility, the Financing Commitment, cash on hand and available under the Revolving Credit Facility, and other cash flows from operations are expected to provide sufficient liquidity to meet our known liquidity needs for the next 12 months. We believe this plan is probable of being achieved and alleviates substantial doubt about our ability to continue as a going concern. In the longer-term, we intend to refinance all of the indebtedness maturing in 2023 with new, longer-term debt facilities (the "New Debt Facilities"). We may receive additional capital from the cash exercise of the Public and Private Warrants. However, the exercise price of our Warrants is$11.50 per warrant and the last reported sales price of our Class A Common Stock onNovember 18, 2022 was$2.19 . The likelihood that Warrant holders will exercise their Warrants, and therefore the likelihood of any amount of cash proceeds that we may receive, is dependent upon the trading price of our Class A Common Stock and we do not currently expect to receive any cash proceeds from the exercise of Warrants in the short- to medium-term due to the trading price of our Class A Common Stock. If the trading price for our Class A Common Stock continues to be less than$11.50 per share, we do not expect Warrant holders to exercise their Warrants. Similarly, the Private Warrants may be exercised on a cashless basis and we will not receive any proceeds from such exercise, even if the Private Warrants are in-the-money. We will have broad discretion over the use of any proceeds from the exercise of such securities. Any proceeds from the exercise of such securities would increase our liquidity, but we are not currently budgeting for any cash proceeds from the exercise of Warrants when planning for our operational funding needs. If we raise funds by issuing equity securities, including under the SEPA, dilution to stockholders will occur and may be substantial. Any equity securities issued may also provide for rights, preferences, or privileges senior to those of holders of common stock. If we raise funds by issuing debt securities, including the convertible notes proposed to be entered into as part of the Financing Commitment and the New Debt Facilities, these debt securities could have rights, preferences, and privileges senior to those of common stockholders. The terms of debt securities or borrowings, including the terms of the Financing Commitment and the New Debt Facilities, could impose significant restrictions on our operations and will increase the cost of capital due to interest payment requirements. The capital markets have been very difficult and expensive to access in recent periods, which could impact the availability and cost of equity and debt financing under the Financing Commitment, the New Debt Facilities or otherwise. It is possible that we will not enter into all of financing contemplated with respect to the New Debt Facilities and that no additional funding will be available at all in the capital markets. In addition, recent and anticipated future increases in federal fund rates set by theFederal Reserve , which serve as a benchmark for rates on borrowing, will impact the cost and availability of debt financing. If we are unable to obtain adequate capital resources to fund operations, we will not be able to continue to operate our business pursuant to our current business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing, product development and other activities, which could have a material adverse impact on our operations and our ability to increase revenues, or we may be forced to discontinue our operations entirely. Similarly, in the longer-term, any inability to repay or refinance our indebtedness maturing in 2023 through the New Debt Facilities or otherwise would have similar effects on our business.
See "-Contractual Obligations" below for a discussion of other obligations with respect to which we will be required to make significant future payments or under which we have significant financial contractual obligations.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
September 30,
2022 2021
Net cash used in operating activities $ (112,918 ) $ (45,110 )
Net cash used in investing activities (69,865 ) (1,344 )
Net cash provided by financing activities 176,630 48,071
Net increase (decrease) in cash and cash equivalents
45
Cash flows used in operating activities
Net cash used in operating activities increased by
? a$220.9 million increase in net loss.
? a
to a
million in loss from change in fair value of forward purchase option
derivative, a
million increase in phantom unit expense, a
amortization of debt issuance costs, a
compensation expense, a
partially offset by a
of earn-out liabilities and a
? a
and liabilities, primarily driven by an increase in favorable impact from
accrued expenses by
partially offset by an increase in unfavorable impact from accounts receivable
by $7.9 million and prepaid expense by $3.7 million .
Cash flows used in investing activities
Net cash used in investing activities increased by$68.5 million to$69.9 million for the nine months endedSeptember 30, 2022 compared to$1.3 million for the nine months endedSeptember 30, 2021 . The increase in cash used in investing activities was primarily driven by payments made under the Forward Purchase Agreement.
