UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended | ||
| For the transition period from __________ to __________ | ||
Commission File Number: 001-39157
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||||||||||||
( | ||||||||||||||
| (Address of Principal Executive Offices) | (Registrant's telephone number, including area code) | (Zip Code) | ||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | o | x | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had 52,404,369 shares of common stock outstanding as of August 10, 2023.
| TABLE OF CONTENTS | ||||||||
| AgileThought, Inc. - Quarterly Report on Form 10-Q | ||||||||
| June 30, 2023 | ||||||||
| Page | ||||||||
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our best judgment based on current expectations and projections regarding future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in the Company's subsequent Quarterly Reports on Form 10-Q, including this report. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others:
•the financial and business performance of the Company;
•our payment and/or covenant compliance defaults and cross-defaults under our principal financing agreements;
•our conclusion that there is substantial doubt about the ability of the Company to continue as a going concern;
•our ability to refinance, repay and/or continue to service our indebtedness;
•our future capital requirements and sources and uses of cash;
•our ability to obtain funding to service and repay our indebtedness and for our future operations;
•our business, expansion plans and opportunities;
•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
•our ability to develop, maintain and expand client relationships, including relationships with our largest clients;
•changes in domestic and foreign business, market, financial, political, regulatory and legal conditions;
•competition and our ability to grow and manage growth profitably;
•our ability to attract and retain highly skilled information technology professionals;
•our ability to maintain favorable pricing, utilization rates and productivity levels for our information technology professionals and their services;
•our ability to innovate successfully and maintain our relationships with key vendors;
•our ability to successfully identify and integrate any future acquisitions;
•our ability to provide our services without security breaches and comply with changing regulatory, legislative and industry standard developments regarding privacy and data security matters;
•our ability to operate effectively in multiple jurisdictions in Latin America and in the United States in the different business, market, financial, political, legal and regulatory conditions in the different markets;
•developments and projections relating to our competitors and industry;
•the impact of health epidemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto;
•expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, as amended;
•changes in applicable laws or regulations;
•the outcome of any known and unknown litigation or legal proceedings and regulatory proceedings involving us; and
•our ability to maintain the listing of our securities.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. In addition, in light of the risks and uncertainties described in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not occur. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AgileThought, Inc. Unaudited Condensed Consolidated Balance Sheets | ||
| (in thousands USD, except share data) | June 30, 2023 | December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Current VAT receivables | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill and indefinite-lived intangible assets | |||||||||||
| Finite-lived intangible assets, net | |||||||||||
| Operating lease right of use assets, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Other taxes payable | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Purchase price obligation note payable | |||||||||||
| Current portion of long-term debt and financing obligations | |||||||||||
| Embedded derivative liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt and financing obligations, net of current portion | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Warrant liability | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders' Equity | |||||||||||
Class A common stock $ | |||||||||||
Treasury stock, | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity attributable to the Company | |||||||||||
| Noncontrolling interests | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Operations | ||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands USD, except share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Change in fair value of embedded derivative | ( | ( | |||||||||||||||||||||
| Change in fair value of warrant liability | ( | ( | |||||||||||||||||||||
| (Gain) Loss on debt extinguishment | ( | ( | |||||||||||||||||||||
| Equity-based compensation expense | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Restructuring expense | |||||||||||||||||||||||
| Other operating expenses, net | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net loss attributable to the Company | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic and Diluted Class A common stock | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average number of shares: | |||||||||||||||||||||||
| Basic and Diluted Class A common stock | |||||||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Loss | ||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands USD) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Actuarial loss | ( | ||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Less: Comprehensive (loss) income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Comprehensive loss attributable to the Company | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Stockholders' Equity | ||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands USD, except share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateral shares issued to subordinated creditors | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of public warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive expense | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateral shares issued to subordinated creditors | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of public warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive expense (income) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Nexxus debt conversion | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands USD, except share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Employee withholding taxes paid related to net share settlements | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of public warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Employee withholding taxes paid related to net share settlements | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Monroe Share Settlement | ( | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive expense | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||
AgileThought, Inc.
Unaudited Condensed Consolidated Statements of Stockholders' Equity
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
AgileThought, Inc. Unaudited Condensed Consolidated Statements of Cash Flows | ||
| Six Months Ended June 30, | |||||||||||
| (in thousands USD) | 2023 | 2022 | |||||||||
| Operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Accretion of interest from convertible notes | |||||||||||
| Gain on forgiveness of debt | ( | ||||||||||
| Loss on debt extinguishment | |||||||||||
| Provision for bad debt expense | |||||||||||
| Impairment of goodwill | |||||||||||
| Equity-based compensation | |||||||||||
| Right of use asset amortization | |||||||||||
| Foreign currency remeasurement | ( | ||||||||||
| Deferred income tax (benefit) | ( | ( | |||||||||
| Obligations for purchase price | |||||||||||
| Embedded derivative | ( | ||||||||||
| Warrant liability | ( | ||||||||||
| Capitalized interest and fees from Blue Torch Credit Facility | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Depreciation and amortization | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Current VAT receivables and other taxes payable | ( | ||||||||||
| Income taxes payable | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Investing activities | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Proceeds from loans | |||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Cash paid for shares withheld from a grantee to satisfy tax withholding | ( | ( | |||||||||
| Payments for finance leases | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rates on cash | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | |||||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | $ | |||||||||
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements
AgileThought, Inc. Notes to Unaudited Condensed Consolidated Financial Statements | ||
Note 1 – Organization and Basis of Consolidation and Presentation
Organization
AgileThought, Inc. (“AgileThought”) is a global provider of agile-first, end-to-end digital transformation services in the North American market using on-shore and near-shore delivery. The Company’s headquarters is in Irving, Texas. AgileThought’s Class A common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “AGIL.”
