Boxed, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______ to ______
Commission File Number 001-39817
Boxed, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 85-3316188 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
451 Broadway, Floor 2 New York, NY 10013 (646) 586-5599 | |||||
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | |||||
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.0001 | BOXD | New York Stock Exchange | ||||||||||||
| Warrants, each warrant exercisable for one share of common stock at an exercise price of $11.50 per share | BOXD WS | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 72,663,598 shares of common stock as of November 4, 2022.
TABLE OF CONTENTS
| Page | ||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| PART II. OTHER INFORMATION | ||||||||
2
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that express Boxed, Inc.’s (the “Company,” “we,” “us,” “our,” “Boxed,” or “New Boxed”) opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “potential,” “would,” or “will,” 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, including Part II, Item 1A, “Risk Factors,” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our future results of operations, financial condition, and liquidity.
These forward-looking statements are based on information available as of the date of this Quarterly Report and current expectations, forecasts and assumptions, which involve a number of judgments, risks and uncertainties, including without limitation, risks related to:
•responding to market conditions and global and economic factors beyond our control, including the ongoing impact and severity of the COVID-19 pandemic on our business, including evolving and future variants, and potential changes in the nature in which businesses are operated in response to the pandemic;
•maintaining the listing of our common stock and warrants on the New York Stock Exchange;
•our capital needs and the ability to secure financing on reasonable terms, or at all;
•our ability to remediate existing and potential future material weaknesses in our internal control over financial reporting and to maintain effective internal control over financial reporting, which, if unsuccessful, may result in material misstatements of our consolidated financial statements or failure to meet periodic reporting obligations or impair access to the capital markets;
•our ability to expand our Software & Services (or “Spresso”) business;
•retaining or recruiting, or making changes with respect to, officers, key employees, or directors;
•managing litigation and adequately protecting our intellectual property rights;
•growing market share in our existing markets or any new markets we may enter;
•competing in the global e-commerce and consumer delivery industry;
•attracting and retaining successful relationships with customers and suppliers in a cost-effective manner;
•the impact of changes in customer spending patterns, customer preferences, local, regional and national economic conditions, crime, weather, demographic trends, and employee availability;
•managing intense competition and competitive pressures from other companies worldwide in the industries in which we operate;
•complying with laws and regulations applicable to our business;
•our ability to achieve and maintain profitability in the future;
•the success of strategic relationships with third parties; and
•other factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission (the “SEC”).
3
The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed under Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated in our subsequent filings with the SEC, and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed as exhibits to this Quarterly Report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report.
4
WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our corporate website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about our company, products, planned financial and other announcements, attendance at upcoming investor and industry conferences and other matters, as well as for complying with our disclosure obligations under Regulation FD promulgated under the Securities Exchange Act of 1934, as amended:
•our Investor Relations page (https://investors.boxed.com);
•our Facebook page (https://www.facebook.com/BoxedWholesale/);
•our LinkedIn page (https://www.linkedin.com/company/boxed-com);
•our Instagram page (https://www.instagram.com/boxedwholesale/); and
•our company blog (https://www.boxed.com/blog).
The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report.
5
CERTAIN DEFINED TERMS
Each of the terms the “Company,” “we,” “our,” “us,” “Boxed,” “New Boxed,” and similar terms used herein refer collectively to Boxed, Inc., a Delaware Corporation, and its consolidated subsidiaries, unless otherwise stated.
In this Quarterly Report, unless otherwise stated or unless the context otherwise requires:
“ACM” refers to ACM ART VII D LLC.
“AEON” refers to AEON Co., Ltd.
“AOV” means average order value.
“ASC” means Accounting Standards Codification.
“B2B” means business to business.
“B2C” means business to consumers.
“Board” means the board of directors of the Company.
“Boxed Market,” formerly known as “MaxDelivery,” refers to BOXEDMAX, LLC, a wholly-owned subsidiary of the Company.
“Boxed Sites” refers to our mobile applications and web-based e-commerce platforms.
“Business Combination” means the consummation of the business combination and the other transactions contemplated by the Business Combination Agreement.
“Business Combination Agreement” means the Agreement and Plan of Merger, dated as of June 13, 2021, by and among the Company (f/k/a Seven Oaks), Blossom Merger Sub, Inc., Boxed, LLC (f/k/a Blossom Merger Sub II, LLC) and Giddy Inc. (d/b/a Boxed).
“Closing” means the closing date of the Business Combination, December 8, 2021.
“Common Stock Purchase Agreement,” “Purchase Agreement,” or “Equity Financing” refers to the common stock purchase agreement, dated as of May 9, 2022, by and between The Jones Group Ventures LLC and Boxed, Inc.
“Earnout liability” refers to the associated liability with the Sponsor Earnout Shares as well as with the contingent consideration related to the acquisition of Boxed Market.
“Forward Purchase Agreement” means the agreement entered into by Seven Oaks and ACM for an OTC Equity Prepaid Forward Transaction.
“Forward Purchase Transaction” means the OTC Equity Prepaid Forward Transaction pursuant to the terms of the Forward Purchase Agreement.
“IPO” means the initial public offering, with respect to Seven Oaks’ IPO.
“New Term Loan” refers to the term loan agreement entered into on August 4, 2021.
“NYSE” means the New York Stock Exchange.
“Old Boxed” refers to the pre-merger Company, also known as Giddy Inc. (d/b/a Boxed).
“Palantir” refers to Palantir Technologies Inc.
6
“PIK Interest” refers to the interest that is capitalized with, or added to, the principal amount of the PIPE Convertible Notes.
“PIPE Convertible Notes” or “Convertible Notes” refers to the $87,500,000 in principal amount of convertible notes pursuant to Subscription Agreements between the Company and PIPE Investors.
“PIPE Investment” means the issuance and sale to the PIPE Investors, an aggregate of 3,250,000 shares of common stock for an aggregate purchase price of $32,500,000 and an aggregate of $87,500,000 in principal amount of convertible notes pursuant to Subscription Agreements between the Company and the PIPE Investors.
“PIPE Investors” means certain third-party investors in the PIPE.
“Prepayment Amount” means the amount paid by the Company with funds from Seven Oaks’ trust account to ACM pursuant to the terms of the Forward Purchase Agreement, equal to the redemption price per share multiplied by the number of subject shares on the date of prepayment.
“Private Warrants” or “Private Placement Warrants” means warrants originally issued in private placement in connection with Seven Oaks’ IPO.
“Public Warrants” means warrants originally issued in the IPO of Seven Oaks.
“Redemptions” refers to the holders of shares of common stock sold in Seven Oaks’ IPO who have exercised their right to have such shares redeemed.
“Retail” refers to our e-commerce retail business unit.
“SEC” means the U.S. Securities and Exchange Commission.
“Seven Oaks” means Seven Oaks Acquisition Corp.
“Software & Services” refers to all sales generated through the Company’s software and services business unit.
“SPAC Warrants” means the Private Warrants and Public Warrants.
“SPAC warrant liabilities” refers to the liabilities recorded in connection with the SPAC Warrants.
“Sponsor” means the Company’s former sponsor, Seven Oaks Sponsor LLC.
“Sponsor Earnout Shares” refers to the portion of shares held by the Sponsor that are subject to certain vesting conditions.
“Spresso” refers to the Company’s branding for its Software & Services business segment.
“U.S. GAAP” means United States generally accepted accounting principles, consistently applied, as in effect from time to time.
7
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOXED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2022 (Unaudited) and December 31, 2021
(in thousands except share and per share amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 32,071 | $ | 105,027 | |||||||
| Restricted cash | 3,302 | 2,768 | |||||||||
| Marketable securities | 3,988 | — | |||||||||
| Accounts receivable, net | 3,239 | 3,122 | |||||||||
| Inventories | 11,081 | 11,428 | |||||||||
| Prepaid expenses and other current assets | 9,438 | 4,915 | |||||||||
| Deferred contract costs, current | 658 | 7,580 | |||||||||
| Forward purchase receivable | 8,101 | — | |||||||||
| TOTAL CURRENT ASSETS | 71,878 | 134,840 | |||||||||
| Property and equipment, net | 7,387 | 7,019 | |||||||||
| Unbilled receivables | 10,898 | 8,891 | |||||||||
| Forward purchase receivable | — | 60,050 | |||||||||
Operating lease right-of-use asset (1) | 11,269 | — | |||||||||
| Goodwill | 7,409 | 7,444 | |||||||||
| Prepaid expenses, noncurrent | 8,555 | — | |||||||||
| Deferred contract costs, noncurrent | — | 11,847 | |||||||||
| Other long-term assets | 1,382 | 1,514 | |||||||||
| TOTAL ASSETS | $ | 118,778 | $ | 231,605 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | 14,705 | $ | 28,936 | |||||||
| Accrued expenses | 8,177 | 6,392 | |||||||||
| Deferred revenue | 2,030 | 2,020 | |||||||||
Operating lease liabilities, current (1) | 2,672 | — | |||||||||
| Other current liabilities | 16,662 | 21,899 | |||||||||
| Earnout liability, current | 286 | — | |||||||||
| SPAC warrant liabilities | 1,667 | 22,045 | |||||||||
| Forward purchase option derivative | 7,555 | — | |||||||||
| TOTAL CURRENT LIABILITIES | 53,754 | 81,292 | |||||||||
| PIPE Convertible Notes, net of transaction costs | 80,972 | 77,047 | |||||||||
| Long-term debt | 43,589 | 43,287 | |||||||||
| Forward purchase option derivative | — | 4,203 | |||||||||
| Earnout liability, noncurrent | 1,781 | 27,134 | |||||||||
Operating lease liabilities, noncurrent (1) | 9,005 | — | |||||||||
| Other long-term liabilities | 385 | 217 | |||||||||
| TOTAL LIABILITIES | 189,486 | 233,180 | |||||||||
| STOCKHOLDERS’ DEFICIT | |||||||||||
Common stock, $0.0001 par value per share; 600,000,000 shares authorized as of both September 30, 2022 and December 31, 2021; 70,722,973 and 66,647,242 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 7 | 7 | |||||||||
| Additional paid-in capital | 408,346 | 383,066 | |||||||||
| Accumulated other comprehensive income (loss) | (10) | — | |||||||||
| Accumulated deficit | (479,051) | (384,648) | |||||||||
| TOTAL STOCKHOLDERS’ DEFICIT | (70,708) | (1,575) | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 118,778 | $ | 231,605 | |||||||
(1) Figures as of September 30, 2022 reflect the Company’s January 1, 2022 adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases. For additional details, see Note 1.
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
8
BOXED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2022 and 2021 (Unaudited)
(in thousands except share and per share amounts)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Retail | $ | 41,580 | $ | 38,186 | $ | 129,543 | $ | 117,253 | |||||||||||||||
Software & Services(1) | 73 | 10,824 | 2,402 | 14,965 | |||||||||||||||||||
| Total net revenue | 41,653 | 49,010 | 131,945 | 132,218 | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Retail | (36,633) | (35,565) | (117,003) | (107,707) | |||||||||||||||||||
Software & Services(1) | (297) | (780) | (1,256) | (1,798) | |||||||||||||||||||
| Total cost of sales | (36,930) | (36,345) | (118,259) | (109,505) | |||||||||||||||||||
| Gross profit | 4,723 | 12,665 | 13,686 | 22,713 | |||||||||||||||||||
| Advertising expense | (2,359) | (5,174) | (22,145) | (14,618) | |||||||||||||||||||
| Selling, general, and administrative expense | (23,957) | (12,859) | (70,237) | (38,905) | |||||||||||||||||||
| Loss from operations | (21,593) | (5,368) | (78,696) | (30,810) | |||||||||||||||||||
| Other income (expense), net | (4,782) | (561) | (15,707) | 509 | |||||||||||||||||||
| Loss before income taxes | (26,375) | (5,929) | (94,403) | (30,301) | |||||||||||||||||||
| Income taxes | — | — | — | — | |||||||||||||||||||
| Net loss | $ | (26,375) | $ | (5,929) | $ | (94,403) | $ | (30,301) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale securities | 10 | — | (10) | — | |||||||||||||||||||
| Net comprehensive loss | $ | (26,365) | $ | (5,929) | $ | (94,413) | $ | (30,301) | |||||||||||||||
| Net loss per share, basic and diluted | $ | (0.37) | $ | (0.55) | $ | (1.38) | $ | (2.99) | |||||||||||||||
| Weighted average shares outstanding, basic and diluted | 70,563,420 | 9,504,786 | 68,232,698 | 9,454,261 | |||||||||||||||||||
(1) For information related to related party transactions, see Note 17.
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
9
BOXED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
For the three and nine months ended September 30, 2022 and 2021 (Unaudited)
(in thousands except share and per share amounts)
| Total Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2022 | — | $ | — | 70,552,272 | $ | 7 | $ | 404,194 | $ | (20) | $ | (452,676) | $ | (48,495) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 4,134 | — | — | 4,134 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | 170,701 | — | 18 | — | — | 18 | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale securities | — | — | — | — | — | 10 | — | 10 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (26,375) | (26,375) | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | — | $ | — | 70,722,973 | $ | 7 | $ | 408,346 | $ | (10) | $ | (479,051) | $ | (70,708) | ||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 | 42,383,516 | $ | 323,869 | 9,935,635 | $ | — | $ | 9,257 | $ | — | $ | (339,797) | $ | (330,540) | ||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | (2,127,590) | — | (498,742) | 1 | (1) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted beginning balance | 40,255,926 | $ | 323,869 | 9,436,893 | $ | 1 | $ | 9,256 | $ | — | $ | (339,797) | $ | (330,540) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 359 | — | — | 359 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | 123,726 | — | 244 | — | — | 244 | ||||||||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | — | — | (6,211) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Series C-3 preferred stock remeasurement | — | (707) | — | — | 707 | — | — | 707 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (5,929) | (5,929) | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2021 | 40,255,926 | $ | 323,162 | 9,554,408 | $ | 1 | $ | 10,566 | $ | — | $ | (345,726) | $ | (335,159) | ||||||||||||||||||||||||||||||||||||
10
| Total Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | — | $ | — | 66,647,242 | $ | 7 | $ | 383,066 | $ | — | $ | (384,648) | $ | (1,575) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 13,758 | — | — | 13,758 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | 558,784 | — | 781 | — | — | 781 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | 822 | — | 11 | — | — | 11 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of awards related to acquisition | — | — | 267,141 | — | 3,000 | — | — | 3,000 | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Convertible Notes | 24,999 | — | 274 | — | — | 274 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued from Equity Financing | — | — | 3,223,985 | — | 7,456 | — | — | 7,456 | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale securities | — | — | — | — | — | (10) | — | (10) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (94,403) | (94,403) | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | — | $ | — | 70,722,973 | $ | 7 | $ | 408,346 | $ | (10) | $ | (479,051) | $ | (70,708) | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 42,383,516 | $ | 325,201 | 9,888,776 | $ | — | $ | 6,983 | $ | — | $ | (315,425) | $ | (308,442) | ||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | (2,127,590) | — | (496,415) | 1 | (1) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted beginning balance | 40,255,926 | $ | 325,201 | 9,392,361 | $ | 1 | $ | 6,982 | $ | — | $ | (315,425) | $ | (308,442) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,214 | — | — | 1,214 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | 170,585 | — | 331 | — | — | 331 | ||||||||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | — | — | (8,538) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Series C-3 preferred stock remeasurement | — | (2,039) | — | — | 2,039 | — | — | 2,039 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (30,301) | (30,301) | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2021 | 40,255,926 | $ | 323,162 | 9,554,408 | $ | 1 | $ | 10,566 | $ | — | $ | (345,726) | $ | (335,159) | ||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
11
BOXED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2022 and 2021 (Unaudited)
(in thousands except share and per share amounts)
For the Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (94,403) | $ | (30,301) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 3,286 | 3,566 | |||||||||
| Stock-based compensation | 13,758 | 1,214 | |||||||||
| Noncash Common Stock Purchase Agreement costs | 1,000 | — | |||||||||
| Bad debt expense/(change in reserve) | 176 | (87) | |||||||||
| Change in fair value of warrants and derivative instruments | 3,052 | (1,470) | |||||||||
| Settlement of forward purchase receivable | 46,386 | — | |||||||||
| Settlement of forward purchase option derivative liability | (45,144) | — | |||||||||
| Loss on extinguishment of debt | — | 203 | |||||||||
| Amortization of debt discount | 1,331 | 60 | |||||||||
| PIK Interest | 3,171 | — | |||||||||
| Net amortization/accretion on available-for-sale securities | (35) | — | |||||||||
| Unrealized gain/(loss) on available-for-sale securities | (4) | — | |||||||||
| Noncash operating lease expense | 2,413 | — | |||||||||
| Other noncash items | — | 181 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables, net | (294) | (1,812) | |||||||||
| Inventories | 347 | 2,551 | |||||||||
| Prepaid expenses and other current assets | (4,523) | (4,258) | |||||||||
| Unbilled receivables | (2,007) | (3,680) | |||||||||
| Deferred contract costs | 18,769 | — | |||||||||
| Prepaid expenses, noncurrent | (8,555) | — | |||||||||
| Other long-term assets | (175) | — | |||||||||
| Accounts payable | (14,227) | 4,962 | |||||||||
| Accrued expenses | 1,785 | 1,052 | |||||||||
| Deferred revenue | 9 | 231 | |||||||||
| Operating lease liabilities | (2,449) | — | |||||||||
| Other liabilities | (1,573) | 493 | |||||||||
| Net cash used in operating activities | (77,906) | (27,095) | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (3,347) | (683) | |||||||||
| Forward purchase payments | (1,242) | — | |||||||||
| Forward purchase receipts | 6,805 | — | |||||||||
| Purchase of available-for-sale securities | (6,960) | — | |||||||||
| Sale of available-for-sale securities | 3,000 | — | |||||||||
| Other investing activities | 34 | 13 | |||||||||
| Net cash used in investing activities | (1,710) | (670) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Principal payments on finance lease obligations | (54) | (56) | |||||||||
| Proceeds from option exercises | 781 | 331 | |||||||||
| Proceeds from warrant exercises | 11 | — | |||||||||
| Proceeds from Common Stock Purchase Agreement | 6,456 | — | |||||||||
| Repayments from borrowings | — | (7,703) | |||||||||
| Proceeds from borrowings | — | 43,800 | |||||||||
| Debt issuance costs | — | (670) | |||||||||
| Net cash provided by financing activities | 7,194 | 35,702 | |||||||||
| Total change in cash, cash equivalents and restricted cash | (72,422) | 7,937 | |||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH BEGINNING OF PERIOD | 107,795 | 30,043 | |||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 35,373 | $ | 37,980 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Cash paid for taxes | $ | 64 | $ | 17 | |||||||
| Cash paid for interest | $ | 3,690 | $ | 281 | |||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Right-of-use asset obtained in exchange for operating lease liability | $ | 2,384 | $ | — | |||||||
| Shares issued related to equity consideration of acquisition | $ | 3,000 | $ | — | |||||||
| Conversion of Convertible Notes | $ | 274 | $ | — | |||||||
| Deferred transaction costs included in accrued expense & accounts payable | $ | — | $ | 2,843 | |||||||
| Cash and cash equivalents at end of period | $ | 32,071 | $ | 35,409 | |||||||
| Restricted cash at end of period | 3,302 | 2,571 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 35,373 | $ | 37,980 | |||||||
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
12
BOXED, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2022 and 2021 (Unaudited)
(in thousands except share and per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description — Boxed, Inc. (the “Company”) is a commerce technology company specializing as both an e-commerce retailer and e-commerce enabler. The Company operates an e-commerce retail (“Retail”) service that provides bulk pantry consumables to businesses and household customers within the continental United States. The Company generates net revenue through direct retail sales of third-party and private-labeled goods, which includes all sales generated primarily through the Company’s website, mobile-optimized website, and mobile applications. Further, the Company monetizes its proprietary commerce technology through its software and services (“Software & Services” or “Spresso”) offerings, which include an end-to-end suite of enterprise-level software and analytics solutions, designed to deliver actionable insights supporting efficient growth and cost reduction.
Business Combination — On December 8, 2021 (the “Closing”), the Company (formerly known as Seven Oaks Acquisition Corp. or Seven Oaks) completed the acquisition of Giddy Inc. (“Old Boxed”) pursuant to the definitive agreement dated June 13, 2021 (the “Business Combination Agreement”), by and among, Seven Oaks, two of its wholly-owned subsidiaries, Blossom Merger Sub, Inc. and Blossom Merger Sub II, LLC, and Old Boxed. Upon the Closing, Old Boxed merged with Blossom Merger Sub, Inc., with Old Boxed surviving the merger as a wholly-owned subsidiary of the Company. Immediately following this initial merger, Old Boxed merged with and into Blossom Merger Sub II, LLC, with Blossom Merger Sub II, LLC surviving the merger and changing its name to “Boxed LLC.” Also upon Closing, the Company changed its name from “Seven Oaks Acquisition Corp.” to “Boxed, Inc.” and is referred to herein as “New Boxed,” or the “Company.” Unless the context otherwise requires, references to “Seven Oaks” herein refer to the Company prior to Closing.
Under the Business Combination Agreement, the Company agreed to acquire all outstanding equity interest of Old Boxed for $550,000 in aggregate consideration, which Old Boxed’s stockholders would receive in the form of shares of common stock of the Company (the consummation of the business combination and the other transactions contemplated by the Business Combination Agreement, collectively, the “Business Combination”).
The Business Combination was accounted for as a reverse recapitalization with Old Boxed as the accounting acquirer and as the acquired company for accounting purposes. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of Old Boxed and its wholly-owned subsidiaries as Old Boxed is the predecessor to the Company.
