The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of operations
Charge Enterprises, Inc. (the “Company”), (formerly known as “Transworld Holdings, Inc.”, “GoIP Global, Inc.” and “E Education Network, Inc.”) was incorporated in Nevada in 2003. The Company was subsequently redomiciled in Delaware.
The Company is an electrical, broadband and electric vehicle (“EV”) charging infrastructure company that provides clients with end-to-end project management services, from advising, designing, engineering, acquiring and installing equipment, to monitoring, servicing, and maintenance. The Company’s vision is to be a leader in enabling the next wave of transportation and connectivity. By building, designing, and operating seamless infrastructure for charging EVs and high-speed broadband, the Company aims to create a future where transportation is safe, reliable, clean, efficient, and connected.
The Company has two operating segments which also represent the Company’s reportable segments:
· | Infrastructure, which has a primary focus on EV charging (“EVC”), broadband, including cell tower, small cell, and in-building applications, and electrical contracting services. |
· | Telecommunications, which provides connection of voice calls, Short Message Services (“SMS”), and data to global carriers. |
Note 2. Summary of significant accounting policies
Basis of Presentation
The interim unaudited consolidated financial statements included herein have been prepared by the Company in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; and (ii) the instructions of the Securities and Exchange Commission (the “SEC”) for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial position for the interim periods presented. All such adjustments are of a normal and recurring nature. The Company’s results shown on an interim basis are not necessarily indicative of results for a full year.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2022, and filed with the SEC on March 15, 2023, as part of the Company’s Annual Report on Form 10-K (the “2022 Annual Report”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
There have been no material changes from Note 2, Summary of significant accounting policies, as described in the notes to the Company’s consolidated financial statements contained in the 2022 Annual Report, other than as noted below.
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and the Company has and intends to continue to take advantage of certain exemptions from various reporting requirements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements and related disclosures, presented in U.S. dollars, have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC. The results and trends in these consolidated financial statements may not be representative for any future periods or the full year.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The Company implemented ASU 2016-13 on January 1, 2023. The impact of adopting this new guidance was not material.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 is designed to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. ASU 2021-08 was effective for the Company beginning January 1, 2023, under a prospective application and may impact the accounting for future business combinations.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S. GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company as of January 1, 2024. Early adoption is permitted. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting as it no longer has convertible debt. The Company will continue to monitor relevant accounting pronouncements.
Reclassification
Certain amounts included in the prior year financial statements and disclosures have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company’s previously reported financial statements.
Change in Accounting Principle
Effective January 1, 2023, the Company changed its accounting principle for recognizing stock-based compensation expense from the graded vesting attribution method, where an award is divided into vesting increments or tranches, to the straight-line attribution method of accounting. The Company believes the straight-line attribution method more accurately reflects how awards are earned over its employees’ service periods. Also, it is the predominant method used in its industry, and therefore it better aligns the Company’s recognition of stock-based compensation expense with its peers.
The retrospective application of the change in accounting principle had an effect on the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income (loss) and consolidated statements of stockholders’ equity. There was no net effect to the amounts reported for net cash provided by (used in) operating, investing or financing activities in the consolidated statements of cash flows for prior periods as a result of the change in accounting method. However, the net loss, change in deferred income taxes and stock-based compensation line items within net cash flows provided by operating activities each decreased as shown below to reflect the change in accounting method.
The following tables present the comparative effect of the change in accounting principle and its effect on the Company’s previously reported financial statements.
| | Three Months Ended | |
| | March 31, 2023 | | | March 31, 2022 | |
| | (amounts, in thousands, except per share data) | |
Stock-based compensation | | | | | | |
Prior to revision | | $ | 5,542 | | | $ | 10,744 | |
Revision | | | 360 | | | | (3,320 | ) |
As revised | | $ | 5,902 | | | $ | 7,424 | |
Loss from operations | | | | | | | | |
Prior to revision | | $ | (9,260 | ) | | $ | (12,786 | ) |
Revision | | | (360 | ) | | | 3,320 | |
As revised | | $ | (9,620 | ) | | $ | (9,466 | ) |
Income tax benefit (expense) | | | | | | | | |
Prior to revision | | $ | (110 | ) | | $ | 1,578 | |
Revision | | | - | | | | (205 | ) |
As revised | | $ | (110 | ) | | $ | 1,373 | |
Net income (loss) | | | | | | | | |
Prior to revision | | $ | (8,852 | ) | | $ | (13,141 | ) |
Revision | | | (360 | ) | | | 3,115 | |
As revised | | $ | (9,212 | ) | | $ | (10,026 | ) |
Basic income (loss) per share available to common stockholders | | | | | | | | |
Prior to revision | | $ | (0.05 | ) | | $ | (0.09 | ) |
Revision | | | - | | | | 0.01 | |
As revised | | $ | (0.05 | ) | | $ | (0.08 | ) |
Diluted income (loss) per share available to common stockholders | | | | | | | | |
Prior to revision | | $ | (0.05 | ) | | $ | (0.09 | ) |
Revision | | | - | | | | 0.01 | |
As revised | | $ | (0.05 | ) | | $ | (0.08 | ) |
The opening balances of accumulated deficit and additional paid in capital as of December 31, 2021, have been adjusted by $8.0 million and $9.1 million, respectively to reflect the cumulative effect of the change.