On August 23, 2021 (the “Closing Date”), LIV Capital Acquisition Corp. (“LIVK”), a special purpose acquisition company, and AgileThought (“Legacy AgileThought”) consummated the transactions contemplated by the definitive agreement and plan of merger (“Merger Agreement”), dated May 9, 2021 (“Business Combination”). Pursuant to the terms, Legacy AgileThought merged with and into LIVK, whereupon the separate corporate existence of Legacy AgileThought ceased, with LIVK surviving such merger (the “Surviving Company”). On the Closing Date, the Surviving Company changed its name to AgileThought, Inc. (the “Company”, “AgileThought”, “we” or “us”).
Basis of Consolidation and Presentation
The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). For interim financial reporting not all disclosures normally required in annual Consolidated Financial Statements prepared in accordance with U.S. GAAP are required.
In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of normal and recurring nature, have been made for the interim periods reported. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. The balance sheet as of December 31, 2022 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements for the year ended December 31, 2022 that are included in our annual report on Form 10-K filed with the SEC on March 13, 2023 (“Annual Report”). All intercompany transactions and balances have been eliminated in consolidation. The ownership interest of noncontrolling investors of the Company's subsidiaries are recorded as noncontrolling interest.
Reclassification
The Company has reclassified prior period costs from cost of revenue to selling, general and administrative expenses related to personnel that provide non-billable, administrative services to our clients. Amounts reclassified were $0.6 1.3 0.6
Liquidity and Going Concern
These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
As discussed in Note 7, Long-term Debt, the Company is currently in default under its Blue Torch Credit Facility. This default triggered cross-defaults under our Second Lien Facility, requiring a reclassification to our total current portion of long-term debt from $37.2 million as of December 31, 2022 to $91.1 million on June 30, 2023. The Company's current liabilities have been adversely impacted and resulted in a negative working capital of $103.7 million. The Blue Torch Credit Facility lenders had granted a forbearance limiting the immediate acceleration of the debt, which forbearance expired on May 26, 2023.
Note 2 – Summary of Significant Accounting Policies
Refer to Note 2, Summary of Significant Accounting Policies, within our annual Consolidated Financial Statements included in our 2022 Annual Report for the full listing of significant accounting policies.
Accounting Pronouncements
The authoritative bodies release standards and guidance, which are assessed by management for impact on the Company’s Unaudited Condensed Consolidated Financial Statements. The Company did not adopt or identify any Accounting Standards Updates (“ASUs”) that have yet to be adopted for the six months ended June 30, 2023 in the Company’s Unaudited Condensed Consolidated Financial Statements.
Note 3 – Fair Value Measurements
The carrying amount of assets and liabilities including cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximated their fair value as of June 30, 2023 and December 31, 2022, due to the relative short maturity of these instruments.
Long-term Debt
Our debt is not actively traded and the fair value estimate is based on an income approach, which requires significant unobservable inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.. As such, these estimates are classified as Level 3 in the fair value hierarchy.
The following table summarizes our instruments where fair value differs from carrying value:
| Fair Value Hierarchy Level | June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| (in thousands USD) | Carry Amount | Fair Value | Carry Amount | Fair Value | |||||||||||||||||||||||||
Second Lien Facility | Level 3 | $ | $ | $ | $ | ||||||||||||||||||||||||
| Blue Torch Credit Facility | Level 3 | ||||||||||||||||||||||||||||
| Purchase Price Obligation Note Payable | Level 3 | ||||||||||||||||||||||||||||
The above table excludes our revolving credit facility, subordinated promissory note payable, and subordinated zero-coupon loan as these balances approximate fair value due to the short-term nature of our borrowings. The above table also excludes our Paycheck Protection Program loans (“PPP loans”) as the carrying value of the Company’s PPP loans approximates fair value based on the current yield for debt instruments with similar terms. Refer to Note 7, Long-term Debt, for additional information.
Warrant Liability
As of June 30, 2023, the Company has private placement warrants, which are liability classified, as discussed in Note 13, Warrants. The Company's private placement warrants are classified as Level 3 of the fair value hierarchy due to use of significant inputs that are unobservable in the market. Private placement warrants are fair valued using the Black-Scholes model, which require a risk-free rate assumption based upon constant-maturity treasury yields. Other significant inputs and assumptions in the model are the stock price, exercise price, volatility, and term or maturity. The volatility input was determined using the historical volatility of comparable publicly traded companies which operate in a similar industry or compete directly against the Company.
| (in thousands USD) | Private Placement Warrants | ||||
| Beginning balance, January 1, 2023 | $ | ||||
| Change in valuation inputs and other assumptions | ( | ||||
Ending balance, June 30, 2023 | $ | ||||
Embedded Derivative Asset (Liability)
In connection with the amendment to the Second Lien Facility on August 10, 2022, the Company bifurcated the embedded derivative with a fair value other than nil associated with conversion feature for the Mexican peso-denominated tranches held by Nexxus Capital. Embedded derivative assets (liabilities) are carried at fair value and classified as Level 3 in the fair value hierarchy. The Company determined the fair values of the bifurcated embedded derivative by using a scenario-based analysis that estimated the fair value of each embedded derivative based on a probability-weighted present value of all possible outcomes related to the features.
The significant unobservable inputs used in the fair value of the Company’s embedded derivative include the implied volatility, the period in which the outcomes are expected to be achieved and the discount rate. The embedded derivative was extinguished on June 15, 2023 as part of the automatic loan conversion of tranches held by Nexxus Capital, see Note 7, Long-Term Debt, for more information.