New Boxed common stock and warrants commenced trading on the New York Stock Exchange (“NYSE”) under the symbols “BOXD” and “BOXD WS,” respectively, on December 9, 2021. See Note 2, “Business Combination,” for additional details. See Note 19, “Subsequent Events,” for additional details with respect to the Company’s NYSE listing.
Boxed Market Acquisition — On December 9, 2021, the Company completed an acquisition of substantially all of the assets and operations of MaxDelivery, LLC, an on-demand grocery delivery business in New York City, which as of the second quarter of 2022 has been rebranded as “Boxed Market.” Consideration for the acquisition consisted of $4,000 in cash consideration, $3,000 in equity consideration, and a future potential earnout, or contingent consideration, discussed below. The acquisition was accounted for as a business combination under the acquisition method in accordance with guidance found in ASC 805, Business Combinations, and the related fair value considerations and purchase price allocation are detailed within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Operating results for this acquisition have been included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss since the date of acquisition and are reflected within the Retail segment. For discussion on the accounting treatment of acquired intangible assets and goodwill, refer to the Intangible Assets and Goodwill discussion below.
The Company recorded a contingent consideration liability of $1,711 as of the acquisition date, representing the estimated fair value of the contingent payable to former shareholders. The fair value of the contingent consideration is remeasured at each reporting period, as discussed in Note 15, and is included within earnout liability in the Company’s Condensed Consolidated Balance Sheets.
13
Principles of Consolidation — The accompanying Condensed Consolidated Financial Statements of Boxed, Inc. include its wholly owned subsidiaries, Boxed, LLC, BOXED MAX LLC, Jubilant LLC, and Ashbrook Commerce Solutions LLC. Any intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation — The accompanying Condensed Consolidated Financial Statements of Boxed, Inc. are unaudited and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair statement of the Company’s Condensed Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the accounting and disclosure rules and regulations of the SEC. They do not include all information and notes required by U.S. GAAP for annual financial statements.
The unaudited results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of future results or results to be expected for the full fiscal year ended December 31, 2022.
These unaudited Condensed Consolidated Financial Statements, including the Company’s significant accounting policies, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021 and related notes thereto included in the Annual Report on Form 10-K, as filed with the SEC on March 15, 2022.
Considerations Related to COVID-19 — The ongoing spread of COVID-19 and emerging and future variants throughout the United States and internationally, as well as measures implemented by government authorities to minimize transmission of the virus have had, and continue to have, negative and positive implications for the Company’s business. Though many areas have begun relaxing such restrictions, varying levels of restrictions remain and may be increased, particularly in light of the proliferation of the Delta, Omicron, BA.4, BA.5, and emerging variants.
In the preparation of these Condensed Consolidated Financial Statements and related disclosures we have assessed the impact that the COVID-19 pandemic has had on the Company’s estimates, assumptions, forecasts, and accounting policies and made additional disclosures, as necessary. As the COVID-19 pandemic and its impacts are unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts.
Going Concern, Liquidity and Management’s Plan — As of September 30, 2022, the Company had total cash and cash equivalents of $32,071, restricted cash of $3,302, short-term marketable securities of $3,988, and an accumulated deficit. In addition, the Company’s net loss and net cash used in operating activities amounted to $(94,403) and $(77,906), respectively, for the nine months ended September 30, 2022. As an emerging growth company, the Company is dependent on outside capital to execute its strategy of investing in growth at the expense of short-term profits. As a result, the Company has incurred significant losses and net cash outflows from operating activities since its inception and expects to incur such losses and remain dependent on outside capital for the foreseeable future until such time that the Company can realize its growth strategy by generating profits and reducing its reliance on outside capital. Given the inherent uncertainties associated with executing the Company’s growth strategy, management can provide no assurance that the Company will be able to obtain sufficient outside capital or generate sufficient cash from operations to fund the Company’s obligations as they become due over the next twelve months from the date these Condensed Consolidated Financial Statements were issued.
In addition, as disclosed in Note 8, the Company entered into a term loan agreement (the “New Term Loan”) in August 2021 for principal of $45,000. The New Term Loan contains a certain number of financial covenants, which requires the Company to (i) maintain a minimum unrestricted cash balance of $15,000, (ii) maintain minimum net Retail revenue based upon agreed quarterly targets; and (iii) maintain a Retail gross margin percentage of at least 8%. In order to achieve these targets, we expect to invest in growth initiatives, with emphasis toward driving growth in B2B customer demand, for which we are seeing strong momentum year-to-date. The Company expects these investments, among others, to result in a continued net use of cash from operating activities over the next twelve months.
As of September 30, 2022, the Company was in compliance with the financial covenants required by its New Term Loan. However, the inherent uncertainties described above may impact the Company’s ability to remain in compliance with these covenants over the next twelve months. If the Company breaches its financial covenants and fails to secure a waiver or forbearance from the third-party lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the New Term Loan or the exercise of other rights or remedies the third-party lender may have under applicable law. No assurance can be provided a waiver or forbearance will be granted or the outstanding borrowings under the New Term Loan will be successfully refinanced on terms that are acceptable to the Company.
14
To date, the Company has raised a substantial amount of capital from outside investors and lenders through the issuance of stock and borrowings, including under its term loans and revolving credit facilities, as well as through the consummation of the Business Combination, and expects this reliance to continue for the foreseeable future. However, as of September 30, 2022, the Company had no additional capital available for borrowing and no firm commitment from current or prospective investors to provide the Company additional capital to fund operations in the foreseeable future. While management believes the Company will be able to obtain additional capital, no assurance can be provided that such capital will be obtained or on terms that are acceptable to the Company. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. If management is unsuccessful in securing additional capital and/or executing its strategy of growth whereby the Company realizes profits and generates sufficient cash inflows from operations to fund the Company’s obligations as they become due, management may be required to seek other strategic alternatives such as a further reduction in the Company’s current cost structure, or a recapitalization of the Company’s balance sheet, including related outstanding debt and equity securities.
The accompanying Condensed Consolidated Financial Statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.
Estimates — The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include (i) revenue recognition and deferral in accordance with ASC 606 (ii) the fair values of derivative instruments within the scope of ASC 815 and (iii) the fair values of performance-based restricted stock units. On a regular basis, management reviews its estimates utilizing currently available information, changes in fact and circumstances, historical experience, and reasonable assumptions. After such review, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Segment Information — The Company manages and reports its operating results through two reportable segments defined by its products and services: Retail and Software & Services (which the Company recently branded as “Spresso”). See Note 18, “Segment Reporting,” for the three and nine months ended September 30, 2022 and 2021.
Cash and Cash Equivalents — The Company considers all highly liquid investments purchased with an original maturity (at the date of purchase) of three months or less to be the equivalent of cash for the purpose of balance sheet presentation. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates market value. In addition, as discussed below within Marketable Securities, the Company also has available-for-sale marketable securities that are carried at estimated fair value. Some of these marketable securities, including both money market accounts and commercial paper, are classified as cash and cash equivalents due to their original maturities of less than three months.
Restricted Cash — The Company’s restricted cash is comprised of cash that is restricted as to withdrawal or use under the terms of certain contractual agreements. Restricted cash as of September 30, 2022 and December 31, 2021 was $3,302 and $2,768, respectively, and consists of collateral for letters of credit related to the Company’s relationships with certain product vendors, and letters of credit issued in lieu of deposits on certain real estate and facility leases.
Marketable Securities— The Company’s marketable securities are investments in available-for-sale marketable securities that are carried at estimated fair value. The Company’s valuations of available-for-sale securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets. Management determines the appropriate classification of its investments in debt securities at the time of purchase. Investments with original maturities beyond three months at the date of purchase and which mature at, or less than 12 months from, the balance sheet date are classified as marketable securities. Investments with original maturities of three months or less at the date of purchase are classified as cash and cash equivalents.
15
Unrealized gains and losses are excluded from earnings and are reported as components of comprehensive loss. The Company periodically evaluates whether declines in fair values of its available-for-sale securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the available-for-sale security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not that it will be required to sell any available-for-sale securities before recovery of its amortized cost basis. No sales of these securities have been made to date.
Accounts Receivable, Net — Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company estimates that the allowance for doubtful accounts based on historical losses, existing economic conditions, and other information available at the balance sheet date. Uncollectable accounts are written off against the allowance after all collection efforts have been exhausted.
Accounts receivable includes $2,715 and $2,318 of trade receivables at September 30, 2022 and December 31, 2021, respectively. The Company has recorded an allowance of $175 and $96 as of September 30, 2022 and December 31, 2021, respectively.
Fair Value of Financial Instruments — Assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The three levels of inputs used to measure fair value are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for substantially the full-term of the asset or liability.
Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the asset of liability.
The hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
Concentrations of Risk — Certain financial instruments potentially subject us to concentrations of credit risk. Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash balances are primarily on deposit at high credit quality financial institutions. The cash balances in all accounts held at financial institutions are insured up to $250 thousand by the Federal Deposit Insurance Corporation (“FDIC”) through September 30, 2022. At times, cash balances may exceed federally insured amounts and potentially subject the Company to a concentration of credit risk. Management believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the respective financial institutions.
The risk with respect to accounts receivable is managed by the Company through its policy of monitoring the creditworthiness of its customers to which it grants credit terms in the normal course of business. As of September 30, 2022 and December 31, 2021, one third-party seller accounted for approximately 22.5% and 40.9% of the Company’s outstanding trade and vendor fund receivables, respectively.
Leases — The Company determines whether an arrangement is a lease at inception and classifies the leases as either operating or finance leases. Operating leases are recorded within right-of-use (“ROU”) assets and operating lease liabilities, both current and noncurrent, on the Company’s Condensed Consolidated Balance Sheets. Finance leases are recorded within property and equipment, net and other liabilities, both current and noncurrent, on the Company’s Condensed Consolidated Balance Sheets.
16
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. ROU assets are also adjusted for prepaid rent, initial indirect costs, and lease incentives. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise or not exercise that option, respectively. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company elected to exclude from its balance sheets the recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for its long-term real-estate leases.
Inventories — Inventories consisting of finished goods are stated at the lower of cost or net realizable value. Inventory costs are determined using the first in, first out method. Inventory costs include price reductions and allowances offered by vendors.
The Company reviews inventories to determine the necessity of write-offs for excess, obsolete, or unsellable inventory. The Company estimates write-offs for inventory obsolescence based on its judgment of future realization. These reviews require the Company to assess customer and market demand. There were no material write-offs for the three and nine months ended September 30, 2022 or 2021.
Property and Equipment, Net — Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets, which range from 3-7 years (see table below). Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. Improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred.
| Estimated Useful Lives | |||||
| Leasehold improvements | 7 years | ||||
| Warehouse equipment | 5 years | ||||
| Computers and small tools | 3 years | ||||
| Furniture and fixtures | 7 years | ||||
| Finance lease assets | 7 years | ||||
| Software development | 4 years | ||||
Software Development Costs — The Company classifies software development costs as either internal-use software or external-use software. The Company accounts for costs incurred to develop internal-use software in accordance with ASC 350-40, Internal Use Software. Consequently, the Company capitalizes certain external costs and internal labor-related costs associated with the development of its platforms and internal-use software products after the preliminary project stage is complete and until the software is ready for its intended use. Costs incurred in the preliminary stages of development, after the software is ready for its intended use and for maintenance of internal-use software are expensed as incurred. Upgrades and enhancements are capitalized to the extent they will result in added functionality. Capitalized software costs are included in property and equipment, net within the Condensed Consolidated Balance Sheets and are amortized over the remaining useful life of four years.
In accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, the software development costs incurred in the research and development of software products or the software component of products to be sold, leased, or marketed to external users are expensed as incurred until technological feasibility has been established. Technological feasibility is established upon the completion of a working model. Software development costs incurred after the establishment of technological feasibility and until the product is available for general release are capitalized, provided recoverability is reasonably assured. Software development costs are stated at the lower of unamortized cost or net realizable value. Net realizable value for each software product is assessed based on anticipated profitability applicable to revenues of the related product in future periods. Amortization of capitalized software costs begins when the related product is available for general release to customers and is provided for using the straight-line method over the estimated life of the respective product. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented in this report.
17
Impairment of Long-Lived Assets — The Company periodically evaluates the need to recognize impairment losses relating to long-lived assets in accordance ASC 360, Property, Plant, and Equipment. Long-lived assets are evaluated for recoverability whenever events or circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows, on an undiscounted basis, expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Company would write the asset down to fair value and record an impairment charge accordingly. As of September 30, 2022 and December 31, 2021, there were no such events or circumstances that indicate a need for such evaluation.
Deferred Contract Costs — The Company defers contract costs when there is a known current obligation that is not yet paid. In these instances, the Company records deferred contract costs to recognize the asset in its Condensed Consolidated Balance Sheets to offset the Company’s related liability. Deferred contract costs as of December 31, 2021 were related to the asset associated with the Company's contract with Palantir as described in Note 12 as well as insurance premiums related to becoming a public company. These obligations were paid in the first quarter of 2022 and the related assets have been reclassified to prepaid expenses, both current and noncurrent, on the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2022, additional deferred contract costs were recorded for Palantir.
Forward Purchase Receivable and Forward Purchase Option Derivative — On December 8, 2021, upon the closing of the Forward Purchase Agreement, as discussed in Note 2, the Company recorded a forward purchase receivable on its Condensed Consolidated Balance Sheets of $65,062 to account for the Prepayment Amount. The Prepayment Amount would be held in a deposit account until the Valuation Date (the second anniversary of the closing of the Business Combination, subject to certain acceleration provisions). On August 16, 2022, the Valuation Date was accelerated, pursuant to the acceleration provision terms of the agreement and ACM’s election. As a result, as of October 24, 2022, the Forward Purchase Transaction was fully unwound. See Note 13, “Forward Purchase Transaction,” for further detail surrounding the acceleration.
As of September 30, 2022, given the effects of the acceleration, the forward purchase receivable was $8,101, of which the Company expects to collect $546. As of September 30, 2022, the Company has collected $10,576 in net proceeds from the Prepayment Amount.
Also in connection with the Forward Purchase Agreement, the Company recognized a liability for a freestanding derivative, referred to herein as the “forward purchase option derivative,” on its Condensed Consolidated Balance Sheets. See Note 2, “Business Combination,” and Note 13, “Forward Purchase Transaction,” for further detail. In accordance with ASC 815, Derivatives and Hedging, and as discussed in Note 15, “Fair Value Measurements,” the Company remeasured the fair value of the forward purchase option derivative liability at each reporting period. As of September 30, 2022, the forward purchase option derivative liability was $7,555.
Intangible Assets and Goodwill — As part of the acquisition of Boxed Market, as discussed above, the Company recorded intangible assets and goodwill on its Condensed Consolidated Balance Sheets. The intangible assets acquired relate to Boxed Market’s customer relationships, trademarks, and internally developed technology which were valued via (i) the multi-period excess-earnings method (ii) relief-from-royalty method and (iii) cost replacement method, respectively, all of which are under the income approach in accordance with ASC 805, Business Combinations. Also in accordance with ASC 805, the Company allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Any excess of the purchase price over the fair values of assets acquired, including intangibles and liabilities assumed, was recognized as goodwill. As the Company views Boxed Market as part of its Retail segment, the goodwill recorded is included within its Retail business unit. The Company’s goodwill is subject to annual impairment testing. Further discussion on the purchase price allocation is detailed within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Debt — The Company defers costs directly associated with acquiring third-party financing. Debt issuance costs related to the Company’s long-term debt, including its PIPE Convertible Notes and New Term Loan (as defined in Note 7 and Note 8, respectively), are recorded as a direct deduction from the carrying amount of the debt. Amortization of debt issuance costs was $464 and $1,331 for the three and nine months ended September 30, 2022, respectively, and $60 for both the three and nine months ended September 30, 2021. Interest expense for total long-term debt was $3,243 and $766 for the three months ended September 30, 2022 and 2021, respectively, and $9,355 and $976 for the nine months ended September, 30, 2022 and 2021, respectively.
18
Equity — Prior to the closing of the Business Combination, the Company’s equity structure consisted of common stock, Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock, and Series E preferred stock. The Company analyzed the relevant provisions of ASC 480, Distinguishing Liabilities from Equity, and determined the preferred shares should be recognized as temporary equity.
Immediately prior to Closing, all Series of Old Boxed preferred stock was converted into Old Boxed common stock based on the applicable conversion rate for each security and then upon Closing converted into the right to receive approximately 0.9498 shares of New Boxed common stock. As of December 31, 2021, the Company no longer had temporary equity on its Condensed Consolidated Balance Sheets.
Employee Benefit Plan — The Company sponsors a qualified 401(k) defined contribution plan covering eligible employees. Participants may contribute a portion of their annual compensation limited to a maximum annual amount set by the Internal Revenue Service. There were no employer contributions under this plan for the three and nine months ended September 30, 2022 and 2021.
Stock-Based Compensation — The Company measures and records the expense related to stock-based awards based upon the fair value at the date of grant.
Employee stock-based compensation awards are recorded in accordance with ASC 718, Compensation — Stock Compensation. ASC 718 requires all stock-based payments to employees to be recognized as expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss based on their grant date fair values. The Company has granted stock options, restricted stock units, and restricted stock awards. Restricted stock units and awards are determined based on the fair market value of the common stock on the date of the grant.
The use of the Black-Scholes Merton model requires management to make the following assumptions:
Expected Volatility — The Company estimates volatility for option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the option grant for a term that is approximately equal to the options’ expected term.
Expected Term — Derived from the life of the options granted under the option plan and is based on the simplified method which is essentially the weighted average of the vesting period and contractual term.
Risk-Free Interest Rate — The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues, with a term that is equal to the options’ expected term at the grant date.
Dividend Yield — The Company has not declared or paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield has been estimated to be zero.
Prior to becoming a public company, the Company estimated the fair value of its common stock. The Board of Directors considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards are approved. The factors considered included, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the Company’s convertible preferred stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s shares.
Since the Company’s common shares began trading on the New York Stock Exchange, the Company utilizes the closing share trade price of its shares as the fair value of the Company’s common stock.
19
Net Loss Per Share — Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, the SPAC Warrants, PIPE Convertible Notes, restricted stock units, and common stock options outstanding are considered to be potentially dilutive securities for the current period presented, and as a result, diluted net loss per common share is the same as basic net loss per share for the current period. Similarly, for the prior period presented, the convertible preferred stock, common stock warrants, preferred stock warrants, and common stock options outstanding are considered to be potentially dilutive securities, and as a result, diluted net loss per common share is the same as basic net loss per share for the prior period.
Historically, basic and diluted net loss per share attributable to common stockholders was presented in conformity with the two-class method required for participating securities as the convertible preferred stock was considered to be participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to share in undistributed earnings as if all income (loss) for the period had been distributed. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses. Accordingly, the Company’s net loss was attributed entirely to common stockholders. As all of the Company's convertible preferred stock converted to common stock immediately prior to the Closing, the Company is no longer required to present its net loss per share in conformity with the two-class method as it no longer has participating securities.
Income Taxes — In accordance with ASC 740, Income Taxes, the Company applies the guidance accounting for uncertainty in income taxes, which prescribes a recognition threshold and a measurement attribute for the balance sheet recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination be taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon the ultimate settlement.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce deferred income tax assets to the amount that is more likely than not to be realized.
Revenue Recognition — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company adopted ASU No. 2014-09 and its related amendments (collectively, known as ASC 606, Revenue from Contracts with Customers) effective January 1, 2019, using the modified retrospective approach to all contracts not completed at the date of initial application. Adoption of ASC 606 did not have an impact on the timing of revenue recognition in the Company’s Condensed Consolidated Financial Statements. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year. See Note 9, “Revenue Recognition,” for details about the Company’s revenue streams and respective revenue recognition policies, including remaining performance obligations.
Other Income (Expense), Net — Other income (expense), net, consists primarily of gains (losses) resulting from fair value valuations and adjustments of the Public and Private Warrants and the Company’s derivative instruments, including the Sponsor Earnout Shares, forward purchase option derivative, and contingent consideration related to the Boxed Market acquisition. Also included in other income (expense), net is (i) interest incurred from the Company’s PIPE Convertible Notes and New Term Loan and (ii) transaction costs related to the Common Stock Purchase Agreement.
Customer Incentives — The Company offers its customers various sales incentives including sales discounts, loyalty rewards, and free items with purchases. The Company records a reduction of net revenue at the time the discount is taken and at the time loyalty rewards are earned. Historically loyalty rewards have been immaterial to the Company.
20
Vendor Rebates — The Company has agreements with its suppliers to receive funds for promotions, volume rebates, and marketing. Amounts earned and due from suppliers under these agreements are included in prepaid expenses and other current assets in the condensed consolidated balance sheet. Vendor rebates received by the Company reduce the carrying cost of inventory and are recognized in cost of sales in the condensed consolidated statements of operations when the related inventory is sold.
Cost of Sales — Cost of sales consists of the costs of merchandise, expenses for shipping to and from clients and inbound freight, inventory write-offs and changes in the Company’s inventory reserve, payment processing fees, and packaging materials costs, offset by vendor funded promotions and various vendor allowances. Also included in cost of sales are wages of employees who provide promised services directly to the customer, including wages attributable to implementation and maintenance services for the Company’s Software & Services customers as well as wages attributable to delivery fulfillment services provided to the Company’s Boxed Market customers.
