UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(I.R.S. Employer |
(Address of principal executive offices, including zip code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 1, 2023, the registrant had
FISCALNOTE HOLDINGS, INC. FORM 10-Q TABLE OF CONTENTS |
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Page No. |
Cautionary Note Regarding Forward-Looking Statements |
1 |
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PART I. Financial Information (Unaudited): |
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Financial Statements |
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2 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss |
3 |
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) |
4 |
5 |
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6 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
24 |
Item 3. Quantitative and Qualitative Disclosures About Market Risks |
37 |
Item 4. Controls and Procedures |
37 |
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Part II. OTHER INFORMATION |
38 |
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Item 1. Legal Proceedings |
38 |
Item 1A. Risk Factors |
38 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
38 |
Item 3. Defaults upon Senior Securities |
38 |
Item 4. Mine Safety Disclosures |
38 |
Item 5. Other Information |
38 |
Item 6. Exhibits |
38 |
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40 |
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They may appear in a number of places throughout this Quarterly Report on Form 10-Q, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors,” and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our future results of operations, financial condition and liquidity; our prospects, growth, strategies and the markets in which FiscalNote operates. Such forward-looking statements are based on available current market material and management’s expectations, beliefs and forecasts concerning future events impacting FiscalNote. Factors that may impact such forward-looking statements include:
The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties described in the “Risk Factors” section of this Quarterly Report on Form 10-Q and the other documents filed by us from time to time with the U.S. Securities and Exchange Commission ("SEC"). The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on current expectations and beliefs concerning future developments and their potential effects on us and our business. There can be no assurance that future developments affecting us will be those that we have anticipated. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
FISCALNOTE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except shares, and par value)
(Unaudited)
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March 31, 2023 |
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December 31, 2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Costs capitalized to obtain revenue contracts, net |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Capitalized software costs, net |
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Noncurrent costs capitalized to obtain revenue contracts, net |
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Operating lease assets |
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Goodwill |
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Customer relationships, net |
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Database, net |
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Other intangible assets, net |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
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$ |
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Accounts payable and accrued expenses |
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Deferred revenue, current portion |
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Customer deposits |
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Contingent liabilities from acquisitions, current portion |
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Operating lease liabilities, current portion |
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Other current liabilities |
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Total current liabilities |
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Long-term debt, net of current maturities |
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Deferred tax liabilities |
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Deferred revenue, net of current portion |
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Contingent liabilities from acquisitions, net of current portion |
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Operating lease liabilities, net of current portion |
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Warrant liabilities |
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Other non-current liabilities |
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Total liabilities |
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Stockholders' equity: |
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Class A Common stock ($ |
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Class B Common stock ($ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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( |
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Accumulated deficit |
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( |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
FISCALNOTE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except shares and per share data)
(Unaudited)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Revenues: |
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Subscription |
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$ |
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$ |
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Advisory, advertising, and other |
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Total revenues |
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Operating expenses: (1) |
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Cost of revenues |
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Research and development |
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Sales and marketing |
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Editorial |
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General and administrative |
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Amortization of intangible assets |
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Impairment of goodwill |
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- |
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Transaction costs (gains), net |
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( |
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Total operating expenses |
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Operating loss |
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( |
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Interest expense, net |
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Change in fair value of financial instruments |
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Gain on PPP loan upon extinguishment |
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- |
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( |
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Other (income) expense, net |
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( |
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Net loss before income taxes |
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( |
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( |
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Provision (benefit) from income taxes |
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( |
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Net loss |
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( |
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( |
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Other comprehensive (loss) gain |
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( |
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Total comprehensive loss |
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$ |
( |
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$ |
( |
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Net loss |
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$ |
( |
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$ |
( |
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Deemed contribution |
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- |
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Net loss used to compute loss per share |
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$ |
( |
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$ |
( |
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Earnings per share attributable to common shareholders: |
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Basic and Diluted |
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$ |
( |
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$ |
( |
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Weighted average shares used in computing earnings per shares attributable to common shareholders: |
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Basic and Diluted |
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(1)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Cost of revenues |
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$ |
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$ |
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Research and development |
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Sales and marketing |
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Editorial |
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General and administrative |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
FISCALNOTE HOLDINGS, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands, except share data)
(Unaudited)
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Temporary Equity |
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Equity (Deficit) |
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Preferred Stock |
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Common Stock |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders' equity (deficit) |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at December 31, 2021 |
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$ |
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$ |
- |
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$ |
- |
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$ |
( |
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$ |
( |
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$ |
( |
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Retroactive conversion of shares due to Business Combination |
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- |
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- |
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- |
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- |
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- |
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Balance at December 31, 2021, as converted |
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$ |
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$ |
- |
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$ |
- |
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$ |
( |
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$ |
( |
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$ |
( |
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Accretion of preferred stock to redemption value |
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- |
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( |
) |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Foreign currency translation gain |
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- |
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- |
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- |
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- |
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- |
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- |
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Balance at March 31, 2022 |
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$ |
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$ |
- |
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$ |
- |
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$ |
( |
) |
$ |
( |
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$ |
( |
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Balance at December 31, 2022 |
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- |
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- |
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( |
) |
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( |
) |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Issuance of Class A common stock in connection with business acquisitions |
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- |
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- |
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- |
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- |
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- |
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Issuance of Class A common Stock upon vesting of restricted share units |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Issuance of Class A common stock upon exercise of stock options |
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- |
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- |
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- |
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- |
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- |
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Issuance of Class A common stock upon settlement of contingent consideration |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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Withholding taxes on net share settlement of stock-based compensation and option exercises |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
Net loss |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
Foreign currency translation loss |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
Balance at March 31, 2023 |
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- |
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$ |
- |
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$ |
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$ |
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$ |
( |
) |
$ |
( |
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$ |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
FISCALNOTE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Operating Activities: |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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Amortization of intangible assets and capitalized software development costs |
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Amortization of deferred costs to obtain revenue contracts |
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Impairment of goodwill |
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- |
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Non-cash operating lease expense |
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Stock-based compensation |
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Operating lease asset impairment |
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- |
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Other non-cash expenses |
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Bad debt expense (recovery) |
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( |
) |
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Change in fair value of acquisition contingent consideration |
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( |
) |
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( |
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Change in fair value of financial instruments |
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( |
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Deferred income tax benefit |
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( |
) |
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( |
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Paid-in-kind interest, net |
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Non-cash interest expense |
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Gain on PPP Loan forgiveness |
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- |
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( |
) |
Changes in operating assets and liabilities: |
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Accounts receivable, net |
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( |
) |
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( |
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Prepaid expenses and other current assets |
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( |
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Costs capitalized to obtain revenue contracts, net |
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( |
) |
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( |
) |
Other non-current assets |
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- |
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Accounts payable and accrued expenses |
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( |
) |
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( |
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Deferred revenue |
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Customer deposits |
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( |
) |
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( |
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Other current liabilities |
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( |
) |
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( |
) |
Contingent liabilities from acquisitions, net of current portion |
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( |
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- |
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Operating lease liabilities |
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( |
) |
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( |
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Other non-current liabilities |
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( |
) |
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Net cash used in operating activities |
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( |
) |
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( |
) |
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Investing Activities: |
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Capital expenditures |
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( |
) |
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( |
) |
Cash paid for business acquisitions, net of cash acquired |
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( |
) |
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- |
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Net cash used in investing activities |
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( |
) |
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( |
) |
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Financing Activities: |
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Proceeds from long-term debt, net of issuance costs |
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Principal payments of long-term debt |
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( |
) |
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- |
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Proceeds from exercise of stock options |
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Net cash provided by financing activities |
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Effects of exchange rates on cash |
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( |
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Net change in cash, cash equivalents, and restricted cash |
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( |
) |
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|
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental Noncash Investing and Financing Activities: |
|
|
|
|
|
|
||
Accretion of redemption value of preferred stock |
|
$ |
- |
|
|
$ |
( |
) |
Warrants issued in conjunction with long-term debt issuance |
|
$ |
|
|
$ |
|
||
Fees payable to debt holders settled through increase of debt principal |
|
$ |
- |
|
|
$ |
|
|
PIK interest settled through issuance of additional convertible notes to noteholders |
|
$ |
- |
|
|
$ |
|
|
Property and equipment purchases included in accounts payable |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental Cash Flow Activities: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for taxes |
|
$ |
|
|
$ |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
FISCALNOTE HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except shares, par value, per share amounts, or as otherwise noted)
(Unaudited)
1. Summary of Business and Significant Accounting Policies
Description of Business
FiscalNote Holdings, Inc. (“FiscalNote,” or the “Company”) is a leading technology provider of global policy and market intelligence. It delivers critical, actionable legal and policy insights in a rapidly evolving political, regulatory and macroeconomic environment. By combining artificial intelligence (AI) technology, other technologies with analytics, workflow tools, and expert peer insights, FiscalNote empowers customers to manage policy, address regulatory developments, and mitigate global risk. FiscalNote ingests unstructured legislative and regulatory data, and employs AI and data science to deliver structured, relevant and actionable information in order to facilitate key operational and strategic decisions by global enterprises, midsized and smaller businesses, government institutions, trade groups, and nonprofits. FiscalNote delivers that intelligence through its suite of public policy and issues management products. The Company is headquartered in Washington, D.C.
On July 29, 2022 (the “Closing Date”), the Company consummated the transactions contemplated by the Agreement and Plan of Merger, dated as of November 7, 2021, and as amended on May 9, 2022, (the “Merger Agreement”), by and among FiscalNote Holdings, Inc., a Delaware corporation (“Old FiscalNote”), Duddell Street Acquisition Corp., a Cayman Islands exempted company (“DSAC”), and Grassroots Merger Sub, Inc., a Delaware Corporation and a wholly owned direct subsidiary of DSAC (“Merger Sub” and, together with DSAC, the “DSAC Parties”). Pursuant to these transactions, Merger Sub merged with and into Old FiscalNote, with Old FiscalNote becoming a wholly owned subsidiary of DSAC (the “Business Combination” and, collectively with the other transactions described in the Business Combination Agreement, the “Transactions”). In connection with the closing of the Transactions (the “Closing”), DSAC domesticated and continued as a Delaware corporation under the name of “FiscalNote Holdings, Inc.” (“New FiscalNote”). Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “FiscalNote,” “we,” “us,” or “our” refer to the business of Old FiscalNote, which became the business of New FiscalNote and its subsidiaries following the Closing.
Basis of Presentation and Interim Financial Information
We accounted for the Business Combination as a reverse recapitalization whereby Old FiscalNote was determined as the accounting acquirer and DSAC as the accounting acquiree. This determination was primarily based on:
Accordingly, the Business Combination was treated as the equivalent of Old FiscalNote issuing stock for the net assets of DSAC, accompanied by a recapitalization. The net assets of DSAC are stated at historical cost, with
While DSAC was the legal acquirer in the Business Combination, because Old FiscalNote was determined as the accounting acquirer, the historical financial statements of Old FiscalNote became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in the accompanying unaudited interim condensed consolidated financial statements reflect (i) the historical operating results of Old FiscalNote prior to the Business Combination; (ii) the combined results of the Company and Old FiscalNote following the closing of the Business Combination; (iii) the assets and liabilities of Old FiscalNote at their historical cost; and (iv) the Company’s equity structure for all periods presented.
In connection with the Business Combination, the Company has converted the equity structure for the periods prior to the Business Combination to reflect the number of shares of New FiscalNote’s common stock issued to Old FiscalNote’s stockholders in connection with the recapitalization transaction based on an exchange ratio of
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.
These condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes
6
required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of March 31, 2023, and its results of operations, including its comprehensive loss, temporary equity, stockholders' equity (deficit), and cash flows for the three months ended March 31, 2023 and 2022. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2023. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Liquidity
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due.
The Company received approximately $
The Company's future capital requirements also depend on many factors, including sales volume, the timing and extent of spending to support research and development (“R&D”) efforts, investments in information technology systems, the expansion of sales and marketing activities, and execution on our acquisition strategy. Historically the Company’s cash flows from operations have not been sufficient to fund its current operating model. The Company believes with the cash on hand at March 31, 2023, proceeds from our expected product sales, and available borrowings under our New Senior Term Loan and for certain acquisition activity, will be sufficient to meet our short-term and long-term operating expenses and capital expenditures for at least the next twelve months.
Pursuant to the terms of the New Senior Term Loan, the Company is subject to customary covenant requirements (see Note 8, “Debt” for additional details). The Company expects to be in compliance with its quarterly financial covenants throughout 2023 and 2024, but cannot guarantee that will be the case. In the event of non-compliance with any quarterly financial covenants, should the lenders of the New Senior Term Loan accelerate the maturity of the New Senior Term Loan, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt in the event of default.
On April 13, 2020, the Company received funding in the principal amount of $
Segments
The Company operates as
Fair value of financial instruments
The Company has elected the fair value option on the subordinated convertible promissory notes issued as part of the Dragonfly acquisition. The Company records changes in fair value through the condensed consolidated statement of operations where the portion of the change that results from a change in the instrument-specific credit risk is recorded separately in accumulated other comprehensive income, if applicable. Additionally, under the fair value option, all issuance costs are expensed in the period that the debt is incurred.