| | As of | |
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
| | (amounts, in thousands) | |
Net deferred tax (liability) asset | | | | | | |
Prior to revision | | $ | (1,262 | ) | | $ | (1,389 | ) |
Revision | | | (26 | ) | | | (21 | ) |
As revised | | $ | (1,288 | ) | | $ | (1,410 | ) |
Additional paid in capital | | | | | | | | |
Prior to revision | | | 214,758 | | | | 197,816 | |
Revision | | | (17,733 | ) | | | (18,093 | ) |
As revised | | $ | 197,025 | | | $ | 179,723 | |
Accumulated deficit | | | | | | | | |
Prior to revision | | $ | (182,795 | ) | | $ | (173,586 | ) |
Revision | | | 17,707 | | | | 18,072 | |
As revised | | $ | (165,088 | ) | | $ | (155,514 | ) |
Total stockholders’ equity | | | | | | | | |
Prior to revision | | $ | 31,984 | | | $ | 24,250 | |
Revision | | | (26 | ) | | | (21 | ) |
As revised | | $ | 31,958 | | | $ | 24,229 | |
Note 3. Fair value measurements
Recurring Fair Value Measurements
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis:
| | March 31, 2023 | |
(in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Measured at Net Asset Value as a Practical Expedient | | | Total | |
Assets: | | | | | | | | | | | | | | | |
Marketable securities (Note 5) | | $ | 4,956 | | | $ | - | | | $ | - | | | $ | 1,592 | | | $ | 6,548 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivative liabilities (Note 9) | | $ | - | | | $ | 339 | | | $ | - | | | $ | - | | | $ | 339 | |
The market value of the equity securities is determined using quoted prices in active markets. The market value of underlying investments in funds is determined using the net asset value (“NAV”) provided by the administrator of the fund as a practical expedient. The NAV is determined by the fund’s trustee based upon the fair value of the underlying assets owned by the fund, less liabilities, divided by outstanding units. In accordance with appropriate accounting guidance, these investments have not been classified in the fair value hierarchy. This class includes investments in a closed end interval fund that invests in publicly traded equity securities of U.S. and foreign companies. There are no unfunded commitments related to this investment. Investment redemptions are limited to 25% of the fund’s outstanding shares but may be redeemed on a quarterly basis with 15 days’ notice.
The Company had a contingent consideration liability of $3.5 million as of December 31, 2022, related to the Company’s acquisition of EV Group Holdings LLC, and its settlement occurred in the first quarter of 2023. The contingency was based on the Company’s average share price for the month ending December 31, 2022. As a result of the settlement of this contingent consideration liability, the Company issued 1,530,145 additional shares of common stock to the sellers. The contingent consideration liability was reflected in accrued liabilities on the consolidated balance sheet, and the remeasurement was reflected in other income (expense), net on the consolidated statement of operations as of and for the period ended December 31, 2022.
Nonrecurring Fair Value Measurements
The Company also has investments in non-marketable securities, which are primarily equity securities in a non-public company that do not have readily determinable fair values. Such investments are initially recorded at cost and adjusted to fair value on a nonrecurring basis through earnings for observable price changes in orderly transactions for identical or similar transactions of the same company (Level 2 of U.S. GAAP fair value hierarchy). Historical adjustments have not been material. The carrying amount of these equity securities is $0.2 million as of March 31, 2023, and December 31, 2022, and is included in non-marketable securities on the consolidated balance sheet. There were no increases or decreases in the fair value of the non-marketable securities for the three months ended March 31, 2023, and 2022.
Note 4. Revenue
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers. Accounts receivable in the table below exclude other receivables that are not generated from contracts with customers. These amounts are $0.3 million and $0.0 million as of March 31, 2023, and December 31, 2022, respectively.
(in thousands) | | March 31, 2023 | | | December 31, 2022 | |
Receivables included in “Accounts receivable net of allowances” | | $ | 74,865 | | | $ | 72,405 | |
Contract assets | | | 11,009 | | | | 6,090 | |
Contract liabilities - current | | | 18,043 | | | | 13,741 | |
Changes in Contract Balances
The timing of revenue recognition, billings and cash collections results in accounts receivable, and customer advances and unearned revenue on the Company’s consolidated balance sheets. At times, the Company receives advance payments or deposits from its customers before revenue is recognized, resulting in contract liabilities. The contract liabilities primarily relate to the advance consideration received from customers on certain contracts. For these contracts, revenue is recognized in a manner that is consistent with the satisfaction of the underlying performance obligations. The contract liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each respective reporting period within the contract liabilities line item.
Significant changes in the balance of contract liabilities during the period are as follows:
(in thousands) | | | |
Balance at December 31, 2022 | | $ | 13,741 | |
Revenue recognized during the period that was included in the beginning balance | | | (10,081 | ) |
Additions, net of revenue recognized during the period | | | 14,383 | |
Balance at March 31, 2023 | | $ | 18,043 | |
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by segment:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Revenue: | | | | | | |
Infrastructure | | $ | 27,497 | | | $ | 19,618 | |
Telecommunications | | | 166,052 | | | | 143,360 | |
Total | | $ | 193,549 | | | $ | 162,978 | |
Note 5. Marketable securities and other investments
The Company’s marketable securities are stated at fair value. Any changes in the fair value of the Company’s marketable securities are included within income (loss) from investments, net on the consolidated statement of operations.
Realized and unrealized gains and losses are determined on an average cost basis. The marketable securities are investments predominantly in shares of large publicly traded companies which are being invested until such time as the funds are needed for operations.
The fair value of these marketable securities is as follows:
(in thousands) | | March 31, 2023 | | | December 31, 2022 | |
Brokerage Account | | $ | 6,548 | | | $ | 6,757 | |
During the three months ended March 31, 2023, the Company recognized net gains of $0.3 million on marketable securities and other investments, which included $0.4 million of realized losses and $0.7 million of unrealized gains on marketable securities.
During the three months ended March 31, 2022, the Company recognized net losses of $0.2 million on marketable securities and other investments, which included $0.2 million of realized gains which were offset by $0.4 million of unrealized losses on marketable securities.
Note 6. Goodwill and intangible assets
Goodwill and certain intangible assets are not amortized for book purposes. They may, however, be amortized for tax purposes. The Company accounts for its acquired customer relationships, backlogs, non-compete agreements, favorable leases and brand assets as indefinite-lived intangible assets and, similar to goodwill, these assets are reviewed at least annually for impairment. At the time of each review, if the fair value of a reporting unit or an asset is less than its respective carrying value, then a charge is recorded to the results of operations.