The following table presents the changes in the fair value of the embedded derivative assets (liabilities) at June 30, 2023:
| (in thousands USD) | Embedded Derivative Asset (Liability) | ||||
| Beginning balance, January 1, 2023 | $ | ( | |||
| Change in valuation inputs and other assumptions | |||||
| Nexxus conversion | $ | ( | |||
Ending balance, June 30, 2023 | $ | ||||
Note 4 – Balance Sheet Details
The following table provides detail of select balance sheet items:
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
| Accounts receivables | $ | $ | |||||||||
| Unbilled accounts receivables | |||||||||||
| Other receivables | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| Total accounts receivable, net | $ | $ | |||||||||
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
| Employee retention credit | $ | $ | |||||||||
| Income tax receivables | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total prepaid expenses and other current assets | $ | $ | |||||||||
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
| Accrued wages, vacation & other employee related items | $ | $ | |||||||||
| Accrued interest | |||||||||||
| Accrued incentive compensation | |||||||||||
| Accrued services | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
The following table is a rollforward of the allowance for doubtful accounts:
| Six Months Ended June 30, | |||||||||||
| (in thousands USD) | 2023 | 2022 | |||||||||
| Beginning balance, January 1 | $ | $ | |||||||||
| Charges to expense | |||||||||||
| Foreign currency translation | |||||||||||
| Ending balance | $ | $ | |||||||||
The Company records any obligations for contingent purchase price at fair value. The Company recorded the 2019 acquisition-date fair value of a contingent liability based on the likelihood of contingent earn-out payments through the year ended December 31, 2021 subject to the underlying agreement terms. As of December 31, 2021, the obligation now relates to a known and fixed amount due and is no longer a contingent obligation recorded at fair value. The amount due accrues interest at 12 %. On November 15, 2022, the Company entered into an amendment to change terms of the AN Extend portion of the purchase price obligation note payable. The amendment converted the note from Mexican pesos to U.S. dollars with capitalized interest added, set the applicable interest to 11 % annually, set a maturity date of November 15, 2023, as well as added mandatory conversion. If the note is not paid in full prior to the maturity date, the total amount of principal and the interest will be converted within the following 30 calendar days counted from the maturity date with common shares of common stock, taking as value of the shares the value resulting from using the volume weighted moving average price. This amendment was determined to substantially alter the AN Extend portion of the purchase price obligation note payable such that extinguishment
accounting was applied. The Company recognized a loss on debt extinguishment of $0.7 million for the three months ended December 31, 2022. Payment of any and all of the purchase price obligation note payable is subordinate of all existing senior debt, including the Blue Torch Credit Facility and the Second Lien Facility. In the event of any liquidation, dissolution, or bankruptcy proceedings, all senior debt shall first be paid in full before any distribution shall be made to the purchase price obligation note payable creditors.
The following table provides a roll-forward of the obligation related to the 2019 acquisition due to the seller:
| (in thousands USD) | Purchase Price Obligation Note Payable | ||||
| Opening balance, January 1, 2023 | $ | ||||
| Accrued interest on the contingent consideration | |||||
Ending balance, June 30, 2023 | |||||
| Less: Current portion | |||||
| Purchase price obligation note payable, net of current portion | $ | ||||
Note 5 – Property and Equipment, Net
Property and equipment, net consist of the following:
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
| Computer equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Furniture and equipment | |||||||||||
| Computer software | |||||||||||
| Transportation equipment | |||||||||||
| Finance lease right-of-use assets | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense was $0.4 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $0.7 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively. The Company did no
Note 6 – Goodwill and Intangible Assets, Net
The Company performs an assessment each year to test goodwill for impairment, or more frequently in certain circumstances where impairment indicators arise. In the first and second quarter of 2023, the Company determined a triggering event had occurred requiring an interim impairment assessment resulting from the decline in our revenue forecast, existing debt defaults, limited liquidity and deteriorating market conditions. As a result, the Company recognized a $19.1 million non-cash impairment charge related to goodwill allocated within our Latin America ("LATAM") reporting unit which is included within Impairment charges in the Unaudited Condensed Consolidated Statement of Operations for the six months ended June 30, 2023.
The following table presents changes in the goodwill balances as of June 30, 2023:
| (in thousands USD) | LATAM | USA | Total | ||||||||||||||
| December 31, 2022 | $ | $ | $ | ||||||||||||||
| Impairments charges | ( | ( | |||||||||||||||
| Foreign currency translation | |||||||||||||||||
| June 30, 2023 | $ | $ | $ | ||||||||||||||
As of June 30, 2023 | |||||||||||||||||||||||||||||
| (in thousands USD) | Gross Carrying Amount | Currency Translation Adjustment | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life (Years) | ||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | ( | |||||||||||||||||||||||||
| Tradename | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||||||||
| (in thousands USD) | Gross Carrying Amount | Currency Translation Adjustment | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life (Years) | ||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ( | $ | ||||||||||||||||||||||||
| Tradename | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
In 2021, the Company changed the estimated life of a certain tradename from indefinite to finite-lived and began amortizing it over the average remaining economic life of five years .
The Company’s indefinite-lived intangible assets relate to tradenames acquired in connection with business combinations. The tradenames balance was $16.4 million and $16.5 million as of June 30, 2023 and December 31, 2022, respectively. No
Note 7 – Long-term Debt
Long-term debt as of June 30, 2023 and December 31, 2022 consists of the following:
| (in thousands USD) | June 30, 2023 | December 31, 2022 | |||||||||
Borrowings under revolving credit agreement, principal due January 1, 2025 | $ | $ | |||||||||
Borrowings under term loan, principal due January 1, 2025 | |||||||||||
Unamortized debt issuance costs and debt discount(a) | ( | ||||||||||
Blue Torch Credit Facility, net of unamortized debt issuance costs and debt discount | |||||||||||
Paycheck Protection Program loans, | |||||||||||
Subordinated promissory note payable with a related party, | |||||||||||
| Subordinated debt, guaranteed by a related party, principal due July 27, 2023 | |||||||||||
Unamortized debt issuance costs(a) | ( | ( | |||||||||
| Subordinated debt, guaranteed by a related party, net of unamortized debt issuance costs | |||||||||||
Convertible note payable with a related party, | |||||||||||
Convertible note payable with a related party, | |||||||||||
Convertible note payable with a related party, | |||||||||||
Convertible note payable with a related party, | |||||||||||
Convertible note payable with a related party, | |||||||||||
Unamortized debt premium and debt discount(a) | ( | ||||||||||
| Second Lien Facility, net of unamortized debt premium and debt discount | |||||||||||
Total debt, net of unamortized debt issuance costs, debt premium, and debt discount | |||||||||||
Less: current portion of debt and financing obligations | ( | ( | |||||||||
Long-term debt and financing obligations, net of unamortized debt issuance costs, debt premium and debt discount, and current portion | $ | $ | |||||||||
_________________
(a)Debt issuance costs, premium, and discount are presented as a reduction, addition, and reduction to the Company’s debt, respectively in the Unaudited Condensed Consolidated Balance Sheets. $5.7 million and $1.9 million of debt issuance cost and discount/premium amortization was charged to interest expense for the six months ended June 30, 2023 and 2022.