Delivery Costs — Outbound shipping and handling costs incurred to deliver merchandise to customers amounted to $5,536 and $6,767 for the three months ended September 30, 2022 and 2021, respectively, and $19,715 and $20,063 for the nine months ended September 30, 2022 and 2021, respectively. The delivery costs are included in cost of sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Selling, General and Administrative Expense — Selling, general and administrative expense consists primarily of salaries and benefits for warehouse employees as well as all regional and home office employees, including buying personnel. Selling, general and administrative expense also includes substantially all building and equipment depreciation, research and development expense, bank service charges, utilities, as well as other operating costs incurred to support e-commerce website operations. In accordance with ASC 730-10-25, Research and Development, research and development costs are charged to expense as and when incurred in the development of software products to be sold, leased, or marketed to external parties. Research and development expense incurred was $789 and $547 for the three months ended September 30, 2022 and 2021, respectively, and $1,715 and $1,358 for the nine months ended September 30, 2022 and 2021, respectively.
Advertising Expense — The Company expenses advertising as incurred. Advertising expense was $2,359 and $5,174 for the three months ended September 30, 2022 and 2021, respectively, and $22,145 and $14,618 for the nine months ended September 30, 2022 and 2021, respectively. These costs are included in advertising expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 are prepayments for future advertising expenses of approximately $92 and $78, respectively. In addition, beginning in the first quarter of 2022, the Company started to incur advertising costs related to a television commercial production. In accordance with ASC 720-35, Advertising Costs, the Company has elected to defer production advertising costs for its commercial production activities until the first-time the advertisement takes place, while the costs of communicating advertising are expensed as services are received. As the commercial production first aired in March 2022, the costs were both deferred and recognized within the first quarter.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), as subsequently amended, which requires a lessee to recognize in its balance sheet an asset and liability for most leases with a term greater than 12 months. These assets, or ROU assets, represent the Company’s right to use an underlying asset for the lease term and the lease liabilities represent the Company’s obligation to make lease payments arising from the lease. In June 2020, the FASB issued Accounting Standards Update No. 2020-5 which deferred the effective date of ASC 842 for privately-held companies. According to the update, the standard is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. In accordance with guidance in Topic 10 of the SEC Division of Corporate Finance’s Financial Reporting Manual, an EGC may elect to comply with new or revised accounting standards as of the effective date for a private company; thus, the Company elected to use the extended transition period for private companies to adopt the standard effective January 1, 2022 using the “modified retrospective transition effective date method” which resulted in a cumulative-effect adjustment to the Condensed Consolidated Balance Sheets at January 1, 2022.
21
Upon adoption of ASC 842 the Company recognized operating lease ROU assets and operating lease liabilities related to its office leases and fulfillment centers of $11,298 and $11,742, respectively. The difference in the initial operating lease ROU assets and operating lease liabilities balances is $444 related to the de-recognition of existing deferred rent and incentive balances.
The Company elected the “package of practical expedients,” which permitted the Company to not reassess prior conclusions about whether any expired or existing arrangements are or contain a lease, lease classification and the treatment of initial direct costs under the new guidance. The Company did not elect the use-of-hindsight practical expedient.
The Company’s accounting for lessee finance leases remains substantially unchanged from legacy guidance. All prior periods are presented in accordance with legacy guidance for both operating and finance leases. The standard did not have a significant impact on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss or Statements of Cash Flows.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASC 740”). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The Company adopted ASU 2018-15 as of December 31, 2021 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been “incurred”). Under the “expected loss” model, an entity will recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considers past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. ASU 2016-13 is effective for private companies beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of adoption of the new standard on the Condensed Consolidated Financial Statements.
2. BUSINESS COMBINATION
On December 8, 2021, the Company consummated its Business Combination pursuant to the terms of the Business Combination Agreement, by and among the Company, Blossom Merger Sub, Inc., Blossom Merger Sub II, LLC, and Old Boxed.
Upon consummation of the Business Combination and other transactions, the following occurred:
•The Company changed its name from “Seven Oaks Acquisition Corp.” to “Boxed, Inc.” and is referred to herein as “New Boxed,” or the “Company.” Unless the context otherwise requires, references to “Seven Oaks” herein refer to the Company prior to Closing.
•Holders of 18,098,335 shares of Seven Oaks Class A common stock sold in its initial public offering exercised their right to have such shares redeemed (the “Redemptions”) for a full pro rata portion of the trust account holding the proceeds from Seven Oaks’ initial public offering. The remaining 7,776,665 shares of Seven Oaks Class A common stock were each automatically reclassified into one share of New Boxed common stock.
22
•The 6,468,750 shares of Seven Oaks Class B common stock held by Seven Oaks Sponsor LLC (the “Sponsor”) were each automatically reclassified into one share of New Boxed common stock, of which 1,940,625 are subject to vesting under certain conditions (the “Sponsor Earnout Shares”). The Sponsor Earnout Shares will be considered outstanding for legal purposes prior to the achievement of the vesting conditions but will not be considered outstanding for accounting purposes until such vesting conditions are achieved. See Note 15, “Fair Value Measurements,” for detail on the Company’s valuation of these shares.
•Pursuant to subscription agreements entered into in connection with the Business Combination Agreement (the “Subscription Agreements”), certain investors (the “PIPE Investors”) subscribed to purchase an aggregate of 3,250,000 shares of Class A common stock at $10.00 per share and an aggregate of $87,500 in principal amount of convertible notes (the “PIPE Convertible Notes” or “Convertible Notes”) upon consummation of the Business Combination (collectively, the “PIPE Investment”). At Closing, the Company consummated the PIPE Investment and 3,250,000 shares of New Boxed common stock were issued. See Note 7, “Convertible Notes,” for terms and details of the PIPE Convertible Notes.
•After giving effect to the transactions described above, including the Redemptions and the consummation of the PIPE Investment, there were 15,554,790 shares of New Boxed common stock issued and outstanding (excluding the Sponsor Earnout Shares).
Prior to the Closing, on November 28, 2021, Seven Oaks entered into an agreement (the “Forward Purchase Agreement”) with ACM AART VII D LLC (“ACM”) for a cash-settled OTC Equity Prepaid Forward Transaction (the “Forward Purchase Transaction”). Pursuant to the terms of the Forward Purchase Agreement, ACM purchased approximately 6,504,768 shares of Seven Oaks’ Class A common stock (the “Forward Purchase shares”) and, one business day following the closing of the Business Combination, the Company paid out to ACM an amount (such amount, as adjusted under the Forward Purchase Agreement, the “Prepayment Amount”) equal to the redemption price per share multiplied by the number of subject shares on the date of prepayment. The Prepayment Amount of $65,062 was paid out of the funds received by the Company from Seven Oaks’ trust account and would be held in a deposit account for the benefit of ACM until the “Valuation Date” (the second anniversary of the closing of the Business Combination, subject to certain acceleration provisions). On July 6, 2022, an acceleration provision of the Agreement was triggered giving ACM the right to accelerate the Valuation Date at its option, which it did on August 16, 2022. As of September 30, 2022, given the effects of the acceleration, the remaining forward purchase receivable was $8,101, of which the Company expects to collect $546. As of September 30, 2022, the Company has collected $10,576 in net proceeds from the Prepayment Amount. See Note 13, “Forward Purchase Transaction,” for further detail surrounding the acceleration.
As discussed above, a total of 18,098,335 shares of Seven Oaks Class A common stock were presented for redemption in connection with the Business Combination (the “Redemptions”). As a result, there was approximately $77,784 remaining in Seven Oaks’ trust account, following Redemptions. Combined with the total PIPE Investment of $120,000, comprised of $32,500 in equity and $87,500 in Convertible Notes, and after deducting combined company transaction fees of $47,667, there was approximately $150,117 of cash proceeds received by the Company from the transaction. After paying the Prepayment Amount of $65,062 on December 9, 2021, the day after the Closing, the Company had $85,054 in net proceeds remaining. As discussed above, as of September 30, 2022, $10,576 of the amount initially subject to settlement under the Forward Purchase Transaction had been recovered by the Company, net of applicable fees paid to ACM.
Public and Private Warrants — In December 2021, in connection with the closing of the Business Combination, the Company assumed a total of 18,525,000 outstanding warrants to purchase one share of Boxed common stock with an exercise price of $11.50. Of these warrants, 12,937,500 warrants (the “Public Warrants”) were originally issued in the initial public offering (“IPO”) of Seven Oaks and 5,587,500 warrants (the “Private Warrants”) were originally issued in a private placement in connection with the IPO. The Private Warrants are identical to the Public Warrants, except the Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants were not transferable, assignable or salable until after the completion of the Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable by the Company so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchases or their transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
23
The Company evaluated its warrants under ASC 815-40, Derivatives and Hedging, and concluded that they do not meet the criteria to be classified in stockholders’ equity. Therefore, the Company recorded these warrants as current liabilities on the Condensed Consolidated Balance Sheets at fair value upon Closing, with subsequent changes in their respective fair values to be recognized in other income (expense), net in the Condensed Consolidated Statements of Operations during future reporting periods. See Note 15, “Fair Value Measurements,” for further disclosure on the change in fair value of Public and Private Warrant liabilities.
During the nine months ended September 30, 2022, 822 warrants were exercised, leaving 18,524,178 outstanding.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Leasehold improvements | $ | 8,799 | $ | 8,716 | |||||||
| Warehouse equipment | 3,858 | 3,056 | |||||||||
| Computers and small tools | 1,533 | 1,337 | |||||||||
| Furniture and fixtures | 86 | 85 | |||||||||
| Software development | 14,190 | 14,091 | |||||||||
| Work in progress | 2,154 | 7 | |||||||||
| 30,620 | 27,292 | ||||||||||
| Less: Accumulated depreciation and amortization | (23,233) | (20,273) | |||||||||
| Property and equipment, net | $ | 7,387 | $ | 7,019 | |||||||
The Company recorded depreciation and amortization expense of $1,078 and $1,102 for the three months ended September 30, 2022 and 2021, respectively, of which $386 and $376 related to software development costs as well as costs for other intangibles, respectively. The Company recorded depreciation and amortization expense of $3,286 and $3,566 for the nine months ended September 30, 2022 and 2021, respectively, of which $1,189 and $1,369 related to software development costs as well as costs for other intangibles, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of September 30, 2022 and December 31, 2021, the major components of prepaid expenses and other current assets consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Prepaid insurance | $ | 2,440 | $ | 476 | |||||||
Prepaid services (1) | 4,195 | 1,918 | |||||||||
| Vendor funds receivable | 976 | 1,058 | |||||||||
| Other prepaid expenses | 1,672 | 806 | |||||||||
| Other receivables | 155 | 657 | |||||||||
| Total | $ | 9,438 | $ | 4,915 | |||||||
(1) Prepaid services primarily represent the current portion paid to Palantir in 2022 in accordance with the Company’s Master Service Agreement, as discussed and defined in Note 12. Prepaid expenses, noncurrent on the Company’s Condensed Consolidated Balance Sheets of $8,555 primarily represent the noncurrent portion paid to Palantir in 2022.
24
5. MARKETABLE SECURITIES
The Company began investing in certain available-for-sale securities during the second quarter of 2022. The fair value and amortized costs of available-for-sale securities by major security type as of September 30, 2022 were as follows:
| September 30, 2022 | ||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||
| Commercial paper | $ | 10,981 | $ | — | $ | (8) | $ | 10,973 | ||||||||||||||||||
| Corporate bonds | 1,000 | — | (2) | 998 | ||||||||||||||||||||||
| Money market funds | 3,133 | — | — | 3,133 | ||||||||||||||||||||||
| Total marketable securities, including those classified as cash equivalents | $ | 15,114 | $ | — | $ | (10) | $ | 15,104 | ||||||||||||||||||
These available-for-sale securities were classified on the Company’s balance sheets as of September 30, 2022:
| Fair Value | ||||||||
| Cash equivalents | $ | 11,116 | ||||||
| Short-term marketable securities | 3,988 | |||||||
| Long-term marketable securities | — | |||||||
| Total marketable securities, including those classified as cash equivalents | $ | 15,104 | ||||||
As of September 30, 2022, all of the available-for-sale securities have contractual maturities of less than one year. Those with original maturities of less than three months are recorded on the Company’s Condensed Consolidated Balance Sheets as cash equivalents and still fall under the disclosure requirements within ASC 320-10, Investments — Debt Securities. There have been no significant realized gains or losses on available-for-sale securities in the periods presented in the accompanying financial statements. Based on the Company’s review of its available-for-sale securities, the Company believes that it had no other-than-temporary impairments on these securities as of September 30, 2022 because the Company does not intend to sell these securities nor does it believe that it will be required to sell these securities before the recovery of their amortized cost basis.
As of September 30, 2022, unrealized losses on available-for-sale investments are not attributed to credit risk. The Company believes that an allowance for credit losses is unnecessary because the unrealized losses on certain of the Company’s marketable securities are due to market factors.
6. OTHER CURRENT LIABILITIES
As of September 30, 2022 and December 31, 2021, the major components of other current liabilities consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Credit card payable | $ | 9,798 | $ | 13,738 | |||||||
| Accrued sales tax payable | 1,681 | 1,708 | |||||||||
| Deferred rent – short term | — | 451 | |||||||||
| Credits liability | 661 | 641 | |||||||||
Obligation for equity consideration(1) | — | 3,000 | |||||||||
| Other accrued liabilities | 4,522 | 2,361 | |||||||||
| Total | $ | 16,662 | $ | 21,899 | |||||||
(1) For further detail on the equity consideration, refer to Note 1 within the discussion on the Boxed Market Acquisition. The equity consideration was issued in March 2022.
25
7. CONVERTIBLE NOTES
Concurrently with the execution of the Business Combination and for the purposes of raising the cash portion of the consideration for the Business Combination, Seven Oaks entered into Subscription Agreements with the PIPE Investors. Pursuant to these agreements, upon the Closing on December 8, 2021, the Company issued an aggregate of $87,500 in principal amount of PIPE Convertible Notes. The PIPE Convertible Notes will bear interest at a rate of 7.00% per annum payable semi-annually on June 15 and December 15 of each year, commencing June 15, 2022. The PIPE Convertible Notes will mature on December 15, 2026, unless earlier repurchased by the Company or converted at the option of the holders. Upon conversion, the Company will settle conversions of PIPE Convertible Notes through payment or delivery, as the case may be, of cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election.
The initial conversion rate for the PIPE Convertible Notes is 83.333 shares of common stock per $1 thousand principal amount of the PIPE Convertible Notes (which represents an initial conversion of approximately $12.00 per share). The conversion rate for the PIPE Convertible Notes will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, if a make-whole fundamental change (as defined in the indenture governing the PIPE Convertible Notes) or a redemption with respect to the PIPE Convertible Notes occurs prior to the maturity date, under certain circumstances as specified in the relevant indenture, the Company will increase the conversion rate for the PIPE Convertible Notes by a number of additional shares of the Company’s common stock for a holder that elects to convert its notes in connection with such make-whole fundamental change or redemption.
The Company is required to repurchase the PIPE Convertible Notes upon a fundamental change (as defined in the indenture governing the PIPE Convertible Notes) at a fundamental repurchase price equal to 101% of the principal amount plus any accrued and unpaid interest. On or after December 20, 2024, respectively, the Company may redeem for cash all or any portion of the PIPE Convertible Notes, at the Company’s option if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price in effect for at least 20 trading days (whether or not consecutive) during any 30-consecutive trading-day period.
To the extent that the Company is unable to pay cash interest on the PIPE Convertible Notes on each interest payment date because of restrictions in the Company’s new term loan agreement (as discussed in Note 8), or at the election of the Company to defer interest payments, an amount equal to the unpaid interest then due will be added to the principal amount, without any action by the Company or the lender of the new term loan. The interest that is capitalized with, or added to, the principal amount is known as “PIK Interest.” As of September 30, 2022, the Company elected to defer $3,171 in interest to PIK Interest.
Of the total transaction costs incurred as part of the Business Combination, $10,534 was allocated to the PIPE Convertible Notes and treated as debt issuance costs. As of September 30, 2022, the remaining period over which the debt issuance costs will be amortized was 4.23 years. There were no material write-offs of the debt issuance costs during the period.
The indenture related to the Subscription Agreements includes customary affirmative and negative covenants including, among other things, compliance with applicable law, payment terms, events of default, and the terms surrounding the ability to repurchase the PIPE Convertible Notes.
As of September 30, 2022, (i) $300 of the principal PIPE Convertible Notes were converted into 24,999 shares of common stock and (ii) the PIK Interest was added to the outstanding principal, increasing the remaining principal to $90,371.
26
8. DEBT
On August 4, 2021, the Company entered into a new term loan agreement (the “New Term Loan”). The New Term Loan will provide the Company with $45,000 at a floating per annum rate of LIBOR plus 8.5%, with a maturity date of August 4, 2025. Should LIBOR no longer be published, the agreement provides for an alternative rate of interest based on the per annum rate equal to the greatest of the Prime Rate or the Federal Funds Effective Rate plus 1/2 of 1% in effect on such day. The agreement provides the lender with a first priority security interest in all of the Company’s assets and contains a certain number of financial covenants, which requires the Company to (i) maintain minimum unrestricted cash balance of $15,000, (ii) maintain minimum net Retail revenue based upon agreed upon quarterly targets, and (iii) maintain a Retail gross margin percentage of at least 8%. These net Retail revenue and Retail gross margin targets are tested quarterly on a trailing twelve-month basis. The agreement also includes other affirmative and negative covenants, which, among other things, restricts the Company’s ability to pay dividends or make any distributions, incur indebtedness, incur liens, and sell substantially all of its assets. The agreement also subjects the Company to certain reporting covenants. The Company is required to provide monthly, quarterly and annual financial statements, operating budget and metrics, and other financial information as requested. Also in connection with the New Term Loan, the Company issued 126,993 warrants to purchase common stock at an exercise price of $7.0871, which were cashless exercised immediately prior to the closing of the Business Combination.
Further, on August 4, 2021, the Company repaid the outstanding principal balance of the Seventh Amendment of its existing term loan and security agreement (the “Credit Agreement”) of $5,000 and recognized a loss on extinguishment of debt in the amount of $203. In connection with the loan repayment, the Company’s letter of credit was modified and the Company is now required to maintain cash collateral for the outstanding letters of credit. As a result, the cash collateral related to the outstanding letters of credit are segregated in restricted cash accounts as of September 30, 2022. Refer to the Notes to the Annual Report on Form 10-K for further detail on the Seventh Amendment and corresponding Credit Agreement.
As of both September 30, 2022 and December 31, 2021, the Company had approximately $3,302 and $2,768 of letters of credit issued, respectively, of which none were drawn.
Amounts outstanding under long-term debt, including the PIPE Convertible Notes (discussed in Note 7), consisted of the following as of September 30, 2022 and December 31, 2021. The estimated fair value of long-term debt is approximated at its carrying value as of these reporting dates.
| September 30, 2022 | December 31, 2021 | ||||||||||
| Term Loan, matures August 2025 | $ | 43,589 | $ | 43,287 | |||||||
PIPE Convertible Notes (1) | 80,972 | 77,047 | |||||||||
| Total debt | 124,561 | 120,334 | |||||||||
| Less: current portion | — | — | |||||||||
| Long-term debt | $ | 124,561 | $ | 120,334 | |||||||
Aggregate maturities of long-term debt as of September 30, 2022 are as follows:
| September 30, 2022 | |||||
| 2022 (remaining three months) | $ | — | |||
| 2023 | — | ||||
| 2024 | — | ||||
| 2025 | 43,589 | ||||
| 2026 | 80,972 | ||||
| Total | $ | 124,561 | |||
(1) As discussed in Note 7, the PIPE Convertible Notes will mature in 2026, unless earlier repurchased by the Company or converted at the option of the holders.
27
9. REVENUE RECOGNITION
Retail Revenue — The Company’s Retail revenue is generated from the following revenue streams:
Merchandise Sales — The Company offers merchandise in the following core merchandise categories: grocery, snacks, beverages, and household and cleaning products. Revenue generated through the Company’s e-commerce platform is recognized when control of the goods ordered are transferred to the customer, which generally occurs upon delivery to the customer. Deferred revenue consists of payments received from customers for goods not yet shipped by the end of the period. As the shipments in-transit represent unsatisfied performance obligations, the revenue is deferred until delivery to the customer is complete.
Subscription Sales — The Company charges a membership fee to customers who sign up for the Company’s Boxed Up program. That fee allows customers to earn cash back on every purchase, access to exclusive discounts, and free shipping over a minimum order amount. The duration of the membership is generally 12 months. Because the Company has the obligation to provide access to its website for the duration of the membership term, the Company recognizes membership fees on a straight-line basis over the life of the membership. The Company’s deferred revenue related to membership fees was $798 and $752 as of September 30, 2022 and December 31, 2021, respectively.
Outbound delivery fees — Outbound delivery fees are included in customer billing and are recorded as revenue as control of the product is transferred to customers upon delivery. Delivery charges to customers were $606 and $342 for the three months ended September 30, 2022 and 2021, respectively, and $1,231 and $1,169 for the nine months ended September 30, 2022 and 2021, respectively. Outbound delivery fees are included in net revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Marketing fees — The Company provides a mix of marketing services to merchants. The Company provides merchants access to its e-commerce platform where merchants display and sell their products to users. The Company also provides advertising services to help merchants promote their products within the Company’s platform. The Company recognizes revenue when a user’s order is processed, and the related order information has been made available to the merchant. Revenue from marketing fees charged to vendors and partners was $318 and $366 for the three months ended September 30, 2022 and 2021, respectively, and $1,093 and $1,110 for the nine months ended September 30, 2022 and 2021, respectively. Marketing fees are included in net revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Returns and Refunds — The Company’s contracts with customers are generally sold with a right of return. Historically the returns have been immaterial and recognized in the period in which the products are returned.