The following table presents goodwill by reportable segment:
(in thousands) | | Infrastructure | | | Telecommunications | | | Consolidated Total | |
Goodwill, net, as of December 31, 2022 | | $ | 11,900 | | | $ | 772 | | | $ | 12,672 | |
Additions | | | - | | | | - | | | | - | |
Measurement period adjustments | | | - | | | | - | | | | - | |
Goodwill, net, as of March 31, 2023 | | $ | 11,900 | | | $ | 772 | | | $ | 12,672 | |
The Company’s goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The Company conducts its annual impairment analyses as of October 1 each year. There were no indicators of impairment during the three months ended March 31, 2023.
The Company performs review of its intangible assets for impairment when evidence exists that the carrying value of an asset may not be recoverable. There were no events or changes in circumstances which indicated the Company’s intangible assets may not be recoverable. Accordingly, no impairment assessments were conducted on its intangible assets during the three-month periods ended March 31, 2023.
The following table presents intangible assets:
| | March 31, 2023 | | | December 31, 2022 | |
(in thousands) | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Customer relationships | | $ | 30,849 | | | $ | (3,003 | ) | | $ | 27,846 | | | $ | 30,849 | | | $ | (2,489 | ) | | $ | 28,360 | |
Backlog | | | 3,322 | | | | (1,384 | ) | | | 1,938 | | | | 3,322 | | | | (1,107 | ) | | | 2,215 | |
Non-compete agreements | | | 3,729 | | | | (1,127 | ) | | | 2,602 | | | | 3,729 | | | | (895 | ) | | | 2,834 | |
Off-market favorable leases | | | 955 | | | | (955 | ) | | | - | | | | 955 | | | | (955 | ) | | | - | |
Brand | | | 560 | | | | (47 | ) | | | 513 | | | | 560 | | | | (37 | ) | | | 523 | |
Total | | $ | 39,415 | | | $ | (6,516 | ) | | $ | 32,899 | | | $ | 39,415 | | | $ | (5,483 | ) | | $ | 33,932 | |
Note 7. Related party transactions
In 2022, the Company entered into a special advisor agreement with KORR Acquisitions Group, Inc., a stockholder of the Company. The agreement includes an upfront payment of $0.5 million and an annual advisory fee of $0.3 million. Mr. Orr, the former Chairman of the Company, has sole voting and dispositive power over the shares held by KORR Acquisitions Group, Inc. and its affiliates.
Note 8. Debt
Debt was comprised of the following as of the periods indicated:
(in thousands) | | March 31, 2023 | | | December 31, 2022 | |
Line of Credit | | | | | | |
ANS Line of Credit | | $ | - | | | $ | 5,024 | |
Total Line of Credit | | | - | | | | 5,024 | |
Notes Payable | | | | | | | | |
Issued on May 19, 2021 | | | 11,860 | | | | 11,860 | |
Issued on December 17, 2021 | | | 15,926 | | | | 15,926 | |
Total Face Value of Notes Payable | | | 27,786 | | | | 27,786 | |
Less: Unamortized Discount | | | (2,640 | ) | | | (3,630 | ) |
Net Carrying Value of Notes Payable | | | 25,146 | | | | 24,156 | |
Total debt before deferred financing costs | | | 25,146 | | | | 29,180 | |
Current amount of Notes Payable | | | 25,146 | | | | 24,156 | |
Current amount of Line of Credit | | | - | | | | 5,024 | |
Total current portion of long-term debt | | | 25,146 | | | | 29,180 | |
Total long-term debt, net of current portion | | $ | - | | | $ | - | |
Convertible notes payable
May 2020 Financing
On May 8, 2020, the Company entered into a securities purchase agreement with certain institutional investors (collectively, the “May 2020 Investors”) pursuant to which the Company issued convertible notes in an aggregate principal amount of $3.0 million for an aggregate purchase price of $2.7 million (the “May 2020 Convertible Notes”). In connection with the issuance of the May 2020 Convertible Notes, the Company issued to the May 2020 Investors warrants to purchase an aggregate of 7,600,000 shares of common stock (collectively, the “Warrants”) and 7.5 shares of series G convertible preferred stock (the “Series G Preferred Stock”). The May 2020 Convertible Notes’ maturity date of May 8, 2021, was subsequently extended to May 8, 2023. The May 2020 Convertible Notes accrued interest at a rate of 8% per annum, subject to increase to 20% per annum upon and during the occurrence of an event of default. Interest was payable in cash on a quarterly basis beginning on December 31, 2020.
November 2020 Financing
On November 3, 2020, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP (the “November 2020 Investors”) pursuant to which it issued convertible notes in an aggregate principal amount of $3.9 million for an aggregate purchase price of $3.5 million (the “November 2020 Convertible Notes”). In connection with the issuance of the November 2020 Convertible Notes, the Company issued to the November 2020 Investors 903,226 shares of common stock. The November 2020 Convertible Notes were convertible at any time, at the holder’s option, into shares of the Company’s common stock at a conversion price of $0.25 per share. The November 2020 Convertible Notes’ maturity was extended from November 3, 2023, to November 3, 2024. The November 2020 Convertible Notes accrued interest at a rate of 8% per annum.
May 2021 Financing
On May 19, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP (the “May 2021 Investors”) pursuant to which it issued convertible notes in an aggregate principal amount of $5.6 million for an aggregate purchase price of $5.0 million (collectively, the “May 2021 Convertible Notes” and together with the May 2020 Convertible Notes and the November 2020 Convertible Notes, the “Convertible Notes”). In connection with the issuance of the May 2021 Convertible Notes, the Company issued to the May 2021 Investors warrants to acquire 1,870,000 shares of common stock. The May 2021 Convertible Notes were convertible at any time, at the holder’s option, into shares of the Company’s common stock at a conversion price of $3.00 per share. The May 2021 Convertible Notes were due to mature on May 19, 2024. The May 2021 Convertible Notes accrued interest at a rate of 8% per annum.