Cash flows from financing activities
Net cash provided by financing activities was$176.6 million for the nine months endedSeptember 30, 2022 , compared to$48.1 million for the nine months endedSeptember 30, 2021 . Net cash provided by financing activities for the nine months endedSeptember 30, 2022 resulted primarily from net proceeds from the Mergers of$175.0 million and proceeds of$8.0 million from the SAFE, offset in part by$4.5 million repayments of long-term debt, and$2.0 million payments of financing costs. Net cash provided by financing activities was$48.1 million for the nine months endedSeptember 30, 2021 resulted primarily from proceeds of$32.5 million from warrants exercised and$22.3 million from long-term debt, offset in part by net payment on line of credit of$4.4 million , repayments of long-term debt in the amount of$1.5 million and$0.8 million payments of financing costs. Tax Receivable Agreement
In connection with the consummation of the Mergers, we entered into the Tax
Receivable Agreement with the common and preferred unitholders of
The actual future payments to the TRA Holders will vary, and estimating the amount of payments that may be made under the Tax Receivable Agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors and future events. The actual future payments under the Tax Receivable Agreement are dependent on a number of factors, including the price of Class A Common Stock at the time of the exchange; the timing of future exchanges; the extent to which exchanges are taxable; the amount and timing of the utilization of tax attributes; the amount, timing and character of our income; theU.S. federal, state and local tax rates then applicable; the depreciation and amortization periods that apply to the increases in tax basis; the timing and amount of any earlier payments that we may have made under the TRA; and the portion of our payments under the TRA that constitutes imputed interest or gives rise to depreciable or amortizable tax basis. A significant portion of any potential future payments under the Tax Receivable Agreement is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us, assumingHoldings LLC generates sufficient income to utilize the deductions. If sufficient income is not generated byHoldings LLC , our associated taxable income will be affected and the associated tax benefits to be realized will be limited, thereby similarly reducing the associated Tax Receivable Agreement payments to be made. We may however still need to seek additional sources of financing depending on the given circumstances at the time any payments will be made. 46 While many of the factors that will determine the amount of payments that we will make under the Tax Receivable Agreement are outside of its control, we expect that the payments we will make under the Tax Receivable Agreement will be substantial. We generally expect to fund such distributions out of available cash ofHoldings LLC , and as a result, such payments will reduce the cash provided by the tax savings generated from the relevant transactions that would otherwise have been available to us andHoldings LLC for other uses, including repayment of debt, funding day-to-day operations, reinvestment in the business or returning capital to holders of Class A Common Stock in the form of dividends or otherwise. We may incur significant costs in addition to the due course obligations arising under the Tax Receivable Agreement described above. In particular, in the event that (a) we undergo certain change of control events (e.g., certain mergers, dispositions and other similar transactions), (b) there is a material uncured breach under the Tax Receivable Agreement, or (c) we elect to terminate the Tax Receivable Agreement early, in each case, our obligations under the Tax Receivable Agreement would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax savings calculated based on certain assumptions, as set forth in the Tax Receivable Agreement. In addition, the interest on the payments made pursuant to the Tax Receivable Agreement may significantly exceed our other costs of capital. In certain situations, including upon the occurrence of the events described above, we could be required to make payments under the Tax Receivable Agreement that exceed its actual cash savings, requiring it to seek funding from other sources, including incurring additional debt. Thus, our obligations under the Tax Receivable Agreement could have a substantial negative effect on its financial condition and liquidity. Despite these potential costs, we do not believe that that the Tax Receivable Agreement will be a material detriment to our future results of operations and liquidity, as any payments required under the Tax Receivable Agreement will arise directly from our realized (or in certain cases, deemed realized) tax savings as a result of certain tax benefits related to the Mergers and future exchanges of ClassB Units for Class A Common Stock or cash and are expected to be made in lieu of income taxes otherwise payable by us. Additionally, we will receive the benefit of 15% of any such tax savings. See Note 1, Nature of operations and summary of significant accounting policies, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for further information regarding the Tax Receivable Agreement. Debt OnDecember 14, 2018 , we entered into a Revolving Credit Facility, which was subsequently amended, and which provides for borrowings of up to$60.0 million and, as recently amended, matures inDecember 2023 . As ofSeptember 30, 2022 , we had approximately$30.1 million of borrowings under the Revolving Credit Facility, resulting in an unused borrowing capacity of approximately$21.2 million . We may use the proceeds of future