Tax Collected — In the ordinary course of business, the Company collects sales tax on items purchased by our customers that are taxable in the jurisdictions when the purchases take place. These taxes are then remitted to the appropriate taxing authority. The Company excludes these taxes collected from net revenue in its financial statements.
28
Software & Services Revenue — The Company’s Software & Services revenue is generated from its software licensing agreements.
Software License Revenue — The Company generates revenue through software license agreements, which allow the customers the Company engages with to take possession of the software for usage of the Company’s IP, and host that software in an on-premise, or cloud-based infrastructure environment, at the customer’s election. A software license contract with multiple performance obligations typically includes the following elements: implementation services, software license, training services, and maintenance and support services. The total transaction price of a software license contract includes a fixed fee and may include forms of variable consideration, such as platform usage fees. Revenue is recognized as the performance obligations are satisfied. For contracts with multiple performance obligations, the Company allocates the contract price to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices using a cost plus a margin approach. The total transaction price for the Company’s current contract related to software license revenue includes fixed and variable consideration.
For software license, revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $923 as of September 30, 2022 for maintenance fees for the remainder of the initial contract term of five years. The Company recognized $1,668 and $180 in implementation and maintenance fees during the first nine months of 2022, respectively, and expects to recognize approximately $240 in maintenance fees, respectively, over the next 12 months.
Contract Assets and Liabilities
The difference in the opening and closing balances of the Company’s contract assets (unbilled receivables) and contract liabilities (deferred revenue) results from the timing differences between the Company’s performance and the customer’s payment. The Company fulfills its obligations under contracts with customers by transferring goods and services in exchange for consideration from the customer. The Company recognizes a contract asset when it transfers products or services to a customer for which the billings occur in a future period. As of September 30, 2022, the Company recognized contract assets (unbilled receivables) related to its software licensing agreement under its Software & Services segment. The Company recognizes a contract liability when consideration is received from customers in advance of revenue recognition as described within the revenue streams above.
| September 30, 2022 | December 31, 2021 | ||||||||||
Contract assets (unbilled receivables) | $ | 10,898 | $ | 8,891 | |||||||
Contract liabilities (deferred revenue) | $ | 2,030 | $ | 2,020 | |||||||
The unbilled receivables and deferred revenue for the Company’s Software & Services segment are presented net at the contract level. The remaining deferred revenue that is presented separately on the Company’s Condensed Consolidated Balance Sheets as of September 30, 2022 is related to the Company’s Retail segment.
The increase in unbilled receivables as of September 30, 2022 is driven by the recognition of the remaining deferred revenue related to AEON’s implementation, which previously offset a portion of the unbilled receivables. The unbilled receivables balance is attributable to the satisfaction of certain performance obligations for which billings were not yet invoiced as of September 30, 2022, partially offset by an increase in new billings for other certain performance obligations that were not yet satisfied.
29
Revenue Disaggregation
The Company had total revenue of $41,653 and $49,010 for the three months ended September 30, 2022 and 2021, respectively, and $131,945 and $132,218 for the nine months ended September 30, 2022 and 2021, respectively. The Company manages and reports operating results through two reportable segments defined by its products and services: Retail and Software & Services. The Company’s Retail operations represent the majority of its consolidated total revenues.
The following table summarizes the Company’s net revenue disaggregated by sales channel:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Direct Sales(1) | $ | 37,059 | $ | 33,616 | $ | 116,207 | $ | 103,709 | |||||||||||||||
Channel Sales(2) | $ | 4,521 | $ | 4,570 | $ | 13,336 | $ | 13,544 | |||||||||||||||
Software & Services(3) | $ | 73 | $ | 10,824 | $ | 2,402 | $ | 14,965 | |||||||||||||||
(1) Direct Sales includes retail direct to consumer sales on the Company’s e-commerce platform.
(2) Channel Sales includes retail sales on other third-party platforms.
(3) Software & Services includes revenue generated from software licensing agreements.
10. INCOME TAXES
The Company had an effective tax rate of 0.00% for all periods presented.
The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all of its net deferred tax assets. When the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period such determination is made.
The Company has applied ASC 740, Income Taxes, and has determined that it has an uncertain position that resulted in a tax reserve of $1,263 for each of the three and nine months ended September 30, 2022 and $1,349 for the three and nine months ended September 30, 2021. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company is subject to U.S. federal and state authority examinations.
11. LEASES
The Company leases its principal offices in New York, New York and maintains fulfillment centers and office space in various locations throughout the United States under operating leases which expire on various dates through January 2030. In addition, in the third quarter of 2022, the Company entered into a new operating lease for a Boxed Market micro fulfillment center in Elmsford, New York, which expires in 2032.
Certain of these arrangements have escalating rent payment provisions or optional renewal clauses. The tables below only considers lease obligations through the committed term as the Company is not reasonably certain to elect the option to extend its leases beyond the option date.
The Company also entered into various finance lease arrangements for fulfillment center equipment. These agreements range from three years to approximately six years.
30
Supplemental balance sheet information related to operating and finance leases as of September 30, 2022 was as follows:
| Leases | Balance Sheet Classification | September 30, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Operating lease assets | Operating right-of-use assets | $ | 11,269 | |||||||||||
| Finance lease assets | 541 | |||||||||||||
| Total lease assets | $ | 11,810 | ||||||||||||
| Liabilities | ||||||||||||||
| Current: | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities, current | $ | 2,672 | |||||||||||
| Finance | 226 | |||||||||||||
| Noncurrent: | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities, noncurrent | 9,005 | ||||||||||||
| Finance | 326 | |||||||||||||
| Total lease liabilities | $ | 12,229 | ||||||||||||
As of September 30, 2022, for operating leases, the weighted-average remaining lease term is 6.1 years and the weighted-average discount rate is 12.33%. As of September 30, 2022, for finance leases, the weighted-average remaining lease term is 2.6 years, and the weighted-average discount rate is 10.60%.
The components of lease cost for the three and nine months ended September 30, 2022 were as follows:
| Lease Cost | Statements of Operations Classification | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of right-of-use assets | General and administrative expense | $ | 43 | $ | 93 | |||||||||||||||
| Interest on lease liabilities | General and administrative expense | 11 | 18 | |||||||||||||||||
| Total finance lease cost | $ | 54 | $ | 111 | ||||||||||||||||
| Operating lease cost | General and administrative expense | 1,128 | 3,304 | |||||||||||||||||
| Variable lease cost | General and administrative expense | 283 | 857 | |||||||||||||||||
| Total lease cost | $ | 1,465 | $ | 4,272 | ||||||||||||||||
For office and fulfillment center leases and leased equipment, the variable lease cost primarily represents variable payments such as common area maintenance, utilities and equipment maintenance.
31
The following represents a schedule of maturing lease commitments for operating and finance leases as of September 30, 2022:
| September 30, 2022 | ||||||||||||||
| Operating | Finance | |||||||||||||
| Maturity of lease liabilities | ||||||||||||||
| 2022 (remaining three months) | $ | 1,135 | $ | 65 | ||||||||||
| 2023 | 3,359 | 255 | ||||||||||||
| 2024 | 2,193 | 212 | ||||||||||||
| 2025 | 2,235 | 104 | ||||||||||||
| 2026 | 2,185 | — | ||||||||||||
| thereafter | 6,059 | — | ||||||||||||
| Total future minimum lease payments | $ | 17,166 | $ | 636 | ||||||||||
| Less: interest | (5,489) | (83) | ||||||||||||
| Present value of lease liabilities | $ | 11,677 | $ | 553 | ||||||||||
Future minimum lease payments under non-cancelable operating leases as of December 31, 2021 under ASC 840 were as follows:
| December 31, 2021 | |||||
| 2022 | $ | 4,478 | |||
| 2023 | 2,920 | ||||
| 2024 | 1,742 | ||||
| 2025 | 1,769 | ||||
| 2026 | 1,711 | ||||
| thereafter | 2,921 | ||||
| Total future minimum lease payments | $ | 15,541 | |||
Other supplemental cash flow information for the nine months ended September 30, 2022 was as follows:
| September 30, 2022 | ||||||||
| Supplemental cash flow information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash used for operating leases | $ | 3,340 | ||||||
| Operating cash used for finance leases | 10 | |||||||
| Financing cash used for finance leases | 54 | |||||||
| Total | $ | 3,404 | ||||||
There were $2,384 in right-of-use assets obtained in exchange for new operating lease liabilities during the period. There were no material right-of-use assets obtained in exchange for new finance lease liabilities during the period.
12. COMMITMENTS AND CONTINGENCIES
Sales or Other Similar Taxes— Based on the location of the Company’s current operations, sales tax is collected and remitted. To date, the Company has had no actual or threatened sales and use tax claims from any state where it does not already claim nexus or any state where it sold products prior to claiming nexus. However, the Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it sold products prior to claiming nexus is reasonably possible. As of September 30, 2022 and December 31, 2021, the Company estimates that the potential liability is approximately $1,263. All periods have been recorded as an accrued liability. Although it is reasonably possible that a change in this estimate will occur in the near term, the Company believes this is the best estimate of an amount due to taxing agencies, given that such a potential loss is an unasserted liability that would be contested and subject to negotiation between the Company and the respective state, or decided by a court.
32
Legal Proceedings— The Company is not currently subject to any legal proceedings or currently aware of any claims that it believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position as of September 30, 2022 and December 31, 2021.
On February 8, 2022, a putative stockholder of the Company filed a complaint in the Delaware Chancery Court alleging that he is entitled to a monetary award, including certain attorney’s fees and expenses in connection with a demand he made on the Company regarding the ability of Seven Oaks Class A common stockholders to vote on certain charter amendments in connection with the Business Combination, which closed on December 8, 2021. The parties have submitted motions and briefs on the matter and a hearing was held with the Court on October 19, 2022. The parties are awaiting the Court’s ruling. As of September 30, 2022, no estimate of reasonably possible losses was available due to the early stage of this matter and the uncertainty inherent in litigation and investigations.
Service Agreements— The Company is currently engaged in the below service agreements under which it has certain long-term commitments in exchange for the described services:
On June 13, 2021, the Company executed a Master Subscription Agreement with Palantir Technologies Inc. (“Palantir”) under which it will pay $20,000 over five years for access to Palantir’s Foundry software platform and related services for advanced data management and analytics to be used for the Company’s strategic initiatives. In exchange for this agreement, Palantir agreed to purchase, and the Company agreed to sell to Palantir, an aggregate of 2,000,000 shares of Seven Oaks Class A common stock, for a purchase price of $10.00 per share and an aggregate purchase price of $20,000, in connection with the PIPE Investment. On December 8, 2021, upon the Closing (as discussed in Notes 1 and 2), $15,000 of the $20,000 was due to Palantir, pursuant to the terms of the Master Subscription Agreement, thirty days after Closing. The initial $15,000 was fully paid to Palantir during the first quarter of 2022. Also upon the Closing, each share of Seven Oaks Class A common stock was reclassified into one share of New Boxed common stock.
The Company received access to Palantir’s Foundry software platform on June 25, 2021; however, no software expense was recognized until after the consummation of the Business Combination as the Company could cancel the agreement if the Business Combination was not consummated.
On December 1, 2021, the Company entered into an addendum to a prior service agreement with Google LLC for access to the Google Cloud Platform. The addendum includes three commitment periods, with the first commitment period beginning on the implementation date and lasting 12 months and the next two commitment periods beginning at the end of the preceding period and lasting 12 months each. The minimum commitments for the first, second, and third commitment periods are $2,000, $4,500, and $8,500, respectively. Any fees the Company incurs in a single commitment period (other than the final commitment period) that in total exceed the minimum commitment for such period will apply towards the Company’s minimum commitment for the following commitment period. As of September 30, 2022, the total remaining commitment, gross of discounts, was approximately $12,740, with a minimum of approximately $4,100 due within the next 12 months.
13. FORWARD PURCHASE TRANSACTION
As discussed in Note 2, prior to the Closing, on November 28, 2021, Seven Oaks entered into a Forward Purchase Agreement with ACM for a Forward Purchase Transaction. Pursuant to the terms of the Forward Purchase Agreement, ACM purchased approximately 6,504,768 shares of Seven Oaks’ Class A common stock in exchange for the Prepayment Amount of $65,062, which was paid out of the funds received by the Company from Seven Oaks’ trust account and was held in a deposit account for the benefit of ACM until the Valuation Date.
The Forward Purchase Agreement could be settled either before or on the Valuation Date, as stipulated by certain terms of the agreement. Included in such terms is the allowance for early termination if the volume weighted average share price (“VWAP”) of the shares falls below $5.00 per share for 20 out of any 30 consecutive trading days (a “VWAP Trigger Event”). Pursuant to these terms, upon a VWAP Trigger Event, ACM may elect to accelerate the Valuation Date to the date of such VWAP Trigger Event. If ACM elects to accelerate the Valuation Date, the Valuation Period would commence, at which point the Forward Purchase Transaction would go through the process of being unwound. For further detail on the terms, refer to the Forward Purchase Agreement, as filed with the SEC on November 30, 2021.
33
The VWAP Trigger Event occurred on July 6, 2022, giving ACM the right to elect to accelerate the Valuation Date at its option, which it did on August 16, 2022. As a result of ACM’s election, as of August 16, 2022, the Valuation Period commenced, which resulted in an unwinding of the remaining 5,760,114 shares over the respective Valuation Period. The Valuation Period is determined by the daily trading of the shares on the NYSE, whereby the number of shares unwound in any given day during the Valuation Period is equal to 10% of the daily trading volume on each given trading day. The Valuation Period ended on October 24, 2022, which finalized the unwinding of the Forward Purchase Transaction and triggered the final cash settlement payment date. At the end of the Valuation Period, the proceeds due to the Company are approximately equal to the VWAP of the shares unwound during each trading day during the Valuation Period, net of $0.20 per share in fees.
Prior to the VWAP Trigger Event, ACM had sold 744,654 shares, for which the Company received net proceeds of $6,516, after paying related fees to ACM. From August 16, 2022 through September 30, 2022, 4,950,217 of the remaining shares were unwound in accordance with the terms of the agreement, for which the Company has collected $4,365, of which $305 is interest payable to ACM. The Company expects to receive $546 in additional proceeds in connection with the final cash settlement in the fourth quarter of 2022.
At the time of entering into the Forward Purchase Agreement, the Company had determined that the forward option within the Forward Purchase Agreement was (i) a freestanding financial instrument and (ii) a derivative in accordance with ASC 815, Derivatives and Hedging. This derivative, referred to throughout as the “forward purchase option derivative” is recorded as a liability on the Company’s Condensed Consolidated Balance Sheets. The Company has performed fair value measurements for this derivative as of Closing and remeasures the fair value at each reporting period, which is described in Note 15, “Fair Value Measurements.” This derivative will remain on the Company’s Condensed Consolidated Balance Sheets until the remainder of the shares are unwound in the fourth quarter of 2022.
14. STOCKHOLDERS’ DEFICIT AND STOCK-BASED COMPENSATION
Common Stock and Preferred Stock
Common Stock— As of September 30, 2022 and December 31, 2021, the Company was authorized to issue 600,000,000 shares of common stock at $0.0001 par value per share, respectively. As of September 30, 2022 and December 31, 2021, there was 70,722,973 and 66,647,242 common shares outstanding, respectively. Each share of common stock has the right to one vote per share.
Preferred Stock — As of September 30, 2022 and December 31, 2021, the Company was authorized to issue 60,000,000 shares of preferred stock at $0.0001 par value per share, respectively. As of September 30, 2022 and December 31, 2021, there were no shares of preferred stock outstanding.
Common Stock Purchase Agreement
In May 2022, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with an investor related to a committed capital on demand facility (the “CCOD Facility”). Pursuant to the Purchase Agreement, the Company will have the right from time to time at its option to sell to the investor up to the lesser of (i) $100,000 of the Company’s common stock and (ii) the Exchange Cap which, under the applicable rules of the NYSE, states that in no event may the Company issue more than 19.99% of the voting power or number of shares of common stock outstanding, unless certain stipulations are met. Proceeds from the sale of shares will go towards the Company to be used to support funding of ongoing operations and working capital.
In accordance with ASC 815, Derivatives and Hedging, the Company has determined that the right to sell additional shares represents a freestanding put option, and as such, the financial instrument was classified as a derivative asset with a nominal fair value.
In May 2022, we issued 114,585 of upfront commitment shares of common stock to the investor which had a fair value of $1,000 upon issuance. The $1,000 in commitment costs, along with an additional $703 in other related transaction costs, were recorded in other income (expense), net on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
In the second quarter of 2022, the Company sold 3,109,400 shares of common stock to the investor, pursuant to the terms of the Purchase Agreement, for cash proceeds of $6,456. There were no sales in the third quarter of 2022.
34
Equity Award Plans
Equity Incentive Plan — The Company historically had one Equity Incentive Plan, the 2013 Equity Incentive Plan (the “2013 Plan”), under which the Company had issued equity awards to the Company’s officers, directors, employees, and consultants. The option exercise price was determined by the Board of Directors based on the estimated fair value of the Company’s common stock.
Incentive Award Plan — In December 2021, the Board of Directors adopted the Company’s 2021 Incentive Award Plan (the “2021 Plan”), upon consummation of the Business Combination. No new awards will be issued under the 2013 Plan following the approval of the 2021 Plan.
Under the 2021 Plan, the Company has the ability to issue incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, and restricted stock units to selected employees, officers, directors and consultants of the Company as an incentive to such persons. The Company has initially reserved 10,024,848 shares of common stock for issuance to officers, directors, employees, and consultants of the Company pursuant to the 2021 Plan. The number of shares initially available for issuance will be increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of (a) 5% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by the Board. For fiscal year 2022, the Board elected not to increase the initial reserve under the 2021 Plan as it was only adopted in December of 2021.
Of such reserved shares of common stock, as of September 30, 2022, 7,230,393 options and restricted stock units have been granted and are currently outstanding, leaving 2,794,455 shares of common stock remain available for issuance pursuant to the 2021 Plan.
Employee Stock Purchase Plan — In connection with the Business Combination, the Company adopted the 2021 Employee Stock Purchase Plan (the “ESPP”), which will allow eligible employees to acquire a stock ownership in the Company. A total of 2,004,969 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares available for issuance under the ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending on and including January 31, 2031, by an amount equal to the lesser of (a) 1% of the aggregate number of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the Board. For fiscal year 2022, the Board elected not to increase the initial reserve under the ESPP as it was only adopted in December of 2021. As of September 30, 2022, there have been no issuances under the ESPP.
Equity Awards and Stock-Based Compensation
Stock Options — Stock options granted under both the 2013 Plan and 2021 Plan are generally granted at a price per share not less than the fair value at the date of the grant. Options granted to date generally vest over a four-year period with 25% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 75% of the shares vesting on a pro-rata basis over the succeeding thirty-six months, subject to continued service with the Company through each vesting date. Options granted are generally exercisable for up to 10 years, also subject to continued service with the Company.
The following is a summary of stock options activity during the nine months ended September 30, 2022:
| Number of options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||||||||
Outstanding as of December 31, 2021 | 5,832,519 | $ | 3.30 | 5.62 | |||||||||||||
| Granted | 2,802,985 | 1.72 | 9.83 | ||||||||||||||
| Exercised | (406,075) | 1.92 | |||||||||||||||
| Forfeited | (344,263) | ||||||||||||||||
Outstanding as of September 30, 2022 | 7,885,166 | $ | 2.75 | 6.40 | |||||||||||||
Vested and expected to vest as of September 30, 2022 | 7,885,166 | $ | 2.75 | 6.40 | |||||||||||||
Exercisable as of September 30, 2022 | 4,386,163 | $ | 3.13 | 3.90 | |||||||||||||
35
Stock-based compensation expense related to stock options was $700 and $2,395 for the three and nine months ended September 30, 2022, respectively. All stock-based compensation expense is recorded within selling, general, and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
As of September 30, 2022, total unrecognized compensation costs related to unvested stock options was approximately $5,826, which is expected to be recognized over a weighted-average period of 1.56 years. The total fair value of options vested during the nine months ended September 30, 2022 was $2,549.
Restricted Stock Units — Certain executive officers are eligible for (i) time-based restricted stock units (“RSUs”) and (ii) performance-based RSUs under a three-year long-term incentive program (“LTIP”) through which these individuals will be granted shares of RSUs eligible to vest over a three-year period (the “LTIP period”). For each individual, certain portions of the RSUs granted (i) will vest over time based on continued service over the LTIP period (ii) will vest based on the achievement of certain share price hurdles for the Company’s common stock and (iii) will vest based on the achievement of certain gross profit targets over the LTIP period. Each of these grant types will be subject to the officers’ continuous employment through each vesting date. Further, as part of its overall compensation strategy, the Company grants RSUs to its (i) employees as part of the new-hire process as well as ongoing equity refresh cycles and (ii) non-employee directors in accordance with the Company’s Non-employee Director Compensation Policy.
Time-Based RSUs
Time-based RSUs granted to employees typically vest over a four-year period with 25% of the shares underlying the grant vesting on the first anniversary of the vesting commencement date, with the remaining 75% of the shares vesting quarterly over the remaining twelve quarters, subject to continued service with the Company through each vesting date. Those issued to the Company’s executive officers will vest annually over a three-year LTIP period, subject to the executives’ continued service at each vesting date, as discussed above.