Conversion of Convertible Notes to Preferred Stock
In the second quarter of 2022, the Convertible Notes were exchanged for 1,177,023 shares of Series D preferred stock (“Series D Preferred Stock”). As a result of this exchange, the Company has no Convertible Notes Payable outstanding at March 31, 2023 and December 31, 2022. Refer to Note 12, Stockholders’ equity, for additional information.
April 30, 2020 Sutton Global Note
On April 30, 2020, a former CEO converted his payable into a convertible note with a face value of $0.3 million (the “April 2020 Convertible Note”). The April 2020 Convertible Note had a coupon rate of 6% and a maturity date of December 31, 2021. The April 2020 Convertible note was convertible at a rate of $0.0005 per share. Since the April 2020 Convertible Note added a conversion option, it resulted in a debt modification requiring the Company to record a loss on modification of debt in the amount of $0.1 million. On March 25, 2021, Sutton Global Associates converted $0.2 million in principal plus accrued interest into 644,499 shares of the Company common stock. The remaining balance of the April 2020 Convertible note was subsequently sold to an unrelated party and converted into 319,950 shares of the Company common stock.
The Company has accounted for all Convertible Notes payable as a financing transaction, wherein the net proceeds that were received were allocated to the financial instrument issued. Prior to making the accounting allocation, the Company evaluated the Convertible Notes under ASC 815, which generally requires the analysis of embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. None of the terms and features embedded in the notes required bifurcation and liability classification.
The Company analyzed the detachable warrants under ASC 480 and ASC 815. The warrants did not fall under the guidance of ASC 480. After analyzing the warrants under ASC 815, it was determined that the warrants met all of the requirements for equity classification under guidance of ASC 815-40-25-1 through 6.
Line of credit
Nextridge Inc. (“Nextridge”) and its operating subsidiary Advance Network Services, LLC. (“ANS”) have a revolving $8.0 million line of credit (the “ANS Line of Credit”) available with a bank, collateralized by all the assets of Nextridge and ANS. Interest is payable monthly at the Wall Street Journal prime rate (8.00% and 7.50% at March 31, 2023 and December 31, 2022, respectively). As of March 31, 2023, and December 31, 2022, the Company had outstanding balances of $0 and $5.0 million, respectively, on this ANS Line of Credit.
On October 25, 2022, Nextridge and ANS renewed the line of credit increasing the availability from $4.0 million to $8.0 million. Borrowings under the line of credit will bear interest at a floating rate at the Wall Street Journal prime rate with a floor of 5%. Advances under the line of credit are limited to 70% and 50% of Nextridge and ANS’ eligible accounts receivable and work in progress, respectively. At each fiscal year end, Nextridge and ANS must maintain a minimum debt service coverage ratio of 1.2:1 and maximum debt/tangible net worth ratio of 3:1. The outstanding balance on the line of credit is payable upon demand by the bank. In addition to the security interest in the assets of Nextridge and ANS, the line of credit is guaranteed by the Company and Charge Infrastructure Holdings, Inc., the parent of Nextridge and ANS and a subsidiary of the Company. At December 31, 2022, the Company was in compliance with the aforementioned covenants.
On November 18, 2022, Nextridge and ANS renewed a $750,000 equipment and vehicle line of credit available with a bank. Interest is payable monthly at the Wall Street Journal prime rate. On December 1, 2023, the line will convert to a term loan with the then five-year Federal Home Loan Bank rate + 2.5% and have a five year term with a five year amortization. There are no financial commitments or covenants on the line of credit. As of March 31, 2023, and December 31, 2022, the Company had an outstanding balance of $0 on this line of credit.
B W Electrical Services, LLC. (“BW”) has a revolving $3.0 million line of credit (the “BW Line of Credit”) available with a bank, collateralized by all the assets of BW. Interest is payable monthly at the Wall Street Journal prime rate (8.00% and 7.50% at March 31, 2023 and December 31, 2022, respectively). On May 26, 2022, BW renewed the facility with substantially the same terms and an expiration of August 1, 2023.
Advances under the line of credit are limited to 75% of BW’s eligible accounts receivable. At all times during the loan term BW is required to maintain a minimum increase in the net retained earnings of $0.2 million tested annually and maintain a maximum seller funded debt to EBIDA of 2.0x tested semi-annually on a trailing twelve-month basis beginning with the period ended June 30, 2022. In addition to the security interest in the assets of BW, the line of credit is guaranteed by the Company and Charge Infrastructure Holdings, Inc., the parent of BW and a subsidiary of the Company. As of March 31, 2023, and December 31, 2022, the Company had no outstanding balance on the BW Line of Credit. At December 31, 2022, the Company was in compliance with the aforementioned covenants.
Notes payable
Prior to the Company’s acquisition, BW was approved for a Paycheck Protection Program loan on February 10, 2021 from the Small Business Administration (“SBA”) in the amount of $2.0 million. In the second quarter of 2022, the loan was forgiven by the SBA. Although the loan was forgiven by the SBA, per the purchase agreement with the sellers of BW in December 2021, if such an event occurred, the Company was obligated to reimburse the SBA loan of $2.0 million to such sellers. As such, the $2.0 million SBA loan was reimbursed to the sellers of BW during the third quarter of 2022.
On May 19, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP (the “May 2021 Investors”) pursuant to which it issued notes payable in an aggregate face value (includes 7.5% premium and 10% original issue discount) of $11.8 million for an aggregate purchase price of $10.0 million (the “May 2021 Notes”). The May 2021 Notes have a coupon of 8% and an 18-month term. The May 2021 Notes’ original maturity date of November 19, 2022, was extended to November 19, 2023.