Blue Torch Credit Facility
On May 27, 2022, the Company entered into a financing agreement (“Blue Torch Credit Facility”) by and among the Company, AN Global LLC, as borrower ("AN Global") certain subsidiaries of the Company, as guarantors (the “Guarantors”), the financial institutions party thereto as lenders, and Blue Torch Finance LLC (“Blue Torch”), as the administrative agent and collateral agent. The Blue Torch Credit Facility is secured by substantially all of the Company’s, AN Global's and the Guarantors’ properties and assets and provides for a term loan of $55.0 million and revolving credit facility with an aggregate principal limit not to exceed $3.0 million at any time outstanding. On May 27, 2022, AN Global borrowed the full $55.0 million under the term loan. On June 28, 2022, AN Global borrowed $3.0 million under the revolving credit facility. The Company recognized $5.0 million in debt issuance costs.
On August 10, 2022, the Company entered into a waiver and amendment to the Blue Torch Credit Facility to provide for an extension of the period of time which the Company has to satisfy certain reporting and post-closing obligations under the Blue Torch Credit Facility. The Company recognized $0.6 million in debt issuance costs related to the wavier and amendment. On
November 1, 2022, the Company entered into an amendment to further extend the period of time which the Company has to satisfy certain reporting and post-closing obligations.
As of December 31, 2022, the Company was in default under the permitted factoring disposition and leverage ratio covenants. Subsequent to December 31, 2022, the Company was also in default under the leverage ratio, liquidity, aged accounts payables, permitted payments and other covenants under the Blue Torch Credit Facility. As a result of such defaults, the Company entered into a waiver and amendment on March 7, 2023 (“Amendment No. 4”) to revise significant terms of the Blue Torch Credit Facility as set forth below.
Pursuant to Amendment No. 4, the Company agreed to pay approximately $34.0 million of the Company’s total indebtedness and related obligations in 2023, including principal payments of $15.0 million by April 15, 2023, $20.0 million by June 15, 2023 (inclusive of the $15.0 million by April 15, 2023 if not paid by then) and $25.0 million by September 15, 2023 (inclusive of the $20.0 million by June 15, 2023 if not paid by then) to the Blue Torch Lenders. Thereafter, the Company covenanted to quarterly payments on the term loan of approximately $0.7 million starting December 31, 2023. The amendment also revised the maturity date of the Blue Torch Credit Facility from May 27, 2026 to January 1, 2025 and revised the interest provisions to remove the step-down in interest rate based on the Company’s total leverage ratio. Interest is paid monthly for both loans and is calculated based on the Adjusted Term SOFR (the three-month Term Secured Overnight Financing Rate, plus 0.26161 %) plus a margin of 9.0 % annually. Under default, the Company is required to pay interest monthly at a Reference Rate (as defined in the Blue Torch Credit Facility) plus a margin of 8 % plus a 2 % post-default margin. Interest on each loan is payable on the last day of the then effective interest period applicable to such loan and at maturity. The revolving credit facility will bear a 2.0 % annual usage fee on any undrawn portion of the facility. In connection with Amendment No. 4, the Company agreed to pay the administrative agent a fee equal to $6.0 million, which was paid in kind by adding such amount to the outstanding principal of the term loan. In addition, if the Company fails to repay the respective aggregate principal amounts on or prior to April 15, 2023, June 15, 2023 and September 15, 2023, a failed payment fee equal to $4.0 million, $2.0 million and $3.0 million, respectively, would be paid in kind by adding such fee to the outstanding principal of the term loan. If we meet these payments when due, which have not been met for April 15, 2023 and June 15, 2023 as noted below, then no fee would be added to the outstanding principal. Failure to make these payments would constitute an event of default but will not result in the ability of the administrative agent to accelerate indebtedness under the Blue Torch Credit Facility. Amendment No. 4 also required the Company to engage both a financial advisor to support the Company’s capital raising needs and an operational advisor to conduct a formal assessment of the Company’s financial performance, in both cases on terms reasonable acceptable to Blue Torch. Lastly, Amendment No.4 granted a waiver for certain financial covenants as of December 31, 2022 and reset the covenant requirements for future periods. This amendment was determined to substantially alter the Blue Torch Credit Facility such that extinguishment accounting was applied. The Company recognized a $0.7 million debt discount and a loss on debt extinguishment of $10.2 million for the three months ended March 31, 2023. The Company recognized $1.1 million in debt issuance costs with the amendment.
The Company defaulted in making the March 31, 2023 interest payment and was not in compliance with the liquidity and aged accounts payable aging covenants, which constituted an event of default under the Blue Torch Credit Facility. On April 15, 2023, the Company did not pay the $15.0 million principal payment due by April 15, 2023 and thus $4.0 million in fees was added to the outstanding principal balance. On April 18, 2023, the Company entered into forbearance agreements regarding the Blue Torch Credit Facility and Second Lien Facility. Pursuant to the forbearance terms, the lenders agreed to forbear from accelerating their respective obligations and otherwise exercising any rights and remedies (other than certain limited remedies, such as continuing to accrue applicable default interest) under the loans until May 10, 2023 (which was subsequently extended to May 19, 2023, and then further extended to May 26, 2023), or earlier in the event of non-compliance with certain representations, covenants and other requirements, all subject to the terms and conditions thereof. Such forbearance has not been subsequently extended.