Concentrations of Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company generally maintains its cash and cash equivalents with various nationally recognized financial institutions. The Company’s cash and cash equivalents at times exceed amounts guaranteed by the Federal Deposit Insurance Corporation. The Company considers cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At March 31, 2023, over
The Company does not require collateral for accounts receivable. The Company maintains an allowance for its doubtful accounts receivable due to estimated credit losses. This allowance is based upon historical loss patterns, the number of days billings are past due,
7
collection history of each customer, an evaluation of the potential risk of loss associated with delinquent accounts and current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss patterns. The Company records the allowance against bad debt expense through the condensed consolidated statements of operations, included in sales and marketing expense, up to the amount of revenues recognized to date. Any incremental allowance is recorded as an offset to deferred revenue on the condensed consolidated balance sheets. Receivables are written off and charged against the recorded allowance when the Company has exhausted collection efforts without success. As of March 31, 2023, allowance for credit losses of $
One customer accounted for more than
Two vendors individually accounted for more than
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") guidance with respect to measuring credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate now reflects an entity's current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The Company adopted ASC 2016-13 on January 1, 2023 using the modified retrospective transition method. Upon adoption, the Company recorded a $
In August 2020, the FASB issued ASU 2020-06 Debt – Debt with Conversion and Other Options (ASC 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (ASC 815-40) ("ASU 2020-06") guidance modifying the requirements for the accounting for convertible instruments and contracts in an entity’s own equity. The modifications eliminate certain accounting models for convertible debt instruments, eliminate certain requirements for equity classification of embedded derivatives and align earnings per share calculations for convertible instruments. The Company adopted ASC 2020-06 on January 1, 2023 using the modified retrospective approach. The adoption of ASC 2020-06 did not have a material impact on the Company's condensed consolidated financial statements.
2. Business Combination with DSAC
On July 29, 2022, Old FiscalNote and DSAC consummated the transactions contemplated by the Business Combination Agreement. In connection with the Closing, each share of preferred stock of Old FiscalNote was converted into common stock and, immediately thereafter, each share of common stock of Old FiscalNote that was issued and outstanding immediately prior to the effective time of the Business Combination (other than excluded shares as contemplated by the Business Combination Agreement) was canceled and converted into the right to receive approximately
At the Closing, each option to purchase Old FiscalNote’s common stock, whether vested or unvested, was assumed and converted into an option to purchase a number of shares of New FiscalNote Class A common stock in the manner set forth in the Business Combination Agreement. Each restricted stock unit of Old FiscalNote was assumed and converted into restricted stock units of New FiscalNote settling in a number of New FiscalNote Class A common stock in the manner set forth in the Business Combination Agreement.
Pursuant to the terms of the Business Combination Agreement, the holders of Old FiscalNote equity instruments outstanding immediately prior to the Closing Date will be entitled to receive their proportionate allocation of additional shares subject to achievement of certain conditions (see Note 10, "Earnout Shares and RSUs").
In connection with the Closing, FiscalNote also entered into the New Senior Term Loan with Runway Growth Finance Corp., ORIX Growth Capital, LLC, Clover Orochi LLC, and ACM ASOF VIII SaaS FinCo LLC (together the “New Senior Lenders”). The New Senior Term Loan was consummated simultaneously with the Closing.
The Company accounted for the Business Combination as a reverse recapitalization whereby Old FiscalNote was determined as the accounting acquirer and DSAC as the accounting acquiree. Accordingly, the Business Combination was treated as the equivalent of Old FiscalNote issuing stock for the net assets of DSAC, accompanied by a recapitalization. The net assets of DSAC are stated at historical cost, with no goodwill or other intangible assets recorded. Refer to Note 1, "Summary of Business and Significant Accounting Policies", for further details.
8
Upon the closing of the Transactions and the New Senior Term Loan, the Company received total gross proceeds of $
3. Revenues
Disaggregation of Revenue
The following table depicts the Company's disaggregated revenue for the periods presented:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
Subscription |
|
$ |
|
|
$ |
|
|
||
Advisory |
|
|
|
|
|
|
|
||
Advertising |
|
|
|
|
|
|
|
||
Books |
|
|
|
|
|
|
|
||
Other revenue |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
Revenue by Geographic Locations
The following table depicts the Company’s revenue by geographic operations for the periods presented:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
North America |
|
$ |
|
|
$ |
|
|
||
Europe |
|
|
|
|
|
|
|
||
Australia |
|
|
|
|
|
|
|
||
Asia |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
Revenues by geography are determined based on the region of the Company's contracting entity, which may be different than the region of the customer. North America revenue consists solely of revenue attributed to the United States. For the three months ended March 31, 2023 and 2022, revenue attributed to the United Kingdom represented approximately
Contract Assets
The Company had contract assets of $
Deferred Revenue
Details of the Company’s deferred revenue for the periods presented are as follows:
Balance at December 31, 2021 |
|
$ |
|
|
Revenue recognized in the current period from amounts in the prior balance |
|
|
( |
) |
New deferrals, net of amounts recognized in the current period |
|
|
|
|
Effects of foreign currency |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
|
|
|
|
|
|
|
Balance at December 31, 2022 |
|
$ |
|
|
Acquired deferred revenue |
|
|
|
|
Revenue recognized in the current period from amounts in the prior balance |
|
|
( |
) |
New deferrals, net of amounts recognized in the current period |
|
|
|
|
Effects of foreign currency |
|
|
|
|
Balance at March 31, 2023 |
|
$ |
|
Costs to Obtain
During the three months ended March 31, 2023 and 2022, the Company capitalized $
9
Unsatisfied Performance Obligations
At March 31, 2023, the Company had $
4. Business Combinations
2023 Acquisitions
Dragonfly Acquisition
On January 27, 2023, the Company entered into a Sale and Purchase Agreement for all of the issued and outstanding share capital of Dragonfly Eye Limited ("Dragonfly"), a UK- based SaaS-based geopolitical and security intelligence provider of actionable data and analysis delivered through Dragonfly's SaaS-based, proprietary Security Intelligence and Analysis Service subscription platform and API.
The aggregate purchase price consisted of (i) $
The acquisition date fair value of the consideration transferred for Dragonfly consisted of the following:
Cash |
|
$ |
|
|
Fair value of Class A common stock |
|
|
|
|
Fair value of Seller Convertible Notes |
|
|
|
|
Fair value of contingent consideration |
|
|
|
|
Total |
|
$ |
|
The Class A common stock issued as consideration as part of the acquisition of Dragonfly represents non-cash activity on the condensed consolidated statement of stockholders equity and condensed consolidated statement of cash flows.
Additionally, the sellers are eligible to receive an additional payment from the Company of up to approximately $
Certain employees of Dragonfly are eligible for employee earnout bonus awards ("Employee Earnout Awards") based on 2024 revenue targets. The Employee Earnout Awards are subject to forfeiture in the event that Dragonfly does not achieve its revenue target or these employees terminate their employment. Any Employee Earnout Awards that are forfeited are reallocated to the other eligible employees.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:
Cash and cash equivalents |
|
$ |
|
|
Current assets, net |
|
|
|
|
Property and equipment, net |
|
|
|
|
Intangible assets |
|
|
|
|
Deferred revenues |
|
|
( |
) |
Current liabilities |
|
|
( |
) |
Deferred tax liabilities |
|
|
( |
) |
Total net assets acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase price |
|
$ |
|
The following table sets forth the components of identified intangible assets acquired and their estimated useful lives as of the date of acquisition:
|
|
Estimated Fair Value |
|
|
Estimated Useful Life (Years) |
|
|
||
Customer relationships |
|
$ |
|
|
|
(a) |
|||
Developed technology |
|
|
|
|
|
|
|
||
Tradename |
|
|
|
|
|
|
|
||
Total intangible assets acquired |
|
$ |
|
|
|
|
|
||
(a) Includes 2 separate customer relationships with two different useful lives |
|
|
The estimated fair values of the customer relationships, developed technology and tradename were determined using the income approach. The approaches used to estimate the fair values use significant unobservable inputs including revenue and cash flow forecasts, customer attrition rates, and appropriate discount rates.
The purchase price allocation includes UK deferred assets and liabilities for acquired book and tax basis differences.
10
The fair values assigned to tangible and intangible assets acquired and liabilities assumed combined with the fair value of the purchase consideration are based on management's estimates and assumptions and are preliminary and may change upon completion of the determination of the fair value of assets and liabilities assumed. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
2022 Acquisitions
Aicel Acquisition
On July 29, 2022, the Company acquired all of the outstanding stock of Seoul, South Korea-based Aicel Technologies (“Aicel”), an AI-driven enterprise SaaS company that delivers market intelligence and data insights. The acquisition consideration of $
Fair value of Class A common stock |
|
$ |
|
|
Fair value of contingent consideration |
|
|
|
|
Total |
|
$ |
|
The fair value of the Class A common stock issued was estimated based on the fair value of the Company’s common stock on the date of the acquisition. The fair value of the contingent consideration is estimated based on the expected future cash flows and revenues along with the fair value of the Company’s Class A common stock on the date of acquisition.
The contingent consideration consists of shares of the Company’s Class A common stock and is scheduled to be delivered within eighteen months upon achievement of certain revenue targets pursuant to the terms of the prevailing purchase agreement. The contingent consideration is payable to certain selling shareholders and contains no future service conditions. The fair value of the contingent consideration was recorded as equity as the number of shares that ultimately may be issued upon achievement of the revenue targets is fixed. Classification as equity requires fair value measurement initially and there are no subsequent re-measurements. Settlement of equity-classified contingent consideration is accounted for within equity.
The acquisition also includes contingent payments in the form of up to $
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:
Cash and cash equivalents |
|
$ |
|
|
Current assets, net |
|
|
|
|
Property and equipment, net |
|
|
|
|
Equity method investment |
|
|
|
|
Intangible assets |
|
|
|
|
Deferred revenues |
|
|
( |
) |
Other current liabilities |
|
|
( |
) |
Debt |
|
|
( |
) |
Total net assets acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase price |
|
$ |
|
The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill, which is primarily attributed to the future economic benefits arising from other assets acquired and could not be individually identified and separately recognized including expected synergies and assembled workforce.
The following table sets forth the components of identified intangible assets acquired and their estimated useful lives as of the date of acquisition:
|
|
Estimated Fair Value |
|
|
Estimated Useful Life (Years) |
|
||
Developed technology |
|
$ |
|
|
|
|
||
Database |
|
|
|
|
|
|
||
Customer relationships |
|
|
|
|
|
|
||
Tradename |
|
|
|
|
|
|
||
Total intangible assets acquired |
|
$ |
|
|
|
|
11
The estimated fair values of the developed technology, database, customer relationships, and tradename were determined using the income approach. The approaches used to estimate the fair values use significant unobservable inputs including revenue and cash flow forecasts, customer attrition rates, and appropriate discount rates.
For federal income tax purposes, the Company has made a Section 338(g) election to treat the transaction as an asset acquisition for federal income tax purposes which results in additional tax basis approximately equal to the fair value assigned at the acquisition date. The intangibles and goodwill are to be amortized over
DT-Global Asset Acquisition
On September 30, 2022, the Company acquired certain assets of DT-Global Business Consulting, a Vienna, Austria subscription-based market intelligence company which provides in-depth expertise and analysis for Central & Eastern Europe, Commonwealth of Independent States, and Middle East-Africa areas. The aggregate purchase price was $
The Company accounted for this acquisition as an asset purchase. In connection with the acquisition, the Company incurred direct transaction costs of approximately $
For federal income tax purposes, the Company obtained a tax basis in the assets acquired equal to the purchase price, as adjusted and allocated, pursuant to IRC guidelines. The resulting intangible asset will be amortized over
5. Leases
The Company has operating leases, principally for corporate offices under non-cancelable operating leases that expire at various dates through 2031. The non-cancellable base terms of these leases typically range from to
The following table details the composition of lease expense for the year presented:
|
|
Three Months Ended |
|
|||||
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
||
Operating lease cost (a) |
|
$ |
|
|
$ |
|
||
Variable lease cost |
|
|
|
|
|
|
||
Short-term lease cost |
|
|
|
|
|
|
||
Total lease costs |
|
$ |
|
|
$ |
|
||
Sublease income |
|
$ |
( |
) |
|
$ |
( |
) |
Cash payments related to operating lease liabilities were $
In March 2022, the Company ceased use of excess office space under one of its existing leases, with the intent to sublease this space. In accordance with ASC 360, the Company evaluated the asset group for impairment and recognized the excess of the carrying value over the fair value of the asset group, which totaled $
In April 2021, the Company entered into a modification of one of its existing subleases. The Company exercised its termination notification right on this lease which resulted in a termination fee payment of $
12
6. Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of the Company’s intangible assets by major class:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
Weighted Average |
|
|||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Remaining Useful Life (Years) March 31, 2023 |
|
|||||||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|||||
Developed technology |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Databases |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Tradenames |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Expert network |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Patents |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Content library |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
Amortization of developed technology was recorded as part of cost of revenues in the amount of $
The expected future amortization expense for intangible assets as of March 31, 2023 is as follows:
2023 (remainder) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
Capitalized software development costs
Capitalized software development costs are as follows.
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
||||||
Capitalized software development costs |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
During the three months ended March 31, 2023 and 2022, the Company capitalized interest on capitalized software development costs in the amount of $
7. Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill amounts are not amortized, but are rather tested for impairment at least annually as of October 1 of each year.