borrowings under the Revolving Credit Facility to finance our acquisition strategy and for other general corporate purposes. The Revolving Credit Facility bore interest at LIBOR plus 4.5% until an amended agreement entered onApril 26, 2022 , and since the amendment, it bore interest at SOFR plus 4.6%. We entered into an amended agreement onNovember 18, 2022 , which extended the maturity of the Revolving Credit Facility and increased the interest rate thereafter to SOFR plus 5.6%. Additionally, pursuant to the amendment, we committed to raise$5.0 million from the Financing Commitment or a similar commitment byNovember 23, 2022 , and additional$25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date our S-1 filed with theSEC onAugust 22, 2022 becomes effective, or (ii)January 31, 2023 . Our Revolving Credit Facility also includes a lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at
the discretion of the lender. OnMarch 29, 2019 , we entered into a Term Loan agreement, which was subsequently amended, and which provides for$60.0 million of term loan secured by a second lien on all of our assets at an interest rate of LIBOR plus 9.5%. The Term Loan matures on the earlier ofMarch 2024 or the maturity date under the Revolving Credit Facility. We did not meet the minimum equity raise requirement of$50.0 million byJune 30, 2022 , which if not met, the lender could reduce the Term Loan collateral by$20.0 million and require the use of available funds under the Revolving Credit Facility as additional Term Loan collateral. As a result of the$20.0 million reduction in the Term Loan collateral, the availability under the Revolving Credit Facility was reduced by approximately$8.7 million as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , we had loans outstanding under the Term Loan agreement with a total carrying value of$49.9 million . OnNovember 18, 2022 , we entered into an amendment to the Term Loan agreement, in which the lender consented to the amendments to the Revolving Credit Facility agreement and the Subordinated Term Loan agreement. Additionally, we committed to raise$5.0 million from the Financing Commitment or a similar commitment byNovember 23, 2022 , and additional$25.0 million from the issuance of equity by the earlier of (i) 5 business days after the date our S-1 filed with theSEC onAugust 22, 2022 becomes effective, or (ii)January 31, 2023 . The amended Term Loan agreement also requires us to cause the Yorkville Investor to purchase the maximum amount of our equity interests available under the SEPA and to utilize the net proceeds from such drawdowns to repay the Term Loan until it is fully repaid. If we do not repay the Term Loan in full byMarch 27, 2023 , we will be liable for an additional fee in the amount of$2.0 million , out of which$1.0 million will be due in cash onMarch 27, 2023 , and the other$1.0 million will accrue to the principal balance of the Term Loan. Furthermore, beginning onMarch 27, 2023 , an additional$0.15 million fee will accrue to the principal balance of the Term Loan each week thereafter until the Term Loan is fully repaid. We may not use the SEPA to fund the new equity financing commitments we agreed to in the amendments to the Revolving Credit Facility and Term Loan, and the financings used to satisfy the commitments under the Revolving Credit Facility amendment may be used to also satisfy the commitments under the Term Loan amendment. 47 OnDecember 22, 2021 , we entered into a Subordinated Term Loan agreement which provides for$20.0 million of term loan secured by a third lien on all of our assets at an interest rate of 15.0%. The Subordinated Term Loan, as recently amended, matures onDecember 31, 2023 . As ofSeptember 30, 2022 , we had term loans outstanding under the Subordinated Term Loan agreement with a total carrying value of$19.6 million . If we do not repay the Subordinated Term Loan on or before its maturity, the Subordinated Term Loan Warrants will become exercisable for additional Class A Common Stock until such time that the principal and interest are fully paid in cash. OnNovember 18, 2022 , we entered into an amendment to the Subordinated Term Loan agreement. The amendment extended the Subordinated Term Loan maturity throughDecember 31, 2023 . Concurrently, we entered into an amendment to the Subordinated Term Loan Warrants agreements, which (i) increased the number of Class A Common Stock the lender has the right to purchase with the Subordinated Term Loan Warrants to such number of Class A Common Stock worth$2.6 million ($2.0 million prior to the amendment), (ii) caused the Subordinated Term Loan Warrants to be immediately exercisable upon execution of the amended Subordinated Term Loan Warrants agreements, and (iii) increased the value of Class A Common Stock the Subordinated Term Loan Warrants will earn each additional full calendar month afterMarch 22, 2023 to$0.25 million ($0.2 million prior to the amendment) until we repay the Subordinated Term Loan in full. In addition, we received loans under the PPP, which was established under the CARES Act and is administered by the SBA, for an amount totaling$10.8 million . We elected to repay$2.3 million of the PPP loans during the year endedDecember 31, 2020 . The SBA forgave the PPP loans in the full amount of$10.8 million along with associated accumulated interest during the year endedDecember 31, 2021 , resulting in a refund of the$2.3 million of the PPP loans repaid. As ofSeptember 30, 2022 andDecember 31, 2021 , we had no outstanding PPP loan balances. The SBA and other government communications have however indicated that all loans in excess of$2.0 million will be subject to audit and that those audits could take up to seven years to complete.