Furthermore, as contemplated in the forbearance agreements, on April 20, 2023, the Company entered into Amendment No. 5 to the Blue Torch Credit Facility that increased the revolver capacity thereunder by $3.0 million. The Company also incurred an additional $1.5 million in lenders fees associated with the forbearance and revolver amendments, of which $1.0 million is refundable if the revolver is paid in full by an agreed upon future date. In addition, the Company capitalized $0.9 million of interest payments not paid by March 31, 2023.
On June 15, 2023, the Company did not pay the $20.0 million principal payment due by June 15, 2023 under the Blue Torch Credit Facility and thus $2.0 million in fees was added to the outstanding principal balance under the Blue Torch Credit Facility.
On July 17, 2023, the Company entered into an additional amendment to the Blue Torch Credit Facility ("Amendment No.6") pursuant to which the lenders agreed to provide an additional term loan in the amount of $4.6 million. Among other
amendments to the Blue Torch Credit Facility, Amendment No. 6 eliminated AN Global's ability to select an interest rate based on Term SOFR to apply to the loans thereunder, such that the interest rate applicable to all loans under the Blue Torch Credit Facility will now be determined as follows: the greatest of the following reference rates (a) 2.0 % per annum (b) the Federal Funds rate plus 0.5 % per annum (c) Adjusted Term SOFR plus 1.0 % per annum or (d) the last prime rate quoted by the Wall Street Journal (which was 8.25 % per annum as of the date of Amendment No. 6), plus an applicable margin (which is 8.0 % per annum for reference rate loans), plus a 2.0 % per annum post-default margin. AN Global paid an amendment fee of $2.5 million in connection with Amendment No. 6, which was paid in kind by capitalizing such fee and adding the amount to the outstanding principal amount under the Blue Torch Credit Facility.
Second Lien Facility
On November 22, 2021, the Company entered into a new Second Lien Facility (the “Second Lien Facility”) with Nexxus Capital and Credit Suisse (both of which are existing AgileThought shareholders and have representation on AgileThought’s Board of Directors), Manuel Senderos, Chief Executive Officer and Chairman of the Board of Directors, and Kevin Johnston, former Chief Operating Officer. The Second Lien Facility provides for a term loan facility in an initial aggregate principal amount of approximately $20.7 million, accruing interest at a rate per annum equal to 11.00 % for the US dollar-denominated loan and 17.41 % for the Mexican peso-denominated loan. The Second Lien Facility had an original maturity date of March 15, 2023. The Company recognized $0.9 million in debt issuance costs with the issuance.
On August 10, 2022, the Company entered into an amendment to the Second Lien Facility to extend the maturity date of the Tranche A (Credit Suisse), Tranche C (Senderos), and Tranche E (Johnston) loans to September 15, 2026, and provide for potential increases, that step up over time from one percent to five percent, in the interest rate applicable to the Tranche A loans. The amendment also extended the maturity date of the Tranche B (Nexxus Capital) loans thereunder to June 15, 2023, and provided for a mandatory conversion of the Tranche B loans thereunder, including interest and fees, into equity securities of the Company upon the maturity of said loans at a conversion price equal to $4.64 per share, subject to regulatory approval. The amendment also provided for the covenants and certain other provisions of the Second Lien Facility to be made consistent with those in the Blue Torch Credit Facility (and in certain cases for those covenants to be made less restrictive than those in the Blue Torch Credit Facility). This amendment was determined to substantially alter the debt agreement such that extinguishment accounting was applied. The Company recognized a loss on debt extinguishment of $11.7 million for the three months ended September 30, 2022. As part of the reassessment of the debt instrument, the Company bifurcated the conversion option on the Mexican peso-dominated loans and recognized an embedded derivative liability of $9.0 million as of the amendment date. See Note 3, Fair Value Measurements, for additional information.
On November 18, 2022, the Company entered into a letter agreement with the Tranche A (Credit Suisse) lenders. The letter agreement changed the conversion price at which the Credit Suisse lenders may convert their outstanding loans, interest, and fees into the Company’s common stock from a fixed conversion price of $4.64 per share to the closing price of one share of our common stock on the trading day immediately prior to the conversion date, subject to a floor price of $4.64 per share. This amendment was determined to substantially alter the Credit Suisse portion of the debt agreement such that extinguishment accounting was applied. The Company recognized a gain on debt extinguishment of $8.8 million for the three months ended December 31, 2022. The total loss on debt extinguishment related to the Second Lien Facility was $2.9 million for the twelve months ended December 31, 2022.
Each Second Lien Lender has the option to convert all or any portion of its outstanding loans, interest and fees into common stock of the Company at any time at the respective conversion prices. On December 27, 2021, Manuel Senderos and Kevin Johnston exercised the conversion options for their respective principal amounts of $4.5 million and $0.2 million, respectively, at the original conversion price of $10.19 per share.
On March 7, 2023, in connection with Amendment No. 4 to the Blue Torch Credit Facility, the Company entered into a sixth amendment to the Second Lien Facility (“Amendment No. 6”). Amendment No. 6 revised the maturity date of the Credit Suisse loans from September 15, 2026 to July 1, 2025. Amendment No. 6 also provided for the covenants and certain other provisions of the Second Lien Facility to be consistent with those in the Blue Torch Credit Facility, as amended by Amendment No. 4, except as set forth below in Financial Covenants.