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, are as follows:
Balance at December 31, 2022 |
|
$ |
|
|
Acquisition |
|
|
|
|
Impairment |
|
|
( |
) |
Impact of foreign currency fluctuations |
|
|
( |
) |
Balance at March 31, 2023 |
|
$ |
|
The Company has the following goodwill reporting units: Public Policy & Issues Management ("PPIM"); Geopolitical & Market Intelligence ("GMI"); Advocacy; Community; AI-Driven Intelligence ("FNAI"); and Environmental, Sustainability, and Governance ("ESG"). The Company performed the required annual impairment test as of October 1, 2022 at the reporting unit level, which resulted in no impairment of goodwill. Subsequent to performing our annual impairment test, we continued to monitor our reporting units for events that might indicate an interim impairment. Due to the decline in the Company’s stock price and market capitalization in the first quarter of 2023, and the underperformance of the Company’s ESG reporting unit compared to internal projections, the Company performed a quantitative goodwill impairment assessment as of March 31, 2023. This quantitative assessment resulted in all the goodwill in our ESG reporting unit being impaired; accordingly, an impairment charge of $
13
Prior to the quantitative goodwill impairment the Company tested the recoverability of its long-lived assets, and concluded that such assets were not impaired.
The fair value estimate of the Company's reporting units was derived based on an income approach. Under the income approach, the Company estimated the fair value of reporting units based on the present value of estimated future cash flows, which the Company considers to be a Level 3 unobservable input in the fair value hierarchy. The Company prepared cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the current macroeconomic, industry, and market conditions. The Company based the discount rate on the weighted-average cost of capital considering Company-specific characteristics and the uncertainty related to our reporting unit's ability to execute on the projected cash flows. At March 31, 2023 the Company's
Potential indicators of impairment include significant changes in performance relative to expected operating results, significant negative industry or economic trends, or a significant decline in the Company's stock price and/or market capitalization for a sustained period of time. It is reasonably possible that one or more of these impairment indicators could occur or intensify in the near term, which may result in an impairment of long-lived assets or further impairment of goodwill.
8. Debt
The following presents the carrying value of the Company’s debt as of the respective period ends:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
New Senior Term Loan |
|
$ |
|
|
$ |
|
||
Convertible Notes |
|
|
|
|
|
|
||
Dragonfly Seller Convertible Notes |
|
|
|
|
|
- |
|
|
Aicel Convertible Note |
|
|
|
|
|
|
||
PPP loan |
|
|
|
|
|
|
||
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Total |
|
|
|
|
|
|
||
Less: Current portion |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
New Senior Term Loan
Concurrently with the Closing, FiscalNote, Inc., a wholly owned indirect subsidiary of FiscalNote Holdings, Inc., entered into a New Senior Term Loan consisting of a fully funded principal amount of $
On March 17, 2023, the Company, entered into Amendment No. 1 ( “Amendment No. 1”) to its New Senior Term Loan dated July 29, 2022. Among other things, Amendment No. 1 provided for the extension of an incremental term loan by one of the lenders under the facility in the principal amount of $
The Prime Rate in effect for the New Senior Term Loan was
The Company may prepay the New Senior Term Loan in whole, subject to a
14
The New Senior Term Loan is senior to all other debt and has a first priority lien on substantially all of the Company’s assets. The New Senior Term Loan contains customary negative covenants related to borrowing, events of default and covenants, including certain non-financial covenants and covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire stock, and make investments, in each case subject to certain exceptions. In addition to the negative covenants, there were
Convertible Notes
At March 31, 2023, the holders of four convertible notes that were previously issued by Old FiscalNote (the “Convertible Notes”) with a principal and accrued PIK balance of $
Concurrently with the Closing, the Company repaid or converted to shares of Class A Common Stock of New FiscalNote all other previously outstanding debt instruments. The Company recorded $
Dragonfly Seller Convertible Notes
In connection with the Company's acquisition of Dragonfly, the Company financed part of the purchase with the issuance of convertible notes. The Dragonfly Convertible Notes were issued in a principal amount of £
At any time after August 2, 2023, the Company can convert any portion of the principal and accrued interest at the volume weighted-average price for the five consecutive trading day period ending on the last trading day of the calendar month preceding the date the Company provides notice of conversion to the Sellers.
At any time after the 18 month anniversary of the Dragonfly acquisition closing date, the lender has the right to convert the outstanding principal and accrued interest for FiscalNote common stock at $
The Company elected to account for the Dragonfly Seller Convertible Notes using the fair value option due to these embedded features within the note.
The Dragonfly Seller Convertible Notes were recorded at their acquisition date fair value of $
Aicel Convertible Note
In connection with the Company’s acquisition of Aicel, the Company assumed a convertible note (“Aicel Convertible Note”) issued by Aicel in a private placement to a third-party lender dated July 27, 2022. The Aicel Convertible Note was issued in a principal amount of $
The Aicel Convertible Note can be converted upon the occurrence of certain events, including (i) Aicel initial public offering (“IPO”), (ii) change in control of Aicel (the acquisition of Aicel by FiscalNote did not constitute a change in control as defined in the purchase agreement), or (iii) sale of substantially all of Aicel’s assets (collectively, a “Conversion Event”). The Company has the right to convert the Aicel Convertible Note into shares of common stock issued in an IPO, if (a) the Conversion Event is an IPO and (b) the price per share paid in an IPO is greater than the stipulated initial conversion price. The lender has the right to elect to convert the Aicel Convertible Note into shares of common stock upon the occurrence of a Conversion Event.
At any time after the second anniversary of the Aicel acquisition closing date until the earlier of (a) the Aicel Convertible Note maturity date, or (b) the occurrence of any liquidity event, the lender has the right to require FiscalNote to repurchase the outstanding principal in
15
exchange for FiscalNote common stock. The lender will receive a number of shares of FiscalNote equal to the outstanding principal plus accrued interest divided by the FiscalNote common stock price and rounded to the nearest whole share.
Upon the occurrence of an event of default, in addition to the lenders being able to declare amounts outstanding under the Aicel Convertible Note due and payable the lenders can elect to increase the paid-in-kind interest rate to
The Company concluded that the contingent default interest provision was required to be bifurcated and treated as an embedded derivative liability. The associated value was immaterial and required no initial amount to be recorded. The Company determined that the remaining embedded features were clearly and closely related to the debt host and did not require bifurcation from the debt host.
The Aicel Convertible Note was recorded at its acquisition fair value of $
PPP Loan
On April 13, 2020, the Company received funding in the principal amount of $
Total Debt
The following table summarizes the total estimated fair value of the Company's debt as of March 31, 2023 and December 31, 2022, respectively. These fair values are deemed Level 3 liabilities within the fair value measurement framework.
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
New Senior Term Loan |
|
$ |
|
|
$ |
|
||
Convertible notes |
|
|
|
|
|
|
||
Dragonfly Seller Convertible Notes |
|
|
|
|
|
- |
|
|
Total |
|
$ |
|
|
$ |
|
Warrants
Old FiscalNote Warrants
At March 31, 2023,
Warrants associated with Amendment 1
On March 17, 2023, in connection with Amendment No. 1 discussed above, the Company issued
9. Stockholders’ Equity
Authorized Capital Stock
The Company’s charter authorizes the issuance of
Class A Common Stock
Subsequent to the Closing of the Business Combination, the Company's Class A common stock and public warrants began trading on the New York Stock Exchange (“NYSE”) under the symbols “NOTE” and “NOTE WS,” respectively. Pursuant to the Company’s charter, the Company is authorized to issue
Additionally, the Company has outstanding warrants to purchase shares of New FiscalNote Class A common stock that became exercisable upon the Closing of the Business Combination. Refer to Note 11, "Warrant Liabilities."
Class B Common Stock
Pursuant to the Company’s charter, the Company is authorized to issue
In connection with the Closing of the Business Combination, the Co-Founders, or entities controlled by the Co-Founders, received Class B shares of New FiscalNote common stock as consideration (see further details in Note 2, "Business Combination with DSAC").
As of March 31, 2023, the Company had
16
Preferred Stock
Pursuant to the Company’s charter, the Company is authorized to issue
Dividends
The Company's Class A and Class B common stock are entitled to dividends if and when any dividend is declared by the Company's board of directors, subject to the rights of all classes of stock outstanding having priority rights to dividends. The Company has not paid any cash dividends on common stock to date. The Company may retain future earnings, if any, for the further development and expansion of the Company's business and have no current plans to pay cash dividends for the foreseeable future. Any future determination to pay dividends will be made at the discretion of the Company's board of directors and will depend on, among other things, the Company's financial condition, results of operations, capital requirements, restrictions contained in future agreements and financing instruments, business prospects and such other factors as the Company's board of directors may deem relevant.
10. Earnout Shares and RSUs
The shareholders and other equity holders of Old FiscalNote as described below are entitled to receive up to
Pursuant to the terms of the Business Combination Agreement, the holders of Old FiscalNote common stock, Old FiscalNote warrants, vested Old FiscalNote options and vested Old FiscalNote RSUs outstanding immediately prior to the Closing Date will be entitled to receive their proportionate allocation of Earnout Shares subject to achievement of the Triggering Event. Holders of unvested Old FiscalNote options and unvested Old FiscalNote RSUs outstanding immediately prior to the Closing Date will be entitled to receive their proportionate allocation of Earnout Shares in the form of Earnout RSUs subject to achievement of the Triggering Event. To the extent the equity award issued upon New FiscalNote's assumption of such any Old FiscalNote Option or Old FiscalNote RSU (each a “Converted Award”) is outstanding and has vested as of the occurrence of a Triggering Event, the holder thereof will receive a proportionate allocation of Earnout Shares in lieu of Earnout RSUs.
If a Converted Award is forfeited after the Closing Date but prior to the Triggering Event, no Earnout RSUs will be issued for such Converted Award. The right to receive Earnout RSUs that have been forfeited shall be reallocated pro-rata to the remaining holders of vested Converted Awards in the form of Earnout Shares and unvested Converted Awards in the form of Earnout RSUs in the manner described above. Reallocated Earnout RSUs are subject to the remaining vesting schedule and conditions of the Converted Award held by such equity holder. The forfeiture and subsequent reallocation of the Earnout RSUs are accounted for as the forfeiture of the original award and the grant of a new award.
A portion of the Earnout Shares that may be issued to Old FiscalNote common stockholders, Old FiscalNote vested option holders and Old FiscalNote warrant holders and all of the Earnout RSUs were determined to represent additional compensation for accounting purposes pursuant to ASC 718, “Compensation-Stock Compensation”. The Company recognizes stock-compensation expense based on the fair value of the Earnout Awards over the requisite service period for each tranche. Upon Closing, the Company recognized $
As of March 31, 2023, there was $
11. Warrant Liabilities
Upon the Closing of the Business Combination, the Company assumed
During the three months ended March 31, 2023,
17
Public Warrants
Each public warrant entitles the registered holder to acquire
Redemption of warrants for cash
The Company may call the public warrants for redemption for cash:
If and when the warrants become redeemable by the Company for cash, the Company may exercise its redemption right even if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of warrants for shares of Class A common stock
The Company may redeem the outstanding warrants for shares of Class A common stock:
Private Placement Warrants
The private placement warrants are not redeemable by the Company so long as they are held by the sponsor of DSAC or its permitted transferees, except in certain limited circumstances. The DSAC Sponsor, or its permitted transferees, has the option to exercise the private placement warrants on a cashless basis and the DSAC Sponsor and its permitted transferees has certain registration rights related to the private placement warrants (including the shares of Class A common stock issuable upon exercise of the private placement warrants). Except as described in this section, the private placement warrants have terms and provisions that are identical to those of the public warrants. If the private placement warrants are held by holders other than the DSAC Sponsor or its permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by the holders on the same basis as the public warrants.
12. Stock-Based Compensation
2022 Long-Term Incentive Plan
In connection with the Business Combination, the Company's board of directors adopted, and its stockholders approved, the 2022 Long-Term Incentive Plan (the “2022 Plan”) under which
During the three months ended March 31, 2023 the Company issued
18
The Company recognized $
2022 Employee Stock Purchase Plan
In connection with the Business Combination, the Company’s board of directors adopted, and its stockholders approved, the 2022 Employee Stock Purchase Plan (the “ESPP”) whereby eligible employees may authorize payroll deductions of up to
Withholding Taxes on Equity Awards
In connection with the settlement of equity awards, the Company records a non-cash liability and corresponding APIC adjustment for the withholding taxes on net share settlement of stock-based compensation and option exercises until such time as those taxes have been remitted to the respective taxing authorities.
13. Transaction (Gains) Costs, net
The Company incurred the following transaction costs related to businesses acquired and the consummation of the Business Combination during the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Transaction costs related to acquired businesses |
|
$ |
|
|
$ |
|
||
Non-capitalizable Business Combination costs |
|
|
|
|
|
|
||
Change in contingent consideration liabilities |
|
|
( |
) |
|
|
( |
) |
Contingent compensation expense |
|
|
|
|
|
|
||
Total transaction costs (gains), net |
|
$ |
|
|
$ |
( |
) |
14. Earnings (Loss) Per Share
The Company has two classes of common stock authorized: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting. Each share of Class A common stock is entitled to
Earnings (loss) per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s net loss used in computing basic and diluted earnings per share is adjusted for the deemed dividends resulting from the accretion of Old FiscalNote's preferred shares to redemption value and beneficial conversion features, as applicable. The Old FiscalNote preferred shares were outstanding during the three months ended March 31, 2022. At the closing of the Business Combination, all of Old FiscalNote’s preferred shares were exchanged for Class A common stock of New FiscalNote. Diluted earnings (loss) per share considers the impact of potentially dilutive securities.
