AGILETHOUGHT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in Part II, Item 8 "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the captions "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." For purposes of this item only "AgileThought", "the Company," "we," "us" or "our" refer toAgileThought, Inc. and its subsidiaries, unless the context otherwise requires.
Overview
We are a leading provider of agile-first, end-to-end digital transformation services in the North American market using onshore and nearshore delivery. We offer client-centric, onshore and nearshore agile-first digital transformation services that help our clients transform by building, improving and running new solutions at scale. Our services enable our clients to leverage technology more effectively to focus on better business outcomes. From consulting to application development and cloud services to data management and automation, we strive to create a transparent, collaborative, and responsive experience for our clients.
For the year ended
As ofDecember 31, 2022 , we had 5 delivery centers acrossthe United States ,Mexico ,Brazil ,Argentina andCosta Rica from which we deliver services to our clients. As ofDecember 31, 2022 , we had 2,144 billable employees providing services remotely, from our talent centers or directly at client locations inthe United States andLatin America . The breakdown of our employees by geography is as follows for the dates presented: As of December 31, Employees by Geography 2022 2021 United States 249 355 Latin America 2,255 2,315 Total 2,504 2,670 Total headcount decrease by 166 people fromDecember 31, 2021 toDecember 31, 2022 . The decrease is related mainly to the Company´s strategy to exit non-core projects which entails the exit of employees whose skill-set was not matching the purely-digital engagements the Company is actively pursuing. OurLatin America based headcount decreased by 60 people fromDecember 31, 2021 toDecember 31, 2022 whereas ourUnited States based headcount decreased by 106 people fromDecember 31, 2021 toDecember 31, 2022 , mainly as a result of our strategy to focus on nearshore resources to staff new sold contracts during 2022.
The following table presents our revenue by geography for the periods presented:
Year Ended December 31,
Revenue by Geography (in thousands) 2022 2021
United States $ 112,223 $ 103,436
Latin America 64,623 55,232
Total $ 176,846 $ 158,668
For the year ended December 31, 2022 , our revenue was $176.8 million , as
compared to $158.7 million for the year ended December 31, 2021 . We generated
63.5% and 65.2% of our revenue from clients located in the United States and
36.5% and 34.8% of our revenue from clients located in Latin America for the
years ended December 31, 2022 and 2021, respectively.
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The following table presents our loss before income taxes for the periods
presented:
Year Ended December 31,
2022 2021
(in thousands)
Loss before income taxes $ (18,674) $ (19,588)
Our loss before income taxes was $18.7 million and $19.6 million for the years
ended December 31, 2022 , and 2021, respectively, and, for the same periods, our
loss as a percentage of revenue was 10.6% and 12.3%, respectively.
Factors Affecting Our Performance
We believe that the key factors affecting our performance and results of operations include our ability to:
Expand Our Client Footprint in
We are focused on growing our client footprint inthe United States and furthering the application of our proven business capabilities in the U.S. market. We are currently working towards gradually exiting non-core engagements to focus on a highly strategic client base, requiring purely next-gen digital services, which are more aligned with our ideal client profile which targets clients with an average annual revenue potential of+$10 million and consumes our highly specialized Guild delivery model. We acquired 4th Source in 2018 andAgileThought, LLC in 2019, both of which areU.S. headquartered and operated companies. For the years endedDecember 31, 2022 and 2021, we had 67 and 80 active clients inthe United States , respectively. We define an active client at a specific date as a client with whom we have recognized revenue for our services during the preceding 12-month period. As ofDecember 31, 2022 , we had 249 employees located inthe United States . We believe we have a significant opportunity to penetrate the U.S. market further and expand ourU.S. client base. Our ability to expand our footprint inthe United States will depend on several factors, including the U.S. market perception of our services, our ability to increase nearshore delivery successfully, our ability to successfully integrate acquisitions, as well as pricing, competition and overall economic conditions, and to a lesser extent our ability to complete future complementary acquisitions.
Expand Our Client Footprint in the
We are also focused on growing our client footprint inLatin America and leveraging our local experience and network to capitalize on the region's growth potential. TheLatin America region is expected to experience the second strongest growth in digital transformation from 2022 to 2026 with a five year projected compounded annual growth rate of approximately 20%. Our business started inMexico and we have established experience in theLatin America market since then, and we believe our experience allows us to tailor our offerings and naturally assertively approach our clients in that market. Our 2022 and 2021 revenues fromLatin America clients were 36.5% and 34.8% of our total revenue, respectively.
Penetrate Existing Clients via Cross-Selling
We seek to strengthen our relationships with existing clients by cross-selling additional services. We have a proven track record of expanding our relationship with clients by offering a wide range of complementary services. Our ten largest active clients based on revenue accounted for$108.6 million , or 61.4%, and$103.3 million , or 65.1%, of our total revenue during the years endedDecember 31, 2022 and 2021, respectively. The following table shows the active clients concentration from the top client to the top twenty clients, for the periods presented: Percent of Revenue for the Year Ended December 31, Client Concentration 2022 2021 Top client 14.9 % 13.0 % Top five clients 42.9 % 43.7 % 55
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Top ten clients 61.4 % 65.1 %
Top twenty clients 78.1 % 78.9 %
The following table shows the number of our active clients by revenue for the
periods presented:
For the Year Ended December 31,
Active Clients by Revenue 2022 2021
Over $5 Million 10 9
$2 - $5 Million 12 7
$1 - $2 Million 11 13
Less than $1 Million 104 162
Total 137 191
The decrease in the total number of active clients from December 31, 2021 to
December 31, 2022 is mainly related to the completion of smaller customer
projects and maintenance engagements in 2021 that were not subsequently renewed
as a result of COVID-19 pandemic combined with our gradual efforts, starting
during the third quarter of 2022, to de-emphasize non-core projects and to focus
on strategic digital projects.
We believe we have the opportunity to further cross-sell our clients with
additional services that we have enhanced through recent acquisitions. However,
our ability to increase sales to existing clients will depend on several
factors, including the level of client satisfaction with our services, changes
in clients' strategic priorities and changes in key client personnel or
strategic transactions involving clients, as well as pricing, competition and
overall economic conditions.
Attract, Train, Retain and Utilize Highly Skilled Employees
We believe that attracting, training, retaining and utilizing highly skilled employees with capabilities in next-generation technologies will be key to our success. As ofDecember 31, 2022 , we had 2,504 employees. We continuously invest in training our employees and offer regular technical and language training, as well as other professional advancement programs. These programs not only help ensure our employees are well trained and knowledgeable, but also help enhance employee retention.
Strengthen Onshore and Nearshore Delivery with Diversification in Regions
In order to drive digital transformation initiatives for our clients, we believe that we need to be near the regions in which our clients are located and in similar time zones. We have established a strong base for our onshore and nearshore delivery model acrossMexico . We also have offices inArgentina ,Brazil ,Costa Rica andthe United States to source diverse talent and be responsive to clients in our core markets. SinceJanuary 1, 2018 , we have added 4 new offices, including one inthe United States (Tampa, Florida ) and three inMexico (one inMexico City and the other two inMerida andColima as a result of the acquisitions). FromDecember 31, 2021 toDecember 31, 2022 , our delivery headcount decreased by 114 employees, or 5.0%, mainly driven by the voluntary and involuntary attrition observed during the first half of 2022. As we continue to grow our relationships, we will expand our delivery centers in other cities inMexico and other countries in similar time zones, such asArgentina andCosta Rica . While we believe that we currently have sufficient delivery center capacity to address our near-term needs and opportunities, as the recovery from the COVID-19 pandemic continues, and with our goal to expand our relationships with existing clients, attract new clients and expand our footprint inthe United States , we will need to expand our teams through remote work opportunities and at existing and new delivery centers in nearshore locations with an abundance of technical talent. As we do so, we compete for talented individuals with other companies in our industry and companies in other industries. 56
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Key Business Metrics
We regularly monitor several financial and operating metrics to evaluate our
business, measure our performance, identify trends affecting our business,
formulate financial projections and make strategic decisions. Our key non-GAAP
and business metrics may be calculated in a different manner than similarly
titled metrics used by other companies. See " Non-GAAP Measures" for additional
information on non-GAAP financial measures and a reconciliation to the most
comparable GAAP measures.
Year Ended December 31,
2022 2021
Gross Margin 32.6 % 29.2 %
Loss from Operations (in thousands) $ (12,927) $ (2,047)
Adjusted Operating Income (in thousands) $ 11,400 $ 3,584
Net Loss (in thousands) $ (20,128) $ (20,048)
Adjusted Net Income (Loss) (in thousands) $ 2,723 $ (6,415)
Adjusted Diluted EPS $ 0.06 $ (0.17)
Number of large active clients (at or above $1.0 million of 33 29
revenue in prior 12-month period) as of end of period Revenue concentration with top 10 clients
61.4 % 65.1 %
Gross Margin
We monitor gross margin to understand the profitability of the services we provide to our clients. Gross margin is calculated as net revenues for the period minus cost of revenue for the period, divided by net revenues.