As described above, the Company defaulted in making the March 31, 2023 interest payment under the Blue Torch Credit Facility and was not in compliance with our Liquidity and our Accounts Payable aging covenants thereunder, which constituted an event of default under the Blue Torch Credit Facility and triggered a cross-default under the Second Lien Facility. On April 18, 2023, the Company entered into a forbearance agreement regarding the Second Lien Facility. Pursuant to the forbearance terms, the lenders under the Second Lien Facility agreed to forbear from accelerating their respective obligations and otherwise
exercising any rights and remedies under their loans until May 10, 2023 (and are otherwise not permitted to accelerate the debt until the Blue Torch Credit Facility is paid in full).
On June 15, 2023, the outstanding principal, interest, and fees related to the Nexxus Capital loans automatically converted into 2,163,412 shares of common stock of the Company at a conversion price equal to $4.64 per share.
AGS Subordinated Promissory Note
On June 24, 2021, the Company entered into a subordinated promissory note with AGS Group LLC (“AGS Group”) for a principal amount of $0.7 million (the "AGS Subordinated Promissory Note"). The principal amount outstanding under the AGS Subordinated Promissory Note matured on December 20, 2021 (“Original Maturity Date”) and was extended until May 19, 2022. On August 4, 2022, the Company entered into another amendment to further extend the maturity date of the AGS Subordinated Promissory Note to January 31, 2023 ("January 2023 Maturity Date"). Interest is due and payable in arrears on the Original Maturity Date at a 14.0 % per annum until and including December 20, 2021 and at 20.0 % per annum from the Original Maturity Date to the January 2023 Maturity Date calculated on the actual number of days elapsed.
On January 31, 2023, the AGS Subordinated Promissory Note was cancelled in full and restated for a principal amount of $0.8 million with accrued interest of $0.1 million. The outstanding principal and interest matured on March 31, 2023 (the "Extended Maturity Date"). In addition, the Company also agreed to the issuance of common stock of the Company with a value of approximately $1.8 million, equal to approximately two times the then-outstanding principal and interest under the AGS Subordinated Promissory Note. On February 10, 2023, the Company issued 414,367 shares of common stock to AGS Group to serve as collateral. Upon the earlier of the Extended Maturity Date or the occurrence of an event of default, AGS Group may sell those shares and apply 100 % of the net proceeds therefrom to repay the AGS Subordinated Promissory Note. If the net proceeds from sales of the shares exceed the indebtedness owed by the Company, AGS Group shall remit such excess cash proceeds to the Company. Upon payment in full of the AGS Subordinated Promissory Note in cash by us or through sales of the shares by AGS Group, AGS Group shall return any of the unsold shares to the Company.
Under the terms of the Blue Torch Credit Facility and the Second Lien Facility, the Company may only repay the AGS Subordinated Promissory Note with the proceeds of an equity issuance, and then only if the total leverage ratio is 2.50 to 1.00 or less and the Company is in compliance with all financial covenants and no event of default has occurred and is continuing under the Blue Torch Credit Facility and the Second Lien Facility. The Company has entered into a letter agreement with AGS Group to provide that a failure to pay such indebtedness will not be deemed an event of default. As of June 30, 2023, the Company has not yet paid the AGS Promissory Note due to conditions of the Blue Torch Credit Facility.
Exitus Capital Subordinated Debt
On July 26, 2021, the Company agreed with existing lenders and Exitus Capital, S.A.P.I. de C.V. (“Exitus Capital”) to enter into a zero-coupon subordinated loan agreement with Exitus Capital in an aggregate principal amount equal to $3.7 million (the “Exitus Capital Subordinated Debt”). Net loan proceeds totaled $3.2 million, net of $0.5 million in debt discount. No periodic interest payments are currently required and the loan was due on January 26, 2022, with an option to extend for up to two additional six month terms. On January 25, 2022 and July 26, 2022, the Company exercised its option to extend the loan an additional six months 0.5
On January 26, 2023, the Company entered into an amendment to extend the maturity date of the Exitus Capital Subordinated Debt from January 26, 2023 to July 27, 2023. In addition, the Company paid approximately $1.1 million of the principal amount of the Exitus Capital Subordinated Debt on January 27, 2023, plus a fee of approximately $0.4 million. On February 27, 2023 the Company paid an additional $1 million of the principal. The remaining principal of approximately $1.6 million was due and payable on the new maturity date of July 27, 2023. In addition, on January 31, 2023, the Company agreed to the issuance of common stock of the Company with a value of approximately $5.2 million, equal to approximately two times the then-current outstanding principal amount of the Exitus Capital Subordinated Debt. On February 10, 2023, the Company issued 1,207,712 shares of common stock to serve as collateral. The Company is obligated to issue additional shares to Exitus Capital from time to time if the value of the shares held by them is less than two times the outstanding principal amount of the loan. As of July 27, 2023, the remaining balance of the Exitus Capital Subordinated Debt was not repaid to Exitus Capital due to existing contractual restrictions in the Company's secured credit facilities and a related subordination agreement that prohibit payments by the Company and its subsidiaries in respect of subordinated debt, which failure to pay resulted in an event of default (under the cross-default provision) under the Blue Torch Credit Facility and the Second Lien Facility. As a result, Exitus Capital may be able to sell those shares and apply up to 100 % of the net proceeds therefrom to repay the Exitus Capital Subordinated Debt.
Although a failure to pay Exitus Capital is a cross-default under both the Blue Torch Credit Facility and Second Lien Facility, it does not allow either of the Blue Torch or Second Lien Lenders to accelerate indebtedness due under their respective loans unless Exitus Capital accelerates the amounts due to it.
The Company's default status on the Blue Torch Credit Facility also triggered a cross-default on the Exitus Capital Subordinated Debt.