The components of basic and diluted earnings (loss) per shares are as follows
(in thousands, except per share data) |
|
Three Months Ended March 31, |
|
|
|||||
Numerator: |
|
2023 |
|
|
2022 |
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Deemed dividend - change in redemption value of preferred stock of Old FiscalNote |
|
|
- |
|
|
|
|
|
|
Net loss used to compute basic and diluted loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
Denominator: |
|
|
|
|
|
|
|
||
Weighted average common stock outstanding, basic and diluted |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Net loss per share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
||
Anti-dilutive securities excluded from diluted loss per share: |
|
|
|
|
|
|
|
||
Anti-dilutive Earnout Awards |
|
|
|
|
|
- |
|
|
|
Anti-dilutive stock options |
|
|
|
|
|
|
|
||
Anti-dilutive Convertible Notes |
|
|
|
|
|
|
|
||
Anti-dilutive contingently issuable shares |
|
|
|
|
|
|
|
||
Anti-dilutive restricted stock units |
|
|
|
|
|
|
|
||
Anti-dilutive other liability - classified warrants |
|
|
- |
|
|
|
|
|
|
Anti-dilutive Aicel Convertible Notes |
|
|
|
|
|
- |
|
|
|
Anti-dilutive convertible preferred stock |
|
|
- |
|
|
|
|
|
|
Anti-dilutive convertible senior debt |
|
|
- |
|
|
|
|
|
|
Total anti-dilutive securities excluded from diluted loss per share |
|
|
|
|
|
|
|
The weighted-average common shares and thus the net loss per share calculations and potentially dilutive security amounts for all periods prior to the Business Combination have been retrospectively adjusted to the equivalent number of shares outstanding immediately
19
after the Business Combination to effect the reverse recapitalization. Historically reported weighted average shares outstanding have been multiplied by the Exchange Ratio (see Note 2, "Business Combination with DSAC").
15. Provision (Benefit) from Income Taxes
Effective Tax Rate
The Company computes its quarterly and year-to-date provisions for income taxes by applying the estimated effective tax rates to the quarterly and year-to-date pre-tax income or losses and adjusting the provisions for discrete tax items recorded in the periods. For the three months ended March 31, 2023 the Company reported a tax provision of $
For the three months ended March 31, 2022, the Company reported a tax benefit of $
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the tax audits cannot be predicted with certainty, if any issues arising in the Company's tax audits progress in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future. For the three months ended March 31, 2023, the Company reported an uncertain tax position totaling $
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Beginning balances at December 31, 2022 and 2021 |
|
$ |
|
|
$ |
|
||
Gross increases - tax positions in prior periods |
|
|
- |
|
|
|
- |
|
Gross decreases - tax positions in prior periods |
|
|
- |
|
|
|
- |
|
Gross increases - tax positions in current periods |
|
|
- |
|
|
|
- |
|
Settlements |
|
|
- |
|
|
|
- |
|
Lapses in statutes of limitations |
|
|
- |
|
|
|
( |
) |
Ending balances at March 31, 2023 and 2022 |
|
$ |
|
|
$ |
|
16. Fair Value Measurements and Disclosures
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other accruals readily convertible into cash approximate fair value because of the short-term nature of the instruments.
The following table presents the Company’s financial assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2023 by level within the fair value hierarchy:
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Public warrants |
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
||
Private placement warrants |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Contingent liabilities from acquisitions |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Liability classified warrants (a) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Dragonfly Seller Convertible Notes |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
(a) - Included in other liabilities on the condensed consolidated balance sheets |
|
20
The following table presents the Company’s financial assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2022 by level within the fair value hierarchy:
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Public warrants |
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
||
Private placement warrants |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Contingent liabilities from acquisitions |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Liability classified warrants (a) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
(a) - Included in other liabilities on the condensed consolidated balance sheets |
|
The following table summarizes changes in fair value of the Company’s level 3 liabilities during the periods presented:
|
|
Contingent |
|
|
Liability Classified Warrants |
|
|
Dragonfly Seller Convertible Notes |
|
|||
Balance at December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
- |
|
||
Fair value at issuance date |
|
|
- |
|
|
|
- |
|
|
|
|
|
Contingent consideration at acquisition date |
|
|
|
|
|
- |
|
|
|
- |
|
|
Contingent compensation recognized |
|
|
|
|
|
- |
|
|
|
- |
|
|
included in the determination of net loss(a) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Earned contingent consideration settled |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
Cash contingent consideration earned and subsequently settled |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
Paid in kind interest |
|
|
- |
|
|
|
- |
|
|
|
|
|
Foreign exchange |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Balance at March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
Public Warrants
The fair value of the public warrants is estimated based on the quoted market price of such warrants on the valuation date. As of March 31, 2023 and December 31, 2022, the estimated fair value of the public warrants was $
Private Placement Warrants
As of March 31, 2023 and December 31, 2022, the estimated fair value of the private warrants was $
Dragonfly Seller Convertible Notes
The Dragonfly Seller Convertible Notes were recognized as a liability in connection with the acquisition on January 27, 2023 at a fair value of $
|
|
March 31, 2023 |
|
|
January 27, 2023 |
|
||
Common stock share price |
|
$ |
|
|
$ |
|
||
Risk free rate |
|
|
% |
|
|
% |
||
Yield |
|
|
% |
|
|
% |
||
Expected volatility |
|
|
% |
|
|
% |
||
Expected term (years) |
|
|
|
|
|
|
As of March 31, 2023, the difference between the aggregate fair value and the unpaid principal balance of the Dragonfly Seller Convertible Notes is $
Contingent Liabilities from acquisitions
The contingent liabilities from acquisitions are classified as Level 3 in the fair value hierarchy. At March 31, 2023 and December 31, 2022, the contingent consideration and compensation relates to the following acquisitions:
21
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Dragonfly |
|
$ |
|
|
$ |
- |
|
|
Curate |
|
|
|
|
|
|
||
FrontierView |
|
|
|
|
|
|
||
Equilibrium |
|
|
|
|
|
|
||
DT Global |
|
|
|
|
|
|
||
Total contingent liabilities from acquisitions |
|
$ |
|
|
$ |
|
The Company settled part of the Curate contingent consideration and compensation through an issuance of
The Company estimated the fair value of the Dragonfly and Curate contingent consideration and compensation using a Monte Carlo simulation. These fair value measurements are based on significant inputs not observable in the market and thus represents Level 3 measurements as defined in ASC 820. Significant changes in the key assumptions and inputs could result in a significant change in the fair value measurement of the contingent consideration.
The following inputs and assumptions were used to value contingent liabilities from acquisitions as of March 31, 2023:
|
|
Dragonfly |
|
|
Curate |
|
||
Risk premium |
|
|
% |
|
|
% |
||
Risk free rate |
|
|
% |
|
|
% |
||
Revenue volatility |
|
|
% |
|
|
% |
||
Expected life (years) |
|
|
|
|
|
|
Liability classified warrants
The Last Out Lender Warrants are classified as Level 3 in the fair value hierarchy. The fair value of the Last Out Lender Warrants is calculated using the Black-Scholes calculation with the following inputs:
|
|
March 31, 2023 |
|
|
Common stock fair value |
|
$ |
|
|
Time to maturity (years) |
|
|
|
|
Risk free rate |
|
|
% |
|
Volatility |
|
|
% |
|
Exercise price |
|
$ |
|
Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company’s long-lived assets, including property and equipment, intangible assets and goodwill are measured at fair value on a non-recurring basis when an impairment has occurred. The Company has recognized an impairment of goodwill as disclosed in Note 7, "Goodwill" during the three months ended March 31, 2023. The company recognized an impairment of an operating lease asset related to certain unoccupied office space as disclosed in Note 5, "Leases" during the three months ended March 31, 2022. The Company has not identified any additional impairments to be recorded during the three months ended March 31, 2023 and 2022.
Excluding a total of $
Changes to fair value are recognized as income or expense in the condensed consolidated statements of operations and comprehensive loss.
17. Commitments and Contingencies
Legal Proceedings
From time to time the Company is a party to various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved.
On May 13, 2022, Old FiscalNote received a letter from GPO FN Noteholder LLC (the “Disputing Lender”) disputing such lender’s pro forma beneficial ownership set forth Amendment No. 4 to the Company’s Registration Statement on Form S-4 dated May 9, 2022. The terms governing Old FiscalNote’s indebtedness with the Disputing Lender provided that, in connection with the Business Combination, and following a $
On January 27, 2023, the Company entered into a term sheet (the “Term Sheet”) with the Disputing Lender pursuant to which the parties agreed to negotiate in good faith to enter into definitive documentation providing for the following: (i) the Disputing Lender shall return
22
issue to the Disputing Lender a subordinated convertible promissory note in an initial principal amount of $
Pursuant to the Term Sheet, the New Note would have a maturity date
The New Note would be subordinate to the Company’s obligations under its existing senior secured indebtedness. Additionally, the New Note would be subject to guarantees by the guarantors of the Company’s existing senior secured indebtedness. At any time prior to the Maturity Date, the Disputing Lender would be entitled to convert all or any portion of the principal amount of the New Note and accrued interest thereon into shares of Class A Common Stock at a conversion price equal to $
The principal amount, together with accrued interest thereon, of the New Note would be redeemable by the Company in whole or in part as follows: (i) from the 24th month following issuance through the 48th month following issuance, if the Measurement Price (defined below) equals or exceeds
In addition, the New Note would contain restrictive covenants and events of default provisions that are customary for transactions of this type. Additionally, the Disputing Lender would receive customary resale registration rights with respect to the shares of Class A Common Stock issuable upon conversion of the New Note.
The Term Sheet is non-binding and only requires the Company and Disputing Lender to negotiate the definitive documents in good faith and use reasonable best efforts to obtain all requisite third-party approvals required to consummate the transaction. Additionally, if definitive documentation is not mutually agreed within five months from the date of the Term Sheet, either party may elect to cease negotiations and terminate the Term Sheet. As a result, the terms of the New Note as set forth in the Term Sheet may be subject to change in connection with the preparation and execution of the definitive agreements and there is no guarantee that the parties will be able to finalize definitive agreements or that the closing conditions will be satisfied.
At December 31, 2022 the Company determined that as it related to the Term Sheet, it was both probable that a liability had been incurred and the amount of the loss could be reasonably estimated and such amount is material. Accordingly, at December 31, 2022 the Company accrued $
Legal fees are recognized as incurred when the legal services are provided, and therefore are not recognized as part of the loss contingency.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information that FiscalNote’s management believes is relevant to an assessment and understanding of FiscalNote’s condensed consolidated results of operations and financial condition. The discussion should be read together with the unaudited interim condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Certain monetary amounts, percentages and other figures included below have been subject to rounding adjustments as amounts are presented in thousands or millions, as the context describes. Percentage amounts included below have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts may vary from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements included elsewhere herein. Certain other amounts that appear below may not sum due to rounding.
This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A, “Risk Factors” and other factors set forth in other parts of this Quarterly Report on Form 10-Q. Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “FiscalNote,” “we,” “us,” or “our” refer to the business of Old FiscalNote, which became the business of New FiscalNote and its subsidiaries following the Closing.
Overview
FiscalNote is a leading technology provider of global policy and market intelligence. It delivers critical, actionable legal and policy insights in a rapidly evolving political, regulatory and macroeconomic environment. By combining artificial intelligence (AI) technology, other technologies with analytics, workflow tools, and expert peer insights, FiscalNote empowers customers to manage policy, address regulatory developments, and mitigate global risk. FiscalNote ingests unstructured legislative and regulatory data, and employs AI and data science to deliver structured, relevant and actionable information in order to facilitate key operational and strategic decisions by global enterprises, midsized and smaller businesses, government institutions, trade groups and nonprofits. FiscalNote delivers that intelligence through its suite of public policy and issues management products, coupled with expert research and analysis of markets and geopolitical events, as well as powerful tools to manage workflows, advocacy campaigns and constituent relationships.
Business Combination
On the Closing Date, we consummated the transactions contemplated by the Merger Agreement, by and among Old FiscalNote, DSAC, and Merger Sub. Pursuant to these transactions, Merger Sub merged with and into Old FiscalNote, with Old FiscalNote becoming a wholly owned subsidiary of DSAC. On the Closing Date, and in connection with the Closing, DSAC domesticated and continued as a Delaware corporation under the name of “FiscalNote Holdings, Inc."
We accounted for the Business Combination as a reverse recapitalization whereby Old FiscalNote was determined as the accounting acquirer and DSAC as the accounting acquiree. While DSAC was the legal acquirer in the Business Combination, because Old FiscalNote was determined as the accounting acquirer, the historical financial statements of Old FiscalNote became the historical financial statements of the combined company, upon the consummation of the Business Combination. Accordingly, New FiscalNote, as the parent company of the combined business, is the successor SEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC.