Time-based RSU activity for the nine months ended September 30, 2022 is as follows:
| Time-based restricted stock units | ||||||||
| Unvested, December 31, 2022 | 510,000 | |||||||
| Granted in nine months ended September 30, 2022 | 2,472,408 | |||||||
| Vested | (152,709) | |||||||
| Forfeited | (50,865) | |||||||
| Unvested September 30, 2022 | 2,778,834 | |||||||
Stock-based compensation expense for time-based awards will be recognized evenly over (i) the three-year LTIP for those awards issued executive officers and (ii) their respective specified vesting periods for those awards issued to employees and non-employee directors. For time-based RSUs, the stock-based compensation expense was $1,667 and $4,462 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, total unrecognized compensation costs related to unvested time-based RSUs was approximately $14,736 to be recognized over a weighted-average period of 2.57 years.
Share-Price Target RSUs
As of September 30, 2022, 1,445,000 share-price target RSUs have been granted to certain of the Company’s executive officers. Of these awards, 675,000 were granted during the nine months ended September 30, 2022. The share-price target RSUs are subject to vesting based on the achievement of certain share price hurdles over the LTIP period. A valuation to determine the fair values for the share-price target RSUs was performed using a Monte-Carlo Simulation, which includes the probability of reaching the share-price hurdles in determining the fair value of the award. Total stock-based compensation to be recognized for these share-price target RSUs is based on a derived service period, calculated by the model. Total stock-based compensation expense related to these awards recognized for the three and nine months ended September 30, 2022 was $1,767 and $6,901, respectively. As of September 30, 2022, total unrecognized compensation costs related to unvested share-price target RSUs was approximately $1,524, respectively, which is expected to be recognized over a weighted-average period of 2.36 years.
36
Gross Profit Target RSUs
To date, the Company has not yet granted RSUs which vest based on the achievement of certain gross profit targets.
15. FAIR VALUE MEASUREMENTS
The table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value.
| Fair Value Hierarchy | ||||||||||||||||||||
| September 30, 2022 | Level 1 | Level 2 | Level 3 | |||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and certain cash equivalents | $ | 20,955 | $ | — | $ | — | ||||||||||||||
| Money market funds | 3,133 | — | — | |||||||||||||||||
| Commercial paper | 7,983 | — | — | |||||||||||||||||
| Restricted cash | 3,302 | — | — | |||||||||||||||||
| Short-term marketable securities | 3,988 | — | — | |||||||||||||||||
| Total financial assets | $ | 39,361 | $ | — | $ | — | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Forward purchase option derivative | $ | — | $ | — | $ | 7,555 | ||||||||||||||
| Earnout liability | — | — | 2,067 | |||||||||||||||||
| Public Warrants | 1,164 | — | — | |||||||||||||||||
| Private Warrants | — | 503 | — | |||||||||||||||||
| Total financial liabilities: | $ | 1,164 | $ | 503 | $ | 9,622 | ||||||||||||||
| December 31, 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash & cash equivalents | $ | 105,027 | $ | — | $ | — | ||||||||||||||
| Restricted cash | 2,768 | — | — | |||||||||||||||||
| Total financial assets | $ | 107,795 | $ | — | $ | — | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Forward purchase option derivative | $ | — | $ | — | $ | 4,203 | ||||||||||||||
| Earnout liability | — | — | 27,134 | |||||||||||||||||
| Public Warrants | 15,396 | — | — | |||||||||||||||||
| Private Warrants | — | 6,649 | — | |||||||||||||||||
| Total financial liabilities | $ | 15,396 | $ | 6,649 | $ | 31,337 | ||||||||||||||
| Level 3 Rollforward | Forward purchase option derivative | Earnout liability | ||||||||||||
| Beginning balances | $ | 4,203 | $ | 27,134 | ||||||||||
| Additions | — | — | ||||||||||||
| Changes in fair value | 48,496 | (25,067) | ||||||||||||
| Settlement of liability | (45,144) | — | ||||||||||||
| Ending balances | $ | 7,555 | $ | 2,067 | ||||||||||
The Company’s Level 3 financial liabilities include the forward purchase option derivative and earnout liability, which is comprised of (i) the contingent consideration related to the Boxed Market acquisition (See Note 1) and (ii) the Sponsor Earnout Shares (See Note 2). The fair value of each instrument was estimated using a Monte-Carlo Simulation. The Company measures the fair value at each reporting period, with subsequent revisions to be recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Refer to Application of Critical Accounting Policies and Estimates within the Company’s Annual Report on Form 10-K for further detail on the valuations.
37
There were no transfers between levels during the reporting periods. All significant Level 3 fair value hierarchy were recorded during the periods ended September 30, 2022 and December 31, 2021.
16. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net loss | $ | (26,375) | $ | (5,929) | $ | (94,403) | $ | (30,301) | |||||||||||||||
| Less: accretion adjustment | — | (707) | — | (2,039) | |||||||||||||||||||
| Less: earnings allocated to participating securities | — | — | — | — | |||||||||||||||||||
| Net loss attributable to common shareholders | $ | (26,375) | $ | (5,222) | $ | (94,403) | $ | (28,262) | |||||||||||||||
| Less: undistributed earnings allocated to participating securities | — | — | — | — | |||||||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted-average shares–basic and diluted | 70,563,420 | 9,504,786 | 68,232,698 | 9,454,261 | |||||||||||||||||||
| Net loss per common share–basic and diluted | $ | (0.37) | $ | (0.55) | $ | (1.38) | $ | (2.99) | |||||||||||||||
Historically, including for the three and nine months ended September 30, 2021, the Company used the two-class method to compute basic and diluted earnings per common share. In periods of net loss, no effect is given to the Company’s participating securities as they do not contractually participate in the losses of the Company. As all of the Company's convertible preferred stock converted to common stock immediately prior to the Closing, the Company is no longer required to present its net loss per share in conformity with the two-class method as it no longer has participating securities.
The following securities were excluded from the computation of diluted loss per share in the periods presented, as their effect would be anti-dilutive:
| As of September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Series preferred stock, outstanding | — | 41,289,914 | |||||||||
| Common stock warrants, outstanding | — | 35,719 | |||||||||
| Preferred stock warrants, outstanding | — | 1,309,466 | |||||||||
| Common stock options, outstanding | 7,885,166 | 5,335,394 | |||||||||
PIPE Convertible Notes, if-converted (1) | 7,266,667 | — | |||||||||
| Restricted stock units, outstanding | 4,223,834 | — | |||||||||
| Private Warrants, outstanding | 12,936,678 | — | |||||||||
| Public Warrants, outstanding | 5,587,500 | — | |||||||||
(1) The PIPE Convertible Notes are presented using a conversion rate of $12.00, in line with the if-converted method under ASC 260, Earnings Per Share.
38
17. RELATED PARTY TRANSACTIONS
In 2021 and prior, the Company identified three related parties, including (i) the employer of the Director elected by the shareholders of the Series C-1 class of preferred stock, (ii) a shareholder of the Series D-1 class of preferred stock, and (iii) AEON Integrated Business Services Co., Ltd, a wholly-owned subsidiary of AEON Co., Ltd. (“AEON”).
Immediately prior to the consummation of the Business Combination in December 2021, all shares of Old Boxed preferred stock converted into shares of Old Boxed common stock. Upon Closing, each share of Old Boxed common stock then converted into the right to receive approximately 0.9498 shares of New Boxed common stock.
As a result of the Business Combination and the related transactions, (i) the majority holder of the Series C-1 class was no longer a related party as of Closing as this holder no longer holds more than 10% of the Company’s voting interest and the elected Director is no longer on the Board of Directors and (ii) the holder of the Series D-1 class, was no longer a related party.
As of September 30, 2022, the Company identified AEON as its only remaining related party. The following discussion includes related party transactions with AEON as well as prior year period related party transactions for the previously identified related parties related to holders of Series C-1 and Series D-1 preferred stock.
AEON
On February 12, 2021, the Company entered into an agreement with AEON Integrated Business Services Co., Ltd., a wholly-owned subsidiary of AEON Co., Ltd. (“AEON”), a Series D-1 shareholder, to license its e-commerce platform through a software licensing arrangement. The objective of the agreement is for the Company to design, develop and support the e-commerce platform customized for the digital marketplace operations of AEON and AEON affiliates. The services provided include implementation services, license of the e-commerce software platform, training, and maintenance and support. The Company has been engaged to provide services to AEON and AEON Malaysia, and as of September 30, 2022, AEON Vietnam. The total transaction price for the contract includes fixed and variable consideration. Based on the Company’s estimates of the standalone selling prices of the performance obligations identified in the AEON Malaysia contract, the Company has allocated $7,300 to implementation services specific to AEON, $4,500 to the implementation services specific to AEON Malaysia, and $20 per month to software maintenance services with respect to the licensed software for AEON Malaysia. The transaction price attributable to the software license to AEON Malaysia is variable and consists of sales and usage-based royalties. See Note 9, “Revenue Recognition,” for further details surrounding the revenue recognition policy and remaining performance obligations. As of September 30, 2022, the Company has not yet recognized revenue for AEON Vietnam. Tsukasa Ojima, a director of Boxed, is affiliated with AEON.
Holders of Series C-1 and Series D-1 preferred stock
For the three and nine months ended September 30, 2021, the majority holder of the Series C-1 class of preferred stock was a vendor from whom the Company purchases inventory. The collective shareholders of the Series C-1 class of preferred stock had the right to elect one director to the Board of Directors and the elected director was an employee of this vendor. In connection with the inventory purchases, the Company receives various volume rebates and incentives to continue doing business. Total inventory purchases for the three and nine months ended September 30, 2021 were approximately $2,994 and $9,591, respectively. Total volume rebates and incentives for the three and nine months ended September 30, 2021 were approximately $11 and $214, respectively.
For the three and nine months ended September 30, 2021, a holder of the Series D-1 class of preferred stock was a vendor from whom the Company purchases inventory. The collective shareholders of the Series D-1 class of preferred stock had the right to elect two directors to the Board of Directors. The directors elected by the collective Series D-1 shareholders were not employees of this vendor. In connection with the inventory purchases, the Company receives various volume rebates and incentives to continue doing business. For the three and nine months ended September 30, 2021, total inventory purchases were $440 and $1,377, respectively. For the three and nine months ended September 30, 2021, total dunnage purchases were $658 and $1,820, respectively. Volume rebates and incentives received for the three and nine months ended September 30, 2021 were $1 and $6, respectively.
39
18. SEGMENT REPORTING
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The profitability measure employed by the Company’s CODM for allocating resources to operating segments and assessing operating segment performance is operating loss. The CODM does not receive or regularly review asset information when allocating resources and assessing segment performance.
Therefore, asset information by segment has not been disclosed. Substantially all of the Company’s identifiable assets are located in the United States. The Company currently does not have substantial sales outside the United States, nor does any customer represent more than 10 percent of total revenues for any period presented.
There were no material inter-segment net sales and expenses to be eliminated in computing total revenue and operating income. In addition, the Company allocates its selling, general and administrative expenses to its segment results based on usage, which is generally reflected in the segment in which the costs are incurred. The following table provides information for the Company’s reportable segments, including product category disaggregation for its Retail segment:
Information about Reported Segment Profit or Loss
| Retail | Software & Services | Total | |||||||||||||||
| For the Three Months Ended September 30, 2022 | |||||||||||||||||
| Grocery net revenue | $ | 29,645 | $ | — | $ | 29,645 | |||||||||||
| Home & Household net revenue | 10,554 | — | 10,554 | ||||||||||||||
Other net revenue (1) | 1,381 | — | 1,381 | ||||||||||||||
| Software & Services net revenue | — | 73 | 73 | ||||||||||||||
| Total net revenue | $ | 41,580 | $ | 73 | $ | 41,653 | |||||||||||
| Operating income (loss) | $ | (20,681) | $ | (912) | $ | (21,593) | |||||||||||
| For the Three Months Ended September 30, 2021 | |||||||||||||||||
| Grocery net revenue | $ | 24,496 | $ | — | $ | 24,496 | |||||||||||
| Home & Household net revenue | 12,629 | — | 12,629 | ||||||||||||||
Other net revenue (1) | 1,061 | — | 1,061 | ||||||||||||||
| Software & Services net revenue | — | 10,824 | 10,824 | ||||||||||||||
| Total net revenue | $ | 38,186 | $ | 10,824 | $ | 49,010 | |||||||||||
| Operating income (loss) | $ | (14,864) | $ | 9,496 | $ | (5,368) | |||||||||||
| Retail | Software & Services | Total | |||||||||||||||
| For the Nine Months Ended September 30, 2022 | |||||||||||||||||
| Grocery net revenue | $ | 90,217 | $ | — | $ | 90,217 | |||||||||||
| Home & Household net revenue | 35,627 | — | 35,627 | ||||||||||||||
Other net revenue (1) | 3,699 | — | 3,699 | ||||||||||||||
| Software & Services net revenue | — | 2,402 | 2,402 | ||||||||||||||
| Total net revenue | $ | 129,543 | $ | 2,402 | $ | 131,945 | |||||||||||
| Operating income (loss) | $ | (78,346) | $ | (350) | $ | (78,696) | |||||||||||
| For the Nine Months Ended September 30, 2021 | |||||||||||||||||
| Grocery net revenue | $ | 72,908 | $ | — | $ | 72,908 | |||||||||||
| Home & Household net revenue | 40,875 | — | 40,875 | ||||||||||||||
Other net revenue (1) | 3,470 | — | 3,470 | ||||||||||||||
| Software & Services net revenue | — | 14,965 | 14,965 | ||||||||||||||
| Total net revenue | $ | 117,253 | $ | 14,965 | $ | 132,218 | |||||||||||
| Operating income (loss) | $ | (42,619) | $ | 11,809 | $ | (30,810) | |||||||||||
(1) Includes revenues related to our subscription services program, advertising and marketing fees, and third-party marketplace service fees.
40
19. SUBSEQUENT EVENTS
Management has evaluated subsequent events to determine if events or transaction occurring through the filing date of this Quarterly Report require adjustments to or disclosures in the Company’s Condensed Consolidated Financial Statements. Aside from the items discussed below, the Company did not have any subsequent events that required recognition or disclosure in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2022.
1.On October 13, 2022, the Company received written notice from the NYSE that it is not in compliance with Rule 802.1C of the NYSE Listed Company Manual because the average closing price of the Company’s common stock was less than $1.00 over a consecutive 30 trading-day period. The Company can regain compliance at any time within the six-month period following receipt of the NYSE notice if on the last trading day of any calendar month during the cure period the Company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. The notice does not result in the immediate delisting of the Company’s common stock from the NYSE, which will continue to be listed and trade on the NYSE during this period, subject to the Company’s compliance with other NYSE continued listing standards. The Company notified the NYSE that it intends to cure the deficiency and to return to compliance with the NYSE continued listing requirements.
41
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial condition and results of operations together with our Condensed Consolidated Financial Statements and the related notes and other financial information of Boxed included elsewhere in this Quarterly Report, as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving 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 under “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated in our subsequent filings with the SEC, and in other parts of this Quarterly Report. Please read the information under the caption entitled “Cautionary Note Under Forward Looking Statements.”
Overview
Boxed is a commerce technology company specializing as both an e-commerce retailer and e-commerce enabler. We operate an e-commerce Retail service that provides bulk pantry consumables to businesses and household customers. This service is powered by our own purpose-built storefront, marketplace, analytics, fulfillment, advertising, and robotics technologies. We further enable e-commerce through our Software & Services business (which we have branded as “Spresso”), which offers customers in need of an enterprise-level e-commerce platform access to our end-to-end technology. Included in our Retail segment is revenue generated through our expanding on-demand grocery delivery business, now known as Boxed Market, which began in December 2021 when we purchased substantially all of the assets and operations of MaxDelivery, LLC.
Founded in 2013 by an experienced group of tech pioneers, we have been a technology-first organization since our inception. The founders (including our Chief Executive Officer Chieh Huang and Chief Operating Officer Jared Yaman) had a simple idea: make shopping for bulk, household essentials easy, convenient and fun so customers can focus their time and energy on the things that really matter, instead of spending their weekends traveling to and shopping in traditional brick-&-mortar wholesale clubs with their families. From that initial concept, we grew into the e-commerce technology company that it is today, with our own purpose-built storefront, analytics, fulfillment, advertising, and robotics technologies. Now, in addition to offering B2C and B2B customers with bulk consumables, such as paper products, snacks, beverages, and cleaning supplies, we have also begun to drive high-margin revenue through our Spresso business, helping the world to stock up through our technology.
Since our inception, we have been engaged in developing and expanding our Retail and Spresso businesses. We have incurred net operating losses and have generated negative cash flows from operations in each year since our inception. For the nine months ended September 30, 2022, we had a net loss and negative cash flows from operations of $94.4 million and $77.9 million, respectively. Since our inception, beyond sales of our product and services, we have funded our operations primarily with proceeds from the issuance of stock and borrowings, including under our term loans and revolving credit facilities, as well as through the consummation of the Business Combination.
Business Combination and Public Company Costs
On December 8, 2021, we consummated our previously announced Business Combination, at which time (i) Old Boxed merged with a subsidiary of Seven Oaks and became a wholly-owned subsidiary of Seven Oaks and (ii) Seven Oaks changed its name from Seven Oaks Acquisition Corp. to Boxed, Inc., and is referred to herein as “New Boxed” or “us” or “we.” In connection with the Closing, among other things:
•We became an SEC-registrant and our common stock and warrants commenced trading on the NYSE on December 9, 2021 under the symbols “BOXD” and “BOXD WS,” respectively.
•Immediately prior to Closing, each share of Old Boxed preferred stock was converted into Old Boxed common stock based on the conversion ratios of each respective series. Then upon Closing, each share of Old Boxed common stock was converted into the right to receive approximately 0.9498 shares of New Boxed common stock, par value $0.0001 per share.
42
•The 6,468,750 shares of Seven Oaks Class B common stock held by the Sponsor, JTCM Ventures and related parties were each automatically reclassified into one share of New Boxed common stock (of which 1,940,625 shares are subject to vesting under certain conditions).
•PIPE Investors contributed a total of $120.0 million, comprised of $32.5 million for 3,250,000 shares of New Boxed common stock and an aggregate of $87.5 million in PIPE Convertible Notes.
•An aggregate of $181.0 million was paid from Seven Oaks’ trust account to holders that exercised their right to have initial shares redeemed. In addition, on December 9, 2021, one day following the Closing, we paid the Prepayment Amount of $65.1 million to ACM utilizing funds from Seven Oaks’ trust account, pursuant to the terms of a Forward Purchase Agreement entered into by Seven Oaks and ACM on November 28, 2021 for an OTC Equity Prepaid Forward Transaction.
The Business Combination is accounted for as a reverse capitalization in accordance with U.S. GAAP. Under the guidance in ASC 805, Business Combinations, Seven Oaks is treated as the “acquired” company for financial reporting purposes. See Note 2, “Business Combination,” of our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional detail about the Business Combination as well as Note 13, “Forward Purchase Transaction,” therein for further detail about the Forward Purchase Agreement.
As a result of becoming a public company, we have hired, and will continue to need to hire, additional staff, and will continue to implement processes and procedures to address public company regulatory requirements and customary practices. We incurred and expect to continue to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, registration and filing fees, director fees and additional internal and external accounting, auditor, legal and administrative resources and fees.
Recent Developments
On October 13, 2022, we received written notice from the NYSE that we are not in compliance with Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than $1.00 over a consecutive 30 trading-day period. We can regain compliance at any time within the six-month period following receipt of the NYSE notice if on the last trading day of any calendar month during the cure period the Company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. The notice does not result in the immediate delisting of our common stock from the NYSE, which will continue to be listed and trade on the NYSE during this period, subject to our compliance with other NYSE continued listing standards. We notified the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements. For additional information, see “Risk Factors – An active, liquid trading market for our securities may not be sustained.”
43
Factors Affecting our Performance
We believe that our performance and future success depend on many factors. While we believe that each of these factors present significant opportunities for our business, each factor also poses risks and challenges that we must successfully address in order to sustain our growth and continue to improve our results of operations.
COVID-19. During 2020, the COVID-19 pandemic had a mixed impact on our results of operations. Throughout the pandemic our fulfillment centers largely remained open as they were deemed as “essential businesses” in our locations. While we experienced increased demand from B2C customers, as many individuals adopted online shopping during the pandemic, that increase was offset by a decline in demand from our B2B customers, as many businesses reverted to work-from-home environments. The result of these two counteracting trends was slight growth in 2020 sales compared to 2019. Further, during 2020, we experienced a significant increase in organic new customer traffic to our web properties as a result of COVID-19. This rapid and variable surge in traffic put significant stress on our supply chain, with industry-wide inventory supply shortages limiting our ability to provide the products in demand from our customers. As such, during this period, we significantly reduced our growth-related investments (i.e. promotional spend and advertising expense) and temporarily shut down service to certain new customers in specific states. While industry-wide demand for e-commerce services remains elevated compared to pre-pandemic levels, the surge in organic new customer traffic we experienced in 2020 did not persist at the same levels in 2021 or to date in 2022, and we began to meaningfully increase our investments in advertising expense and promotional spend in order to drive additional demand. In addition, the waves of COVID-19 virus variants, including the proliferation of the Delta and Omicron variants, further delayed the return-to-office plans of many of our B2B customers in 2021, which yielded a slower recovery from our B2B customers than originally anticipated throughout 2021. While we remain optimistic on the recovery of B2B, the demand from our B2B customers may not fully recover to the levels that existed during 2019. These changes could adversely affect our business, financial condition, and results of operations.
Additionally, the higher propensity for online shopping has led to increased demand for our technology, which we began to monetize in 2021, but could also reverse in the future as customer behavior changes. Overall, the COVID-19 pandemic is unprecedented and continuously evolving and the long-term impacts on our financial condition and results of operations are still uncertain. We are continuing to monitor the impact of the pandemic on the overall macro-economic environment, as well as the impact on cost inflation in consumable products and transportation, which continues to increase our operating costs.