Adjusted Operating Income
We define and calculate Adjusted Operating Income as Loss from operations adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of purchase price obligation, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus impairment charges, plus restructuring expenses, plus (gain) loss on business dispositions, plus (gain) loss on debt extinguishment, plus intangible assets amortization, plus certain transaction costs and other certain operating expense, net.
Adjusted Net Income (Loss)
We define and calculate Adjusted Net Income (Loss) as Net loss adjusted to exclude the change in fair value of embedded derivative liability, plus the change in fair value of purchase price obligation, plus the change in fair value of warrant liability, plus equity-based compensation expense, plus restructuring expenses, plus (gain) loss on business dispositions, plus foreign exchange (gain) loss, plus loss (gain) on debt extinguishment and debt forgiveness, plus intangible assets amortization, plus certain transaction costs, plus paid in kind interest expenses and amortization of debt issuance cost, premiums, and discounts and certain other expense, net.
Adjusted Diluted EPS
We define and calculate Adjusted EPS as Adjusted Net Income, divided by the diluted weighted-average number of common shares outstanding for the period.
See " Non-GAAP Measure s" for additional information and a reconciliation of Loss from operations to Adjusted Operating Income and from Net loss to Adjusted Net Income (Loss) and Adjusted Diluted EPS.
Number of Large Active Clients
We monitor our number of large active clients to better understand our progress in winning large contracts on a period-over-period basis. We define the number of large active clients as the number of active clients from whom we generated more than$1.0 million of revenue in the prior 12-month period. For comparability purposes, we include the clients of the acquired businesses that meet these criteria to properly evaluate total client spending evolution. 57
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Revenue Concentration with Top 10 clients
We monitor our revenue concentration with top 10 clients to understand our dependence on large clients on a period-over-period basis and to monitor our success in diversifying our revenue base. We define revenue concentration as the percent of our total revenue derived from our ten largest active clients.
Components of Results of Operations
Our business is organized into a single reportable segment. The Company's chief operating decision maker is the CEO, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
Net Revenues
Revenue is derived from the several types of integrated solutions we provide to our clients. Revenue is organized by contract type and geographic location. The type of revenue we generate from customers is classified based on: (i) time and materials, and (ii) fixed price contracts. Time and materials are transaction-based, or volume-based contracts based on input method such as labor hours incurred. Fixed price contracts are contracts where price is contractually predetermined. Revenue by geographic location is derived from revenue generated inthe United States andLatin America , which includesMexico ,Argentina ,Brazil , andCosta Rica .
Cost of Revenue
Cost of revenue consists primarily of employee-related costs associated with our personnel and fees from third-party vendors engaged in the delivery of our services, including: salaries, bonuses, benefits, project related travel costs, software licenses and any other costs that relate directly to the delivery of our services. Gross Profit
Gross profit represents net revenues less cost of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists primarily of employee-related costs associated with our sales, marketing, legal, accounting and administrative personnel. Selling, general and administrative expenses also includes legal costs, external professional fees, brand marketing, provision for doubtful accounts, as well as expenses associated with our back-office facilities and office infrastructure, information technology, and other administrative expenses.
Depreciation and Amortization
Depreciation and amortization consist of depreciation and amortization expenses related to customer relationships, computer equipment, leasehold improvements, furniture and equipment, and other assets.
Change in Fair Value of Purchase Price Obligation
Changes in fair value of purchase price obligation consists of changes in estimated fair value of earnout arrangements entered into as part of our business acquisition process.
Change in Fair Value of Embedded Derivative Liabilities
Changes in fair value of embedded derivative liabilities consists of changes in the fair value of redemption and conversion features embedded within our preferred stock or debt instruments.
Change in Fair Value of Warrant Liability
Changes in fair value of warrant liability consist of changes to the outstanding private placement warrants assumed upon the consummation of the Business Combination.
Loss on Debt Extinguishment
Loss on debt extinguishment represents the difference between the net carrying value of the old debt instrument and the fair value of the new debt instrument.
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Equity-based Compensation Expense
Equity-based compensation expense consists of compensation expenses recognized in connection with equity incentive awards granted to our employees and board members. Restructuring Expenses Restructuring expenses consists of costs associated with business realignment efforts and strategic transformation costs resulting from value creation initiatives following business acquisitions, which primarily relate to severance costs from back-office headcount reductions.
Other Operating Expenses, Net
Other operating expenses, net consists primarily of acquisition related costs and transaction costs related, including legal, accounting, valuation and investor relations advisors, and compensation consultant fees, as well as other operating expenses. Interest Expense
Interest expense consists of interest incurred in connection with our long-term debt obligations, and amortization of debt issuance costs and/or debt premium/discounts.
Other Income (Expense), net
Other income (expense), net consists of interest income on invested funds, impacts from foreign exchange transactions, gain on disposition of business, gain on loan forgiveness and other expenses.
Income Tax Expense
Income tax expense represents expenses associated with our operations based on
the tax laws of the jurisdictions in which we operate. Our calculation of income
tax expense is based on tax rates and tax laws at the end of each applicable
reporting period.
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Results of Operations
The following table sets forth our consolidated statements of operations for the
presented periods:
Year Ended December 31,
(in thousands USD) 2022 2021
Net revenues $ 176,846 $ 158,668
Cost of revenue 119,159 112,303
Gross profit 57,687 46,365
Operating expenses:
Selling, general and administrative expenses 45,786 43,551
Depreciation and amortization 7,025 6,984
Change in fair value of purchase price obligation - (2,200)
Change in fair value of embedded derivative liabilities (3,337) (4,406)
Change in fair value of warrant liability 169 (4,694)
Loss on debt extinguishment 9,734 -
Equity-based compensation expense 5,771 6,481
Restructuring expenses 1,804 911
Other operating expenses, net 3,662 1,785
Total operating expense 70,614 48,412
Loss from operations (12,927) (2,047)
Interest expense (12,890) (16,457)
Other income (expense), net 7,143 (1,084)
Loss before income tax (18,674) (19,588)
Income tax expense 1,454 460
Net loss (20,128) (20,048)
Net income attributable to noncontrolling interests 52 22
Net loss attributable to the Company $ (20,180) $ (20,070)
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The following table sets forth our consolidated statements of operations
information expressed as a percentage of net revenues for each respective year
presented:
Year Ended December 31,
2022 2021
Net revenues 100.0 % 100.0 %
Cost of revenue 67.4 % 70.8 %
Gross profit 32.6 % 29.2 %
Operating expenses:
Selling, general and administrative expenses 25.9 % 27.4 %
Depreciation and amortization 4.0 % 4.4 %
Change in fair value of purchase price obligation - % (1.4) %
Change in fair value of embedded derivative liabilities (1.9) % (2.8) %
Change in fair value of warrant liability 0.1 % (3.0) %
Loss on debt extinguishment 5.5 % - %
Equity-based compensation expense 3.3 % 4.1 %
Restructuring expenses 1.0 % 0.6 %
Other operating expenses, net 2.1 % 1.1 %
Total operating expense 40.0 % 30.4 %
Loss from operations (7.4) % (1.2) %
Interest expense (7.3) % (10.4) %
Other income (expense), net 4.0 % (0.7) %
Loss before income tax (10.7) % (12.3) %
Income tax expense 0.8 % 0.3 %
Net loss (11.5) % (12.6) %
Net income attributable to noncontrolling interests - % - %
Net loss attributable to the Company (11.5) % (12.6) %
Comparison of Years Ended
Net revenues
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Net Revenues $ 176,846 $ 158,668 11.5 %
Net revenues for the year ended December 31, 2022 increased $18.2 million , or
11.5%, to $176.8 million from $158.7 million for the year ended December 31,
2021 . The increase was primarily due to increased services, expanded scope in
projects with existing clients, and the commencement of new projects with new
clients.
Net Revenues by Geographic Location
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
United States $ 112,223 $ 103,436 8.5 %
Latin America 64,623 55,232 17.0 %
Total $ 176,846 $ 158,668 11.5 %
Net revenues from our United States operations for the year ended December 31,
2022 increased $8.8 million , or 8.5%, to $112.2 million from $103.4 million for
the year ended December 31, 2021 . The change was mainly driven by an
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increase$16.2 million revenue generated with existing clients and new projects, offset by a reduction of$7.4 million due to a reduction of scope with legacy projects. Net revenues from ourLatin America operations for the year endedDecember 31, 2022 increased$9.4 million , or 17.0%, to$64.6 million from$55.2 million for the year endedDecember 31, 2021 . The change was driven by an increase of$11.0 million related to increased scope of work with existing clients, offset by a$1.6 million decrease in revenues from other customers as a result of project scope reductions. Revenues by Contract Type
The following table sets forth net revenues by contract type and as a percentage of our revenues for the periods indicated:
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Time and materials $ 125,231 $ 130,603 (4.1) %
Fixed price 51,615 28,065 83.9 %
Total $ 176,846 $ 158,668 11.5 %
Net revenues from our time and materials contracts for the year ended
December 31, 2022 decreased approximately $5.4 million , or 4.1%, to $125.2
million from $130.6 million for the year ended December 31, 2021 . The main
driver of the net variation is related to the decrease in service volume with
existing and new customers under the time and materials revenue model towards
fixed-price engagements. Net revenues from our fixed price contracts for the
year ended December 31, 2022 increased $23.5 million , or 83.9%, to $51.6 million
from $28.1 million for the year ended December 31, 2021 . The main driver of the
net increase is related to the shift to fixed price core delivery teams with two
major clients from the financial services industry in Latin America , combined
with additional revenues coming from fixed price engagements with other major
existing customers.
