Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Operations
SVF Investment Corp. 3, formerly known as SVF Investment III Corp. (“SVF 3” and, after the Domestication as described below, “Symbotic” or the “Company”), was a blank check company incorporated as a Cayman Islands exempted company on December 11, 2020. SVF 3 was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more businesses. Warehouse Technologies LLC (“Legacy Warehouse”), a New Hampshire limited liability company, was formed in December 2006 to make investments in companies that develop new technologies to improve operating efficiencies in modern warehouses. Symbotic LLC (“Symbotic US”), a technology company that develops and commercializes innovative technologies for use within warehouse operations and Symbotic Group Holdings, ULC (“Symbotic Canada”) were wholly owned subsidiaries of Legacy Warehouse. On December 12, 2021, (i) SVF 3 entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Legacy Warehouse, Symbotic Holdings LLC, a Delaware limited liability company (“Symbotic Holdings”), and Saturn Acquisition (DE) Corp., a Delaware corporation and wholly owned subsidiary of SVF 3 (“Merger Sub”) and (ii) Legacy Warehouse entered into an Agreement and Plan of Merger (the “Company Merger Agreement”) with Symbotic Holdings.
On June 7, 2022, as contemplated by the Company Merger Agreement, Legacy Warehouse merged with and into Symbotic Holdings (the “Company Reorganization”), with Symbotic Holdings surviving the merger (“Interim Symbotic”). Immediately following such merger, on June 7, 2022, as contemplated by the Merger Agreement, SVF 3 filed a notice of deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which SVF 3 was transferred by way of continuation from the Cayman Islands and domesticated as a Delaware corporation, changing its name to “Symbotic Inc.” (the “Domestication”). Immediately following the Domestication of SVF 3, on June 7, 2022, as contemplated by the Merger Agreement, SVF 3, Symbotic Holdings, and Merger Sub merged with and into Interim Symbotic (the “Merger” and, together with the Company Reorganization, the “Business Combination”), with Interim Symbotic surviving the merger as a subsidiary of Symbotic (“New Symbotic Holdings”).
Symbotic is an automation technology company established to develop technologies to improve operating efficiencies in modern warehouses. The Company’s vision is to make the supply chain work better for everyone. The Company does this by developing innovative, end-to-end technology solutions that dramatically improve supply chain operations. The Company currently automates the processing of pallets and cases in large warehouses or distribution centers for some of the largest retail companies in the world. Its systems enhance operations at the front end of the supply chain, and therefore benefit all supply partners further down the chain, irrespective of fulfillment strategy.
The Company’s headquarters are located in Wilmington, Massachusetts, and its Canadian headquarters are located in Montreal, Quebec.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes prepared in accordance with GAAP have been condensed in, or omitted from, these interim financial statements. Accordingly, these unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto as of and for the year ended September 24, 2022, which are included within the Company’s Annual Report on Form 10-K, filed with the SEC on December 9, 2022. The September 24, 2022 consolidated balance sheet included herein is derived from the Company’s audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and majority-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include 100% of the accounts of wholly-owned and majority-owned subsidiaries and the ownership interest of the minority investor is recorded as a non-controlling interest in a subsidiary. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The Company operates and reports using a 52-53 week fiscal year ending on the last Saturday of September of each calendar year. Each of the Company’s fiscal quarters end on the last Saturday of the third month of each quarter.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and the amounts disclosed in the related notes to the consolidated financial statements. Actual results and outcomes may differ materially from management’s estimates, judgments, and assumptions. Significant estimates, judgments, and assumptions used in these financial statements include, but are not limited to, those related to revenue, useful lives and realizability of long-lived assets, accounting for income taxes and related valuation allowances, and stock-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience.
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the audited consolidated financial statements and related notes thereto as of and for the year ended September 24, 2022. Except as noted below, there have been no material changes to the significant accounting policies during the three month period ended December 24, 2022.
Leases
The Company determines if an arrangement is a lease at its inception. When the arrangements include lease and non-lease components, the Company separates them and does not account for them as a single lease component. Leases with an initial term of less than 12 months are not reported on the balance sheet, but rather recognized as lease expense on a straight-line basis over the lease term. Arrangements may include options to extend or terminate the lease arrangement. These options are included in the lease term used to establish right-of-use (“ROU”) assets and lease liabilities when it is reasonably certain they will be exercised. The Company will reassess expected lease terms based on changes in circumstances that indicate options may be more or less likely to be exercised.
The Company has lease arrangements that include variable rental payments. The future variability of these payments and adjustments are unknown and therefore are not included in minimum rental payments used to determine the ROU assets and lease liabilities. The Company has lease arrangements where it makes separate payments to the lessor based on the lessor’s common area maintenance expenses, property and casualty insurance costs, property taxes assessed on the property, and other variable expenses. Variable rental payments are recognized in the period in which their associated obligation is incurred.