Paycheck Protection Program Loans
On April 30, 2020 and May 1, 2020, the Company received PPP loans through four of its subsidiaries for a total amount of $9.3 million. The PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the United States federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company submitted its forgiveness applications to the Small Business Administration (“SBA”) between November 2020 and January 2021. The monthly repayment terms were established in the notification letters with the amount of loan forgiveness. On December 25, 2020, $0.1 million of a $0.2 million PPP loan was forgiven. On March 9, 2021, $0.1 million of a $0.3 million PPP loan was forgiven. On June 13, 2021, $1.2 million of a $1.2 million PPP loan was forgiven. On January 19, 2022, $7.3 million of a $7.6 million PPP loan was forgiven resulting in a remaining PPP Loan balance of $0.3 million of which $0.1 million is due within the next year. The remaining payments are due quarterly until May 2, 2025 if not forgiven. All loan forgiveness was recognized in Other income, net of the Unaudited Condensed Consolidated Statements of Operations.
Prior First Lien Facility
In 2018, the Company entered into a revolving credit agreement with Monroe Capital Management Advisors LLC that permitted the Company to borrow up to $1.5 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing limit to $5.0 million. Also in 2018, the Company entered into a term loan credit agreement with Monroe Capital Management Advisors LLC that permitted the Company to borrow up to $75.0 million through November 10, 2023. In 2019, the agreement was amended to increase the borrowing amount to $98.0 million. Interest on the revolving credit agreement and term loan agreement (“First Lien Facility”) were paid monthly and calculated as LIBOR plus a margin of 8.0 % to 9.0 %, based on the Total Leverage Ratio as calculated in the most recent Compliance Certificate. An additional 2.0 % interest were incurred during periods of loan covenant default.
On March 22, 2021, the Company used $20.0 million from proceeds of issuance of preferred stock to partially pay the First Lien Facility.
On June 24, 2021, an amendment was signed to modify the debt covenants for the periods June 30, 2021 and thereafter. In addition to the covenant modifications, the amendment also established the deferral of the monthly $1.0 million principal payments previously due in April and May, along with the $1.0 million payments due in June and July to September 30, 2021. As a result, the regular quarterly principal installments resumed, and the First Lien Facility lenders charged a $4.0 million fee paid upon the end of the term loan in exchange for the amended terms. The amendment resulted in a debt modification, thus the fees payable to the First Lien Facility lenders were capitalized and were amortized over the remaining life of the First Lien Facility. From September 30, 2021 to October 29, 2021, the Company entered into various amendments to extend the due date of the $4.0 million in principal payments previously due September 30, 2021 to November 19, 2021.
On November 29, 2021, the Company made a $20.0 million principal prepayment, which included the $4.0 million principal payment that was originally due September 30, 2021. The Company paid with proceeds from the Second Lien Facility. Furthermore, on December 29, 2021, the Company issued 4,439,333 shares of common stock to the administrative agent for the First Lien Facility (the “First Lien Shares”), which subject to certain terms and regulatory restrictions, may sell the First Lien Shares upon the earlier of August 29, 2022 and an event of default and apply the proceeds to the outstanding balance of the loan. In addition, the Company agreed to issue warrants to the administrative agent to purchase $7 million worth of the Company’s common stock for nominal consideration. The warrants will be issued on the earlier of full repayment of outstanding deferred fees or August 29, 2023. In addition, the Company may be required to pay the First Lien Facility lenders cash to the extent that we cannot issue some or all of the warrants due to regulatory restrictions. The First Lien Facility lenders charged an additional $2.9 million fee paid upon the end of the term loan in exchange for the amended terms.
On November 22, 2021, the Company entered into an amendment that requires sixty percent (60 %) of proceeds from future equity issuances be used to repay the outstanding balance on the First Lien Facility. On December 27, 2021, the Company
closed a follow on stock offering resulting in $21.8 million of net proceeds, of which $13.7 million was used as payment of the outstanding principal and interest balances for the First Lien Facility.
On March 30, 2022, the Company entered into an amendment with the First Lien Facility and Second Lien Facility Lenders to waive the Fixed Charge Coverage Ratio for March 31, 2022. In addition, the Total Leverage Ratio covenant for the quarterly period ending March 31, 2022 was reset. As consideration for entering into this amendment, the Company agreed to pay the First Lien Facility’s administrative agent a fee equal to $0.5 million. The fee would be fully earned as of March 30, 2022 and due and payable upon the end of the term loan. However, the agreement provided that the fee shall be waived in its entirety if final payment in full occurred prior to or on May 30, 2022. The modification triggered by this new amendment was determined to be substantially different from the old instrument, therefore the modification was accounted for as an extinguishment and the debt instrument was adjusted to fair value as of March 31, 2022. The Company recognized a loss on debt extinguishment of $7.1 million in the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2022.
On May 27, 2022, the Company paid approximately $40.2 million to settle the outstanding principal, interest, and a portion of the $6.9 million deferred fees related to amendments to the First Lien Facility. The First Lien Lenders waived the $0.5 million fee related to the March 30, 2022 amendment and returned 2,423,204 First Lien Shares as part of the deferred fees settlement. Since August 29, 2022 the First Lien Lenders may sell the remaining First Lien Shares and apply 100 % of the net proceeds to the outstanding deferred fees obligation. The First Lien Lenders shall return any of the remaining unsold First Lien Shares upon full payment of the remaining deferred fees. As of June 30, 2023, total deferred fees payable on or before May 25, 2023, including fees recognized from prior amendments, totaled $3.5 million. These fees are recognized in Other current liabilities in the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2023 and December 31, 2022.
Financial Covenants
The Blue Torch Credit Facility establishes the following financial covenants for the consolidated group:
Revenue. Requires the Company's trailing annual aggregate revenue to exceed $150.0 million as of the end of each fiscal month.
Liquidity. As a result of Amendment No. 4, the Company is required to maintain liquidity above $1.0 million through March 24, 2023, above $2.0 million through April 15, 2023, and above $7.0 million at any time thereafter. Liquidity is defined as the remaining capacity under the Blue Torch Credit Facility plus the total unrestricted cash on hand.