Cost of revenue
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Cost of revenue $ 119,159 $ 112,303 6.1 %
% of net revenues 67.4 % 70.8 %
Cost of revenue for the year ended December 31, 2022 increased $6.9 million , or
6.1%, to $119.2 million from $112.3 million for the year ended December 31,
2021 . The increase was primarily driven by the increase in the scope of work
from an existing client and the new scope of work from new clients consistent
with our revenue growth from the year ended December 31, 2021 to December 31,
2022 .
Selling, general and administrative expenses
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Selling, general and administrative expenses $ 45,786 $ 43,551 5.1 %
% of net revenues 25.9 % 27.4 %
Selling, general and administrative expenses for the year ended December 31,
2022 increased $2.2 million , or 5.1%, to $45.8 million from $43.6 million for
the year ended December 31, 2021 . The increase was primarily due to a $2.8
million increase in employee costs mostly driven by new hires, the adoption of
the guild delivery model, and a change in Mexican labor laws and an increase of
$0.8 million of software and rent. This was offset by a reduction of $0.9
million in professional fees and a $0.5 million reduction insurance expense.
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Depreciation and amortization
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Depreciation and amortization $ 7,025 $ 6,984 0.6 %
% of net revenues 4.0 % 4.4 %
Depreciation and amortization for year ended
Change in fair value of purchase price obligation
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Change in fair value of purchase price obligation $ - $ (2,200) (100.0) %
% of net revenues - % (1.4) %
Change in fair value of purchase price obligation for the year ended
December 31, 2022 resulted in a gain of $2.2 million . As of December 31, 2021 ,
the obligation now relates to a known and fixed amount due and is no longer a
contingent obligation recorded at fair value. There was no change in fair value
of purchase price obligation for the year ended December 31, 2022 .
Change in fair value of embedded derivative liability
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Change in fair value of embedded derivative (24.3) %
liabilities $ (3,337) $ (4,406)
% of net revenues (1.9) % (2.8) %
Change in fair value of embedded derivative liabilities for the year ended
December 31, 2021 resulted in a gain of $4.4 million . The gain was primarily
driven by the change in the discount rate used to estimate the fair value of
embedded derivative liabilities from February 2, 2021 (inception date) to August
23, 2021 . The change in fair value of embedded derivative liabilities for the
year ended December 31, 2022 was primarily driven by a decline in the Company's
stock price during from August 10, 2022 (inception date) to December 31, 2022 .
Change in fair value of warrant liability
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Change in fair value of warrant liability $ 169 $ (4,694) (103.6) %
% of net revenues 0.1 % (3.0) %
Change in fair value of warrant liability for the year ended December 31, 2022
increased $4.9 million or 103.6% to $0.2 million from $(4.7) million for the
year ended December 31, 2021 . The loss was primarily driven by an increase in
the
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market price of our public warrants, changes in the risk-free rate of return and
volatility used to estimate the fair value of our warrant liability from
Loss on debt extinguishment
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Loss on debt extinguishment $ 9,734 $ - 100.0 %
% of net revenues 5.5 % - %
Loss on debt extinguishment for the year ended December 31, 2022 of $9.7 million
was due to an amendment signed on March 30, 2022 for the First Lien Facility
resulting in a $7.1 million loss offset by the $0.9 million gain on debt
extinguishment recognized on May 27, 2022 when the Company extinguished the
First Lien Facility. In addition, the loss on debt extinguishment increased due
to the amendment signed on August 10, 2022 for the Second Lien Facility
resulting in an $11.7 million loss. The Company entered into an amendment for
the purchase price obligation on November 15, 2022 resulting in a $0.6 million
loss on debt extinguishment. This was offset by a $8.8 million gain on debt
extinguishment from the amendment signed on November 18, 2022 for the Second
Lien Facility. Refer to Note 9, Long-Term Debt , for further
information.
Equity-based compensation expense
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Equity-based compensation expense $ 5,771 $ 6,481 (11.0) %
% of net revenues 3.3 % 4.1 %
Equity-based compensation expense for the year ended December 31, 2022 decreased
$0.7 million , or 11.0%, to $5.8 million from $6.5 million for the year ended
December 31, 2021 . The Company issued 4,673,681 RSUs during the year ended
December 31, 2022 under the 2021 Equity Incentive Plan. In total, the awards
under the 2021 Equity Incentive Plan resulted in $5.8 million equity-based
compensation expense that was recognized during the year ended December 31,
2022 . In connection with the Business Combination, the Company granted stock
awards covering shares of common stock and accelerated previously granted
restricted stock units, which resulted in $6.5 million equity-based compensation
expense that was recognized during the year ended December 31, 2021 . Refer to
Note 18, Equity-based Arrangements , for further information.
Restructuring expenses
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Restructuring expenses $ 1,804 $ 911 98.0 %
% of net revenues 1.0 % 0.6 %
Restructuring expenses for the year ended
Restructuring , for further information.
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Other operating expenses, net
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Other operating expense, net $ 3,662 $ 1,785 105.2 %
% of net revenues 2.1 % 1.1 %
Other operating expenses, net for the year ended December 31, 2022 increased
$1.9 million , or 105.2%, to $3.7 million from $1.8 million for the year ended
December 31, 2021 . This was mainly driven by increased fees for tax audit
consultants, legal fees, and executive recruitment costs.
Interest expense
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Interest expense $ (12,890) $ (16,457) (21.7) %
% of net revenues (7.3) % (10.4) %
Interest expense for the year ended December 31, 2022 decreased $3.6 million , or
21.7%, to $12.9 million from $16.5 million for the year ended December 31, 2021 .
The decrease was primarily due to the reduction in principal debt obligations
occurring from September 2021 to December 2022 . During the first half of 2021
our outstanding principal debt was larger than the majority of 2022.
Other income (expense), net
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Other income (expense), net $ 7,143 $ (1,084) (758.9) %
% of net revenues 4.0 % (0.7) %
Other income (expense), net for the year ended December 31, 2022 increased $8.2
million , or 758.9%, to $7.1 million from $(1.1) million for the year ended
December 31, 2021 . The change was driven by a $2.5 million increase in net
foreign currency exchange gains, an increase of the $6.0 million gain related to
the PPP loan forgiveness, and offset by an increase of $0.3 million of other
(expense).
Income tax expense
Year Ended December 31, % Change
2022 2021 2022 vs. 2021
(in thousands, except percentages)
Income tax expense $ 1,454 $ 460 216.1 %
Effective income tax rate 0.8 % 0.3 %
Income tax expense for the year ended December 31, 2022 increased $1.0 million ,
or 216.1%, to $1.5 million from $0.5 million for the year ended December 31,
2021 due to an increase of deferred tax expense as a result of book to tax
timing differences.
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Non-GAAP Measures
To supplement our consolidated financial data presented on a basis consistent withU.S. GAAP, we present certain non-GAAP financial measures, including Adjusted Operating Income, Adjusted Net Income (Loss) and Adjusted Diluted EPS. We have included the non-GAAP financial measures because they are financial measures used by our management to evaluate our core operating performance and trends, to make strategic decisions regarding the allocation of capital and new investments and are among the factors analyzed in making performance-based compensation decisions for key personnel. The measures exclude certain expenses that are required underU.S. GAAP. We exclude certain non-cash expenses and certain items that are not part of our core operations. We believe this supplemental performance measurement are useful in evaluating operating performance, as they are similar to measures reported by our public industry peers and those regularly used by security analysts, investors and other interested parties in analyzing operating performance and prospects. The non-GAAP financial measures are not intended to be a substitute for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies. We compensate for these limitations by providing investors and other users of our financial information a reconciliation of our non-GAAP measures to the related GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP measures in conjunction with GAAP financial measures.
We define and calculate our non-GAAP financial measures as follows:
•Adjusted Operating Income: Loss from operations adjusted to exclude the change
in fair value of embedded derivative liability, plus the change in fair value of
purchase price obligation, plus the change in fair value of warrant liability,
plus equity-based compensation expense, plus impairment charges, plus
restructuring expense, plus gain (loss) on business depositions, plus loss
(gain) on debt extinguishment, plus intangible assets amortization, plus certain
transaction costs and certain other operating expense, net.