As most of the Company’s lease arrangements do not provide an implicit interest rate, an incremental borrowing rate is applied in determining the present value of future payments. The Company’s incremental borrowing rate is selected based upon information available at the lease commencement date, and represents the Company’s estimate of an interest rate that it would be able to obtain from a lender to borrow, on a collateralized basis, over a similar term to obtain an asset of similar value in a similar economic environment.
The ROU assets are reported as “Other long-term assets” and lease liabilities are reported as “Other current liabilities” and “Other long-term liabilities” on the consolidated balance sheets. Operating lease expense is recognized on a straight-line basis over the lease term and is included in “Selling, general, and administrative expenses” in the consolidated statements of operations. Variable lease expense is included in “Selling, general, and administrative expenses” in the consolidated statements of operations.
Volume of Business
The Company has concentration in the volume of purchases it conducts with its suppliers. For the three months ended December 24, 2022, there was one supplier that accounted for greater than 10% of total purchases, and the aggregate purchases amounted to $28.3 million. For the three months ended December 25, 2021, there was one supplier that accounted for greater than 10% of total purchases, and the aggregate purchases amounted to $10.8 million.
Emerging Growth Company
We are an emerging growth company (“EGC”), as defined in Section 2(a) of the Securities Act of 1933, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts EGCs from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an EGC can elect to opt out of the extended transition period and comply with the requirements that apply to non-EGCs but any such an election to opt out is irrevocable. The Company has not elected to opt out of such extended transition period which means that when a financial accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an EGC, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). The ASU requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with a new transition method where comparative periods presented in the financial statements in the period of adoption will not need to be restated. Under this new transition method, an entity initially applies the provisions of the standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 and ASU 2018-11 on September 25, 2022, as required by the ASUs, and utilized the cumulative effect adjustment approach, which did not result in an adjustment to the Company’s opening balance of retained earnings. At adoption, the Company recognized ROU assets and lease liabilities of $5.5 million and $6.4 million, respectively, on the balance sheet at September 25, 2022. The new standard did not materially impact the statements of operations, cash flows, or stockholders’ equity (deficit). In addition, the Company provides expanded disclosures related to its leasing arrangements in accordance with these ASUs. Refer to Note 5, Leases, for additional information.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes—Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. The guidance is effective to the Company for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2019-12 on September 25, 2022 and there was not a material impact of the adoption to the Company’s financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments. This may result in the earlier recognition of allowances for losses. The guidance is effective to the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect the new standard to have a material impact on its consolidated financial statements.
Other recent accounting pronouncements that are or will be applicable to the Company did not, or are not expected to, have a material impact on the Company’s present or future financial statements.
3. Noncontrolling Interests
Noncontrolling interests represent the portion of net assets in consolidated entities that are not owned by the Company. Following the Business Combination, Legacy Warehouse unitholders hold their economic interests directly in New Symbotic Holdings. Upon completion of the Business Combination, Symbotic Inc. issued to Legacy Warehouse unitholders an aggregate of 60,844,573 shares of Symbotic Class V-1 Common Stock and 416,933,025 shares of Symbotic Class V-3 Common Stock, each of which is exchangeable, together with a New Symbotic Holdings Common Unit, into an equal number of Class A Common Stock. Class V-1 and Class V-3 Common Stock are non-economic voting shares in Symbotic Inc. where Class V-1 Common Stock have one vote per share and Class V-3 Common Stock have three votes per share. Class V-3 Common Stock can convert into Class V-1 Common Stock in certain situations, including automatically, seven years following the Business Combination. Pursuant to the Merger Agreement, the Company issued an additional 20,000,000 New Symbotic Common Units and an equal number of shares of Symbotic Class V-1 Common Stock to Legacy Warehouse unitholders as earnout shares in July and August 2022 upon the achievement of triggering events specified in the Merger Agreement tied to the volume weighted average price of Class A Common Stock.
The following table summarizes the ownership of Symbotic Inc. stock for the three months ended December 24, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class V-1 and Class V-3 Common Stock | | Total | | Class A Common Stock | | Class V-1 and Class V-3 Common Stock | | Total |
Beginning of period | 57,718,836 | | | 496,170,413 | | | 553,889,249 | | | | | | | |
Issuances | 17,500 | | | — | | | 17,500 | | | | | | | |
Exchanges | 848,354 | | | (848,354) | | | — | | | | | | | |
End of period | 58,584,690 | | | 495,322,059 | | | 553,906,749 | | | 10.6 | % | | 89.4 | % | | 100 | % |
4. Revenue
The Company generates revenue through its design and installation of modular inventory management systems (the “Systems”) to automate customers’ depalletizing, storage, selection, and palletization warehousing processes. The Systems have both a hardware component and an embedded software component that enables the system to be programmed to operate within specific customer environments. The Company enters into contracts with customers that can include various combinations of services to design and install the Systems. These services are generally distinct and accounted for as separate performance obligations. As a result, each customer contract may contain multiple performance obligations. The Company determines whether performance obligations are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company’s commitment to provide the services to the customer is separately identifiable from other obligations in the contract.