On December 17, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP (the “December 2021 Investors”) pursuant to which it issued a note payable in an aggregated face value of $15.9 million for an aggregate purchase price of $13.3 million (collectively, the “December 2021 Notes” and together with the May 2021 Notes, the “Notes”). The December 2021 Notes have a coupon of 7.5% and a 23-month term. The December 2021 Notes mature on November 19, 2023.
Interest Expense
The components of interest expense are as follows:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Interest expense | | $ | (548 | ) | | $ | (735 | ) |
Amortization of debt discount | | | (990 | ) | | | (1,030 | ) |
Total net interest expense | | $ | (1,538 | ) | | $ | (1,765 | ) |
Note 9. Derivative liabilities
The Company does not use financial derivative instruments to manage risk. In June 2022, the Company exchanged the outstanding convertible debt for Series D preferred stock (“Series D Preferred Stock”). Concurrently, the warrants that were granted along with the original convertible debt were amended to provide, at the holders’ choice, the option to exercise for a to-be-issued class of preferred stock, which are convertible into the same number of shares of common stock as would have been issued upon exercise of such warrants under the original terms. This amendment caused the instruments to be treated as a derivative liability beginning on June 30, 2022. The warrants were reclassified from equity to a derivative liability and measured at fair value using a Black Scholes model (Level 2 of U.S. GAAP fair value hierarchy), which included inputs for exercise price, stock price, term to expiration, volatility, and interest rate. The impact was a derivative liability of approximately $40.4 million and a deemed dividend of approximately $32.8 million. This derivative liability is revalued on a recurring basis with changes in the fair value of the derivative recorded through the consolidated statement of operations.
In the first quarter of 2023, the Arena Investors (defined below) exercised 7.6 million warrants issued in May 2020 (the “May 2020 Warrants”) into: (i) 4,400,000 shares of common stock; and (ii) 3,200,000 shares of Series E preferred stock (“Series E preferred stock”). In connection with this exercise, the Company revalued the exercised warrants immediately before the exercise and recorded a gain of $0.9 million with an offsetting reduction to the outstanding derivative liability. The Company revalued the remaining warrants as of March 31, 2023, and recorded a gain of $0.5 million, with an offsetting reduction to the outstanding derivative liability. These gains on the remeasurement of the warrants are included in the Change in fair value of derivative liabilities line item on the consolidated statement of operations. Refer to Note 12, Stockholders’ equity, and Note 13, Stock-based compensation, for additional information.
The following table summarizes the effects on the Company’s gain (loss) associated with changes in the fair values of the derivative financial instruments by type of financing reflected on the change in fair value of derivative liabilities line on the consolidated statement of operations:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Derivative liability beginning balance | | $ | 6,521 | | | $ | - | |
Change in fair value of derivative liabilities | | | (1,376 | ) | | | - | |
Warrant exercise | | | (4,806 | ) | | | - | |
Derivative liability ending balance | | $ | 339 | | | $ | - | |
Note 10. Leases
Lease Revenue
The Company leases commercial properties under agreements that are classified as operating leases. The Company’s commercial property leases generally include minimum rents and do not include recoveries for property taxes and common area maintenance.
The Company’s rental revenues are earned from its operating subsidiary EVDepot, LLC (“EV Depot”) operations and are a component of Infrastructure revenues disclosed in Note 4, Revenue. The following table summarizes the fixed components of rental revenue for the three months ended March 31, 2023, and 2022:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Revenue: | | | | | | |
Fixed component | | $ | 889 | | | $ | 1,147 | |
The Company does not have any variable components of rental revenue for the three months ended March 31, 2023 and 2022.
Note 11. Reportable segments
The Company has two reportable operating segments - Infrastructure, and Telecommunications. The Company also has a Non-operating Corporate segment. All inter-segment revenues are eliminated.
Refer to Note 4, Revenue, for additional information on the Company’s revenue by segment. Summary information with respect to the Company’s income (loss) from operations is as follows:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 (As Adjusted) | |
Income (loss) from operations: | | | | | | |
Infrastructure | | $ | (2,187 | ) | | $ | 1,637 | |
Telecommunications | | | (140 | ) | | | 527 | |
Non-operating corporate | | | (7,293 | ) | | | (11,630 | ) |
Total | | $ | (9,620 | ) | | $ | (9,466 | ) |
A reconciliation of the Company’s consolidated segment loss from operations to consolidated loss from operations before income taxes and net loss is as follows:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 (As Adjusted) | |
Loss from operations | | $ | (9,620 | ) | | $ | (9,466 | ) |
Income (loss) from investments, net | | | 296 | | | | (170 | ) |
Change in fair value of derivative liabilities | | | 1,376 | | | | - | |
Interest expense | | | (1,538 | ) | | | (1,765 | ) |
Other income (expense), net | | | 391 | | | | 258 | |
Foreign exchange adjustments | | | (7 | ) | | | (256 | ) |
Total other expenses | | | 518 | | | | (1,933 | ) |
Loss from operations before income taxes | | | (9,102 | ) | | | (11,399 | ) |
Income tax (expense) benefit | | | (110 | ) | | | 1,373 | |
Net loss | | $ | (9,212 | ) | | $ | (10,026 | ) |
Summary information with respect to the Company’s operating segments is as follows:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Depreciation and amortization: | | | | | | |
Infrastructure | | $ | 1,190 | | | $ | 165 | |
Telecommunications | | | 20 | | | | 44 | |
Total | | $ | 1,210 | | | $ | 209 | |
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 | |
Capital expenditures: | | | | | | |
Infrastructure | | $ | 90 | | | $ | 35 | |
Telecommunications | | | - | | | | - | |
Total | | $ | 90 | | | $ | 35 | |
(in thousands) | | March 31, 2023 | | | December 31, 2022 | |
Investments: | | | | | | |
Infrastructure | | $ | 1,600 | | | $ | 1,389 | |
Telecommunications | | | - | | | | - | |
Non-operating corporate | | | 5,184 | | | | 5,604 | |
Total | | $ | 6,784 | | | $ | 6,993 | |
(in thousands) | | March 31, 2023 | | | December 31, 2022 (As Adjusted) | |
Assets: | | | | | | |
Infrastructure | | $ | 108,804 | | | $ | 102,248 | |
Telecommunications | | | 58,608 | | | | 42,046 | |
Non-operating corporate | | | 15,776 | | | | 24,160 | |
Total | | $ | 183,188 | | | $ | 168,454 | |
Note 12. Stockholders’ equity
The Company has evaluated each series of preferred stock for proper classification under ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. ASC 480 generally requires liability classification for financial instruments that are certain to be redeemed, as they represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares. Series C preferred stock is classified as a liability within mezzanine equity on the consolidated balance sheet as of March 31, 2023 and December 31, 2022.