The following table presents the reconciliation of our Adjusted Operating Income
to our Loss from operations, the most directly comparable GAAP measure, for the
annual periods indicated:
Year Ended December 31,
(in thousands USD) 2022 2021
Loss from operations $ (12,927) $ (2,047)
Change in fair value of embedded derivative liability (3,337) (4,406)
Change in fair value of purchase price obligation - (2,200)
Change in fair value of warrant liability 169 (4,694)
Equity-based compensation expense 5,771 6,481
Restructuring expenses1 1,804 911
Loss on debt extinguishment 9,734 -
Intangible assets amortization 6,614 6,261
Transaction costs 10 1,334
Other operating expense, net2 3,562 1,944
Adjusted Operating Income $ 11,400 $ 3,584 1 - Represents restructuring expenses associated with the ongoing reorganization of our business operations and realignment efforts. Refer to Note 14,
Restructuring , within our consolidated financial statements in this
Annual Report on Form 10-K.
2 - Represents professional service fee primarily comprised of legal fees in
connection with tax consulting fees in connection with review advisory and
corporate consolidation project assessments, as well as non-recurring recruiting
fee.
•Adjusted Net Income (Loss) : Net loss adjusted to exclude the change in fair
value of embedded derivative liability, plus the change in fair value of
purchase price obligation, plus the change in fair value of warrant liability,
plus equity-based compensation expense, plus impairment charges, plus
restructuring expenses, plus (gain) loss on business dispositions, plus foreign
exchange (gain) loss, plus loss (gain) on debt extinguishment and debt
forgiveness, plus
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intangible assets amortization, plus certain transaction costs, plus paid in kind interest and amortization of debt issuance cost, premiums, and discounts and certain other expense, net.
•Adjusted Diluted EPS: Adjusted Net Income (Loss) divided by the diluted weighted-average number of common shares outstanding for the period.
The following table presents the reconciliation of our Adjusted Net Income (Loss) and Adjusted Diluted EPS to our Net loss, the most directly comparable GAAP measure, for the annual periods indicated:
Year Ended December 31,
(in thousands USD) 2022 2021
Net loss $ (20,128) $ (20,048)
Change in fair value of embedded derivative liability (3,337) (4,406)
Change in fair value of purchase price obligation - (2,200)
Change in fair value of warrant liability 169 (4,694)
Equity-based compensation expense 5,771 6,481
Restructuring expenses 1,804 911
Foreign exchange (gain) loss1 (593) 1,936
Loss (Gain) on debt extinguishment and debt forgiveness 2,454 (1,306)
Intangible assets amortization 6,614 6,261
Transaction costs 10 1,334
Paid in kind interests and amortization of debt issuance cost, premiums, and discounts
5,667 6,847
Other expense, net2 4,292 2,469
Adjusted Net Income (Loss) 2,723 (6,415)
Number of shares used in Adjusted Diluted EPS 47,019,741 37,331,820
Adjusted Diluted EPS $ 0.06 $ (0.17)
1 - Represents foreign exchange loss (gain) due to foreign currency
transactions.
2 - Represents professional service fees primarily comprised of legal fees as
well as other miscellaneous non-operating/non-recurring items.
Liquidity and Capital Resources
Our main sources of liquidity have been our cash and cash equivalents, cash generated from operations, and proceeds from issuances of stock and the incurrence of debt. Our main uses of cash are funds to operate our business, make principal and interest payments on our outstanding debt, and capital expenditures.
Our future capital requirements will depend on many factors, including our growth rate. Over the past several years, operating expenses have increased as we have invested in growing our business. Payments of principal and interest on our debt and earnout cash payments following our acquisitions have also been substantial cash outflows. Our operating cash requirements may increase in the future as we continue to invest in the growth of our Company. In addition, we have a substantial amount of debt and other obligations. We do not currently have sufficient available cash flows to service our upcoming payment commitments and may not have sufficient cash flows or assets to repay our debt and other obligations in full when due. However, any such event of default related to theApril 15, 2023 ,June 15, 2023 , orSeptember 15, 2023 payments under the Blue Torch Credit Facility will not result in Blue Torch's ability to accelerate any indebtedness but additional paid in kind fees will be added to the outstanding principal amount of the Blue Torch Credit Facility term loan. If the Company meets these payments timely, no paid-in-kind fees will be incurred. Provisions of our senior credit agreements also restrict us from paying certain near-term obligations and subordinated indebtedness. We have defaulted on certain financial covenants in our credit agreements and have requested and obtained waivers from our lenders and made significant amendments to our credit agreements to reset those covenants. These waivers and amendments have required us to commit to pay additional fees to our lenders, which in some cases have substantially changed our original debt terms. 67 -------------------------------------------------------------------------------- Table of Contents Our failure to pay any of these amounts will be a payment default under the terms of those agreements. Defaulting on our near-term obligations toExitus Capital andMonroe would allowExitus Capital to accelerate the amounts due under their respective loan or allowMonroe to seek to enforce our obligation to repay the Monroe Deferred Fees. In addition, our failure to pay the indebtedness due toExitus Capital will be a cross-default under both the Blue Torch Credit Facility and the Second Lien Facility, but would not allow either of Blue Torch or the SecondLien Lenders to accelerate indebtedness due under their respective loans unlessExitus Capital accelerates the amounts due to it. In order to comply with our upcoming payment commitments, we are planning to access different sources of funding, including potentially through issuances of our common stock or other securities, debt financing or refinancing, other commercial arrangements or a combination of such alternatives. To the extent we raise additional capital through the sale of our common stock or securities convertible into our common stock, the ownership interests of our existing shareholders will be diluted, perhaps substantially. We also intend to refinance the Blue Torch Credit Facility and are in active discussions with potential lenders regarding this strategy. There is no assurance that we will be successful in raising additional funds, refinancing our indebtedness or revising the payment terms of our near-term obligations. If we are unable to obtain sufficient financial resources or revise such payment terms, we may be required to adopt one or more alternatives, such as restructuring our indebtedness or selling material assets or operations. As ofDecember 31, 2022 andFebruary 28, 2023 , we had$8.5 million and$3.5 million , respectively, of available cash and cash equivalents. We believe that we will have sufficient financial resources to fund our operations for the next 12 months. In addition, we believe that the plans discussed in the prior paragraph are sufficient to allow us to comply with our upcoming payment commitments. We are continuously looking to implement strategies to improve our profitability and reduce expenses. Our ability to generate additional cash flows will be dependent on increasing revenues, securing stronger profit margins, and, as noted above, reducing debt. In order to increase cash flows from operating activities, we are implementing cost reduction initiatives to reduce selling, general, and administrative expenses, in particular reducing overhead in non-revenue production activities. In addition, our investments made to increase our sales team during the past six months are expected to contribute to positive revenue growth and stronger gross margins.
Debt
The table below sets forth all principal amounts of our indebtedness and related obligations as ofFebruary 28, 2023 and upcoming principal payments within the next 12 months.