The Business Combination had a significant impact on our reported financial position and results as a result of the reverse recapitalization. The most significant change in our reported financial position and results was an increase in net cash of $65.6 million from gross cash proceeds of $325.0 million, including $114.0 million from the backstop agreement with the sponsor of DSAC, $61.0 million from DSAC’s trust account from its initial public offering, and $150.0 million from the New Senior Term Loan (as defined below). Such gross proceeds were offset by $45.2 million transaction costs, which principally consisted of advisory, legal and other professional fees, and were recorded in Additional Paid-in Capital, net of proceeds from the DSAC trust and $3.5 million of debt issuance costs paid out of the proceeds of the New Senior Term Loan on the Closing Date, of which $2.8 was capitalized and $0.7 million included in the loss on debt extinguishment. Cumulative debt repayments, inclusive of accrued but unpaid interest, of $210.7 million were paid in conjunction with the close, which consisted of a $75.3 million repayment of the First Out Term Loan, $61.7 million repayment of the Last Out Term Loan, a $50.0 million payment used to retire the non-converting portion of the Senior Secured Subordinated Promissory Note, a $16.3 million repayment of the 8090 FV Subordinated Promissory Note, and $7.4 million repayment of the 2021 Seller Notes. Please refer to Note 8, "Debt - Senior Capital Term Loan Refinancing" to our consolidated financial statements for information regarding our indebtedness outstanding prior to the Business Combination and the refinancing thereof.
In connection with the Business Combination, we recognized a $34.9 million warrant liability on our consolidated balance sheets for the fair value of the public warrants and private placement warrants that were previously issued by DSAC and assumed by New FiscalNote in the Business Combination, along with the additional private placement warrants that were issued upon the closing of the Business Combination. We adjust the liability-classified warrants to fair value at each reporting period. The warrant liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our condensed consolidated statement of operations. As a result of the recurring fair value measurement, our future financial statements and results of operations may fluctuate quarterly, based on factors that are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on the warrants each reporting period and that the amount of such gains or losses could be material.
In connection with the Business Combination, we recognized (a) $28.9 million of incremental stock-based compensation charges that consisted of $5.0 million related to certain awards that vested as a result of the Business Combination, $6.2 million related to awards issued
24
to our CEO, COO, and CFO pursuant to their respective employment agreements, and $17.7 million related to the Earnout Awards that may be issued to shareholders and equity award holders that for accounting purposes are treated as compensation awards (See Note 14, Earnings (Loss) Per Share, of our condensed consolidated financial statements), (b) $45.3 million of loss on debt extinguishment as a result of repayment of certain of our outstanding debt, as well as the conversion of our convertible debt as part of the Business Combination, and (c) $32.1 million interest charge related to the derecognition of the beneficial conversion feature associated with our converted debt.
As a consequence of the Business Combination, we became an SEC-registered and NYSE-listed company, which may require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. Upon Closing, we began to incur additional public company expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources.
Factors Impacting the Comparability of Our Operating Results
Acquisitions affect the comparability of our financial statements from period to period. Acquisitions completed during one period impact comparability to a prior period in which we did not own the acquired entity.
On January 27, 2023, we completed the acquisition of Dragonfly for up to $25.2 million (the "2023 Acquisition"), which included a combination of cash, stock, convertible notes and contingent payments.
During the year ended December 31, 2022, we completed the following acquisitions that are referred to as the "2022 Acquisitions" (and collectively with the 2023 Acquisition, the "Acquisitions"):
As a result of our acquisitions, respectively, we have, and will continue to incur, significant non-cash amortization expense related to the amortization of purchased intangibles, which have reduced our operating income by approximately $2.2 million and $1.7 million during the three months ended March 31, 2023 and 2022, respectively.
From time to time, management reviews the Company’s existing products and services based on their financial (e.g., revenue, margin) profile and strategic factors. In connection with such a review in 2020 and 2021 management decided to cease selling certain non-core subscription products representing subscription revenue of approximately $0.1 million and $0.3 million during the three months ended March 31, 2023 and 2022, respectively.
We continue to invest for future growth. We are focused on several key growth levers, including cross-selling and upselling opportunities at existing clients, expanding our client base with a focus on enterprise and government customers, expansion into adjacent markets and deepening our offerings for regulated industries or sectors, and continuing to execute on our acquisition strategy. Several of these growth drivers require investment in and refinement of our go-to-market approach and, as a result, we may continue to incur additional costs upfront to obtain new customers and expand our relationships with existing customers, including additional sales and marketing expenses specific to subscription revenue.
We plan to invest a portion of the available capital resources in building innovative products, acquiring complementary businesses, attracting new customers and expanding our leadership role in the legal and regulatory information market. We drive growth both organically and through acquisitions. We regularly evaluate acquisitions and investment opportunities in complementary businesses to supplement our existing platform, enable us to enter new markets and ensure that we are well positioned to provide critical insights to the regulated sectors of the future. Past acquisitions have enabled us to deliver innovative solutions in new categories, such as global risk analysis and environmental, social and governance (“ESG”) automation software, analytics and integration, and new data sets to enhance the functionality of our existing products. Strategic acquisitions will remain a core component of our strategy in the future.
Key Performance Indicators
In addition to our GAAP results further described and discussed below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we monitor the following key performance indicators to evaluate growth trends, prepare financial projections, make strategic decisions, and measure the effectiveness of our sales and marketing efforts. Our management team assesses our performance based on these key performance indicators because it believes they reflect the underlying trends and indicators of our business and serve as meaningful indicators of our continuous operational performance.
Annual Recurring Revenue (“ARR”)
Approximately 90% of our revenues are subscription based, which leads to high revenue predictability. Our ability to retain existing subscription customers is a key performance indicator that helps explain the evolution of our historical results and is a leading indicator of our revenues and cash flows for subsequent periods. We use ARR as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring subscription customer contracts. We calculate ARR on a parent account level by annualizing the contracted subscription revenue, and our total ARR as of the end of a period is the aggregate thereof. ARR is not adjusted for the impact of any known or projected future customer cancellations, upgrades or downgrades, or price increases or decreases. The amount of actual revenue that we recognize over any 12-month period is likely to differ from ARR at the beginning of that period, sometimes significantly. This may occur due to timing of the revenue bookings during the period, cancellations, upgrades, or downgrades and pending renewals. ARR should be viewed independently of revenue as it is an operating metric and is not intended to be a replacement or forecast of revenue. Our calculation of ARR may differ from similarly titled metrics presented by other companies.
25
Our ARR at March 31, 2023 and December 31, 2022, was $118.9 million and $113.3 million, respectively. Our ARR at March 31, 2023 and 2022, excluding the 2022 and 2023 Acquisitions, was $109.6 million and $100.0 million, respectively. ARR of the 2022 and 2023 Acquisitions, was approximately $9.3 million and $8.1 million as of March 31, 2023 and 2022, respectively, including pre-acquisition ARR performance of the 2022 and 2023 Acquisitions on the basis reported to FiscalNote in connection with such company’s acquisition.
Run-Rate Revenue
Management also monitors Run-Rate Revenue, which we define as ARR plus non-subscription revenue earned during the last twelve months. We believe Run-Rate Revenue is an indicator of our total revenue growth, incorporating the non-subscription revenue that we believe is a meaningful contribution to our business as a whole. Although our non-subscription business is non-recurring, we regularly sell different advisory services to repeat customers. The amount of actual subscription and non-subscription revenue that we recognize over any 12-month period is likely to differ from Run-Rate Revenue at the beginning of that period, sometimes significantly. Our Run-Rate Revenue at March 31, 2023 and December 31, 2022, including Acquisitions, was approximately $133.6 million and $126.7 million, respectively. Our Run-Rate Revenue at March 31, 2023 and 2022, excluding the 2022 and 2023 Acquisitions, was approximately $122.5 million and $112.0 million, respectively. Run-Rate Revenue of the 2022 and 2023 Acquisitions was approximately $11.1 million and $9.5 million as of March 31, 2023 and 2022, respectively, including pre-acquisition Run-Rate Revenue performance of the Acquisitions on the basis reported to FiscalNote in connection with such company’s acquisition.
Net Revenue Retention (“NRR”)
Our NRR, which we use to measure our success in retaining and growing recurring revenue from our existing customers, compares our recognized recurring revenue from a set of customers across comparable periods. We calculate our NRR for a given period as ARR at the end of the period minus ARR contracted from new clients for which there is no historical revenue booked during the period, divided by the beginning ARR for the period. We calculate NRR at our parent account level. Customers from acquisitions are not included in NRR until they have been part of our condensed consolidated results for 12 months. Accordingly, the 2023 and 2022 Acquisitions are not included in our NRR for the three months ended March 31, 2023. Our calculation of NRR for any fiscal period includes the positive recurring revenue impacts of selling additional licenses and services to existing customers and the negative recognized recurring revenue impacts of contraction and attrition among this set of customers. Our NRR may fluctuate as a result of a number of factors, including the growing level of our revenue base, the level of penetration within our customer base, expansion of products and features, the timing of renewals, and our ability to retain our customers. Our calculation of NRR may differ from similarly titled metrics presented by other companies. NRR was 96% and 101% for the three months ended March 31, 2023 and 2022, respectively.
Non-GAAP Financial Measures
In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. Where applicable, we provide reconciliations of these non-GAAP measures to the corresponding most closely related GAAP measure. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure. While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures.
Adjusted Revenue
Adjusted revenue represents revenue adjusted to include amounts that would have been recognized if deferred revenue was not adjusted to fair value in connection with acquisition accounting. Adjusted revenue is presented because we use this measure to evaluate performance of our business against prior periods and believe it is useful for investors as an indicator of the underlying performance of our business. Adjusted revenue is not a recognized term under U.S. GAAP. Adjusted revenue does not represent revenues, as that term is defined under GAAP, and should not be considered as an alternative to revenues as an indicator of our operating performance. Adjusted revenue as presented herein is not necessarily comparable to similarly titled measures presented by other companies.
Adjusted Gross Profit and Adjusted Gross Profit Margin
We define Adjusted Gross Profit as Adjusted Revenue minus cost of revenues, before amortization of intangible assets that are included in costs of revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by Adjusted Revenues.
We use Adjusted Gross Profit and Adjusted Gross Profit Margin to understand and evaluate our core operating performance and trends. We believe these metrics are useful measures to us and to our investors to assist in evaluating our core operating performance because they provide consistency and direct comparability with our past financial performance and between fiscal periods, as the metrics eliminate the non-cash effects of amortization of intangible assets and deferred revenue, which are non-cash impacts that may fluctuate for reasons unrelated to overall operating performance.
Adjusted Gross Profit and Adjusted Gross Profit Margin have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. They should not be considered as replacements for gross profit and gross profit margin, as determined by GAAP, or as measures of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Adjusted Gross Profit and Adjusted Gross Profit Margin as presented herein are not necessarily comparable to similarly titled measures presented by other companies.
26
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to exclude certain non-cash items and other items that management believes are not indicative of ongoing operations. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by Adjusted Revenue.
We disclose EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin in this Quarterly Report on Form 10-Q because these non-GAAP measures are key measures used by management to evaluate our business, measure our operating performance and make strategic decisions. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are useful for investors and others in understanding and evaluating our operating results in the same manner as management. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for net loss, net loss before income taxes, or any other operating performance measure calculated in accordance with GAAP. Using these non-GAAP financial measures to analyze our business would have material limitations because the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. In addition, although other companies in our industry may report measures titled EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate non-GAAP financial measures, which reduces their comparability. Because of these limitations, you should consider EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin alongside other financial performance measures, including net income and our other financial results presented in accordance with GAAP.
Key Components of Results of Operations
Revenues
We derive our revenues from subscription revenue arrangements and advisory, advertising and other revenues. Subscription revenues account for approximately 90% of our total revenues for the three months ended March 31, 2023 and 2022.
Subscription revenue
Subscription revenues consist of revenue earned from subscription-based arrangements that provide customers the right to use the Company’s software and products in a cloud-based infrastructure. Subscription revenues are driven primarily by the number of active licenses, the types of products and the price of the subscriptions. The Company also earns subscription revenues by licensing to customers its digital content, including transcripts, news and analysis, images, video and podcast data.
Our subscription arrangements generally have contractual terms of 12 months or more and are non-refundable regardless of the actual use of the service. Subscription revenues are recognized ratably over the non-cancellable contract terms beginning on the commencement date of each contract, which is the date our service is first made available to customers.
Advisory, advertising, and other revenue
Advisory revenue is typically earned under contracts for specific deliverables and are non-recurring in nature, although we regularly sell different advisory services to repeat customers. One-time advisory revenues are invoiced according to the terms of the contract, usually delivered to the customer over a short period of time, during which revenues are recognized.
Advertising revenue is primarily generated by delivering advertising in our own publications (Roll Call and CQ) in both print and digital formats. Revenue for print advertising is recognized upon publication of the advertisement. Revenue for digital advertising is recognized over the period of the advertisement or, if the contract contains impression guarantees, based on delivered impressions.
Book revenue is recognized when the product is shipped to the customer, which is when control of the product transfers to the customer. Shipping and handling costs are treated as a fulfillment activity and are expensed as incurred.
Events revenue is deferred and only recognized when the event has taken place and is included in other revenues.