The Company has 20,000,000 shares of preferred stock authorized with a par value of $0.0001.
Permanent Equity
Preferred Stock
Series D: On June 30, 2022, the Company entered into an exchange agreement with funds affiliated with Arena Investors LP (“Arena Investors”) pursuant to which the Company issued 1,177,023 shares of Series D preferred stock. The Series D preferred stock was issued in exchange for the Convertible Notes. The total principal of the Convertible Notes was $12.5 million. The remaining unamortized discount as of June 30, 2022, of $4.3 million was fully amortized during the period ended June 30, 2022, and included in the amortization of debt discount on the consolidated statement of operations. As of March 31, 2023, and December 31, 2022, there were 1,177,023 shares of Series D preferred stock issued and outstanding.
The Series D preferred stock has the following designations:
| · | Convertible at the option of the holder into common stock at $0.4248 per share |
| · | The Series D liquidation preference is equal to $10.6191 per share |
| · | The holders are entitled to receive cumulative quarterly dividends at a fixed annual rate of 2.25% of the liquidation preference, or $0.23893 per share |
| · | No voting rights |
In addition to the exchange of the Convertible Notes, the related 11.8 million outstanding warrants to purchase common stock were amended to allow the holder to exercise for a to-be-issued class of the Company’s preferred stock, which shall be convertible into the same number of shares of common stock as would have been issued upon exercise of such warrants under the original terms. This amendment caused the instruments to be treated as a derivative liability beginning on June 30, 2022. The transition to derivative accounting created a derivative liability of $40.4 million and a related deemed dividend of $32.8 million. Changes in the fair value of the derivative liability are marked to market through the consolidated statement of operations in the respective period.
Series E: In connection with the Series D preferred stock discussed above, the Company entered into an agreement with the Arena Investors pursuant to which the holder of the 11.8 million outstanding warrants to purchase common stock was allowed to exercise for shares of a to-be-issued class of preferred stock. Pursuant to this provision, on March 14, 2023, the Arena Investors exercised the warrants issued in May 2020 (the “May 2020 Warrants”) into: (i) 4,400,000 shares of common stock; and (ii) 3,200,000 shares of Series E preferred stock (“Series E preferred stock”).
The Series E preferred stock has the following designations:
| · | Convertible at the option of the holder at $0.50 per share of common stock |
| · | The liquidation preference is senior in liquidation rights to holders of common stock. |
| · | No dividends |
| · | No voting rights |
Common Stock
On April 20, 2022, the Company entered into a securities purchase agreement with an affiliate of Island Capital Group, LLC pursuant to which the Company issued 1,428,575 shares of Charge’s common stock and three-year warrants to purchase up to 2,000,000 shares of Charge’s common stock at $8.50 per share for an aggregate purchase price of $10.0 million. The purchase price was allocated between common stock and warrants and is reported within common stock and additional paid-in capital on the consolidated balance sheet.
On December 8, 2020, the Company entered into a Private Placement Agreement for the purchase of up to an aggregate $2.5 million of Charge’s common stock at $0.25 per share. In connection with this agreement, the Company issued 8,700,000 shares for an aggregate purchase price of $2.2 million. The shares were issued on January 15, 2021.
Mezzanine Equity
Preferred Stock
Series C: On December 17, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP pursuant to which the Company issued 2,370,370 shares of Series C preferred stock at an aggregate face value of $7.4 million for an aggregate purchase price of $6.7 million. In connection with the issuance of the Series C preferred stock, the Company also issued warrants to purchase 2,370,370 shares of the Company’s common stock. The Company has valued and recorded the beneficial conversion feature of the Series C preferred stock and the warrants resulting in a deemed dividend at the time of issuance.
On February 25, 2022, the Company entered into a securities purchase agreement with an affiliate of Island Capital Group LLC pursuant to which it issued 3,856,000 Series C preferred stock at an aggregate face value of $12.1 million for an aggregate purchase price of $10.8 million. The Company has valued and recorded the beneficial conversion feature of the Series C preferred stock resulting in a deemed dividend at the time of issuance. As of March 31, 2023, and December 31, 2022, there were 6,226,370 shares of Series C preferred stock issued and outstanding.