2023 Principal Payment Due Dates and Amounts (excluding interest)
Obligation atFebruary 28, 2023 March 31 April 15 May 25 June 15 July 27 Sept 15 Nov 15 Dec 31 Equity Settlement Blue Torch Credit Facility(a)$ 63.5 $ -$ 15.0 $ -$ 5.0 $ -$ 5.0 $ -$ 0.7 N/A Second Lien Facility(b) 19.4 - - - - - - - -$8.6 Exitus Capital Subordinated Debt(c) 1.6 - - - - 1.6 - - - (c) AGS Subordinated Promissory Note(c) 0.8 0.8 - - - - - - - (c) Other 0.2 - - - - - - - - N/A Monroe Deferred Fees (c) 3.5 - - 3.5 - - - - - (c) Purchase Price Obligation Note Payable(d) 10.2 - - - - - - 2.4 -$2.4 (a) Defaults on theApril 15, 2023 ,June 15, 2023 , orSeptember 15, 2023 , payments will result in additional paid in kind fees of$4.0 million ,$2.0 million and$3.0 million , respectively. However, any such events of default will not result in Blue Torch's ability to accelerate any indebtedness. Amount outstanding atFebruary 28, 2023 does not include an additional paid in kind fee of$0.5 million added to the term loan as ofMarch 9, 2023 . (b) As ofFebruary 28, 2023 Credit Suisse represented$10.8 million of the Second Lien Facility. Credit Suisse may convert their outstanding loans, interest, and fees into the Company's common stock to the closing price of one share of our common stock on the trading day immediately prior to the conversion date, subject to a floor price of$4.64 per share. As ofFebruary 28, 2023 Nexxus Capital represented$8.6 million of the Second Lien Facility.Nexxus Capital will convert their outstanding loans, interest, and fees into the Company's common stock at$4.64 per share upon maturity,June 15, 2023 . (c) On December 29, 2021, the Company issued common stock toMonroe as collateral for the outstanding deferred fees. OnFebruary 10, 2023 , the Company issued common stock toExitus Capital andAGS Group as collateral for the outstanding principal and interest. Each ofMonroe ,Exitus Capital andAGS Group may sell those shares and apply 100% of the net proceeds therefrom to repay our obligations. If the net proceeds from sales of the shares exceed the obligations owed by the Company, the relevant party shall remit such excess cash proceeds to the Company. Upon payment in full of the respective obligation in cash by us or through sales of the shares, the relevant party shall return any of the unsold shares to us. (d) As ofFebruary 28, 2023 AN Extend represented$2.4 million of the purchase price obligation note payable. If AN Extend is not paid in full prior to the maturity date,November 15, 2023 , the total amount of principal and the interest will be converted within the following 30 calendar days counted from the maturity date with shares of common stock, taking as value of the shares the value resulting from using the Volume Weighted Moving Average Price. 68 -------------------------------------------------------------------------------- Table of Contents In addition, the Blue Torch Credit Facility and the Second Lien Facility restrict our ability to make payments on outstanding obligations, including the Monroe Deferred Fees and the indebtedness due toExitus Capital andAGS Group , unless we satisfy certain financial covenants and there is no event of default that has occurred and is continuing. The following paragraphs further summarize the material terms of our indebtedness and related payment obligations. See also "Risk Factors - Risks Related to Our Financial Position and Need forAdditional Capital " for additional information. For additional information, see Note 9, Long-term Debt , to our consolidated financial statements appearing in this Annual Report on Form 10-K. Blue Torch Credit Facility OnMay 27, 2022 , the Company entered into a financing agreement ("Blue Torch Credit Facility") by and among the Company,AN Global LLC , certain subsidiaries of the Company, as guarantors (the "Guarantors"), the financial institutions party thereto as lenders, andBlue Torch Finance LLC ("Blue Torch"), as the administrative agent and collateral agent. The Blue Torch Credit Facility is secured by substantially all of the Company's and the Guarantors' properties and assets and provides for a term loan of$55.0 million and a revolving credit facility with an aggregate principal limit not to exceed$3.0 million at any time outstanding, both of which were fully drawn as ofJune 28, 2022 . We used approximately$40.2 million from the Blue Torch financing agreement to refinance the outstanding principal, interest, and a portion of the$6.9 million deferred fees related amendments on our Prior First Lien Credit Facility. The remaining$14.8 million from the Blue Torch Credit Facility was used to pay approximately$9.0 million of certain past-due accounts and approximately$5.8 million was used for operations and general corporate purposes. The Company entered into a waiver and amendment onAugust 10, 2022 and an amendment onNovember 1, 2022 , in each case to provide for an extension to satisfy certain post-closing obligations under the Blue Torch Credit Facility. The Company recognized$0.6 million in debt issuance costs related to the August waiver and amendment. As ofDecember 31, 2022 , the Company was in default under the permitted factoring disposition and leverage ratio covenants. Subsequent toDecember 31, 2022 , the Company was also in default under the leverage ratio, liquidity, aged accounts payable, permitted payments and other covenants under the Blue Torch Credit Facility. As a result of such defaults, the Company entered into a waiver and amendment onMarch 7, 2023 ("Amendment No.4") to revise significant terms of the Blue Torch Credit Facility as set forth below. Pursuant to Amendment No.4, the Company agreed to pay approximately$34.0 million of our total indebtedness and related obligations in 2023, including principal payments of$15.0 million byApril 15, 2023 ,$20.0 million byJune 15, 2023 (inclusive of the$15.0 million byApril 15, 2023 if not paid by then) and$25.0 million bySeptember 15, 2023 (inclusive of the$20.0 million byJune 15, 2023 if not paid by then) to the Blue Torch Lenders. Thereafter, the Company will make quarterly payments on the term loan of approximately$0.7 million startingDecember 31, 2023 . The amendment also revised the maturity date of the Blue Torch Credit Facility fromMay 27, 2026 toJanuary 1, 2025 and revised the interest provisions to remove the step-down in interest rate based on the Company's total leverage ratio. Interest is paid quarterly for both loans, and is calculated based on the Adjusted Term SOFR (the three-month Term Secured Overnight Financing Rate, plus 0.26161%) plus a margin of 9.0% annually. Interest on each loan is payable on the last day of the then effective interest period applicable to such loan and at maturity. The revolving credit facility will bear a 2.0% annual usage fee on any undrawn portion of the facility. In connection with Amendment No.4, the Company agreed to pay the administrative agent a fee equal to$6.0 million , which was paid in kind by adding such capitalized amount to the outstanding principal of the term loan. In addition, if the Company fails to repay the respective aggregate principal amounts on or prior toApril 15, 2023 ,June 15, 2023 andSeptember 15, 2023 , a failed payment fee equal to$4.0 million ,$2.0 million and$3.0 million respectively will be paid in kind by adding such fee to the outstanding principal of the term loan. If we meet these payments when due then no fee will be incurred. Failure to make these payments would constitute an event of default but will not result in the ability of the administrative agent to accelerate indebtedness under the Blue Torch Facility. Amendment No. 4 also required the Company to engage both a financial advisor to support the Company's capital raising needs and an operational advisor to conduct a formal assessment of the Company's financial performance, in both cases on terms reasonable acceptable to Blue Torch.
Lastly, Amendment No.4 granted a waiver for the covenant breaches and reset the covenant requirements for future periods.
The covenants were amended as follows:
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Revenue. Requires the Company's trailing annual aggregate revenue to exceed
$150.0 million as of the end of each computation period as described below. No
changes to this covenant were made as a result of this amendment.
Computation Period Ending Revenue
December 31, 2022 $ 150,000,000
March 31, 2023 and each fiscal month ending thereafter 150,000,000
Liquidity. Prior to Amendment No.4, the Blue Torch Credit Facility required the Company's liquidity to be above$5.0 million at any time during the effective duration of the agreement. As a result of Amendment No.4, the Company is required to maintain liquidity above$1.0 million throughMarch 24, 2023 , above$2.0 million throughApril 15, 2023 , and above$7.0 million at any time thereafter. Liquidity is defined as the remaining capacity under the Blue Torch Credit Facility plus the total unrestricted cash on hand. LeverageRatio . The Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. Prior to Amendment No. 4, it was calculated as of the last day of each quarterly computation period as the ratio of (a) total debt (as defined in the Blue Torch Facility) to (b) EBITDA for the computation period ending on such day. The following tables represent our leverage ratio covenant requirements as of each computation period before and after the effective date of Amendment No. 4. A computation period is any period of four consecutive fiscal quarters for which the last fiscal month ends on a date set forth below. Prior to amendment Computation Period Ending LeverageRatio December 31, 2022 4.00:1.00March 31, 2023 3.75:1.00June 30, 2023 and each quarter ending thereafter 3.50:1.00 Following the amendment Computation Period Ending LeverageRatio March 31, 2023 6.38:1.00April 30, 2023 6.60:1.00May 31, 2023 6.20:1.00June 30, 2023 6.00:1.00July 31, 2023 5.28:1.00August 31, 2023 4.51:1.00September 30, 2023 4.12:1.00October 31, 2023 3.50:1.00November 30, 2023 3.14:1.00December 31, 2023 4.63:1.00January 31, 2024 and each fiscal month ending thereafter
3.50:1.00
EBITDA. Following the effective date of Amendment No.4, if the Company fails to make the$15.0 million payment and related obligations byApril 15, 2023 , the Company will be subjected to a consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant requirement. The Company will be required to maintain a 12-month trailing EBITDA of at least the following for each fiscal month end. 70