See Note 5, Debt, and Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for a more detailed description of our indebtedness and the recent amendments thereto.
We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.
Other Financing Arrangements OnMay 25, 2022 , we entered into the Rubicon Equity Investment Agreement (Simple Agreement for Future Equity or "SAFE") with certain investors, whereby, the investors advanced us$8,000,000 and, in connection with the consummation of the Mergers and in exchange for the advancements, (a)Holdings LLC issued 880,000 of its ClassB Units to such investors, (b) Rubicon issued 160,000 shares of Class A Common Stock to such investors, and (c) Founder SPAC Sponsor LLC forfeited 160,000 shares of Class A Common Stock. All the obligations thereunder were satisfied upon the Closing and the exchanges for the advancements discussed above. See Note 10, Equity Investment Agreement, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for more information regarding the SAFE. OnAugust 4, 2022 , we entered into the Forward Purchase Agreement for an OTC Equity Prepaid Forward Transaction with the FPA Sellers. Pursuant to the Forward Purchase Agreement, prior to the Closing, the FPA Sellers purchased an aggregate of 7,082,616 shares of Class A Common Stock from Founder shareholders who, pursuant to the governing documents of Founder, elected to redeem such shares in connection with the Closing, and upon such purchase, the FPA Sellers waived their redemption rights to such securities. The Forward Purchase Agreement resulted in an additional$4.0 million of cash at the Closing. Pursuant to the terms therein, we are entitled to receive certain additional payments in the future periods in connection with certain sales of Class A Common Stock by the FPA Sellers, if any. In addition, we may be required to issue additional shares of Class A Common Stock pursuant to the FPA Agreement. See Note 11, Forward-Purchase Agreement, and Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for more information regarding the Forward Purchase Agreement and for discussion of the occurrence of a VWAP Trigger Event, which could allow the FPA Sellers to accelerate the maturity date of the Forward Purchase Agreement. OnAugust 31, 2022 , we entered into the SEPA with the Yorkville Investor. Pursuant to the SEPA, we have the right to sell to the Yorkville Investor, from time to time, up to$200.0 million of shares of Class A Common Stock at a discounted per share price until the earlier of the 36-month anniversary of the SEPA or until the date on which the facility has been fully utilized, subject to certain limitations and conditions set forth in the SEPA. Sales of Class A Common Stock to the Yorkville Investor under the SEPA, and the timing of any such sales, are at our option, and we are under no obligation to sell any securities to the Yorkville Investor under the SEPA. Pursuant to the SEPA, onAugust 31, 2022 , the Company issued the Yorkville Investor 200,000 shares of Class A Common Stock, which represented an initial up-front commitment fee. The Company has not sold any shares of Class A Common Stock during the period fromAugust 31, 2022 andSeptember 30, 2022 . See Note 12, Standby Equity Purchase Agreement, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for more information regarding the SEPA. 48 OnNovember 14, 2022 , we entered into a binding Financing Commitment with certain existing investors, whereby the investors intend to provide us with up to$30.0 million of financing through the issuance by us of debt and/or equity securities including, without limitation, shares of capital stock, securities convertible into or exchangeable for shares of capital stock, warrants, options, or other rights for the purchase or acquisition of such shares and other ownership or profit interests of the Company. Any debt issued pursuant to this letter would have a term of at least 12 months and any equity or equity linked securities issued under this letter would have a fixed price such that no other shareholder or other exchange approvals would be required. The amount the investors agreed to contribute under the Financing Commitment will be reduced on a dollar-for-dollar basis by the amount of any other equity capital we receive throughJanuary 15, 2023 . See Note 20, Subsequent Events, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q for more information regarding the Financing Commitment. Contractual Obligations