Cost of revenues
Cost of revenues primarily consists of expenses related to hosting our service, the costs of data center capacity, amortization of developed technology and capitalized software development costs, certain fees paid to various third parties for the use of their technology, services, or data, costs of compensation, including bonuses, stock compensation, benefits and other expenses for employees associated with providing professional services and other direct costs of production. Also included in cost of revenues are our costs related to the preparation of contracted advisory deliverables, as well as costs to develop, publish, print and deliver our publications underlying our books revenue.
Research and development
Research and development expenses include the costs of compensation, including bonuses, stock compensation, benefits and other expenses for employees associated with the creation and testing of the products we offer, related software subscriptions, consulting and contractor fees and allocated overhead.
Sales and marketing
Sales and marketing expenses consist primarily of salaries and related expenses, including bonuses, stock compensation, benefits and other expenses for our sales and marketing staff, including commissions, related software subscriptions, consulting fees, marketing programs
27
and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities.
Editorial
Editorial expenses consist of salaries and related expenses, including bonuses, stock compensation, benefits and other expenses for the editorial team involved in acquiring, creating, and distributing content and allocated overhead.
General and administrative
General and administrative expenses are primarily related to our executive offices, finance and accounting, human resources, legal, internal operations and other corporate functions. These expenses consist of salaries and related expenses, including bonuses, stock compensation, benefits and other expenses, along with professional fees, depreciation and other allocated overhead.
Amortization of intangible assets
Amortization expense relates to our finite-lived intangible assets, including developed technology, customer relationship, databases and tradenames. These assets are amortized over periods of between three and twenty years. Finite-lived intangible assets are tested for impairment when indicators are present, and, if impaired, are written down to fair value. No impairment of intangible assets has been identified during any financial period included in our accompanying condensed consolidated financial statements.
Impairment of goodwill
Goodwill is tested for impairment when indicators are present, and if impaired are written down to fair value. An impairment of goodwill has been identified for the three months ended March 31, 2023 and is included in our accompanying condensed consolidated financial statements.
Transaction costs, net
Transaction costs consist of acquisition related costs (including due diligence, accounting, legal, and other professional fees, incurred from acquisition activity), fair value adjustments to contingent consideration due to sellers, and non-capitalizable costs.
Interest expense, net
Interest expense, net, consists of expense related to interest on our borrowings, the amortization and write off of debt issuance costs and original discount, and interest related to certain derivative instruments.
Fair value of financial instruments
The fair value of warrants, debt accounted for under the fair value option, and derivative liabilities are accounted for in accordance with ASC 815, ASC 825, and ASC 480. These financial instruments are marked to market each reporting period in accordance with ASC 820 with all gains and losses being recorded within the condensed consolidated statement of operations and comprehensive loss, with the exception of any gains or losses recorded due to changes in the fair value of instrument-specific credit risk being recorded as a component of accumulated other comprehensive income in the condensed consolidated balance sheets.
Income taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the condensed consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the condensed consolidated statements of operations and comprehensive loss in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts that are expected to be realized based on the weighting of positive and negative evidence.
Results of Operations
The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our condensed consolidated financial statements. The following discussion should be read in conjunction with those condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
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Comparison of the Consolidated Results for the Three Months Ended March 31, 2023 and March 31, 2022
The following table presents our results of operations for the periods indicated:
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
(In thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription |
|
$ |
28,467 |
|
|
$ |
22,779 |
|
|
$ |
5,688 |
|
|
|
25.0 |
% |
Advisory, advertising, and other |
|
|
3,062 |
|
|
|
3,292 |
|
|
|
(230 |
) |
|
|
(7.0 |
)% |
Total revenues |
|
|
31,529 |
|
|
|
26,071 |
|
|
|
5,458 |
|
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenues |
|
|
8,937 |
|
|
|
7,170 |
|
|
|
1,767 |
|
|
|
24.6 |
% |
Research and development |
|
|
5,120 |
|
|
|
6,018 |
|
|
|
(898 |
) |
|
|
(14.9 |
)% |
Sales and marketing |
|
|
12,298 |
|
|
|
9,497 |
|
|
|
2,801 |
|
|
|
29.5 |
% |
Editorial |
|
|
4,265 |
|
|
|
3,676 |
|
|
|
589 |
|
|
|
16.0 |
% |
General and administrative |
|
|
18,221 |
|
|
|
10,557 |
|
|
|
7,664 |
|
|
|
72.6 |
% |
Amortization of intangible assets |
|
|
2,814 |
|
|
|
2,608 |
|
|
|
206 |
|
|
|
7.9 |
% |
Impairment of goodwill |
|
|
5,837 |
|
|
|
- |
|
|
|
5,837 |
|
|
|
100 |
% |
Transaction costs (gains), net |
|
|
1,408 |
|
|
|
(1,045 |
) |
|
|
2,453 |
|
|
|
(234.7 |
)% |
Total operating expenses |
|
|
58,900 |
|
|
|
38,481 |
|
|
|
20,419 |
|
|
|
53.1 |
% |
Operating loss |
|
|
(27,371 |
) |
|
|
(12,410 |
) |
|
|
(14,961 |
) |
|
|
120.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
6,681 |
|
|
|
22,523 |
|
|
|
(15,842 |
) |
|
|
(70.3 |
)% |
Change in fair value of financial instruments |
|
|
(14,680 |
) |
|
|
1,338 |
|
|
|
(16,018 |
) |
|
NM% |
|
|
Gain on PPP loan upon extinguishment |
|
|
- |
|
|
|
(7,667 |
) |
|
|
7,667 |
|
|
NM% |
|
|
Other (income) expense, net |
|
|
(129 |
) |
|
|
121 |
|
|
|
(250 |
) |
|
NM% |
|
|
Net loss before income taxes |
|
|
(19,243 |
) |
|
|
(28,725 |
) |
|
|
9,482 |
|
|
|
(33.0 |
)% |
Provision (benefit) from income taxes |
|
|
30 |
|
|
|
(374 |
) |
|
|
404 |
|
|
|
(108.0 |
)% |
Net loss |
|
$ |
(19,273 |
) |
|
$ |
(28,351 |
) |
|
$ |
9,078 |
|
|
|
(32.0 |
)% |
Revenue:
Subscription revenue
Subscription revenue of $28.5 million for the three months ended March 31, 2023 increased $5.7 million, or 25%, from $22.8 million for the three months ended March 31, 2022.
The comparability of our revenues between periods was impacted by the Acquisitions described under “Factors Impacting the Comparability of Our Results of Operations” above. The table below presents the primary items that impacted the comparability of our subscription revenues between periods.
|
|
Change for the Three Months Ended |
|
|
|||||
|
|
March 31, 2023 vs March 31, 2022 |
|
|
|||||
(In thousands) |
|
$ |
|
|
% |
|
|
||
Revenue change driver: |
|
|
|
|
|
|
|
||
Impact of 2021 Acquisitions deferred revenue adjustment |
|
$ |
993 |
|
|
|
100 |
% |
|
Increase from 2022 Acquisitions |
|
|
477 |
|
|
|
100 |
% |
|
Increase from 2023 Acquisitions |
|
|
1,150 |
|
|
|
100 |
% |
|
Decrease from discontinued products |
|
|
(144 |
) |
|
|
(45 |
)% |
|
Increase from organic business |
|
|
3,212 |
|
|
|
14 |
% |
|
Revenues, net (total change) |
|
$ |
5,688 |
|
|
|
25 |
% |
|
Our organic growth (determined based on FiscalNote ownership over a full calendar year) has grown through the successful integration of our 2021 Acquisitions as evidenced by the growth in our organic ARR from $100.0 million at March 31, 2022 compared to $109.6 million at March 31, 2023. Also contributing towards our growth in revenue is a realignment of our business development team, strategic price increases, and rollout of new products. Revenue for the three months ended March 31, 2023 reflects a full three months of revenue from the 2022 Acquisitions as well as a partial quarter of revenue contribution from the 2023 Acquisition, whereas revenue for the three months ended March 31, 2022 does not reflect any revenue contribution from the 2022 and 2023 Acquisitions.
Advisory, advertising, and other revenue
Advisory, advertising, and other revenue was $3.1 million for the three months ended March 31, 2023, as compared to $3.3 million for the three months ended March 31, 2022. The decrease of $0.2 million, or 7%, was primarily due to timing of revenue recognition for certain advisory contracts.
29
Revenue by Geography
The below tables present our revenues split by geographic region for the periods presented:
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
(In thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
North America |
|
$ |
26,152 |
|
|
$ |
23,199 |
|
|
$ |
2,953 |
|
|
|
12.7 |
% |
Europe |
|
|
4,100 |
|
|
|
2,499 |
|
|
|
1,601 |
|
|
|
64.1 |
% |
Australia |
|
|
289 |
|
|
|
258 |
|
|
|
31 |
|
|
|
12.0 |
% |
Asia |
|
|
988 |
|
|
|
115 |
|
|
|
873 |
|
|
NM% |
|
|
Total revenues |
|
$ |
31,529 |
|
|
$ |
26,071 |
|
|
$ |
5,458 |
|
|
|
20.9 |
% |
Revenues by geography are determined based on the region of the FiscalNote contracting entity, which may be different than the region of the customer. North America revenues increased primarily for the reasons stated above. Revenues outside of North America increased primarily due to our acquisitions of Dragonfly (included in Europe) and Aicel (included in Asia).
Cost of revenues
Cost of revenues was $8.9 million for the three months ended March 31, 2023, as compared to $7.2 million for the three months ended March 31, 2022. The increase of $1.8 million, or 25%, was primarily attributable to an increase of $1.0 million related to the 2022 and 2023 Acquisitions, an increase in amortization expense of approximately $0.7 million related to capitalized software development costs and developed technology, and an increase in consulting expenses of $0.4 million, partially offset by a decrease of $0.3 million of data center costs.
Research and development
Research and development expense was $5.1 million for the three months ended March 31, 2023 as compared to $6.0 million for the three months ended March 31, 2022. The decrease of $0.9 million, or 15%, was primarily attributable to a decrease of $1.4 million of compensation and benefits, offset by $0.3 million incremental share-based compensation and $0.2 million of research and development costs incurred by our 2022 and 2023 Acquisitions.
Sales and marketing
Sales and marketing expense was $12.3 million for the three months ended March 31, 2023 as compared to $9.5 million for the three months ended March 31, 2022. The increase of $2.8 million, or 29%, was primarily attributable to an increase of $0.7 million in compensation and benefits stemming from an increase in our sales team headcount, build out of our sales leadership, an increase of $0.6 million from our 2022 and 2023 Acquisitions, $0.6 million of commission amortization, an increase of $0.3 million of share-based compensation and an increase of $0.2 million of bad debt expense relating to implementation of new guidance.
Editorial expense
Editorial expense was $4.3 million for the three months ended March 31, 2023 as compared to $3.7 million for the three months ended March 31, 2022. The increase was primarily the result of headcount realignment within the Company.
General and administrative
General and administrative expense was $18.2 million for the three months ended March 31, 2023 as compared to $10.6 million for the three months ended March 31, 2022. The increase of $7.7 million, or 73%, was primarily attributable to $5.5 million of incremental non-cash stock based compensation expense, $1.2 million associated with incremental public costs such as insurance, build out of investor relations and people teams, and $0.3 million of incremental costs from the 2022 and 2023 Acquisitions.
Impairment of goodwill
Impairment of goodwill was $5.8 million for the three months ended March 31, 2023 related to the impairment of goodwill in the ESG reporting unit.
Amortization of intangibles
Amortization of intangibles was $2.8 million for the three months ended March 31, 2023 as compared to $2.6 million for the three months ended March 31, 2022. The increase of $0.2 million, or 8%, is primarily due to the increase in amortizable intangible assets from the 2022 and 2023 Acquisitions.
Transaction costs (gains), net
Transaction costs were $1.4 million for the three months ended March 31, 2023, as compared to transaction gains of $1.0 million for the three months ended March 31, 2022. The change of $2.0 million relates to a $1.2 million increase in transactions costs related to business acquisitions primarily related to the acquisition of Dragonfly combined with a $1.0 gain from contingent compensation and earnout liabilities recognized for the three months ended March 31, 2022 related to our 2021 Acquisitions and the reversing of previously recognized earnout liabilities.
30
Interest expense, net
Interest expense was $6.7 million for the three months ended March 31, 2023 as compared to $22.5 million for the three months ended March 31, 2022. The decrease in interest expense of $15.8 million was primarily due interest expense we recorded related to the convertible notes that went into equity as part of the Business Combination as well as interest expense incurred related to the $18.0 million related party convertible note issued in the fourth quarter of 2021.
Change in fair value of financial instruments
Change in fair value of financial instruments was a $14.7 million gain for the three months ended March 31, 2023 as compared to a $1.3 million loss for the three months ended March 31, 2022. The increase of $16.0 million primarily represents a gain that was recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination and a gain on the Dragonfly Seller Convertible Notes, offset by the loss resulting from the final fair value adjustment of the embedded derivative liabilities that were settled as part of the Business Combination.
Gain on PPP loan upon extinguishment
The Company recognized the forgiveness of the PPP Loan as a gain on debt extinguishment during the first quarter of 2022 for $7.7 million.