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Table of Contents Computation Period Ending EBITDA March 31, 2023$ 9,953,000 April 30, 2023 9,627,000 May 31, 2023 10,238,000 June 30, 2023 10,607,000 July 31, 2023 12,023,000 August 31, 2023 14,055,000 September 30, 2023 15,415,000 October 31, 2023 18,117,000 November 30, 2023 20,224,000 December 31, 2023 and each fiscal month end thereafter 13,707,000 Second Lien Facility OnNovember 22, 2021 , the Company entered into a Second Lien Facility (the "Second Lien Facility") withCredit Suisse and Nexxus Capital (both of which are existingAgileThought shareholders and have representation onAgileThought's Board of Directors),Manuel Senderos , Chief Executive Officer and Chairman of the Board of Directors, andKevin Johnston , Global Chief Operating Officer (the "SecondLien Lenders "). The Second Lien Facility provides for a term loan facility, with Tranches for each of the SecondLien Lenders , in an initial aggregate principal amount of approximately$20.7 million , accruing paid in kind interest at a rate per annum from 11.00% for the US denominated loan and 17.41% for the Mexican Peso denominated Loan. The Second Lien Facility had an original maturity date ofMarch 15, 2023 and an original conversion price of$10.19 per share, both of which were subsequently amended as described below. The Company recognized$0.9 million in debt issuance costs in connection with the execution of the Second Lien Facility. OnAugust 10, 2022 , the Company entered into an amendment to the Second Lien Facility to extend the maturity date of the Credit Suisse, Senderos and Johnston loans toSeptember 15, 2026 , and provide for potential increases, that step up over time from one percent to five percent, in the interest rate applicable to the Credit Suisse loans. The amendment also extends the maturity date of theNexxus Capital loans toJune 15, 2023 and provides for the mandatory conversion of theNexxus Capital loans thereunder, including interest and fees, into common stock of the Company upon the maturity at a conversion price equal to$4.64 per share. The amendment also provided for the covenants and certain other provisions of the Second Lien Facility to be consistent with those in the Blue Torch Credit Facility (and in certain cases for those covenants to be made less restrictive than those in the Blue Torch Credit Facility). This amendment was determined to substantially alter the Second Lien Facility such that extinguishment accounting would be applied. The Company recognized a loss on debt extinguishment of$11.7 million for the three months endedSeptember 30, 2022 . As part of the reassessment of the Second Lien Facility, the Company bifurcated the conversion option on the Mexican peso-dominated loans and recognized an embedded derivative liability of$9.0 million as of the amendment date. See Note 4, Fair Value Measurements , for additional information. OnNovember 18, 2022 , the Company entered into a letter agreement with Credit Suisse to modify the conversion price at which the Credit Suisse lenders may convert their outstanding loans, interest, and fees common stock of the Company to the closing price of one share of our common stock on the trading day immediately prior to the conversion date, subject to a floor price of$4.64 per share. This amendment was determined to substantially alter the Credit Suisse portion of the Second Lien Facility such that extinguishment accounting was applied. The Company recognized a gain on debt extinguishment of$8.8 million for the three months endedDecember 31, 2022 . The total loss on debt extinguishment related to the Second Lien Facility was$2.9 million for the twelve months endedDecember 31, 2022 . Each SecondLien Lender has the option to convert all or any portion of its outstanding loans, interest and fees into common stock of the Company at any time at the respective conversion prices. OnDecember 27, 2021 ,Manuel Senderos andKevin Johnston exercised the conversion options for their respective principal amounts of$4.5 million and$0.2 million , respectively, at the original conversion price of$10.19 per share. See Note 16, Stockholders' Equity , for additional information. As noted above, onJune 15, 2023 , the outstanding principal, interest and fees related to theNexxus Capital loans will convert into common stock of the Company at the conversion price of$4.64 per share. As ofDecember 31, 2022 , the outstanding principal, interest and fees related to theNexxus Capital loans was$8.6 million . 71 -------------------------------------------------------------------------------- Table of Contents OnMarch 7, 2023 , in connection with Amendment No. 4 to the Blue Torch Credit Facility, the Company entered into a sixth amendment to the Second Lien Facility ("Amendment No. 6"). Amendment No. 6 revised the maturity date of the Credit Suisse loans fromSeptember 15, 2026 toJuly 1, 2025 . Amendment No. 6 also provided for the covenants and certain other provisions of the Second Lien Facility to be consistent with those in the Blue Torch Credit Facility, as amended by Amendment No. 4, except as set forth below:
Revenue. Requires the Company's trailing annual aggregate revenue to exceed
Computation Period Ending RevenueDecember 31, 2022 $ 120,000,000 March 31, 2023 and each fiscal month ending thereafter
120,000,000
Liquidity. Prior to Amendment No. 6, the Second Lien Facility required the Company's liquidity to be above$3.0 million at any time during the effective duration of the agreement. Following Amendment No. 6, we are required to maintain liquidity (i) above$0.8 million at any time on or prior toMarch 24, 2023 , (ii) above$1.6 million at any time fromMarch 24, 2023 toApril 15, 2023 , (iii) and above$5.6 million afterApril 15, 2023 thereafter. Liquidity is defined as the remaining capacity under the Second Lien Facility plus the total unrestricted cash on hand. LeverageRatio . The Leverage Ratio applies to the consolidated group and is determined in accordance with US GAAP. Prior to Amendment No. 6, it is calculated as of the last day of each quarterly computation period as the ratio of (a) total debt (as defined in the Second Lien Facility) to (b) EBITDA for the computation period ending on such day. The following tables represent our leverage ratio covenant requirements as of each computation period before and after the effective date of Amendment No.6. A computation period is any period of four consecutive fiscal quarters for which the last fiscal month ends on a date set forth below. Prior to amendment Computation Period Ending LeverageRatio December 31, 2022 4.80:1.00March 31, 2023 4.50:1.00June 30, 2023 and each quarter ending thereafter 4.20:1.00 Following the amendment Computation Period Ending LeverageRatio March 31, 2023 7.65:1.00April 30, 2023 7.92:1.00May 31, 2023 7.44:1.00June 30, 2023 7.20:1.00July 31, 2023 6.34:1.00August 31, 2023 5.41:1.00September 30, 2023 4.94:1.00October 31, 2023 4.20:1.00November 30, 2023 3.77:1.00December 31, 2023 5.56:1.00January 31, 2024 and each fiscal quarter ending thereafter
4.20:1.00
EBITDA. Following the effective date of Amendment No. 6, if the Company fails to make the$15.0 million payment and related obligations to Blue Torch byApril 15, 2023 , the Company will be subjected to a consolidated earnings before 72 -------------------------------------------------------------------------------- Table of Contents interest, taxes, depreciation and amortization ("EBITDA") covenant requirement. The Company will be required to maintain a 12-month trailing EBITDA of at least the following for each fiscal month end. Computation Period Ending EBITDAMarch 31, 2023 $ 7,962,400 April 30, 2023 7,701,600May 31, 2023 8,190,400June 30, 2023 8,485,600July 31, 2023 9,618,400August 31, 2023 11,244,000September 30, 2023 12,332,000October 31, 2023 14,493,600November 30, 2023 16,179,200December 31, 2023 and each fiscal month end thereafter
10,965,600
AGS Subordinated Promissory Note
OnJune 24, 2021 , the Company entered into a credit agreement withAGS Group LLC ("AGS Group ") for a principal amount of$0.7 million (the "AGS Subordinated Promissory Note"). The principal amount outstanding under the AGS Subordinated Promissory Note matured onDecember 20, 2021 ("Original Maturity Date") but was extended multiple times untilMarch 31, 2023 ("Extended Maturity Date"). Interest is due and payable in arrears on the Original Maturity Date at a 14.0% per annum until and includingDecember 20, 2021 and at 20% per annum from the Original Maturity Date to the Extended Maturity Date calculated on the actual number of days elapsed. In connection with an extension of the maturity date onJanuary 31, 2023 , the Company also agreed to issue shares of common stock with a value of approximately$1.8 million , equal to approximately two times the then outstanding principal and interest of the AGS Subordinated Promissory Note. We issued 414,367 shares onFebruary 10, 2023 that are intended to serve as collateral. Upon the earlier of the Extended Maturity Date or an event of default,AGS Group may sell those shares and apply 100% of the net proceeds therefrom to repay the AGS Subordinated Promissory Note. If the net proceeds from sales of the shares exceed the indebtedness owed by the Company,AGS Group shall remit such excess cash proceeds to the Company. Upon payment in full of the AGS Subordinated Promissory Note in cash by us or through sales of the shares byAGS Group ,AGS Group shall return any of the unsold shares to us. Under the terms of the Blue Torch Credit Facility and the Second Lien Facility, we may only repay the AGS Subordinated Promissory Note with the proceeds of an equity issuance, and then only if our total leverage ratio is 2.50 to 1.00 or less and we are in compliance with all financial covenants and no event of default has occurred and is continuing under the Blue Torch Credit Facility and the Second Lien Facility. We do not expect to satisfy these conditions on or before the Extended Maturity Date and have entered into a letter agreement withAGS Group to provide that our failure to pay such indebtedness will not be deemed an event of default. We plan to further extend the maturity date or substitute the AGS Subordinated Promissory Note as may be permitted under the Blue Torch Credit Facility or the Second Lien Facility. Any such agreements could be subject to the prior consent of Blue Torch and the SecondLien Lenders .