The COVID-19 pandemic may impact many of the factors discussed in this section, including, among others, overall economic trends including inflation, consumer preferences and demand, product mix, competitive dynamics, and sourcing and distribution, which in turn could adversely affect our business, financial condition and results of operations.
Inflation and the macroeconomic environment. We believe that the combination of inflation and the broader macroeconomic environment, including supply chain disruptions from the COVID-19 pandemic, tight labor markets, pricing volatility, shipping cost volatility, rising interest rates, may put downward pressure on our net revenues and gross profit. In addition, rapid and significant changes in the price of our merchandise may negatively affect our profit margins if we are unable to mitigate any inflationary increases through various pricing actions and cost reduction initiatives. Finally, consumer preferences associated with shopping in-store versus online continue to evolve, and shifts toward in-store purchases due to cost savings or other consumer preference changes could adversely affect our business, financial condition and results of operations. See COVID-19 for a further discussion of the impact of the COVID-19 pandemic on our performance.
Acquisition of new customers and retention of existing customers. The size of our customer base and our customers’ level of engagement and retention are critical to our success. Our ability to continue to attract and retain customers depends, in part, on our ability to consistently provide our customers with a convenient, high-quality experience with competitive pricing for consumer goods, groceries, household products, and other bulk or discounted products. If our customers preferences change or they do not perceive our service and the products we sell to be convenient, competitively priced, and of high quality, we may not be able to attract and retain customers, and as a result, our revenue may be adversely impacted.
44
Brand recognition and customer loyalty. Our ability to succeed in a crowded e-commerce marketplace will depend on our continued success at attracting and retaining a large number of high-value customers to the Boxed Sites who have traditionally purchased bulk consumer packaged goods from our larger competitors. We may be required to incur significantly higher advertising and promotional expenditures to differentiate Boxed Sites from that of our competitors. If our branding efforts are not successful, our operating results and our ability to attract and retain customers may be adversely impacted. In addition, we sell many products under the Prince & Spring private-label brand. Increasing the portfolio of private-label products offered is essential to developing and maintaining customer loyalty. Prince & Spring private-label products also generally carry higher margins than national brand products offered on the Boxed Sites, representing a growth portion of our overall sales. If the Prince & Spring brand experiences a loss of customer acceptance or confidence, our sales and gross margin results could decline.
Competition. We operate in a market that is rapidly evolving and in which we face competition, especially from larger and more well-established companies. These more well-established competitors may have longer operating histories, greater financial, technical, marketing, and other resources, greater name and brand recognition, a larger base of vendors, or faster shipping times or lower-cost shipping. These factors may allow our competitors to derive greater revenue and profits, acquire customers at lower costs, or respond more quickly to emerging technologies and evolving consumer trends. If we are unable to compete successfully, or if competing successfully requires us to expend greater resources, our financial condition and results of operating could be adversely affected.
Effective sourcing and distribution of products. Our net revenues and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net revenues could be adversely affected in the event of constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. We have, from time to time, experienced inventory allocations or shipping delays from our vendors which have resulted in lost sales due to out-of-stocks. Further, our ability to successfully source products also relies on our ability to maintain attractive credit and invoicing terms, which may be impacted in the future if vendors believe our credit and risk profile has been adversely impacted.
Software & Services (or “Spresso”) offerings. Our Spresso business, encompassing the licensing of our software and technology assets, is expected to be an increasing part of our revenue and profitability as we expand. We began to successfully deliver and market these services to customers in the second half of 2021, but if we are not able to continue and expand such services, we would fail to achieve the anticipated benefits of our Spresso offering. The success of our early operations of our Spresso offering may significantly impact our future business, results of operations and financial condition. Our results of operations and future revenue prospects will be harmed if we are unable to increase the adoption of our offerings.
Seasonality. Our Retail business is moderately seasonal, with a meaningful portion of our sales and promotional campaigns dedicated to back-to-school and back-to-work time periods, typically resulting in higher customer demand in the first and third fiscal quarters. Due to the importance of our peak sales periods, which include the post-holiday winter and fall seasons, the first and third fiscal quarters have historically contributed, and are expected to continue to contribute, significantly to our operating results for the entire fiscal year. In anticipation of seasonal increases in sales activity during these periods, we incur additional expense prior to and during our peak seasonal periods. These expenses may include the acquisition of additional inventory, seasonal staffing needs and other similar items. As a result, any factors negatively affecting us during these periods, including adverse weather, spread of seasonal infectious diseases and unfavorable economic conditions, could have a material adverse effect on our results of operations for the entire fiscal year.
Key Performance Indicators
We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies and monitoring our business. Key performance indicators (“KPIs”) are typically operational in nature, are not measures of financial performance in accordance with U.S. GAAP and may exclude items that are significant in understanding and assessing the Company’s financial results. Therefore, these measures should not be considered in isolation or as an alternative to net revenue, cash flows from operations or other measures of growth, profitability, liquidity or performance under U.S. GAAP. You should be aware that our presentation of these measures may not be comparable to similarly-titled measures used by other companies.
45
We present the following KPIs to assist investors in understanding our operating results on an on-going basis: (i) Retail Active Customers, (ii) Retail Average Order Value (Retail “AOV”), (iii) Retail Net Revenue per Retail Active Customer (“RPAC”) and (iv) Gross Merchandise Value (“GMV”). Beginning in the first quarter of 2022, we have elected to update our disclosures from presenting information on a last-twelve-month basis to a quarterly basis in order to provide shareholders and investors with further insight into our quarterly trends and seasonal variability. We believe this disclosure change supports increased interpretability of our operating results. Further, we have elected to update our disclosures to not include Advertising Expenses within KPIs as it is discussed within Results of Operations, below.
This table sets forth our key performance indicators for the three months ended September 30, 2022 and 2021. Figures disclosed for Retail Active Customers and Retail AOV reflect Retail segment metrics only, and do not aggregate metrics from Software & Services (or “Spresso”) customers who are leveraging our software or technology for their own retail operations.
Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Retail Active Customers (in thousands) | 124 | 157 | |||||||||
| Retail AOV (in whole dollars) | $ | 150 | $ | 123 | |||||||
| RPAC (in whole dollars) | $ | 336 | $ | 243 | |||||||
GMV (in millions) | $ | 49.0 | $ | 45.2 | |||||||
Retail Active Customers
We define active customers as the distinct number of customers in our Retail segment who placed at least one order in the referenced respective time-period (“Retail Active Customers”). The change in Retail Active Customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the time period. We view the number of Retail Active Customers as a key indicator of our performance, which is influenced by the level of investment in advertising expense, the number of new customers acquired during a given time period, as well as the churn of previous Retail Active Customers.
The decrease in our Retail Active Customers when comparing the three months ended September 30, 2022 to the three months ended September 30, 2021 was primarily due to a decrease in marketing investment and an associated decline in the number of new customers acquired during the more recent period compared to the prior period. The decrease in marketing investment was executed as part of a strategic update in order to reduce cash burn and reallocate investment into our B2B customer base and Software & Services segment.
Retail AOV
We define Retail AOV as the GMV for the respective time-period divided by the total number of orders placed by customers during the same period. We believe Retail AOV is an important indicator of business performance as it is supported by our proprietary e-commerce technology, where our mobile app, website, and personalization engine provide a seamless shopping experience, enabling customers to easily discover new and relevant products and categories. This results in a trend where on average, Retail AOVs expand over the course of a customer’s lifecycle. Further, larger orders are on average more profitable, helping to drive margin improvement from shipping, packaging, and labor efficiencies.
Total Retail AOV increased when comparing the three months ended September 30, 2022 to the three months ended September 30, 2021 as the result of (i) an increasing percentage of orders from our B2B customers who have, on average, significantly higher Retail AOVs than our B2C customers, (ii) ongoing pricing optimizations and price inflation, and (iii) adjustments to the user experience designed to help drive Retail AOV increases across both our new and repeat customers.
We measure Retail AOV on a gross basis, comparable to the way that we measure GMV. As a result, it does not account for any discounts, promotions, or rewards that are offered to or redeemed by our customers, and therefore it is not intended for use as an alternative to net revenue recorded in accordance with GAAP.
46
RPAC
We define Retail Net Revenue per Active Customer as total Retail net revenue for the respective time-period divided by the total number of Retail Active Customers during the same period. We believe RPAC is an important indicator of business performance as it demonstrates customer engagement within our Retail business, combining the impact of both our Retail AOV as well as the order frequency of customers shopping our Retail e-Commerce offerings.
RPAC increased by $93, or 38.4%, when comparing the three months ended September 30, 2022 to the three months ended September 30, 2021 as the result of (i) an increasing mix of orders from B2B customers who have, on average, significantly higher spend per customer than our B2C customers and (ii) a combination of higher Retail AOV and higher order frequency within both our B2C and B2B customer bases.
GMV
We define GMV as (i) the total value of Boxed goods sold, (ii) 3rd party goods sold on Boxed Sites, gross of any customer promotions, price discounts, credits, or rewards used, and (iii) goods sold on 3rd party (i.e. AEON) websites which are leveraging our Spresso technology, all of which are inclusive of shipping fees, service fees and taxes. We believe our ability to expand GMV is an indicator of the global scale of our technology services platform in any given period, and an indicator of end-customer engagement on our technology services platform worldwide. GMV is not intended for use as an alternative to net revenue recorded in accordance with GAAP.
GMV increased by $3.8 million, or 8.3%, in the three months ended September 30, 2022 compared to the three months period September 30, 2021. The increase was largely attributable to strong B2B customer demand, combined with an increase in GMV from the Boxed Market customer base.
Components of our Results of Operations
We operate in two reportable segments: Retail and Software & Services, to reflect the way our chief operating decision maker (“CODM”) reviews and assesses the performance of the business. Our Retail segment engages in the sale of consumer products and goods in bulk sizes to consumers and businesses in the continental United States. Our Retail segment includes net revenue from merchandising sales, subscription sales, and outbound delivery and marketing fees, as discussed below and within Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Our Software & Services segment primarily relates to our research, development, marketing, and production of our propriety software for sale to third parties. Both our Retail and Software & Services segments are recorded within net revenue in our Condensed Consolidated Statements of Operations and Comprehensive Loss.
Net Revenue
We derive net revenue primarily from the sale of both third-party brand and private-label brand merchandise through our e-commerce platform on which we offer merchandise in the following core categories: groceries, snacks, beverages, and household and cleaning products. Revenue generated through our e-commerce platform is generally recognized upon delivery to the customer, net of promotional discounts and refund allowances. Outbound delivery fees (if applicable) are included in customer billing and are also recorded as revenue upon delivery. Taxes collected from customers are excluded from net revenue.
We earn additional Retail segment revenue through membership fees from customers who sign up for our Boxed Up subscription loyalty program. Membership fees allow customers to earn cash back on every purchase, gain access to exclusive discounts, and enjoy free shipping on all eligible orders. Because we have the obligation to provide access to our website for the duration of the membership term, we recognize membership fees on a straight-line basis over the life of the membership.
We also earn revenue through a mix of marketing services offered to merchants, including vendors, manufacturers, and other partners. We provide these merchants access to our e-commerce platform where merchants display and sell their products to users through our third-party marketplace offering. We also provide advertising services to help merchants promote their products within our platform. While these additional revenue streams have not historically been material, they generate higher margins and we believe there is substantial opportunity to expand these offerings to drive growth in both net revenue and profitability in the future.
47
Our revenue earned through our Software & Services segment is generated through software license agreements with customers. A software license contract with multiple performance obligations typically includes the following elements: implementation services, software license, training services, and maintenance and support services.
Refer to the Notes to our Condensed Consolidated Financial Statements for additional definitions of our financial statement line items included within our Condensed Consolidated Statements of Operations and Comprehensive Loss.
The following tables presents our results of operations for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Retail | $ | 41,580 | $ | 38,186 | $ | 129,543 | $ | 117,253 | |||||||||||||||
| Software & Services | 73 | 10,824 | 2,402 | 14,965 | |||||||||||||||||||
| Total net revenue | 41,653 | 49,010 | 131,945 | 132,218 | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Retail | (36,633) | (35,565) | (117,003) | (107,707) | |||||||||||||||||||
| Software & Services | (297) | (780) | (1,256) | (1,798) | |||||||||||||||||||
| Cost of sales | (36,930) | (36,345) | (118,259) | (109,505) | |||||||||||||||||||
| Gross profit | 4,723 | 12,665 | 13,686 | 22,713 | |||||||||||||||||||
| Advertising expense | (2,359) | (5,174) | (22,145) | (14,618) | |||||||||||||||||||
| Selling, general, and administrative expense | (23,957) | (12,859) | (70,237) | (38,905) | |||||||||||||||||||
| Loss from operations | (21,593) | (5,368) | (78,696) | (30,810) | |||||||||||||||||||
| Other income (expense), net | (4,782) | (561) | (15,707) | 509 | |||||||||||||||||||
| Loss before income taxes | (26,375) | (5,929) | (94,403) | (30,301) | |||||||||||||||||||
| Income taxes | — | — | — | — | |||||||||||||||||||
| Net loss | $ | (26,375) | $ | (5,929) | $ | (94,403) | $ | (30,301) | |||||||||||||||
Comparison of Three Months Ended September 30, 2022 and 2021
Net Revenue
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Retail | $ | 41,580 | $ | 38,186 | $ | 3,394 | 8.9 | % | |||||||||||||||
| Software & Services | 73 | 10,824 | (10,751) | (99.3) | % | ||||||||||||||||||
| Total net revenue | $ | 41,653 | $ | 49,010 | $ | (7,357) | (15.0) | % | |||||||||||||||
Total net revenue for the three months ended September 30, 2022 decreased by $7.4 million, or 15.0%, to $41.7 million as compared to $49.0 million for three months ended September 30, 2021. The total $7.4 million decrease was attributable to an increase of $3.4 million in Retail revenue, more than offset by a decrease in Software & Services revenue of $10.8 million.
The $3.4 million increase in Retail net revenue was primarily driven by a $3.5 million increase in merchandise sales generated through our e-commerce platform, partially offset by a $0.4 million increase in mark-downs (including refunds, promotions, and price discounts) during the period. This increase in merchandising sales primarily resulted from significant growth in RPAC in the three months ended September 30, 2022 compared to the three months ended September 30, 2021; as businesses have begun to return to in-person office environments, there has been an increase in demand from our B2B customers, who historically order at a higher frequency and in larger order quantities than our B2C customers. This trend compared favorably to lower demand experienced during the prior year period due to the impacts of COVID-19 and a corresponding increase in work-from-home environments. Retail net revenue also benefited from the inclusion of Boxed Market revenue in the three months ended September 30, 2022, which is not included in the comparable prior year period.
48
Software & Services net revenue decreased by $10.8 million for the three months ended September 30, 2022. Net revenue was higher in the three months ended September 30, 2021 as we recognized (i) implementation services revenue related to the AEON licensing agreement in accordance with the work performed and (ii) significant up-front platform usage fees associated with the delivery of the software platform to AEON Malaysia in accordance with the contract terms.
On September 30, 2022, we entered into a new statement of work associated with the AEON licensing agreement related to expansion into Vietnam, which we expect will generate implementation and license revenue in near-term future periods. Revenue within the Software & Services segment continues to remain variable from quarter to quarter as revenue recognition is sensitive to the timing of the deployment of enterprise contracts and the ongoing implementation services work performed.
Cost of Sales and Gross Profit
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Retail | $ | (36,633) | $ | (35,565) | $ | (1,068) | 3.0 | % | |||||||||||||||
| Software & Services | (297) | (780) | 483 | (62.0) | % | ||||||||||||||||||
| Total cost of sales | $ | (36,930) | $ | (36,345) | $ | (585) | 1.6 | % | |||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Retail | $ | 4,947 | $ | 2,621 | $ | 2,326 | 88.8 | % | |||||||||||||||
| Software & Services | (224) | 10,044 | (10,268) | (102.2) | % | ||||||||||||||||||
| Total gross profit | $ | 4,723 | $ | 12,665 | $ | (7,942) | (62.7) | % | |||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Retail | 11.9 | % | 6.9 | % | |||||||||||||||||||
| Software & Services | (309.2) | % | 92.8 | % | |||||||||||||||||||
| Total gross margin | 11.3 | % | 25.8 | % | |||||||||||||||||||
Cost of sales for our Retail segment increased by $1.1 million, or 3.0%, to $36.6 million for the three months ended September 30, 2022 as compared to $35.6 million for the three months ended September 30, 2021. The increase in cost of sales is primarily driven by a $2.1 million increase in product costs as we experienced a higher volume of sales and vendors passed on ongoing cost inflation. Also contributing to this increase is the addition of $0.3 million in wages attributable to delivery fulfillment services provided to our Boxed Market customers and a $0.2 million reduction in vendor discounts and rebates. The increase in Retail cost of sales is partially offset by a decrease of $1.6 million in shipping and freight costs as we (i) benefited from our new contract terms and renewed alliance with FedEx, which was executed in May 2022, and (ii) saw Retail segment revenue mix shift toward areas with lower shipping costs (i.e. B2B customers).
Retail gross profit as a percentage of Retail net revenue (Retail gross margin) increased to 11.9% for the three months ended September 30, 2022 from 6.9% for the three months ended September 30, 2021. The increase in Retail gross margin was primarily a result of (i) ongoing pricing optimizations by leveraging our Spresso technology platform, which helped combat cost inflation, (ii) packaging cost savings, and (iii) shipping cost savings resulting from our renewed alliance with FedEx, as discussed above.
Cost of sales for our Software & Services segment decreased by $0.5 million to $0.3 million for the three months ended September 30, 2022 as compared to $0.8 million for the three months ended September 30, 2021. The decrease in cost of sales is the result of a decrease in wages incurred related to hours spent on implementation and maintenance services for our Software & Services segment. However, we are still incurring costs for maintenance services during the third quarter of 2022 given the significant and strategic nature of the AEON partnership, for which we continue to provide meaningful ongoing support.
49
Total gross profit decreased by $7.9 million, or 62.7%, to $4.7 million for the three months ended September 30, 2022 compared to $12.7 million for the three months ended September 30, 2021 primarily due to higher Retail gross profit, which was more than offset by a decrease in Software & Services gross profit associated with the timing of certain contractual software deployments and related revenue recognition. Total gross margin decreased to 11.3% for the three months ended September 30, 2022 compared to 25.8% for the three months ended September 30, 2021, primarily resulting from the decrease in Software & Services revenue, as described above. The gross margin for Software & Services in the third quarter of 2022 is not indicative of overall historical trends. As noted above, we expect the new statement of work associated with the expansion of the AEON licensing agreement into Vietnam will have near-term gross margin improvements as we begin to recognize license and implementation revenue.
Advertising Expense
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Advertising expense | $ | (2,359) | $ | (5,174) | $ | 2,815 | (54.4) | % | |||||||||||||||
| Percentage of net revenue | 5.7 | % | 13.6 | % | |||||||||||||||||||
Advertising expense for the three months ended September 30, 2022 decreased by $2.8 million to $2.4 million as compared to $5.2 million for the three months ended September 30, 2021. The decrease was primarily driven by a decrease in advertising media costs as part of a strategic plan to reduce ongoing cash burn and reallocate investment into growth of our B2B customer base and Software & Services segment.
Selling, General and Administrative Expense
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Selling, general and administrative expense | $ | (23,957) | $ | (12,859) | $ | (11,098) | 86.3 | % | |||||||||||||||
| Percentage of net revenue | 57.6 | % | 33.7 | % | |||||||||||||||||||
Selling, general and administrative expense for the three months ended September 30, 2022 increased by $11.1 million to $24.0 million as compared to $12.9 million for the three months ended September 30, 2021 primarily due to a $3.8 million increase in stock-based compensation, a $3.3 million increase in salary and compensation costs (impacted by wage inflation and headcount growth), and a combined $2.5 million increase in third-party software and insurance costs. These increased costs are due to our overall growth and expansion initiatives as well as costs incurred as a newly public company, which were not incurred during the comparable prior period. The increase in stock-based compensation is primarily driven by upfront recognition of expense associated with new executive employment agreements, which were executed with the management team as part of our public company process.
Operating Income (Loss)
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Retail | $ | (20,681) | $ | (14,864) | $ | (5,817) | 39.1 | % | |||||||||||||||
| Software & Services | (912) | 9,496 | (10,408) | (109.6) | % | ||||||||||||||||||
| Total operating income (loss) | $ | (21,593) | $ | (5,368) | $ | (16,225) | 302.3 | % | |||||||||||||||
| Percentage of net revenue | |||||||||||||||||||||||
| Retail | (49.7) | % | (38.9) | % | |||||||||||||||||||
| Software & Services | (1258.3) | % | 87.7 | % | |||||||||||||||||||
Total operating loss for the three months ended September 30, 2022 increased by $16.2 million to $21.6 million as compared to $5.4 million for the three months ended September 30, 2021. The total $16.2 million increase was attributable to increases in our operating loss of $5.8 million and $10.4 million in our Retail and Software & Services segments, respectively.
50
The increase in operating loss of $5.8 million in our Retail segment was driven by an increase in Retail gross profit and a decrease in advertising expense, which was more than offset by an increase in selling, general and administrative costs. The factors contributing to our (i) increases in Retail gross profit and selling, general and administrative costs and (ii) decrease in advertising expense are discussed above.
The operating loss of $10.4 million for our Software & Services segment was primarily driven by a reduction in net revenue in the segment, as we did not recognize any implementation service or up-front license fee revenue for the three months ended September 30, 2022, which were recognized in the comparable prior reporting period.