Our principal commitments consist of obligations under debt agreements and leases for office facilities. We have a substantial level of debt. For more information regarding our debt service obligations and our lease obligations, see Note 5, Debt and Note 16, Commitments and contingencies, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, respectively. As ofSeptember 30, 2022 , our agreement with Palantir Technologies, Inc. requires us to pay an aggregate of$34.3 million throughOctober 2024 ,$15.5 million of which is due throughSeptember 30, 2023 . See Note 17, Related party transactions, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information regarding our agreement with Palantir Technologies, Inc. We could also be required to make certain significant payments under the Tax Receivables Agreement discussed above. Additionally, in connection with the Mergers, as ofSeptember 30, 2022 ,$44.2 million of fees for certain advisors have been recognized as accrued expenses on our unaudited interim condensed consolidated balance sheet included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q. As disclosed in Note 20, Subsequent Events, included in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form 10-Q, we settled with an advisor on the fees for certain professional services provided in connection with the Mergers onNovember 4, 2022 , which reduced the total transaction costs by$10.7 million . These advisory fees are due on various dates on or beforeFebruary 15, 2023 , most of which are to be paid in cash or Class A Common Stock at our discretion, in accordance with the terms of the agreements with each
of the advisors.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue recognition
We derive our revenue principally from waste removal, waste management and consultation services, platform subscriptions, and the purchase and sale of recyclable commodities. We recognize service revenue over time, consistent with efforts performed and when the customer simultaneously receives and consumes the benefits provided by our services. We recognize recyclable commodity revenue at the point in time when the ownership, risks and rewards are transferred. Further, judgment is required in evaluating the presentation of revenue on a gross versus net basis based on whether we control the service provided to the end-user and are the principal in the transaction (gross), or we arrange for other parties to provide the service to the end-user and are the agent in the transaction (net). We have concluded that we are the principal in most arrangements as we control the waste removal service and are the primary obligor in the transactions. The assessment of whether we are considered the principal or the agent in a transaction could impact the timing and amount of revenue
recognized.
Customer acquisition costs
We make certain expenditures related to acquiring contracts for future services.
These expenditures are capitalized as customer acquisition costs and amortized
in proportion to the expected future revenue from the customer, which in most
cases results in straight-line amortization over the life of the customer.
Amortization of these customer acquisition costs is presented within
amortization and depreciation on our consolidated statements of operations.
Subsequent adjustments to customer acquisition costs estimates are possible
because actual results may differ from these estimates if conditions dictate the
need to enhance or reduce customer acquisition costs.
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Equity-based compensation
We account for equity-based compensation under the fair value recognition and
measurement provisions, in accordance with applicable accounting standards,
which require compensation expense for the grant-date fair value of equity-based
awards to be recognized over the requisite service period.
Warrants
We have issued warrants to purchase shares of our Class A Common Stock. Warrants
may be accounted for as either liability or equity instruments depending on the
terms of the warrant agreements. We determine whether each of the warrants
issued require liability or equity classification at their issuance dates.
Warrants classified as equity are recorded at fair value as of the date of the
issuance on our consolidated balance sheets and no further adjustments to their
valuation are made. Warrants classified as liability are recorded at fair value
as of the date of the issuance on our consolidated balance sheets and
subsequently remeasured at each reporting period with changes being recorded as
a component of other income (expense) on our consolidated statements of
operations.