Exitus Capital Subordinated Debt
OnJuly 26, 2021 , the Company agreed with existing lenders andExitus Capital ,S.A.P.I. de C.V. , SOFOM, E.N.R. ("Exitus Capital ") to enter into a zero-coupon subordinated loan agreement withExitus Capital in an aggregate principal amount equal to$3.7 million (the "Exitus Capital Subordinated Debt"). Net loan proceeds totaled$3.2 million , net of$0.5 million in debt discount. No periodic interest payments are currently required and the loan was due onJanuary 26, 2022 , but was extended for three additional six month terms untilJuly 27, 2023 . With respect to each six month extension, the Company recognized approximately$0.4 million to$0.5 million in debt issuance costs. The loan is subject to a 36% annual interest moratorium if full payment is not made upon the maturity date. In addition, the Company paid approximately$1.1 million of the principal amount of the loan onJanuary 27, 2023 , plus a fee of approximately$0.5 million . OnFebruary 27, 2023 the Company paid an addition$1.0 million of the principal amount of the loan. The remaining principal amount of approximately$1.6 million will be due and payable on the new maturity date ofJuly 27, 2023 . In addition, onJanuary 31, 2023 , the Company agreed to issue shares of Class A Common Stock with a value of approximately$5.2 million , equal to approximately two times the then outstanding principal and interest of theExitus 73 -------------------------------------------------------------------------------- Table of Contents Capital Subordinated Debt. We issued 1,207,712 shares onFebruary 10, 2023 that are intended to serve as collateral. The Company is obligated to issue additional shares toExitus Capital from time to time if the value of the shares held by them is less two times than the outstanding principal amount of the loan. Upon the earlier of theJuly 27, 2023 or an event of default,Exitus Capital may sell those shares and apply 100% of the net proceeds therefrom to repay the Exitus Capital Subordinated Debt. If the net proceeds from sales of the shares exceed the indebtedness owed by the Company,Exitus Capital shall remit such excess cash proceeds to the Company. Upon payment in full of the Exitus Capital Subordinated Debt in cash by us or through sales of the shares byExitus Capital ,Exitus Capital shall return any of the unsold shares to us. Under the terms of the Blue Torch Credit Facility and the Second Lien Facility, we may only repay the Exitus Capital Subordinated Debt if we have repaid Blue Torch$15.0 million and$5.0 million byApril 15, 2023 andJune 15, 2023 , respectively. If we are unable to satisfy these conditions, the Company plans to further extend the maturity date or substitute the Exitus Capital Subordinated Debt as may be permitted under the Blue Torch Credit Facility and the Second Lien Facility. Any such modifications are also subject to the prior consent of Blue Torch and the SecondLien Lenders . Our failure to pay the indebtedness due toExitus Capital will be a payment default under its terms, which would allowExitus Capital to accelerate the indebtedness. In addition, our failure to payExitus Capital will be a cross-default under both the Blue Torch Credit Facility and Second Lien Facility, but would not allow either of the Blue Torch or SecondLien Lenders to accelerate indebtedness due under their respective loans unlessExitus Capital accelerates the amounts due to it.
Paycheck Protection Program Loans
OnApril 30, 2020 andMay 1, 2020 , the Company received Paycheck Protection Program Loans ("PPP Loans") through four of its subsidiaries for a total amount of$9.3 million . The PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed bythe United States federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company submitted its forgiveness applications to theSmall Business Administration ("SBA") betweenNovember 2020 andJanuary 2021 . The monthly repayment terms were established in the notification letters with the amount of loan forgiveness. OnDecember 25, 2020 ,$0.1 million of a$0.2 million PPP loan was forgiven. OnMarch 9, 2021 ,$0.1 million of a$0.3 million PPP loan was forgiven. OnJune 13, 2021 ,$1.2 million of a$1.2 million PPP loan was forgiven. OnJanuary 19, 2022 ,$7.3 million of a$7.6 million PPP loan was forgiven resulting in a remaining PPP Loan balance of$0.3 million of which$0.1 million is due within the next year. The remaining payments will be made quarterly untilMay 2, 2025 . All loan forgiveness was recognized in Other income (expense), net of the Consolidated Statements of Operations.
Prior First Lien Facility
In 2018, the Company entered into a credit agreement withMonroe Capital Management Advisors LLC , orMonroe , as administrative agent and the financial institutions listed therein, as lenders (the "Prior First Lien Facility"). The Prior First Lien Facility provided for a$5.0 million revolving credit facility and$98.0 million term loan facility. We repaid approximately$68.9 million under theMonroe credit agreement during the year ended 2021, primarily using$20.0 million of proceeds from an offering of preferred stock,$20.0 million of proceeds from the Second Lien Facility,$13.7 million of proceeds from an offering of common Stock and$4.3 million received in connection with the closing of the business combination. The remaining deferred fees of$3.5 million are due toMonroe onMay 25, 2023 (the "Monroe Deferred Fees"). An affiliate ofMonroe holds 2,016,129 shares of our common Stock and may sell those shares and apply 100% of the net proceeds therefrom to repay the Monroe Deferred Fees. If the net proceeds from sales of the shares exceed the Monroe Deferred Fees owed by the Company, the affiliate shall remit such excess cash proceeds to the Company. Upon payment in full of the Monroe Deferred Fees in cash by us or through sales of the shares byMonroe's affiliate, the affiliate shall return any of the unsold shares to us. Under the terms of the Blue Torch Credit Facility and the Second Lien Facility, we may only repay the Monroe Deferred Fees only if our total leverage ratio is 3.00 to 1.00 or less or 3.20 to 1.00 or less respectively, and we are in compliance with all financial covenants and no event of default has occurred and is continuing under the Blue Torch Credit Facility and the Second Lien Facility. If we are unable to satisfy these conditions, we will be unable to pay the Monroe Deferred Fees when due onMay 25, 2023 . AlthoughMonroe may sell the Monroe Supporting Shares to repay the Monroe Deferred Fees, there is no assurance that they will be able to do so or that they will not enforce our obligation to repay the Monroe Deferred Fees. 74 -------------------------------------------------------------------------------- Table of Contents Furthermore, we are required to issue a warrant toMonroe to purchase$7.0 million of our common stock for nominal consideration. We may be required to payMonroe cash to the extent that we cannot issue some or all of the warrants due to regulatory restrictions. Prior Second Lien Facility OnJuly 18, 2019 , the Company entered into separate credit agreements withNexxus Capital and Credit Suisse ("the Creditors") and borrowed$12.5 million from each bearing 13.73% interest. OnJanuary 31, 2020 , the agreements were amended to increase the borrowing amount by$2.05 million under each agreement. Interest was capitalized every six months and payable upon maturity. Immediately prior to the Business Combination inAugust 2021 , the Creditors exercised their option to convert their combined$38.1 million of debt outstanding (including interest) into 115,923 shares of the Company's Class A ordinary shares, which were converted into the Company's common stock as a result of the Business Combination. Concurrently with the conversion, the Company amortized the remaining$0.1 million of unamortized debt issuance costs and recognized incremental interest expense in the Consolidated Statements of Operations for the year endedDecember 31, 2021 .
For additional information, see Note 9, Long-term Debt , to our consolidated financial statements appearing in this Annual Report on Form 10-K.
Earnout Obligations
As ofDecember 31, 2022 and 2021, outstanding cash earnouts were$10.2 million and$8.8 million , respectively. Outstanding balance accrues interest at an annual interest rate of 12%. The balance shown atDecember 31, 2022 andDecember 31, 2021 includes the related accrued interest. As ofDecember 31, 2022 , the earnout obligation is related to two prior acquisitions ofAN Extend and AgileThought LLC with a total liability of$2.4 million and$7.8 million respectively.The AN Extend and AgileThought LLC obligation accrues interest at a rate of 11% and 12% respectively. The contingent earnout liability accrued is measured to fair value by an independent third-party expert. In order for the Company to make payments for its contingent purchase price obligations, in addition to having sufficient cash resources to make the payments themselves, the Company must be in pro forma compliance after giving effect to the earnout payments with liquidity and other financial and other covenants included in the Blue Torch Credit Facility and the Second Lien Facility. The Company has not been able to satisfy those covenants to date in connection with the accrued earnout payments. Whether the Company is able to satisfy those covenants will depend on the Company's overall operating and financial performance. OnNovember 15, 2022 , the Company entered into an amendment to change terms of the AN Extend portion of the purchase price obligation note payable. The amendment converted the note from Mexican pesos toU.S. dollars with capitalized interest added, set the applicable interest to 11% annually, set a maturity date ofNovember 15, 2023 . If the note is not paid in full prior to the maturity date, the total amount of principal and the interest will be converted within the following 30 calendar days counted from the date of the maturity date with shares of common stock, taking as value of the shares the value resulting from using the Volume Weighted Moving Average Price. There can be no assurance that we will have sufficient cash flows from operating activities, cash on hand or access to borrowed funds to be able to make any contingent purchase price payments when required to do so, and any failure to do so at such time could have a material adverse effect on our business, financial condition, results of operations and prospects.