Other Income (Expense), Net
Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Other income (expense), net | $ | (4,782) | $ | (561) | $ | (4,221) | 753.0 | % | |||||||||||||||
| Percentage of net revenue | (11.5) | % | (1.5) | % | |||||||||||||||||||
Other expense increased by $4.2 million to $4.8 million for the three months ended September 30, 2022 compared to $0.6 million for the three months ended September 30, 2021. The $4.8 million of other expense for the third quarter of 2022 was primarily attributable to $4.5 million of interest expense related to our New Term Loan and PIPE Convertible Notes, as well as interest paid to ACM related to the Forward Purchase Transaction. Also contributing to this increase in other expense is a $3.6 million increase in the fair value of the forward purchase option derivative liability (which was partially unwound as of September 30, 2022), offset by a combined $3.8 million decrease in the fair value of our earnout liability and SPAC warrant liabilities. The $0.6 million of other expense for the third quarter of 2021 was driven by interest expense incurred related to our New Term Loan, partially offset by the fair value adjustments of our then outstanding common stock warrants and preferred stock warrants.
Comparison of Nine Months Ended September 30, 2022 and 2021
Net Revenue
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Retail | $ | 129,543 | $ | 117,253 | $ | 12,290 | 10.5 | % | |||||||||||||||
| Software & Services | 2,402 | 14,965 | (12,563) | (83.9) | % | ||||||||||||||||||
| Total net revenue | $ | 131,945 | $ | 132,218 | $ | (273) | (0.2) | % | |||||||||||||||
Total net revenue for the nine months ended September 30, 2022 remained relatively flat at $131.9 million compared to the nine months ended September 30, 2021, driven by an increase of $12.3 million in Retail revenue, more than offset by a decrease in Software & Services revenue of $12.6 million.
The $12.3 million increase in Retail net revenue was primarily driven by a $14.6 million increase in merchandise sales generated through our e-commerce platform, partially offset by a $2.4 million increase in mark-downs (including refunds, promotions, and price discounts) during the period. This increase in merchandising sales primarily resulted from growth in demand from B2B customers in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021; as businesses have begun to return to in-person office environments, there has been an increase in demand from our B2B customers, who have begun to order at a higher frequency and in larger order quantities. This trend compared favorably to lower demand experienced during the prior year period due to the impacts of COVID-19 and a corresponding increase in work-from-home environments.
The decrease in Software & Services net revenue of $12.6 million for the nine months ended September 30, 2022 was primarily the result of a comparable year-over-year decline in implementation services and up-front license fee revenue related to the AEON licensing agreement. On September 30, 2022, we entered into a new statement of work associated with the AEON licensing agreement related to expansion into Vietnam, which we expect will generate implementation and license revenue in near-term future periods.
51
Cost of Sales and Gross Profit
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Retail | $ | (117,003) | $ | (107,707) | $ | (9,296) | 8.6 | % | |||||||||||||||
| Software & Services | (1,256) | (1,798) | 542 | (30.2) | % | ||||||||||||||||||
| Total cost of sales | $ | (118,260) | $ | (109,505) | $ | (8,754) | 8.0 | % | |||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Retail | $ | 12,539 | $ | 9,546 | $ | 2,993 | 31.4 | % | |||||||||||||||
| Software & Services | 1,146 | 13,167 | (12,021) | (91.3) | % | ||||||||||||||||||
| Total gross profit | $ | 13,686 | $ | 22,713 | $ | (9,028) | (39.7) | % | |||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Retail | 9.7 | % | 8.1 | % | |||||||||||||||||||
| Software & Services | 47.7 | % | 88.0 | % | |||||||||||||||||||
| Total gross margin | 10.4 | % | 17.2 | % | |||||||||||||||||||
Cost of sales for our Retail segment increased by $9.3 million, or 8.6%, to $117.0 million for the nine months ended September 30, 2022 as compared to $107.7 million for the nine months ended September 30, 2021. The increase in cost of sales is primarily driven by a $8.1 million increase in in product costs as we experienced a higher volume of sales and vendors passed on ongoing cost inflation. Also contributing to this increase is $1.2 million in wages attributable to delivery fulfillment services provided to our Boxed Market customers as well as a $0.6 million increase in credit card processing fees. The increase in Retail cost of sales is partially offset by a decrease of $1.7 million in shipping and freight costs as a result of our renewed alliance with FedEx, which resulted in shipping cost savings beginning in May 2022.
Retail gross profit as a percentage of Retail net revenue (Retail gross margin) increased to 9.7% for the nine months ended September 30, 2022, compared to 8.1% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022 compared to the prior year period, we saw improvements in product and shipping costs as a percentage of Retail net revenue, which were partially offset by a decline in vendor discounts and rebate allowances.
Cost of sales for our Software & Services segment decreased by $0.5 million to $1.3 million for the nine months ended September 30, 2022 as compared to $1.8 million for the nine months ended September 30, 2021. The decrease in cost of sales is the result of a decrease in wages incurred related to hours spent on implementation and maintenance services for our Software & Services segment. However, we are still incurring costs for maintenance services given the significant and strategic nature of the AEON partnership, for which we continue to provide meaningful ongoing support.
Total gross profit decreased by $9.0 million, or 39.7%, to $13.7 million for the nine months ended September 30, 2022 compared to $22.7 million for the nine months ended September 30, 2021. The decrease in total gross profit is primarily due to higher Retail gross profit, driven by an increase in sales volume, which was more than offset by a decrease in Services & Services gross profit due to a decline in net revenue, as discussed above. Total gross margin decreased to 10.4% for the nine months ended September 30, 2022 compared to 17.2% for the nine months ended September 30, 2021, primarily resulting from the decrease in net revenue from our Software & Services segment, which is historically a higher margin business segment and typically has an outsized impact on our overall gross margin.
As noted above, we expect the new statement of work associated with the expansion of the AEON licensing agreement into Vietnam will have near-term gross margin improvements as we begin to recognize license and implementation revenue.
52
Advertising Expense
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Advertising expense | $ | (22,145) | $ | (14,618) | $ | (7,527) | 51.5 | % | |||||||||||||||
| Percentage of net revenue | 16.8 | % | 11.1 | % | |||||||||||||||||||
Advertising expense for the nine months ended September 30, 2022 increased by $7.5 million to $22.1 million as compared to $14.6 million for the nine months ended September 30, 2021. The increase was primarily driven by an increase in advertising media costs used to acquire and retain customers, including costs for television and advertising commercial content. This spend was reduced in the third quarter of 2022, as discussed above.
Selling, General and Administrative Expense
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Selling, general and administrative expense | $ | (70,237) | $ | (38,905) | $ | (31,332) | 80.5 | % | |||||||||||||||
| Percentage of net revenue | 53.2 | % | 29.4 | % | |||||||||||||||||||
Selling, general and administrative expense for the nine months ended September 30, 2022 increased by $31.3 million to $70.2 million as compared to $38.9 million for the nine months ended September 30, 2021 primarily due to a $12.5 million increase in stock-based compensation, a $8.6 million increase in salary and compensation costs, and a combined $7.3 million increase in legal fees and third-party consulting, insurance, and software costs. These increased costs are due to our overall growth and expansion initiatives as well as costs incurred as a newly public company. The increase in stock-based compensation was primarily driven by upfront recognition of expense associated with new executive employment agreements, which were executed with the management team as part of our public company process.
Operating Income (Loss)
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Retail | $ | (78,346) | $ | (42,619) | $ | (35,727) | 83.8 | % | |||||||||||||||
| Software & Services | (350) | 11,809 | (12,159) | (103.0) | % | ||||||||||||||||||
| Total operating income (loss) | $ | (78,696) | $ | (30,810) | $ | (47,886) | 155.4 | % | |||||||||||||||
| Percentage of net revenue | |||||||||||||||||||||||
| Retail | (60.5) | % | (36.3) | % | |||||||||||||||||||
| Software & Services | (14.6) | % | 78.9 | % | |||||||||||||||||||
Total operating loss for the nine months ended September 30, 2022 increased by $47.9 million to $78.7 million as compared to $30.8 million for the nine months ended September 30, 2021. The total $47.9 million increase was attributable to increases in operating losses in our Retail and Software & Services segments of $35.7 million and $12.2 million, respectively.
The increase in operating loss of $35.7 million in our Retail segment was primarily driven by increases in advertising expense and selling, general and administrative costs, which were partially offset by an increase in Retail gross profit. The factors contributing to our increases in Retail gross profit, advertising expense, and selling, general and administrative costs are discussed above.
The increase in operating loss of $12.2 million for our Software & Services segment was driven by a decrease in net revenue in the segment, resulting from a reduction in implementation service fees and up-front license fees related to the AEON licensing agreement.
53
Other Income (Expense), Net
Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Other income (expense), net | $ | (15,707) | $ | 509 | $ | (16,216) | (3186.8) | % | |||||||||||||||
| Percentage of net revenue | (12.1) | % | 0.4 | % | |||||||||||||||||||
Other expense increased by $16.2 million to $15.7 million for the nine months ended September 30, 2022 compared to $0.5 million of other income for the nine months ended September 30, 2021. The $15.7 million of other expense for the nine months ended September 30, 2022 was primarily attributable to the $48.5 million increase in the fair value of the forward purchase option derivative liability (which was partially unwound as of September 30, 2022), offset by a combined $45.4 million decrease in the fair value of our earnout liability and SPAC warrant liabilities. In addition, we incurred interest expense of $10.6 million related to (i) our New Term Loan and PIPE Convertible Notes, as well as interest paid to ACM related to the Forward Purchase Transaction and (ii) $1.7 million in transaction costs related to the Common Stock Purchase Agreement. The $0.5 million of other income was primarily driven by the fair value adjustments related to our common and preferred stock warrants, partially offset by interest expense incurred related to our New Term Loan.
Non-U.S. GAAP Financial Measures
We utilize Adjusted EBITDA, a non-GAAP financial measure, to budget, make operating and strategic decisions and evaluate our performance, and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provide additional insight and transparency on how we evaluate our business. We calculate Adjusted EBITDA as GAAP net loss adjusted for interest income (expense), taxes, depreciation and amortization, stock-based compensation, other costs associated with the Business Combination and other debt and equity financing transactions, gains (losses) attributable to the change in fair value of our warrants and derivatives, and other income (expense) outside of the fair value adjustments. Adjusted EBITDA is supplemental to our operating performance measures calculated in accordance with GAAP and has important limitations. For example, Adjusted EBITDA excludes the impact of certain costs required to be recorded under GAAP and could differ substantially from similarly titled measures presented by other companies in our industry or companies in other industries. Accordingly, this measure should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of our Adjusted EBITDA to our GAAP net loss, which is the most directly comparable GAAP measure, for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net loss | $ | (26,375) | $ | (5,929) | $ | (94,403) | $ | (30,301) | |||||||||||||||
Adjusted to exclude the following: | |||||||||||||||||||||||
Depreciation and amortization | 1,078 | 1,102 | 3,286 | 3,566 | |||||||||||||||||||
Change in fair value of warrants and derivative instruments (1)(2) | (167) | (452) | 3,052 | (1,821) | |||||||||||||||||||
Interest expense | 4,425 | 770 | 10,511 | 988 | |||||||||||||||||||
Other expense | 98 | 243 | 41 | 324 | |||||||||||||||||||
Stock-based compensation | 4,134 | 360 | 13,758 | 1,214 | |||||||||||||||||||
Other costs (3) | 426 | 931 | 2,757 | 3,842 | |||||||||||||||||||
Adjusted EBITDA | $ | (16,381) | $ | (2,975) | $ | (60,998) | $ | (22,188) | |||||||||||||||
(1) Included in the change in fair value of warrants and derivative instruments for the three months ended September 30, 2022 is an increase to other expense of $3.6 million from the increase in fair value of the forward purchase option derivative liability (which was partially unwound as of September 30, 2022), offset by a combined increase to other income of $3.8 million from the decrease in fair value of our earnout liability and SPAC warrant liabilities. Included in the change in fair value of warrants for the three months ended September 30, 2021 is the changes in fair values of our historical common and preferred stock warrants.
54
(2) Included in the change in fair value of warrants and derivative instruments for the nine months ended September 30, 2022 is an increase to other expense of $48.5 million from the increase in fair value of the forward purchase option derivative liability (which was partially unwound as of September 30, 2022), offset by a combined increase to other income of $45.4 million from the decrease in fair value of our earnout liability and SPAC warrant liabilities. Included in the change in fair value of warrants for the nine months ended September 30, 2021 is the changes in fair values of our historical common and preferred stock warrants.
(3) Other costs primarily represent consulting and advisory costs with respect to the Business Combination and other equity and debt financing transactions. Also included within the three and nine months ended September 30, 2022 are costs associated with the litigation discussed in Part II, Item 1, “Legal Proceedings.”
The decrease in Adjusted EBITDA for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was primarily due to an increase in net loss related to a decrease in gross profit and increase in and selling, general and administrative expense, partially offset by a decrease in advertising expense. The increase in net loss is also offset by increases in (i) changes in fair value of our warrants and derivative instruments, (ii) interest expense, and (iii) stock-based compensation, all of which are part of the reconciling items.
The decrease in Adjusted EBITDA for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was primarily due to an increase in net loss related to a decrease in gross profit and increases in advertising expense and selling, general and administrative expense, offset by increases in (i) changes in fair value of our warrants and derivative instruments, (ii) interest expense, and (iii) stock-based compensation, all of which are part of the reconciling items.
Liquidity and Capital Resources
Overview and Funding Requirements
As of September 30, 2022, we had a total cash balance plus marketable securities of $39.4 million, including restricted cash of $3.3 million and $4.0 million in short-term marketable securities, and an accumulated deficit. Notwithstanding the foregoing, our net loss and net cash used in operating activities amounted to $94.4 million and $77.9 million, respectively, for the nine months ended September 30, 2022. We plan to address our operating cash flow requirements primarily through additional outside capital, which we are dependent on to execute our strategy of investing in growth at the expense of short-term profits. As a result, we have incurred significant losses and net cash outflows from operating activities since our inception and expect to incur such losses and remain dependent on outside capital for the foreseeable future until such time that we can realize our growth strategy by generating profits and reducing our reliance on outside capital. Given the inherent uncertainties associated with executing our growth strategy, we can provide no assurance that we will be able to obtain sufficient outside capital, that additional outside capital will be available on terms acceptable to us, or that we will generate sufficient cash from operations to fund our obligations as they become due over the next twelve months.
We expect to finance our operations primarily through cash flows from operations and additional debt and equity financing. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, if needed, it may contain undue restrictions on our operations in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
In August 2021 we entered into the New Term Loan for principal of $45.0 million, as discussed below. The New Term Loan contains a certain number of financial covenants, which requires us to (i) maintain a minimum unrestricted cash balance of $15.0 million, (ii) maintain minimum net Retail revenue based upon agreed quarterly targets, and (iii) maintain a Retail gross margin percentage of at least 8%. In order to achieve these targets, we expect to invest in growth initiatives, with emphasis toward driving growth in B2B customer demand, for which we are seeing strong momentum year-to-date. We expect these investments, among others, to result in continued cash outflows from operating activities over the next twelve months.
55
As of September 30, 2022, we were in compliance with the financial covenants required by our new term loan agreement. However, the inherent uncertainties described above may impact our ability to remain in compliance with these covenants over the next twelve months. If we breach our financial covenants and fail to secure a waiver or forbearance from the third-party lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the new term loan agreement or the exercise of other rights or remedies the third-party lender may have under applicable law. No assurance can be provided a waiver or forbearance will be granted or the outstanding borrowings under the new term loan agreement will be successfully refinanced on terms that are acceptable us.
Despite the substantial amount of capital that we have raised from outside investors and lenders, as well as our Business Combination, as of September 30, 2022, we had no additional capital available for borrowing and no firm commitment from current or prospective investors to provide us additional capital to fund operations in the foreseeable future. While management believes the that we will be able to obtain additional capital, no assurance can be provided that such capital will be obtained or on terms that are acceptable to us. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we are unsuccessful in securing additional capital and/or executing our strategy of growth whereby we realize profits and generate sufficient cash inflows from operations to fund our obligations as they become due, we may be required to seek other strategic alternatives such as a further reduction in our current cost structure, or a recapitalization of our balance sheet, including related outstanding debt and equity securities. We could be forced, among other initiatives, to discontinue some or all of our operations or develop and implement a plan to further extend payables, reduce overhead or scale back our current operating plan until sufficient additional capital is raised to support further operations. For example, to reduce our current cost structure for the quarter ended September 30, 2022, we elected to reduce growth-related investments related to promotional spend and advertising expense, among other items, which impacts the number of retail active customers, one of the key indicators of our performance. Inability to raise additional capital would have a material and adverse effect on us.
Debt and Convertible Debt Financing
New Term Loan
On August 4, 2021, we entered into the New Term Loan. The New Term Loan provided us with $45.0 million at a floating per annum rate of LIBOR plus 8.5%, with a maturity date of August 4, 2025. The agreement provides the lender with a first priority security interest in all of our assets and contains a certain number of financial covenants, which requires us to (i) maintain minimum unrestricted cash balance of $15.0 million, (ii) maintain minimum net Retail revenue based upon agreed upon quarterly targets, and (iii) maintain a Retail gross margin percentage of at least 8%. These net Retail revenue and Retail gross margin targets are tested quarterly on a trailing twelve-month basis. The agreement also includes other affirmative and negative covenants, which, among other things, restrict our ability to pay dividends or make any distributions, incur indebtedness, make investments, incur liens, sell substantially all of its assets, and consummate fundamental changes. The agreement also subjects us to certain reporting covenants. We are required to provide monthly, quarterly, and annual financial statements, operating budget and metrics, and other financial information as requested. Also in connection with the term loan agreement, we issued 126,993 warrants to purchase preferred stock at an exercise price of $7.0871. These warrants were cashless exercised immediately prior to the consummation of the Business Combination and are no longer outstanding. As of September 30, 2022, we were in compliance with all covenants and reporting requirements under the New Term Loan. There was $45.0 million in principal remaining as of September 30, 2022.
On August 4, 2021, we also paid down the $5.0 million in remaining principal under our prior term loan. In connection with the loan repayment, our letter of credit was modified and we are required to maintain cash collateral for the outstanding letters of credit. As a result, the cash collateral related to the outstanding letters of credit are segregated in restricted cash accounts. Approximately $3.3 million of letters of credit were issued to us as of September 30, 2022.
56
PIPE Convertible Notes
Upon consummation of the Business Combination, pursuant to the Subscription Agreements, we issued an aggregate of $87.5 million of principal amount of PIPE Convertible Notes. The PIPE Convertible Notes mature five years after their initial issuance. The Convertible Notes are convertible, at our election, for shares of common stock, cash or a combination of cash and such shares, based on a conversion price of $12.00 per share (subject to customary anti-dilution adjustments) in accordance with the terms thereof. The PIPE Convertible Notes bear interest at a rate of 7.00% per annum, paid-in-kind or in cash at our option and accruing semi-annually. We may redeem the PIPE Convertible Notes after the third anniversary of their issuance, subject to a holder’s right to convert prior to the redemption date, if (i) the trading price of the shares of common stock exceeds 130% of the conversion price on at least twenty out of the preceding thirty consecutive trading days ending on, and including, the trading day immediately before we issue a redemption notice, and (unless we elect to settle conversions in connection with such redemption in cash) if (ii) certain conditions related to the ability of the converting holders to resell the conversion shares without restrictions under the U.S. securities laws are satisfied.
As of September 30, 2022, (i) $0.3 million of the principal PIPE Convertible Notes were converted into 24,999 shares of common stock and (ii) the PIK Interest was added to the outstanding principal, increasing the remaining principal to $90.4 million. For further detail regarding the terms of the PIPE Convertible Notes, refer to Note 7, “Convertible Notes,” in our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
Forward Purchase Agreement
Prior to the Closing, on November 28, 2021, Seven Oaks entered into the Forward Purchase Agreement with ACM for an OTC Equity Prepaid Forward Transaction. Pursuant to the terms of the Forward Purchase Agreement, ACM purchased approximately 6,504,768 shares of Seven Oaks’ Class A common stock (the “Forward Purchase shares”) and, one business day following the closing of the Business Combination, the Prepayment Amount of $65.1 million was paid out of the funds we received from Seven Oaks' trust account, which was held in a deposit account for the benefit of ACM until the “Valuation Date” (the second anniversary of the closing of the Business Combination, subject to certain acceleration provisions).
As discussed in Note 13, “Forward Purchase Transaction,” in our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, if the VWAP of the shares falls below $5.00 per share for 20 out of any 30 consecutive trading days (a “VWAP Trigger Event”), then ACM may elect to accelerate the Valuation Date to the date of such VWAP Trigger Event. If ACM elects to accelerate the Valuation Date, the Valuation Period would commence, at which point the Forward Purchase Transaction would go through the process of being unwound.
The VWAP Trigger Event occurred on July 6, 2022, giving ACM the right to elect to accelerate the Valuation Date at its option, which it did on August 16, 2022. As a result of ACM’s election, as of August 16, 2022, the Valuation Period commenced, which resulted in an unwinding of the remaining 5,760,114 shares over the respective Valuation Period. The Valuation Period is determined by the daily trading of the shares on the NYSE, whereby the numbers of shares unwound in any given day during the Valuation Period is equal to 10% of the daily trading volume on each given trading day. The Valuation Period ended on October 24, 2022, which finalized the unwinding of the Forward Purchase Transaction and triggered the final cash settlement payment date. At the end of the Valuation Period, the proceeds due to the Company are approximately equal to the VWAP of the shares unwound during each trading day during the Valuation Period, net of $0.20 per share in fees.