Following the consummation of the Mergers on August 15, 2022 , we have both
liability-classified and equity-classified warrants outstanding. See Note 9,
Warrants, of the unaudited condensed consolidated financial statements included
in Item 1 of Part I, "Financial Statements" of this Quarterly Report on Form
10-Q for further information.
Income taxes
Rubicon Technologies, Inc. is a corporation and is subject toU.S. federal as well as state income taxes including the income or loss allocated from its investment inRubicon Technologies Holdings, LLC .Rubicon Technologies Holdings, LLC is taxed as a partnership for which the taxable income or loss is allocated to its members. Certain of theRubicon Technologies Holdings, LLC operating subsidiaries are considered taxable Corporations forU.S. income tax purposes. Prior to the Mergers,Holdings LLC was not subject toU.S. Federal and certain state income taxes at the entity level. We account for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute our business plans and tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. The tax positions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statutes of limitations. AtSeptember 30, 2022 orDecember 31, 2021 , we have no tax positions that meet this threshold and, therefore, have not recognized any adjustments. While we believe our tax positions are fully supportable, they may be challenged by various tax authorities. If actual results were to be materially different than estimated, it could result in a material impact on our consolidated financial statements in future periods. The provision for income taxes includes the impact of reserve provisions and changes to reserves as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the tax authorities which may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes. 50 Loss contingencies In the ordinary course of business, we are or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour and other claims. We record a provision for a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements. We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Significant judgment is required to determine both the probability and the estimated amount of loss. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based on new information and future events. The outcomes of litigation and other disputes are inherently uncertain and subject to significant uncertainties. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected. Leases
Leases with a term greater than one year are recognized on the consolidated
balance sheet as right-of-use ("ROU") assets and lease liabilities. Lease
liabilities and their corresponding ROU assets are recorded based on the present
value of lease payments over the expected lease term. As the interest rate
implicit in lease contracts is typically not readily determinable, we utilize
the appropriate incremental borrowing rate, which is the rate incurred to borrow
on a collateralized basis over a similar term an amount equal to the lease
payments in a similar economic environment.
Recent Accounting Pronouncements
For information regarding recently accounting pronouncements, see Note 2, Recent accounting pronouncements, to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report
on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. All statements, other than statements of present or historical fact included in this Quarterly Report, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "projects," "forecasts," "may," "will," "could," "would," "should," "seeks," "plans," "scheduled," "anticipates," "intends," the negative of such terms and similar expressions, although not all forward-looking statements contain such identifying words. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statement. These forward-looking statements are based upon current expectations, estimates, projections, and assumptions that, while considered reasonable by the Company and its management, are inherently uncertain; factors that may cause actual results to differ materially from current expectations include, but are not limited to: 1) the outcome of any legal proceedings that may be instituted against the Company or others following the closing of the business combination; 2) the Company's ability to meet the NYSE's listing standards following the consummation of the business combination; 3) the risk that the business combination disrupts current plans and operations of the Company as a result of consummation of the business combination; 4) the ability to recognize the anticipated benefits of the business combination, which may be affected by, among other things, the ability of the combined company to grow and manage growth profitably, maintain relationships with customers and suppliers and retain its management and key employees; 5) costs related to the business combination; 6) changes in applicable laws or regulations; 7) the possibility that the Company may be adversely affected by other economic, business and/or competitive factors, including the impacts of the COVID-19 pandemic, geopolitical conflicts, such as the conflict betweenRussia andUkraine , the effects of inflation and potential recessionary conditions; 8) the Company's execution of anticipated operational efficiency initiatives, cost reduction measures and financing arrangements; and 9) other risks and uncertainties. More information regarding the risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth under the heading "Risk Factors" in our Registration Statement on Form S-1, as filed with theSEC onAugust 22,2022 , and as may be updated in this and other subsequent Quarterly Reports on Form 10-Q and the Company's other filings with theSEC . There may be additional risks that the Company presently does not know of or that the Company currently believes are immaterial that could also cause actual results to differ from those contained in the forward-looking statements, many of which are beyond the Company's control. Forward-looking statements are not guarantees of future performance and speak only as of the date hereof. We do not undertake, and expressly disclaim, any obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by law. 51
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