Cash Flows
The following table summarizes our consolidated cash flows for the periods
presented:
Year Ended December 31,
(in thousands USD) 2022 2021
Net cash used in operating activities $ (8,292) $ (23,223)
Net cash used in investing activities (1,018)
(916)
Net cash provided by financing activities 9,485 23,551 Operating Activities
Net cash used in operating activities for the year ended
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our operating assets and liabilities which increased$7.6 million on a year over year basis, an increase of$7.4 million in non-cash items, offset by an increase of$0.1 million in net loss. The increase of$7.6 million resulting from changes in our operating assets and liabilities was primarily driven by (i) a decrease of$13.4 million in accounts receivable, (ii) a decrease$5.2 million in prepaid expenses, other current assets, and other noncurrent assets, (iii) an increase of approximately$3.8 million in accrued liabilities, (iv) an increase of$0.4 million of deferred revenue, (v) a decrease of$0.2 million in current VAT receivables and other taxes payable, and (vi) and an increase of$0.1 million in income tax payable partially offset by (i) a decrease of$13.6 million in accounts payable and (ii) a$1.9 million decrease in the lease liability. The increase of$7.4 million in non-cash items was driven by (i) a$9.7 million loss on extinguishment of debt, (ii) the increase of$1.1 million from the fair value of embedded derivative liabilities, (iii) the increase of$2.3 million from the change in obligations for contingent purchase price, (iv) the increase of$4.9 million of changes in fair value of warrant liability, and (v) the increase of$1.0 million in deferred income tax provision, and partially offset by (i) the decrease of$0.7 million of share-based compensation, (ii) the decrease of$0.1 million in amortization of right-of-use assets, (iii) the decrease of$2.5 million in foreign currency remeasurement, (iv) the decrease of$6.0 million gain on forgiveness of debt, (v) the decrease of$0.4 million in accretion on convertible notes, (vi) the decrease of$1.3 million in bad debt expense, and (vii) the decrease of$0.6 million in amortization of debt issuance costs. Investing Activities
Net cash used in investing activities for the year ended
Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2022 decreased$14.1 million to 9.5 million from$23.6 million for the year endedDecember 31, 2021 . The decrease in net cash provided was primarily driven by (i) a decrease in proceeds from$27.6 million of PIPE financing, (ii) a decrease in$25.7 million decrease in capital contributions, (iii) an increase of$8.7 million for cash paid for debt issuance costs, (iv) an increase of$0.6 million of tax withholding for equity-based compensation, (v) an increase of$0.1 million in finance lease payments, and (vi) a decrease of$24.9 million from the 2021 follow on issuance offset by (i) a$33.5 million increase in proceeds from loans (ii) a decrease in repayment of borrowings of$23.9 million (iii) a decrease in PIPE transaction costs of$13.0 million , and (iv) a decrease of$3.1 million in transaction costs for the follow on share issuance.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2022 : Payments Due By Period Less than 1 More than 5 (in thousands USD) Total Year1 1-3 Years 3-5 Years Years
Debt and Note Payable obligations1
$ 51,068 $ 44 $ - Lease obligations 6,818 2,746 4,072 - - Total$ 102,529 $ 47,345 $ 55,140 $ 44 $ - 1 Excludes$6.0 million in capitalized fees from the amendment entered into with Blue Torch onFebruary 28, 2023 and$0.1 million in capitalized interest on the Subordinated Promissory note from the amendment entered into onJanuary 31, 2023 . The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.
For additional information on our debt and lease obligations, see Note 9,
Long-term Debt and Note 8 , Leases in our audited consolidated financial statements. See also Management's Discussion and Analysis -
Liquidity and Capital Resources , Debt .
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Critical Accounting Policies
We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. See Note 2, Summary of Significant Accounting Policies , to our audited consolidated financial statements included in this Annual Report on Form 10-K for a description of our other significant accounting policies. The preparation of our consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with
Revenue is recognized when or as control of promised products or services are
transferred to the customer in an amount that reflects the consideration the
Company expects to receive in exchange for those products or services. In
instances where revenue is recognized over time, the Company uses an appropriate
input or output measurement method, typically based on the contract or labor
volume.
The Company applies judgment in determining the customer's ability and intention
to pay based on a variety of factors, including the customer's historical
payment experience. If there is uncertainty about the receipt of payment for the
services, revenue recognition is deferred until the uncertainty is sufficiently
resolved. Our payment terms are based on customary business practices and can
vary by region and customer type, but are generally 30-90 days. Since the term
between satisfaction of the performance obligation and payment receipt is less
than a year, we do not adjust the transaction price for the effects of a
financing component.
The Company may enter into arrangements that consist of any combination of our
deliverables. To the extent a contract includes multiple promised deliverables,
the Company determines whether promised deliverables are distinct in the context
of the contract. If these criteria are not met, the promised deliverables are
accounted for as a single performance obligation. For arrangements with multiple
distinct performance obligations, we allocate consideration among the
performance obligations based on their relative standalone selling price. The
standalone selling price is the price at which we would sell a promised good or
service on an individual basis to a customer. When not directly observable, the
Company generally estimates standalone selling price by using the expected cost
plus a margin approach. The Company reassesses these estimates on a periodic
basis or when facts and circumstances change.
Revenues related to software maintenance services are recognized over the period
the services are provided using an output method that is consistent with the way
in which value is delivered to the customer, generally straight lined on a
monthly basis over the period of the contract term.
Revenues related to cloud hosting solutions, which include a combination of
services including hosting and support services, and do not convey a license to
the customer, are recognized over the period as the services are provided. These
arrangements represent a single performance obligation.
Revenues related to consulting services (time-and-materials), transaction-based
or volume-based contracts are recognized over the period the services are
provided using an input method such as labor hours incurred. Revenues related to
fixed fee consulting services are recognized as services are performed using a
time elapsed measure of progress. Both time and materials and fixed fee
consulting contracts have hourly rates defined based on the experience of
personnel selected to perform the service. For fixed fee contracts, the fixed
fee generally remains constant for the contracted project period unless the
customer directs a change in scope of project work or requests additional
personnel.
The Company may enter into arrangements with third party suppliers to resell
products or services, such as software licenses and hosting services. In such
cases, the Company evaluates whether the Company is the principal (i.e., report
revenues on a gross basis) or agent (i.e., report revenues on a net basis). In
doing so, the Company first evaluates whether it controls the good or service
before it is transferred to the customer. In instances where the Company
controls the good or service before it is transferred to the customer, the
Company is the principal; otherwise, the Company is the agent. Determining
whether we control the good or service before it is transferred to the customer
may require judgment.
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Some of our service arrangements are subject to customer acceptance clauses. In these instances, the Company must determine whether the customer acceptance clause is substantive. This determination depends on whether the Company can independently confirm the product meets the contractually agreed-upon specifications or if the contract requires customer review and approval. When a customer acceptance is considered substantive, the Company does not recognize revenue until customer acceptance is obtained. Client contracts sometimes include incentive payments received for discrete benefits delivered to clients or service level agreements and volume rebates that could result in credits or refunds to the client. Such amounts are estimated at contract inception and are adjusted at the end of each reporting period as additional information becomes available only to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur. Equity-Based Compensation
We recognize and measure compensation expense for all equity-based awards based on the grant date fair value.
For restricted stock units ("RSUs"), the Company issues awards that vest upon a
service condition or market condition. Service condition awards are valued using
the grant date stock price and is ratably amortized over the service period of
the award. The market condition awards vest if the volume-weighted average stock
price reaches the specified stock price during the specified period. The fair
value of the market condition awards is determined by using a Monte Carlo
simulation to model the expected amount of time to reach the specified stock
price. The derived length of time is also used to amortize the total value of
the awards.
For performance share units ("PSUs"), the amount recognized as an expense is
adjusted to reflect the number of awards for which the related performance
conditions are expected to be met, such that the amount ultimately recognized is
based on the number of awards that meet the related performance conditions at
the vesting date. Vesting is tied to performance conditions that include the
achievement of EBITDA-based metrics and/or the occurrence of a liquidity event.
Prior to the Business Combination, the Company determined the fair value of
shares by using an income approach, specifically a discounted cash flow method,
and in consideration of a number of objective and subjective factors, including
the Company's actual operating and financial performance, expectations of future
performance, market conditions and liquidation events, among other factors.
Following the closing of the Business Combination, the grant date fair value is
determined based on the fair market value of the Company's shares on the grant
date of such awards.
Prior to the Business Combination, since the Company's shares were not publicly
traded and its shares were rarely traded privately, expected volatility is
estimated based on the average historical volatility of similar entities with
publicly traded shares. Determining the fair value of equity-based awards
requires estimates and assumptions, including estimates of the period the awards
will be outstanding before they are exercised and future volatility in the price
of our common shares. We periodically assess the reasonableness of our
assumptions and update our estimates as required. If actual results differ
significantly from our estimates, equity-based compensation expense and our
results of operations could be materially affected. The Company's accounting
policy is to account for forfeitures of employee awards as they occur.
Warrants
We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging.
For warrants that meet all of the criteria for equity classification, the warrants are recorded as a component of additional paid-in capital at the time of issuance. For warrants that do not meet all the criteria for equity classification, the warrants are recorded as liabilities. At the end of each reporting period, changes in fair value during the period are recognized as a component of results of operations. The Company will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) the redemption of the warrants. Our public warrants meet the criteria for equity classification and accordingly, are reported as a component of stockholders' equity while our private warrants do not meet the criteria for equity classification and are thus classified as a liability.Goodwill 78
-------------------------------------------------------------------------------- Table of ContentsGoodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased and is allocated to a reporting unit when the acquired business is integrated into the Company.Goodwill is not amortized but is tested for impairment annually onOctober 1st . The Company will also perform an assessment whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may be more than its recoverable amount. Under FASB guidance, management may first assess certain qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. When needed, the Company performs a quantitative assessment of goodwill impairment if it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In the quantitative test, we compare the fair value of the reporting unit with the respective carrying value. Management uses a combined income and public company market approach to estimate the fair value of each reporting unit. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. This analysis requires significant assumptions, such as estimated future cash flows, long-term growth rate estimates, weighted average cost of capital, and market multiples. For the Rest of the World ("ROW") reporting unit, the analysis further applies additional estimated risk premiums related to forecast volatility and country risk to the discount rate. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies , to our audited consolidated financial statements included in this Annual Report on Form 10-K, for a description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations.
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