Certain Non-GAAP Measures
We present certain non-GAAP financial measures including Adjusted Revenues, Adjusted Gross Profit, Adjusted Gross Profit Margin and Adjusted EBITDA. Our management team assesses our performance based on these non-GAAP measures because it believes they reflect the underlying trends and indicators of our business and serve as meaningful indicators of our continuous operational performance. We believe these measures are useful for investors for the same reasons. Investors should be aware that these measures are not a substitute for GAAP financial measures or disclosures. Where applicable, we provide reconciliations of these non-GAAP measures to the corresponding most closely related GAAP measure.
Adjusted Revenues
The following table presents our calculation of Adjusted Revenues for the periods presented, and a reconciliation of this measure to our GAAP revenues for the same periods:
|
|
Three Months Ended March 31, |
|
|
|||||
(In thousands) |
|
2023 |
|
|
2022 |
|
|
||
Subscription revenue |
|
$ |
28,467 |
|
|
$ |
22,779 |
|
|
Deferred revenue adjustment |
|
|
- |
|
|
|
993 |
|
|
Adjusted subscription revenue |
|
|
28,467 |
|
|
|
23,772 |
|
|
Advisory, advertising, and other revenue |
|
|
3,062 |
|
|
|
3,292 |
|
|
Adjusted Revenues |
|
$ |
31,529 |
|
|
$ |
27,064 |
|
|
Adjusted Gross Profit and Adjusted Gross Profit Margin
The following table presents our calculation of Adjusted Gross Profit and Adjusted Gross Profit Margin for the periods presented:
|
|
Three Months Ended March 31, |
|
|
|||||
(In thousands) |
|
2023 |
|
|
2022 |
|
|
||
Adjusted Revenues |
|
$ |
31,529 |
|
|
$ |
27,064 |
|
|
Costs of revenue |
|
|
(8,937 |
) |
|
|
(7,170 |
) |
|
Amortization of intangible assets |
|
|
2,597 |
|
|
|
1,823 |
|
|
Adjusted Gross Profit |
|
$ |
25,189 |
|
|
$ |
21,717 |
|
|
Adjusted Gross Profit Margin |
|
|
80 |
% |
|
|
80 |
% |
|
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
The following table presents our calculation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin for the periods presented:
31
|
|
Three Months Ended March 31, |
|
|
|||||
(In thousands) |
|
2023 |
|
|
2022 |
|
|
||
Net loss |
|
$ |
(19,273 |
) |
|
$ |
(28,351 |
) |
|
Provision (benefit) from income taxes |
|
|
30 |
|
|
|
(374 |
) |
|
Depreciation and amortization |
|
|
5,747 |
|
|
|
4,717 |
|
|
Interest expense, net |
|
|
6,681 |
|
|
|
22,523 |
|
|
EBITDA |
|
|
(6,815 |
) |
|
|
(1,485 |
) |
|
Deferred revenue adjustment (a) |
|
|
- |
|
|
|
993 |
|
|
Stock-based compensation |
|
|
6,506 |
|
|
|
260 |
|
|
Change in fair value of financial instruments (b) |
|
|
(14,680 |
) |
|
|
1,338 |
|
|
Other non-cash (gains) charges (c) |
|
|
5,873 |
|
|
|
(8,609 |
) |
|
Acquisition related costs (d) |
|
|
1,222 |
|
|
|
72 |
|
|
Employee severance costs (e) |
|
|
369 |
|
|
|
- |
|
|
Non-capitalizable debt raising costs |
|
|
206 |
|
|
|
403 |
|
|
Other infrequent costs (f) |
|
|
- |
|
|
|
20 |
|
|
Costs incurred related to the transaction (g) |
|
|
184 |
|
|
|
203 |
|
|
Loss contingency (h) |
|
|
168 |
|
|
|
- |
|
|
Adjusted EBITDA |
|
$ |
(6,967 |
) |
|
$ |
(6,805 |
) |
|
Adjusted EBITDA Margin |
|
|
(22.1 |
)% |
|
|
(25.1 |
)% |
|
Liquidity and Capital Resources
We have incurred losses and negative cash flows from operations since inception. Through March 31, 2023, we have funded our operations with proceeds from the Business Combination as well as the closing of the New Senior Term Loan whereby the Company received $65.6 million of net cash proceeds, additional borrowings under debt facilities, and receipts from the sale of our products to customers in the ordinary course of business. At March 31, 2023, the Company’s cash, cash equivalents, and restricted cash was $47.5 million compared to $61.2 million at December 31, 2022.
The Company had a negative working capital balance of $42.1 million (excluding cash) at March 31, 2023 and had an accumulated deficit of $720.2 million and $700.7 million as of March 31, 2023 and December 31, 2022, respectively, and has incurred net losses of $19.3 million and $28.4 million for the three months ended March 31, 2023 and 2022, respectively. Management expects that significant on-going operating and capital expenditures will be necessary to continue to implement the Company’s business plan of entering new markets, future acquisitions, and infrastructure and product development. Historically the Company’s cash flows from operations have not been sufficient to fund its current operating model.
Our capital requirements depend on many factors, including sales volume, the timing and extent of spending to support R&D efforts, investments in information technology systems, the expansion of sales and marketing activities, and execution on our acquisition strategy. We believe our cash on hand, proceeds from our expected product sales, and available borrowings under our New Senior Term Loan for certain acquisition activity, will be sufficient to meet our short-term and long-term operating expenses and capital expenditures for at least the next twelve months.
However, our ability to fund our operating expenses and capital expenditure requirements will depend in part on general economic, financial, competitive, legislative, regulatory and other conditions that may be beyond our control. Depending on these and other market conditions, we may seek additional financing. Volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, or may require us to agree to unfavorable terms, and our existing stockholders may experience significant dilution.
Our historical financing activities included borrowings under senior secured credit facilities, senior secured promissory notes, convertible debt, and preferred share issuances. Our principal debt outstanding as of March 31, 2023 and December 31, 2022 consisted of the following (excluding any debt discounts, as applicable):
32
(In thousands) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
New Senior Term Loan |
|
$ |
157,024 |
|
|
$ |
150,647 |
|
Convertible Notes |
|
|
12,654 |
|
|
|
12,219 |
|
Dragonfly Seller Convertible Notes |
|
|
11,044 |
|
|
|
- |
|
Aicel Convertible Note |
|
|
1,138 |
|
|
|
1,174 |
|
PPP Loan |
|
|
224 |
|
|
|
251 |
|
Total Principal Outstanding |
|
$ |
182,084 |
|
|
$ |
164,291 |
|
New Senior Term Loan
In connection with the Closing, FiscalNote entered into a $150.0 million new senior term loan facility (the “New Senior Term Loan”) with Runway Growth Finance Corp., ORIX Growth Capital, LLC, Clover Orochi LLC, and ACM ASOF VIII SaaS FinCo LLC (together the “New Senior Lenders”). The New Senior Term Loan provides for an uncommitted incremental loan facility totaling $100.0 million available upon notice if the Company meets certain financial growth criteria and other customary requirements (the “New Incremental Term Facility”) (collectively the “New Senior Credit Facility”). The annual interest of the New Senior Term Loan consists of two components: a cash interest component of (a) the greater of (i) Prime Rate plus 5.0% per annum and (ii) 9.0% payable monthly in cash, and (b) interest payable in kind component of 1.00% per annum, payable in kind monthly. The New Senior Credit Facility will mature on July 29, 2027. Beginning on August 15, 2025, 50% of the outstanding principal amount of the Senior Term Loan must be repaid in even amounts on a monthly basis over the remaining 24 months, with the final balance due on July 15, 2027. Borrowings under our New Senior Credit Facility are collateralized by substantially all assets of the borrowers and guarantors party thereto.
On March 17, 2023, the Company, entered into Amendment No. 1 ( “Amendment No. 1”) to its New Senior Term Loan dated July 29, 2022. Among other things, Amendment No. 1 provided for the extension of an incremental term loan by one of the lenders to the borrowers under the facility in the principal amount of $6.0 million which was received by the Company on March 31, 2023, on the same terms as the existing term loans (the “Incremental Facility”).
During the three months ended March 31, 2023 we made cash interest payments totaling $4.8 million related to the New Senior Term Loan.
The New Senior Term Loan is senior to all other debt and has a first priority lien on substantially all of the Company’s assets. The New Senior Term Loan contains customary negative covenants related to borrowing, events of default and covenants, including certain non-financial covenants and covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire stock, and make investments, in each case subject to certain exceptions. In addition to the negative covenants, there were three financial covenants in place at March 31, 2023 related to a minimum cash balance of $15.0 million, minimum annual recurring revenue requirement, and a capital expenditure limitation. As of, and for the three months ended March 31, 2023, the Company was in compliance with each of the required financial covenants. Beginning with the third quarter of 2023, the Company will also be subject to an adjusted EBITDA requirement (as defined in the New Senior Term Loan, as amended). Upon the occurrence of an event of default, in addition to the lenders being able to declare amounts outstanding under the New Senior Term Loan due and payable the lenders can elect to increase the interest rate by 5.0% per annum.
See Note 8 “Debt” to the condensed consolidated financial statements included elsewhere herein.
Convertible Notes
Four convertible noteholders with an aggregate principal amount (including accrued paid in kind interest) of $10.5 million as of the Closing Date elected not to convert their notes into shares of capital stock of the Company in conjunction with Closing. The convertible notes are unsecured, earn payable in kind interest of 15% per annum, payable in kind monthly, and mature in 2025.
Dragonfly Seller Convertible Note
On January 27, 2023, we acquired Dragonfly and financed part of the purchase with the issuance of convertible notes. The Dragonfly Convertible Note is subordinate to our New Senior Credit Facility, accrues interest of 8% per annum, payable in kind or in cash, and matures in January 2028.
Aicel Convertible Note
On July 29, 2022, we acquired Aicel Technologies and assumed its $1.0 million convertible note. The Aicel Convertible Note is subordinate to our New Senior Credit Facility, accrues interest of 1% per annum, payable in kind monthly, and matures in July 2027.
PPP Loan
The PPP Loan requires monthly principal and interest payments of approximately $9 thousand until maturity in 2027.
Capital expenditures
Capital expenditures primarily consist of purchases of capitalized software costs and property and equipment. Our capital expenditures program includes discretionary spending, which we can adjust in response to economic and other changes in our business environment to grow our business. We typically fund our capital expenditures through cash flow from operations and external financing. In the event that we are unable to obtain the necessary funding for capital expenditures, our long-term growth strategy could be significantly affected. Our total capital expenditures were $1.9 million and $2.1 million for the three months ended March 31, 2023 and 2022, respectively.
33
Cash Flow Summary
The following tables summarizes our cash flows for the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
(12,826 |
) |
|
$ |
(10,203 |
) |
Investing activities |
|
$ |
(6,879 |
) |
|
$ |
(2,128 |
) |
Financing activities |
|
$ |
6,237 |
|
|
$ |
19,693 |
|
Effect of exchange rates on cash |
|
$ |
(251 |
) |
|
$ |
153 |
|
Net change in cash and cash equivalents |
|
$ |
(13,719 |
) |
|
$ |
7,515 |
|
Operating activities
Cash used in operating activities consists of net loss adjusted for certain non-cash items including depreciation and amortization, stock based compensation, changes in fair value of warrant liabilities, non-cash interest expense, and loss on debt extinguishment, as well as the effect of changes in working capital and other activities.
Cash used in operating activities in the three months ended March 31, 2023 was $12.8 million, an increase of $2.6 million compared to the three months ended March 31, 2022. The primary factors affecting our net operating cash flows during this period was our net loss of $19.3 million, which includes non-cash expenses items totaling $8.4 million, including impairment of goodwill of $5.8 million, non-cash interest expense of $2.0 million, stock-based compensation expense of $6.5 million, a gain due to the change in fair value of financial instruments of $14.1 million, non-cash lease expense of $1.8 million, and amortization and depreciation of $6.4 million, and the effect of changes in operating assets and liabilities that resulted in cash outflows of $1.6 million.
Net cash used in operating activities was $10.2 million during the three months ended March 31, 2022. The primary factors affecting our operating cash flows during this period was our net loss of $28.4 million adjusted for non-cash items of $20.2 million, primarily consisting of $4.7 million of depreciation and amortization, $0.3 million of stock-based compensation, $20.8 million of non-cash interest expense, $1.6 million of non-cash operating lease expense, $0.6 million of amortization of deferred costs to obtain contracts, non-cash charge of $1.3 million resulting from the change in fair value of warrant liabilities, offset by $7.7 million gain on PPP Loan forgiveness, non-cash gain of $1.4 million resulting from the change of fair value of contingent consideration, and $0.4 million of deferred income tax benefit.
Investing activities
Net cash used in investing activities in the three months ended March 31, 2023 was $6.9 million compared to $2.1 million in the three months ended March 31, 2022. Net cash used in investing activities in the three months ended March 31, 2023 primarily consisted of cash paid for acquisitions, net of cash acquired of $5.0 million and cash paid of $1.9 million of capital expenditures primarily related to software development costs. Net cash used in investing activities in the three months ended March 31, 2022 was $2.1 million of capital expenditures.