The Series C preferred stock has the following designations:
| · | Convertible at the option of the holder at a conversion price of $3.125 per share |
| · | The holders are entitled to receive cumulative dividends at 6% per annum, payable monthly |
| · | In the event of reorganization, this class of preferred will not be affected by any such capital reorganization |
| · | The Series C liquidation preference is equal to the stated value, plus any accrued and unpaid dividends |
| · | Change of control provision whereby the Series C preferred shareholders would receive their stated value before all other shareholders |
| · | No voting rights |
| · | Redemption features: |
| o | If the closing price exceeds 200% of the effective conversion price, the company may force the conversion of preferred stock with 10 days written notice; |
| o | At any time after the original issue date, the Company has the option to redeem some or all the outstanding preferred stock for cash within 10 days written notice; and |
| o | On the third anniversary of the issue date, the holder may request redemption, at the Company’s option of cash or common stock, at the conversion price equal to the four-year redemption amount (a) 100% of the aggregate stated value then outstanding, (b) accrued but unpaid dividend, (c) additional cash consideration in order for the Purchasers to achieve a 20% internal rate of return, and (d) all liquidated damages and other amounts due in respect of the preferred stock. |
The Series C preferred stock provides that the Company shall redeem the preferred stock for cash or common stock at the Company’s option and, therefore, is not considered mandatorily redeemable. However, due to the change in control provision, the Series C preferred stock has liquidation preference and is deemed a liability and presented within mezzanine equity on the consolidated balance sheet as of March 31, 2023, and December 31, 2022.
Warrants
Warrant activity is summarized as follows:
| | | | | Weighted Average | | | Weighted Average Remaining | |
(in thousands except exercise price and contractual life) | | Number of Warrants | | | Exercise Price | | | Contractual Life | |
Warrants outstanding at January 1, 2022 | | | 24,085 | | | $ | 1.74 | | | | 3.0 years | |
Issued | | | 2,000 | | | | 8.50 | | | | 2.8 years | |
Exercised | | | (8,183 | ) | | | (1.59 | ) | | | N/A | |
Expired | | | - | | | | - | | | | N/A | |
Warrants outstanding at December 31, 2022 | | | 17,902 | | | $ | 2.56 | | | | 1.8 years | |
Warrants exercisable at December 31, 2022 | | | 17,902 | | | $ | 2.56 | | | | 1.8 years | |
Issued | | | - | | | | - | | | | | |
Exercised | | | (7,600 | ) | | | 0.50 | | | | N/A | |
Expired | | | - | | | | - | | | | N/A | |
Warrants outstanding at March 31, 2023 | | | 10,302 | | | $ | 4.08 | | | | | |
Warrants exercisable at March 31, 2023 | | | 10,302 | | | $ | 4.08 | | | | 2.6 years | |
Note 13. Stock-based compensation
2020 Omnibus Equity Incentive Plan
On January 11, 2021, the Company’s Board of Directors and a majority of its stockholders adopted the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), as amended and restated as of May 7, 2021, and on December 23, 2021, with 75.0 million shares available for issuance. Under the 2020 Plan, the Company may grant stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash-based awards to individuals who are employees, officers, non-employee directors or consultants of the Company. The vesting periods range from one to four years. As of March 31, 2023, approximately 33.5 million shares remain available for issuance under the 2020 Plan.
Non-Qualified Stock Option Agreement
On November 1, 2020, Transworld Holdings, Inc. granted 10.5 million in non-qualified stock options to the spouse of a key executive and current member of the Company’s Board of Directors for service in facilitating and completing the acquisition of PTGi International Carrier Services, Inc. (“PTGi”). The stock options have an exercise price of $0.55, vest over a period of three years from the grant date and have a contractual term of 10 years. The grant date fair value of these stock options using the BSM valuation was $0.51 per share. These non-qualified stock options are separate from the 2020 Plan.
Stock options
Stock option activity is summarized as follows:
| | | | | Weighted Average | | | | | | Weighted Average Remaining | |
(in thousands except exercise price and contractual term) | | Shares | | | Exercise Price | | | Intrinsic Value | | | Contractual Term | |
Options outstanding at December 31, 2022 | | | 49,576 | | | $ | 2.07 | | | | - | | | | - | |
Options granted | | | 1,540 | | | | 1.41 | | | | - | | | | - | |
Options exercised | | | (75 | ) | | | 0.55 | | | | - | | | | - | |
Options cancelled | | | (426 | ) | | | 2.60 | | | | - | | | | - | |
Options outstanding at March 31, 2023 | | | 50,615 | | | $ | 2.05 | | | $ | 11,540 | | | | 4.44 years | |
Options exercisable at March 31, 2023 | | | 26,385 | | | $ | 1.53 | | | $ | 8,598 | | | | 4.20 years | |
Vested and expected to vest at March 31, 2023 | | | 50,615 | | | $ | 2.05 | | | $ | 11,540 | | | | 4.44 years | |
The weighted-average grant date fair value of all options granted during the three months ended March 31, 2023, was $0.82. The total intrinsic value of stock options exercised during the three months ended March 31, 2023, was $0.1 million. There were no stock options exercised during the three months ended March 31, 2022. At March 31, 2023, there was $38.0 million of unrecognized stock-based compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 1.7 years.
The Company uses the following assumptions in its BSM valuation for stock options granted:
| | Three Months Ended March 31, | |
| | 2023 | |
Weighted risk-free interest rate 1 | | | 3.5 | % |
Weighted-average volatility 2 | | | 60 | % |
Weighted expected dividend yield 3 | | | - | % |
Weighted expected term (in years) 4 | | | 5.9 | |
1. Risk-free interest rate - Determined based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.
2. Expected volatility - Determined based on a blend of the Company’s historic stock price volatility and the historic volatility of a peer group of publicly traded companies.
3. Expected dividend yield - Determined to be zero as the Company has not and does not currently plan to issue dividends.
4. Expected term - Determined using the “simplified method” for estimating the expected option life, which is the midpoint of the weighted-average vesting period and contractual term of the option.