Prior to the VWAP Trigger Event, ACM had sold 744,654 shares, for which we received net proceeds of $6.5 million, after paying related fees to ACM. From August 16, 2022 through September 30, 2022, 4,950,217 of the remaining shares were unwound in accordance with the terms of the agreement, for which we have collected $4.4 million, of which $0.3 million is interest payable to ACM. We expect to receive $0.5 million in additional proceeds in connection with the final cash settlement in the fourth quarter of 2022.
57
Equity Financing
Common Stock Purchase Agreement
On May 9, 2022, we entered into the Purchase Agreement with an investor related to a committed capital on demand facility (the “CCOD Facility”). Pursuant to the Purchase Agreement, we have the right from time to time at its option to sell to the investor up to the lesser of (i) $100.0 million of our common stock and (ii) the Exchange Cap which, under the applicable rules of the NYSE, states that in no event may we issue more than 19.99% of the voting power or number of shares of common stock outstanding, unless certain stipulations are met.
In accordance with ASC 815, Derivatives and Hedging, we have determined that the right to sell additional shares represents a freestanding put option, and as such, the financial instrument was classified as a derivative asset with a nominal fair value.
In May 2022, we issued 114,585 of upfront commitment shares to the investor which had a fair value of $1.0 million upon issuance. The $1.0 million in commitment costs, along with $0.7 million in other related transaction costs, were recorded in other income (expense), net on our Condensed Consolidated Statements of Operations and Comprehensive Loss.
In the second quarter of 2022 we sold 3,109,400 shares of common stock to the investor, pursuant to the terms of the Purchase Agreement, for cash proceeds of $6.5 million. There were no sales in the third quarter of 2022.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Net cash used in operating activities | $ | (77,906) | $ | (27,095) | |||||||
| Net cash used in investing activities | $ | (1,710) | $ | (670) | |||||||
| Net cash provided by financing activities | $ | 7,194 | $ | 35,702 | |||||||
Operating Activities
Cash used in operating activities consisted of net loss adjusted for non-cash items, including depreciation and amortization, stock-based compensation expense, the change in fair value of warrants and derivative instruments, and other non-cash items, as well as the effect of the changes in operating assets and liabilities.
Net cash used in operating activities was $77.9 million for the nine months ended September 30, 2022, primarily consisting of $94.4 million net loss, adjusted for certain non-cash items, which primarily included $13.8 million of stock-based compensation, $3.1 million in the combined change in fair value of warrants and derivative instruments, and $3.3 million in depreciation and amortization, as well as a $12.9 million net decrease in operating assets and liabilities.
A significant driver for the net decrease in operating assets and liabilities was the $15.0 million payment for the Palantir software licenses, which per the terms of the related Master Subscription Agreement discussed below, was required to be paid 30 days after the closing of the Business Combination. The payment largely attributed to the decrease of $14.2 million in accounts payable. The payment also resulted in the reclassification of the associated asset from deferred contract costs to prepaid expenses, and as such, is the primary driver of the decrease in deferred contract costs of $18.8 million and increases in current and noncurrent prepaid expenses of $4.5 million and $8.6 million, respectively. Also contributing to the net decrease in operating assets and liabilities is an increase of $2.0 million in unbilled receivables related to our software licensing agreements, as well as other changes to our net operating assets and liabilities of $2.3 million.
58
Net cash used in operating activities was $27.1 million for the nine months ended September 30, 2021, primarily consisting of $30.3 million net loss, adjusted for certain non-cash items, which primarily included $3.6 million of depreciation and amortization, $1.5 million in the change in fair value of warrants, and $1.2 million in stock-based compensation, as well as a $0.5 million net decrease in operating assets and liabilities. The decrease in our net operating assets and liabilities was primarily driven by the change in accounts payable and accrued expense of $6.0 million and change in prepaid and other current assets of $4.3 million, both primarily attributable to legal and consulting fees related to the Business Combination. Increases in advertising spend and accrued interest related to the term loan are also factors driving the changes in accounts payable and accrued expense, respectively. Also contributing to the net decrease in operating assets and liabilities is the change in receivables of $1.8 million and the addition of unbilled receivables, net of related deferred revenue of $3.7 million, both primarily related to our AEON software licensing agreement. Also contributing to the net decrease in net operating assets and liabilities is a $2.6 million change in inventory due to lower sales volume as well as other changes to our net operating assets and liabilities of $0.7 million.
Investing Activities
For the nine months ended September 30, 2022, net cash used in investing activities was $1.7 million, primarily due to $7.0 million in purchases of available-for-sale securities as well as $3.3 million spent in fixed asset capital expenditures and $1.2 million in interest paid to ACM. This was partially offset by the receipt of $6.8 million in funds which were recollected from the Prepayment Amount of the Forward Purchase Transaction, as discussed above, and $3.0 million in available-for-sale securities sold.
For the nine months ended September 30, 2021, net cash used in investing activities was $0.7 million, due to the purchase of fixed assets.
Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing activities was $7.2 million, primarily as the result of $6.5 million in proceeds from issuance of stock pursuant to the terms of the Common Stock Purchase Agreement as well as $0.8 million in proceeds from the exercise of stock options.
For the nine months ended September 30, 2021, net cash provided by financing activities was $35.7 million, primarily due to $43.1 million in net proceeds after debt issuance costs related to our term loan signed in August 2021, offset by repayments of the prior term loan of $7.7 million.
Other Commitments
We maintain our principal offices in New York, New York and maintain fulfillment centers and office space in various locations throughout the United States. Our future minimum rental commitments under non-cancelable leases was $15.5 million as of December 31, 2021.
In June 2021, we entered into a Master Subscription Agreement with Palantir under which we are contracted to pay $20.0 million over five years for access to Palantir’s Foundry platform, $15.0 million of which was due thirty days after the closing of the Business Combination, or on January 8, 2022. The initial $15.0 million was fully paid to Palantir during the first quarter of 2022.
In December 2021, we signed an addendum to a prior service agreement with Google LLC for access to the Google Cloud Platform. Under the addendum, we are required to pay $2.0 million, $4.5 million, and $8.5 million for the first, second, and third commitment periods, respectively. The first commitment period commenced December 1, 2021 and will last 12 months. The next two commitment periods begin at the end of the preceding period and each last 12 months. As of September 30, 2022, the total remaining commitment, gross of discounts, was approximately $12.7 million, with a minimum of $4.1 million due within the next 12 months.
New Accounting Pronouncements
See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a discussion of new accounting standards.
59
Application of Critical Accounting Policies and Estimates
There have been no material changes to the critical accounting estimates and assumptions disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
For a discussion of all of our significant accounting policies, including our critical accounting policies, see Note 1, Description of Business and Summary of Significant Accounting Policies,” to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
JOBS Act Accounting Election
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Boxed is an emerging growth company. Therefore, we have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of interest rate fluctuations and inflation risk.
Interest Rate Risk
We had a total cash balance plus marketable securities of approximately $39.4 million, including $3.3 million of restricted cash and $4.0 million of marketable securities, as of September 30, 2022 and a total cash balance of $107.8 million, including $2.8 million of restricted cash, as of December 31, 2021. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. A hypothetical 10% increase in interest rates during any of the periods presented would not have had a material impact on our Condensed Consolidated Financial Statements.
While the majority of our interest rate is fixed, we are still exposed to certain changes in interest rates with respect to our cost of borrowing under our existing New Term Loan. We monitor our cost of borrowing under our New Term Loan, taking into account our funding requirements, and our expectations for short-term rates in the future. A hypothetical 10% change in the floating portion of the interest rate on our New Term Loan for all periods presented would not have a material impact on our Condensed Consolidated Financial Statements.
Inflation Risk
We have experienced and expect to continue to experience an increase in commodity prices, labor costs, input costs and transportation costs. In response to these rising costs, in 2022, we have continued to optimize and raise prices across a significant portion of our product offerings. These price increases could impact the demand for our products. Our inability to offset these changing costs could harm our business, financial condition, and results of operations. For a discussion of recent increases in product, transportation, and wage costs, related, in part, to inflationary pressures, see “Components of our Results of Operations” in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
60
ITEM 4. CONTROLS AND PROCEDURES
Inherent Limitations on the 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 Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective at the reasonable assurance level due to the existence of the material weaknesses described below.
However, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that, notwithstanding the identified material weaknesses in our internal control over financial reporting, the financial statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Material Weaknesses in Internal Control over Financial Reporting
As previously reported, we and our predecessor identified material weaknesses in our internal control over financial reporting in the prior year. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
During the prior year, we determined that we had material weaknesses because we did not design and maintain an effective control environment and control activities commensurate with our financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of technical knowledge commensurate with our accounting and reporting requirements or effectively select and develop control activities that mitigate risk that involve more complex accounting judgments. These material weaknesses contributed to deficiencies surrounding the controls related to the preparation, review, and analysis of accounting information and financial statements. Our controls were not adequately designed or appropriately implemented to identify material misstatements in financial reporting on a timely basis.
Management’s Plan to Remediate the Material Weaknesses
With the oversight of senior management and our audit committee, we have hired and will continue hiring additional accounting personnel with technical accounting and financial reporting experience and have implemented improved process level and management review controls with respect to the completeness, accuracy, and validity of complex accounting measurements on a timely basis. We also have supplemented internal accounting resources with external advisors to assist with performing technical accounting activities. Furthermore, we are implementing a process of formalizing procedures to ensure appropriate internal communications between the accounting department and other operating departments necessary to support the internal controls. The remediation measures are ongoing, and are expected to result in future costs for the Company. While we are implementing a plan to remediate these material weaknesses, we cannot predict the success of such plan or the outcome of our assessment of these plans at this time. These improvements to our internal control infrastructure are ongoing, including during the preparation of our financial statements as of the end of the period covered by this report. As such, management has concluded that the remediation initiatives outlined above are not sufficient to fully remediate the material weaknesses in internal control over financial reporting, and will remain insufficient until the applicable controls have operated for an adequate period of time, and further, that through testing, management can conclude that the controls are designed and operating effectively. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures.
61
Changes in Internal Control Over Financial Reporting
Except for continuing to take steps to remediate the material weakness in our internal control over financial reporting as described above, there were no changes in our internal control over financial reporting (as defined by 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
62
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 8, 2022, a putative stockholder of the Company filed a complaint in the Delaware Chancery Court alleging that he is entitled to a monetary award, including certain attorneys’ fees and expenses in connection with a demand he made on the Company regarding the ability of Class A common stockholders to vote on certain charter amendments in connection with the Business Combination on December 8, 2021. Garfield v. Boxed, Inc., C.A. No. 2022-0132-VCZ (Del. Ch.). The parties have submitted motions and briefs on the matter and a hearing was held with the Court on October 19, 2022. The parties are awaiting the Court’s ruling. Given the early stage of this matter and the uncertainty inherent in litigation and investigations, we do not believe it is possible to develop estimates of reasonably possible losses (or a range of possible losses) for this matter.
From time to time, we may become involved in actions, claims, suits and other legal proceedings arising in the ordinary course of our business, including assertions by third parties relating to personal injuries sustained using our services, intellectual property infringement, breaches of contract or warranties or employment-related matters. We continually assess the likelihood of adverse judgments or outcomes in such matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. We are not currently a party to any actions, claims, suits or other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition and results of operations. Because most contingencies are resolved over long periods of time, potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements. Any of these claims could subject us to costly litigation, and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our business, financial condition and results of operations. Additionally, any such claims, whether or not successful, could damage our reputation and business.
ITEM 1A. RISK FACTORS
Besides the risk factor described below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, and this Quarterly Report.
An active, liquid trading market for our securities may not be sustained.
There can be no assurance that we will be able to maintain an active trading market for our common stock and warrants on the NYSE or any other exchange. On October 14, 2022, we received written notice from the NYSE that we are not in compliance with Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than $1.00 over a consecutive 30 trading-day period. The notice has no immediate impact on the listing of our common stock, which will continue to be listed and traded on the NYSE during the period allowed to regain compliance, subject to our compliance with other listing standards. We informed the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements. If we are unable to regain compliance with the NYSE’s listing standards, the NYSE may delist our securities. At that point, it is possible that our securities could be quoted on the over-the-counter bulletin board or the pink sheets. This could have negative consequences, including negative publicity, a negative effect on the price of our securities, reduced liquidity for stockholders, reduced trading levels for our securities, limited availability of market quotations or analyst coverage of our securities stricter trading rules for brokers trading our securities, diminished investor, supplier and employee confidence, and reduced access to financing alternatives for us. We also would be subject to greater state securities regulation if our common stock was no longer listed on a national securities exchange. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, or prevent future non-compliance with NYSE’s listing requirements.
63
We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract, develop, motivate and retain well-qualified employees, including due to evolving labor dynamics, our business could be harmed.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel. In addition, our future success depends on our continuing ability to attract, develop, motivate, and retain qualified and skilled employees. The market for such positions is highly competitive. Qualified individuals are in high demand and we may incur significant costs to attract and retain them. In addition, the loss of any of our senior management or other key employees or our inability to recruit and develop mid-level managers could materially and adversely affect our ability to execute our business plan, and we may be unable to find adequate replacements. Further, if we expand our fulfillment center capacity or open additional fulfillment centers, we will need to attract and staff a variety of positions, including managerial positions, which will necessitate the time and attention of management. All of our employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace.
We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. Job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If our stock price performs poorly, it may adversely affect our ability to retain or attract employees. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. In addition, we may have to take additional steps, such as issuing additional equity, to make the equity component of our compensation packages more attractive to attract and retain employees. These steps could result in dilution to stockholders. Any changes in our compensation practices or those of our competitors could affect our ability to retain and motivate existing personnel and recruit new personnel. If we fail to retain talented senior management and other key personnel, or if we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition, and results of operations may be materially and adversely affected.
The price of our common stock and warrants has been and may continue to be volatile or may continue to decline regardless of our operating performance, resulting in substantial losses for our stockholders and warrant holders.
The market price of our common stock, as well as our warrants, has and may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our results of operations;
•the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
•failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations or capital commitments;
•changes in operating performance and stock market valuations of other retail companies generally, or those in our industry in particular;
•price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
•changes in our Board or management;
•sales of large blocks of our common stock or warrants, including sales by us or by our executive officers, directors or major shareholders, including the sale of the Forward Purchase shares pursuant to the Forward Purchase Agreement;
64
•lawsuits threatened or filed against us;
•changes in laws or regulations applicable to our business;
•changes in our capital structure, such as future issuances of debt or equity securities;
•short sales, hedging and other derivative transactions involving our capital stock;
•general economic conditions in the United States, including increasing interest rates and inflation;
•other events or factors, including those resulting from war, geopolitical instability, natural disasters, incidents of terrorism or responses to these events; and
•the other factors described in the sections of our Annual Report on Form 10-K titled “Risk Factors” and our Annual Report on Form 10-K and this Quarterly Report titled “Cautionary Note Regarding Forward-Looking Statements.”
The stock market has recently experienced extreme price and volume fluctuations. The market prices of securities of companies have experienced fluctuations that often have been unrelated or disproportionate to their operating results. Market fluctuations have, and could continue to, result in extreme volatility in the price of shares of our common stock or warrants, which could cause a decline in the value of your investment. Price volatility is, and may continue to be, greater when the public float and trading volume of shares of our common stock is low. Furthermore, in the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business, financial condition, and results of operations.
Our securities are currently listed on the “NYSE.” For continued listing, we are required to meet specified listing standards, including a minimum stock price, market capitalization, and stockholders’ equity. Subsequent to the end of the third quarter of 2022, on October 13, 2022, we received written notice from the NYSE that we are not in compliance with Rule 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than $1.00 over a consecutive 30 trading-day period. We informed the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements. We can regain compliance at any time within the six-month period following receipt of the notice from the NYSE if on the last trading day of any calendar month during the cure period we have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. We intend to consider available alternatives, including, but not limited to, a reverse stock split, subject to stockholder approval, no later than at our next annual meeting of stockholders, if necessary to cure the stock price non-compliance. If we are unable to regain compliance with the NYSE’s listing standards, the NYSE would delist our securities. At that point, it is possible that our securities could be quoted on the over-the-counter bulletin board or the pink sheets. This could have negative consequences, including negative publicity, a negative effect on the price of our securities, reduced liquidity for stockholders, reduced trading levels for our securities, limited availability of market quotations or analyst coverage of our securities, stricter trading rules for brokers trading our securities, diminished investor, supplier, and employee confidence, and reduced access to financing alternatives for us. We also would be subject to greater state securities regulation if our common stock was no longer listed on a national securities exchange. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, or prevent future non-compliance with NYSE’s listing requirements.
Our need to raise additional capital in the future to execute on our business plan and meet the financial covenants included in our term loan raise substantial doubt about our ability to continue as a going concern.
To date, we have raised a substantial amount of capital from outside investors and lenders through the issuance of stock and borrowings, including under our New Term Loan, as well as through the consummation of the Business Combination. As of September 30, 2022, there is $32.1 million in cash and cash equivalents on our balance sheet.
65
We expect to continue to rely on outside capital for the foreseeable future to execute our strategy of investing in growth at the expense of short and long-term profits and expect to continue to make substantial investments in our business, including in the expansion of the merchandise sold on our platform and in our research and development for our Software & Services segment, in addition to incurring additional costs as a result of being a public company. However, there are no assurances that our efforts to meet our operating cash flow requirements will be successful. If our current cash and investments as well as our plans to meet our operating cash flow requirements are not sufficient to fund necessary expenditures and meet our obligations for at least the next twelve months, our liquidity, financial condition and business prospects may be materially and adversely affected.
Included in the capital raised to date is the New Term Loan, entered into in August 2021 for principal of $45.0 million. The term loan contains a certain number of financial covenants, which requires us to (i) maintain minimum unrestricted cash balance of $15.0 million, (ii) maintain minimum net Retail revenue based upon agreed quarterly targets; and (iii) maintain a Retail gross margin percentage of at least 8%. In order to achieve these targets, we expect to invest in growth initiatives, with emphasis toward driving growth in B2B customer demand. As of September 30, 2022, we were in compliance with the financial covenants required by our term loan. However, these uncertainties, including the inherent uncertainties associated with executing our growth strategy, combined with the financial covenants and growth requirements associated with our $45.0 million term loan, create risk that we may not be able to maintain compliance with one or more of these covenants over the next twelve months.
Further, as of September 30, 2022, we had no additional capital available for borrowing and no firm commitment from current or prospective investors to provide us additional capital to fund operations in the foreseeable future. These uncertainties, including the inherent uncertainties discussed above regarding our growth strategy and financial covenants, raise substantial doubt about our ability to continue as a going concern.
Our business plans may change, general economic, financial or political conditions in our markets may change, or other circumstances may arise, that have a material and adverse effect on our cash flow and the anticipated cash needs of our business. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time, and there can be no assurance that we will be able to obtain additional financing on terms acceptable to us, if at all, or that we will generate sufficient future revenues. Our management and Board will have broad discretion in determining when, whether, and how we raise additional capital and, unless required by the rules of NYSE, such capital raises will not require stockholder approval. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. If we raise additional funds through issuances of debt securities, the holders of debt would have priority over the holders of our common stock, and we may be required to accept terms that restrict our ability to run our business or incur additional indebtedness. The debt financing could also contain restrictive covenants that may impact how we run our business and could result in the loan being paid back in full immediately if we are in non-compliance.
If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, financial condition and results of operations could be materially adversely affected. We could be forced, among other initiatives, to discontinue some or all of our operations or develop and implement a plan to further extend payables, reduce overhead or scale back our current operating plan until sufficient additional capital is raised to support further operations. For instance, in the quarter ended September 30, 2022, the Company elected to reduce growth-related investments related to promotional spend and advertising expense, among other items, which impacts the number of retail active customers, one of the key indicators of our performance. Furthermore, if our vendors believe our credit and risk profile has adversely changed, we may also have decreased success in product sourcing because we may not be able to maintain attractive credit and invoicing terms. We also could be required to seek funds through arrangements with partners or others that may result in additional liens on our assets.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
66
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
| Exhibit No. | Description | Form | File No. | Exhibit | Filing Date | Filed/Furnished Herewith | ||||||||||||||||||||||||||||||||
| 2.1† | 8-K | 001-39817 | 2.1† | 6/14/2021 | ||||||||||||||||||||||||||||||||||
| 2.1(a) | 8-K | 001-39817 | 2.1 | 11/26/2021 | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-39817 | 3.1 | 12/14/2021 | ||||||||||||||||||||||||||||||||||
| 3.2 | S-1 | 3.2 | 12/22/2021 | |||||||||||||||||||||||||||||||||||
| 4.1 | 8-K | 001-39817 | 4.1 | 12/14/2021 | ||||||||||||||||||||||||||||||||||
| 4.2 | 8-K | 001-39817 | 4.1 | 12/23/2020 | ||||||||||||||||||||||||||||||||||
| 4.3 | 8-K | 001-39817 | 4.3 | 12/14/2021 | ||||||||||||||||||||||||||||||||||
| 10.1 | * | |||||||||||||||||||||||||||||||||||||
| 31.1 | * | |||||||||||||||||||||||||||||||||||||
| 31.2 | * | |||||||||||||||||||||||||||||||||||||
| 32.1 | ** | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document | * | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | * | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
67
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | * | ||||||||||||||||||||||||||||||||||||
________________
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
* Filed herewith.
** Furnished herewith.
68
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.
| BOXED, INC. | ||||||||||||||
| Date: November 9, 2022 | By: | /s/ Chieh Huang | ||||||||||||
| Name: | Chieh Huang | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
| Date: November 9, 2022 | By: | /s/ Mark Zimowski | ||||||||||||
| Name: | Mark Zimowski | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
69