Financing activities
Net cash provided by financing activities in the three months ended March 31, 2023 was $6.2 million, compared to $19.7 million for the three months ended March 31, 2022. Net cash provided by financing activities during the three months ended March 31, 2023 primarily consisted of $6.0 million from Amendment 1 to the New Senior Term Loan and $0.3 million from the proceeds from the exercise of stock options. Net cash provided by financing activities during the three months ended March 31, 2022 was $19.7 million, primarily consisted of $19.5 million of the increase in our Senior Term Loan and $0.2 million from proceeds from the exercise of stock options.
Commitments and Contingencies
Our principal commitments consist of obligations under leases for office space. For more information regarding our lease obligations, see Note 5 “Leases” to the condensed consolidated financial statements included elsewhere herein. For more information regarding our debt service obligations, see Note 8 “Debt” to the condensed consolidated financial statements included elsewhere herein.
Off-Balance Sheet Arrangements
During the periods presented, we did not engage in any off-balance sheet financing activities or other arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations.
Recently Issued Accounting Pronouncements
For information regarding new accounting pronouncements, and the impact of these pronouncements on our condensed consolidated financial statements, if any, refer to Note 1 of the notes to our financial statements included in this Quarterly Report on Form 10-Q.
Critical Accounting Estimates and Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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.
34
We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” to our condensed consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgment and complexity.
There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended March 31, 2023, as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates and Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 28, 2023.
Revenue Recognition
Subscription revenues are recurring in nature and include subscription fees from customers accessing our company’s cloud-based infrastructure, digital content, transcripts, news and analysis, images, video and podcast data. Advisory, advertising and other revenue includes revenues derived from non-recurring activities where we deliver specific deliverables for clients as well as where we provide advertising in our own publications (Roll Call and CQ) in both print and digital formats, the sale of various publications, and sponsorship revenue for events organized by the Company. Our company’s subscription arrangements are generally non-cancelable and do not contain refund-type provisions. Our company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised goods or services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services.
Our company’s contracts with customers may include promises to transfer multiple services. For these contracts, our company accounts for individual promises separately if they are distinct performance obligations. Determining whether services are considered distinct performance obligations may require significant judgment. Judgment is also required to determine the standalone selling price (“SSP”) for each distinct performance obligation. In instances where SSP is not directly observable, such as when our company does not sell the services separately, our company determines the SSP using available information, including market conditions and other observable inputs.
Costs Capitalized to Obtain Revenue Contracts
Costs capitalized related to new revenue contracts are amortized on a straight-line basis over four years, which, although longer than the typical initial contract period, reflects the average period of benefit, including expected contract renewals. Significant judgment is required in arriving at this average period of benefit. Therefore, we evaluate both qualitative and quantitative factors, including the estimated life cycles of our offerings and our customer attrition.
Business Combinations
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.
Critical estimates in valuing certain of the intangible assets and goodwill we have acquired are:
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill and Intangible Assets
Significant judgment is required to estimate the fair value of our reporting units. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant reporting units for purposes of determining whether there is goodwill impairment. The fair value estimates are based on available historical information and on future expectations. We typically estimate the fair value of these assets using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets. The valuations used to establish and to test goodwill for impairment are dependent on a number of significant estimates and assumptions, including macroeconomic conditions, overall growth rates, competitive activities, cost containment and margin progression, Company business plans and the discount rate applied to cash flows.
Goodwill is not amortized, but tested at least annually for impairment. Our ongoing annual impairment testing for goodwill occurs on October 1st. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe these estimates and assumptions are reasonable and comparable to those that would be used by other marketplace participants. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. For example, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. In addition, changes to or a failure to achieve business plans
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or deterioration of macroeconomic conditions could result in reduced cash flows or higher discount rates, leading to a lower valuation that would trigger an impairment of the goodwill of these businesses.
If the fair value of the reporting unit is less than its carrying value, that difference represents an impairment.
Determining the useful life of an intangible asset also requires judgment. Acquired intangible assets (customer relationships, patents and technologies, and tradenames) are expected to have determinable useful lives. Finite-lived intangible assets are amortized to expense over their estimated lives. An impairment assessment for finite-lived intangibles is only required when an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable.
Based on our annual impairment testing as of October 1, 2022, the fair value of all of our reporting units exceeded their carrying values by more than 50%. The most significant assumptions utilized in the determination of the estimated fair values of our reporting units are the net sales and earnings growth rates (including residual growth rates) and discount rate. The residual growth rate represents the expected rate at which the reporting units are expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimates is consistent with the reporting unit operating plans and approximates expected long-term market growth rates. The residual growth rate is dependent on overall market growth rates, the competitive environment, inflation, and business activities that impact market share. As a result, the residual growth rate could be adversely impacted by a sustained deceleration in category growth or an increased competitive environment. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other country specific factors.
Future sustained depression of our stock price may indicate that a triggering event has occurred that may require us to reassess our goodwill for impairment and may trigger future impairment charges of one or all of our reporting units. Further, changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of our reporting units.
Due to the decline in the Company’s stock price and market capitalization in the first quarter of 2023, and the underperformance of the Company’s ESG reporting unit compared to internal projections, the Company performed a quantitative goodwill impairment assessment as of March 31, 2023. This quantitative assessment resulted in all the goodwill in our ESG reporting unit being impaired; accordingly, a non-cash impairment charge of $5.8 million was recognized during the three months ended March 31, 2023. Prior to the quantitative goodwill impairment the Company tested the recoverability of its long-lived assets, and concluded that such assets were not impaired.
See Note 7, “Goodwill” to the condensed consolidated financial statements for additional discussion on goodwill.
Warrant Liabilities
The Company evaluates its financial instruments, including its outstanding warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company has outstanding public and private warrants, both of which do not meet the criteria for equity classification and are accounted for as liabilities. Accordingly, the Company recognizes the warrants as liabilities at fair value and adjusts the warrants to fair value at each reporting period. The warrant liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statement of operations.
The fair value of the public warrants is estimated based on the quoted market price of such warrants. The fair value of the private warrants is estimated using a binomial option pricing model.
Deferred Taxes and Valuation Allowance
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts that are expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. 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 its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Incremental Borrowing Rate Used to Calculate Lease Balances
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate as the discount rate to measure the operating lease assets and liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease and includes considerations of both the market, our current capital structure and exiting debt borrowings. We perform an incremental borrowing rate analysis on a quarterly basis, or upon execution of any individually material agreement, to ensure that the rates being applied to newly acquired leases are still accurate.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks.
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of inflation risk and fluctuations in interest rates and foreign currency exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Risk
We use the U.S. Dollar ("USD") as our reporting currency. Our local subsidiaries transact generally in their local currency, considered the functional currency for that subsidiary. Our foreign currency exchange rate risk is related to translation of our assets and liabilities from the subsidiaries' functional currencies to USD. These adjustments are recorded in accumulated other comprehensive income (loss) on our consolidated balance sheets. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling and Australian Dollar. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States as well as the European Union, United Kingdom, Australia, South Korea, and India. Our results of operations and cash flows in the future may be adversely affected due to an expansion of non-U.S. dollar denominated contracts, growth of our international entities and changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our cash denominated in foreign currency. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage the risk relating to fluctuations in currency rates.
Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenues, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into USD. Total revenue for the three months ended March 31, 2023, was negatively impacted by approximately 1.0% compared to the three months ended March 31, 2022.
Interest Rate Risk
We are subject to market risk associated with changing interest rates within our variable rate New Senior Term Loan. Our exposure to changes in interest rates is associated with the Prime Rate.
As of March 31, 2023, we had outstanding borrowings on our New Senior Term Loan of $157.0 million that bears interest at a floating rate based on the Prime Rate plus an applicable margin. At March 31, 2023, the interest on our New Senior Term Loan was 12.75%. Assuming no change in the outstanding borrowings on our New Senior Term Loan, we estimate that a one percentage point increase in the Prime Rate would increase our annual cash interest expense by approximately $1.6 million.
Inflation Risk
Although we do not believe inflation has had a material impact on our financial condition, results of operations or cash flows to date, a high rate of inflation in the future may have an adverse effect on our business.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of the disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, due to the material weakness identified in the prior year, our disclosure controls and procedures were not effective as of March 31, 2023. Notwithstanding the material weaknesses, our management has concluded that the financial statements included elsewhere in this report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Changes in Internal Control over Financial Reporting
Other than the material weaknesses identified in prior year and material weakness remediation activities, there were no changes in our internal control over financial reporting, as identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal or regulatory proceedings, including intellectual property claims, commercial contract matters or employment-related disputes. Such cases may raise complex factual and legal issues, may subject us to material risks and uncertainties, could require significant management time and corporate resources to defend, could result in significant media coverage and negative publicity, and could be harmful to our reputation and our brand. We are not currently a party to any litigation or regulatory proceeding that we expect to have a material adverse effect on our business, results of operations, financial conditions or cash flows.
Item 1A. Risk Factors.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Current Report on Form 10-K filed with the SEC on March 28, 2023. However, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
Other than as reported on each of our Current Reports on Form 8-K filed on January 27, 2023 and March 20, 2023, we did not have any unregistered sales of equity securities during the three months ended March 31, 2023.
Use of Proceeds
Not applicable
Purchase of Equity Securities
We did not repurchase shares of our common stock during the three months ended March 31, 2023.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Furnish the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).
Exhibit Number |
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Description |
Incorporation by Reference (where a report is indicated below, that document has been previously filed with the SEC and the applicable exhibit is incorporated by reference thereto) |
2.1 |
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Agreement and Plan of Merger, dated as of November 7, 2021, by and among Duddell Street Acquisition Corp. (renamed “FiscalNote Holdings, Inc.”), Grassroots Merger Sub, Inc. and FiscalNote Holdings, Inc. (renamed “FiscalNote Intermediate Holdco, Inc.”). |
Annex A to the Proxy Statement/Prospectus filed on July 5, 2022 (File No.333-261483). |
2.2 |
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First Amendment to Agreement and Plan of Merger, dated as of May 9, 2022, by and among Duddell Street Acquisition Corp. (renamed “FiscalNote Holdings, Inc.”), Grassroots Merger Sub, Inc. and FiscalNote Holdings, Inc. (renamed “FiscalNote Intermediate Holdco, Inc.”). |
Annex A-2 to the Proxy Statement/Prospectus filed on July 5, 2022 (File No.333-261483). |
3.1 |
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Certificate of Incorporation of FiscalNote Holdings, Inc. (f/k/a/ Duddell Street Acquisition Corp.). |
Exhibit 3.1 to the Current Report on Form 8-K filed on August 2, 2022 (File No. 001-396972) |
3.2 |
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Bylaws of FiscalNote Holdings, Inc. (f/k/a/ Duddell Street Acquisition Corp.). |
Exhibit 3.2 to the Current Report on Form 8-K filed on August 2, 2022 (File No. 001-396972) |
4.1 |
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Warrant Agreement, dated as of Octobe 28, 2020, by and among Duddell Street Acquisition Corp ad Continental Stock Transfer & Trust Company, as warrant agent. |
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4.2 |
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Form of Restricted Stock Agreement, dated as of March 25, 2022, pursuant to the Membership Interest Purchase Agreement, dated as of November 19, 2021, by |
Exhibit 4.6 of DSAC’s Form S-4/A filed with the SEC on June 27,2022 (File No. 333-261483). |
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|
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and among FiscalNote, Inc., the unitholders listed on the Appendix 1 thereto and Legacy FiscalNote. |
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10.1 |
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Sale and Purchase Agreement, dated as of January 27, 2023, by and between FiscalNote Holdings, Inc. and Dragonfly Eye Limited. |
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10.2 |
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Form of 8% Convertible Note |
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10.3 |
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Amendment No. 1 to Second Amended and Restated Credit and Guaranty Agreement by and among FiscalNote, Inc., CQ-Roll Call, Inc., Capitol Advantage LLC, VoterVoice, L.L.C. and Sandhill Strategy LLC as Borrowers, the Company, FiscalNote Intermediate Holdco, Inc., FiscalNote Holdings II, Inc., Fireside 21, LLC, Factsquared, LLC, The Oxford Analytica International Group, LLC, Oxford Analytica Inc., FiscalNote Boards LLC, Predata, Inc., Curate Solutions, Inc., Forge.AI, Inc., and Frontier Strategy Group LLC, as Guarantors, Runway Growth Finance Corp., as administrative agent and collateral agent, and each lender party thereto |
Exhibit 10.1 to the Current Report on Form 8-K filed on March 20, 2023 (File No. 001-39672). |
10.4 |
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Form of Warrant |
Exhibit 10.2 to Current Report on Form 8-K filed on March 20, 2023 (File No. 001-39672). |
10.5 |
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Executive Severance Plan, effective as of April 3, 2023. |
Exhibit 10.1 to the Current Report on Form 8-K filed on April 6, 2023 (File No. 001-39672). |
31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). |
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32 |
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Section 1350 Certifications. |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
Submitted electronically with this report. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
Submitted electronically with this report. |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
Submitted electronically with this report. |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
Submitted electronically with this report. |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
Submitted electronically with this report. |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
Submitted electronically with this report. |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
Submitted electronically with this report. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FISCALNOTE HOLDINGS, INC. |
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Date: May 15, 2023 |
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By: |
/s/ Jon Slabaugh |
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Name: Jon Slabaugh |
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Title: Chief Financial Officer |
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Date: May 15, 2023 |
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By: |
/s/ Timothy Hwang |
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Name: Timothy Hwang |
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Title: Chief Executive Officer |
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