First Lien Leverage Ratio. The First Lien Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. It is calculated as of the last day of any computation period as the ratio of (a) total indebtedness that is secured by a lien on assets which is equal or senior to the loans securing the Blue Torch Credit Facility (other than indebtedness under the Second Lien Facility) to (b) EBITDA for the computation period ending on such day. A computation period is any period of four consecutive fiscal quarters for which the last fiscal month ends on a date set forth below.
| Computation Period Ending | Leverage Ratio | |||||||
| June 30, 2023 | ||||||||
| July 31, 2023 | ||||||||
| August 31, 2023 | ||||||||
| September 30, 2023 | ||||||||
| October 31, 2023 | ||||||||
| November 30, 2023 | ||||||||
| December 31, 2023 | ||||||||
| January 31, 2024 and each fiscal month ending thereafter | ||||||||
EBITDA. The Company is subject to an additional covenant as a result of the failure to make the $15.0 million payment under Amendment No. 4 of the Blue Torch Credit Facility by April 15, 2023, which is a covenant to maintain a minimum consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company is required to maintain a
| Computation Period Ending | EBITDA | |||||||
| June 30, 2023 | $ | |||||||
| July 31, 2023 | ||||||||
| August 31, 2023 | ||||||||
| September 30, 2023 | ||||||||
| October 31, 2023 | ||||||||
| November 30, 2023 | ||||||||
| December 31, 2023 and each fiscal month ending thereafter | ||||||||
The Second Lien Facility establishes the following financial covenants for the consolidated group:
Revenue. Requires the Company's trailing annual aggregate revenue to exceed $120.0 million as of the end of each fiscal month.
Liquidity. Requires the Company's liquidity to be not less than (i) $0.8 million at any time on or prior to March 24, 2023, (ii) $1.6 million at any time from March 24, 2023 to April 15, 2023, and (iii) $5.6 million at any time after April 15, 2023. Liquidity is defined as the remaining capacity under the Blue Torch Credit Facility plus the total unrestricted cash on hand.
First Lien Leverage Ratio. The First Lien Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. It is calculated as of the last day of any computation period as the ratio of (a) total indebtedness that is secured by a lien on assets which is equal or senior to the loans securing the Blue Torch Credit Facility (other than indebtedness under the Second Lien Facility) to (b) EBITDA for the computation period ending on such day. A computation period is any period of four consecutive fiscal quarters for which the last fiscal month ends on a date set forth below.
| Computation Period Ending | First Lien Leverage Ratio | |||||||
| June 30, 2023 | ||||||||
| July 31, 2023 | ||||||||
| August 31, 2023 | ||||||||
| September 30, 2023 | ||||||||
| October 31, 2023 | ||||||||
| November 30, 2023 | ||||||||
| December 31, 2023 | ||||||||
| January 31, 2024 and each fiscal quarter ending thereafter | ||||||||
EBITDA. The Company is subject to an additional covenant as a result of the failure to make the $15.0 million payment under Amendment No. 4 of the Blue Torch Credit Facility by April 15, 2023, which is a covenant to maintain a minimum EBITDA. The Company is required to maintain a 12 -month trailing EBITDA of at least the following for each fiscal month end.
| Computation Period Ending | EBITDA | |||||||
| June 30, 2023 | ||||||||
| July 31, 2023 | ||||||||
| August 31, 2023 | ||||||||
| September 30, 2023 | ||||||||
| October 31, 2023 | ||||||||
| November 30, 2023 | ||||||||
| December 31, 2023 and each fiscal month end thereafter | ||||||||
The Company was not compliant with all financial covenants as of June 30, 2023.
Note 8 – Other Income, net
Items included in other income, net in the Unaudited Condensed Consolidated Statements of Operations are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands USD) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Foreign exchange gain | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Forgiveness of PPP loans | |||||||||||||||||||||||
| Other non-operating expense | ( | ( | ( | ( | |||||||||||||||||||
| Total other income, net | $ | $ | ( | $ | $ | ||||||||||||||||||
Note 9 – Income Taxes
Income tax expense and effective income tax rate were as follows for the periods indicated:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands USD) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Income tax expense | $ | $ | ( | $ | $ | ||||||||||||||||||
| Effective tax rates | ( | %) | % | ( | %) | ( | %) | ||||||||||||||||
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period.
For the three months ended June 30, 2023, the Company reported a tax expense of $0.4 million on a pretax loss of $19.9 million, which resulted in a negative effective tax rate of 2.2 %. The Company’s effective tax rate differs from the U.S. statutory rate of 21% due to the mix of earnings in international jurisdictions with relatively higher tax rates and losses incurred in jurisdictions for which no tax benefit is recognized..
For the three months ended June 30, 2022, the Company reported a tax benefit of less than $0.1 million on a pretax loss of $3.5 million, which resulted in an effective tax rate of 0.8 %. The Company’s effective tax rate differs from the U.S. Statutory rate of 21% due to the mix of earnings in international jurisdictions with relatively higher tax rates and losses incurred in jurisdictions for which no tax benefit is recognized.
For the six months ended June 30, 2023, the Company reported a tax benefit of $0.4 million on a pretax loss of $57.9 million which resulted in an effective tax rate of 0.8 %. The Company’s effective tax rate differs from the U.S. statutory rate of 21% due to the mix of earnings in international jurisdictions with relatively higher tax rates and losses incurred in jurisdictions for which no tax benefit is recognized.
For the six months ended June 30, 2022, the Company reported a tax expense of less than $0.2 million on a pretax loss of $9.6 million, which resulted in a negative effective tax rate of 2.3 %. The Company’s effective tax rate differs from the U.S. Statutory rate of 21% due to the mix of earnings in international jurisdictions with relatively higher tax rates and losses incurred in jurisdictions for which no tax benefit is recognized.
Note 10 – Net Revenues
Disaggregated revenues by contract type and the timing of revenue recognition are as follows:
| (in thousands USD) | Timing of Revenue Recognition | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||
| Revenues by Contract Type | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Time and materials | over time | $ | |||||||||||||||||||||||||||