Restricted stock units
Restricted stock unit (“RSU”) activity is summarized as follows:
| | | | | Weighted Average | |
(in thousands except exercise price and contractual term) | | Shares | | | Grant Date Fair Value | |
RSUs outstanding at December 31, 2022 | | | 405 | | | $ | 2.26 | |
RSUs granted | | | - | | | | - | |
RSUs released | | | - | | | | - | |
RSUs forfeited | | | - | | | | - | |
RSUs outstanding at March 31, 2023 | | | 405 | | | $ | 2.26 | |
Weighted average remaining recognition period in years | | | 3.2 | | | | | |
Unamortized stock-based compensation expense | | $ | 786 | | | | | |
Recognized Non-Cash Stock-Based Compensation Expense
The following non-cash stock-based compensation expense, which is related primarily to options, is included in the stock-based compensation line item in the consolidated statements of operations:
| | Three Months Ended March 31, | |
(in thousands) | | 2023 | | | 2022 (As Adjusted) | |
Stock-based compensation | | $ | 5,902 | | | $ | 7,424 | |
Income tax benefit (1) | | | 71 | | | | 894 | |
After-tax stock-based compensation expense | | $ | 5,831 | | | $ | 6,530 | |
(1) Amounts exclude impact from any stock-based compensation expense subject to Section 162(m) of the Internal Revenue Code, which is nondeductible for income tax purposes.
Note 14. Commitments, contingencies and concentration risk
Contingencies
During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with ASC 450, Contingencies. Litigation and contingency accruals are based on the Company’s assessment, including advice of legal counsel, regarding the expected outcome of litigation or other dispute resolution proceedings. If the Company determines that an unfavorable outcome is probable and can be reasonably assessed, it establishes the necessary accruals. As of March 31, 2023, and December 31, 2022, the Company is not aware of any contingent liabilities that should be reflected in the consolidated financial statements.
Other Commitments
Indemnities
The Company generally indemnifies its customers for the services it provides under its contracts, as well as other specified liabilities, which may subject the Company to indemnity claims, liabilities and related litigation. As of March 31, 2023 and December 31, 2022, the Company was not aware of any material asserted or unasserted claims in connection with these indemnity obligations.
Performance and Payment Bonds
Many customers, particularly in connection with new construction within Infrastructure, require the Company to post performance and payment bonds issued by a financial institution known as a surety. If the Company fails to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. To date, the Company is not aware of any losses to their sureties in connection with bonds the sureties have posted on their behalf, and do not expect such losses to be incurred in the foreseeable future. Generally, 10% of bonding needs are held in cash on the balance sheet.
Concentration of Credit Risk
The Company maintains accounts with financial institutions. All cash in checking accounts is non-interest bearing and is fully insured by the FDIC up to a $250,000 limit. At times, cash balances may exceed the maximum coverage provided by the FDIC on insured depositor accounts. The Company believes it mitigates its risk by depositing its cash and cash equivalents with major financial institutions.
Major Customer Concentration
There was one customer whose individual accounts receivable represented 10% or more of the Company’s total balance as of March 31, 2023. The Company had three customers whose accounts receivable individually represented 10% or more of the Company’s total balance as of December 31, 2022. In aggregate these customers accounted for approximately 46% of the Company’s total accounts receivable as of December 31, 2022.
The Company has one customer whose revenue individually represented 10% or more of the Company’s total revenue and whose revenue accounted for approximately 15% of the Company’s total revenue for the three months ended March 31, 2023. The Company had three customers whose revenue individually represented 10% or more of the Company’s total revenue and in aggregate accounted for approximately 33% of the Company’s total revenue for the three months ended March 31, 2022.
Labor Concentration
One of our operating subsidiaries within Infrastructure sources direct labor from local unions, which have collective bargaining agreements expiring at various times over the next four years. Although the Company’s past experience has been favorable with respect to resolving conflicting demands with these unions, it is possible that contract negotiations are unsuccessful which could impact the renewal of the collective bargaining agreements and availability of personnel.
Note 15. Income taxes
The following table includes the Company’s income (loss) before income tax provision (benefit), income tax provision (benefit) and effective benefit tax rate for the periods indicated:
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 (As Adjusted) | |
Income (loss) before income taxes | | $ | (9,102 | ) | | $ | (11,399 | ) |
Income tax benefit (expense) | | | (110 | ) | | | 1,373 | |
Effective tax rate | | | (1.2 | %) | | | 12.0 | % |
For the three months ended March 31, 2023, and 2022, the Company utilized the discrete effective tax rate method. This discrete method treats the year-to-date period as if it was the annual period and calculates the income tax expense or benefit on a discrete basis. Currently, the Company believes the use of the discrete method represents the best estimate of its annual effective tax rate. The Company’s effective tax rate differed from the statutory rate primarily due to the valuation allowance on deferred tax assets, as well as the Company’s permanent book-tax differences from stock-based compensation.
Note 16. Net income (loss) per share
Basic income (loss) per share available to common stockholders is calculated using the weighted average number of common shares outstanding during the applicable period. Diluted net income (loss) per share available to common stockholders is calculated using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the applicable period. Dilutive potential common shares consist of the incremental common shares (i) issuable upon the vesting of outstanding restricted stock units and the exercise of outstanding stock options using the treasury stock method, (ii) contingently issuable assuming that the end of the reporting period is the end of the contingency period, and (iii) issuable for non-participating preferred stock using the if-converted method. Our warrants and some of our preferred stock are considered participating securities pursuant to the two-class method. Dilutive potential common shares are excluded from the calculation of diluted net income (loss) per share available to common stockholders if their effect is antidilutive.
The following potential common shares were excluded from the calculation of diluted net income (loss) per share available to common stockholders because their effect would have been antidilutive:
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
Restricted stock units | | | 405 | | | | - | |
Contingently issuable shares | | | - | | | | - | |
Warrants | | | 10,303 | | | | 14,240 | |
Stock options | | | 50,451 | | | | 46,555 | |
Preferred stock | | | 20,101 | | | | 14,406 | |
Convertible notes payable | | | - | | | | 50,497 | |
Total | | | 81,260 | | | | 125,698 | |
Note 17. Subsequent Events
Events occurring after March 31, 2023, and through the date that these consolidated financial statements were issued, were evaluated to ensure that any subsequent events that met the criteria for recognition have been included. No subsequent events have been identified.