The Company recognizes revenue upon transfer of control of promised goods or services in a contract with a customer, generally as title and risk of loss pass to the customer, in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur and when collection is considered probable. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue. Shipping and handling costs billed to customers are included in revenue and the related costs are included in cost of revenue when control transfers to the customer. The Company presents amounts collected from customers for sales and other taxes net of the related amounts remitted.
The design, assembly, and installation of a System includes substantive customer-specified acceptance criteria that allow the customer to accept or reject systems that do not meet the customer’s specifications. When the Company cannot objectively determine that acceptance criteria will be met upon contract inception, revenue relating to systems is deferred and recognized at a point in time upon final acceptance from the customer. If acceptance can be reasonably certain upon contract inception, revenue is recognized over time based on an input method, using a cost-to-cost measure of progress.
Disaggregation of Revenue
The Company provides disaggregation of revenue based on product and service type on the consolidated statements of operations as it believes these categories best depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Contract Balances
The following table provides information about accounts receivable, unbilled accounts receivable, and contract liabilities from contracts with customers (in thousands):
| | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
Accounts receivable | $ | 52,327 | | | $ | 3,412 | |
Unbilled accounts receivable | $ | 93,821 | | | $ | 101,816 | |
Contract liabilities | $ | 589,798 | | | $ | 425,709 | |
The change in the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and customer payments. The Company’s performance obligations are typically satisfied over time as work is performed. Payment from customers can vary, and is often received in advance of satisfaction of the performance obligations, resulting in a contract liability balance. During the three months ended December 24, 2022 and December 25, 2021, the Company recognized $196.6 million and $71.1 million, respectively, of the contract liability balance as revenue upon transfer of the products or services to customers.
Remaining Performance Obligations
Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations not delivered, or partially undelivered, at the end of the reporting period. Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded in deferred revenue. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in scope of contracts, periodic revalidation, adjustments for revenue that have not materialized, adjustments for inflation, and adjustments for currency. For contracts with a duration of greater than one year, the transaction price allocated to performance obligations that are unsatisfied as of December 24, 2022 was $12.0 billion, which is primarily comprised of undelivered or partially undelivered Systems under contract, and which a substantial majority relates to undelivered or partially undelivered Systems in connection with the Master Automation Agreement with Walmart Inc. (“Walmart”) to implement Systems in all of Walmart’s 42 regional distribution centers. The definition of remaining performance obligations excludes: (i) any variable consideration, including future adjustments for inflation or deflation, and (ii) those contracts that provide the customer with the right to cancel or terminate the contract without incurring a substantial penalty. The Company expects to recognize approximately 9% of its remaining performance obligations as revenue in the next 12 months, and the remaining thereafter, depending on the timing of System installation timelines. The Company does not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less.
Significant Customers
For the three months ended December 24, 2022, there were two customers that individually accounted for 10% or more of total revenue, and there was one customer that accounted for 10% or more of total revenue for the three months ended December 25, 2021. The following table represents these customers’ aggregate percent of total revenue. The symbol “n/a” indicates that such customer did not exceed 10% or more or total revenue for the period indicated within the table below.
| | | | | | | | | | | |
| Three Months Ended |
| December 24, 2022 | | December 25, 2021 |
Customer A | 81.4 | % | | 87.9 | % |
Customer B | 10.5 | % | | n/a |
Aggregate Percent of Total Revenue | 91.9 | % | | 87.9 | % |
At December 24, 2022, one customer accounted for over 10% of the Company’s accounts receivable balance, and three customers accounted for over 10% of the Company’s accounts receivable balance at September 24, 2022. The following table represents these customers’ aggregate percent of total accounts receivable. The symbol “n/a” indicates that such customer’s accounts receivable balance at the period indicated within the table did not exceed 10% of the Company’s accounts receivable balance.
| | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
Customer A | 91.9 | % | | 39.5 | % |
Customer B | n/a | | 40.7 | % |
Customer C | n/a | | 15.3 | % |
Aggregate Percent of Total Accounts Receivable | 91.9 | % | | 95.5 | % |
The concentration in the volume of business transacted with these customers may lead to a material impact on the Company’s results from operations if a total or partial loss of the business relationship were to occur. As of the date of the issuance of these financial statements, the Company is not aware of any specific event or circumstance which would result in a material adverse impact to its results of operations or liquidity and financial condition.
5. Leases
In connection with the adoption of ASUs 2016-02 and 2018-11 (see Note 2, Summary of Significant Accounting Policies), the Company updated its policy for recognizing leases under ASC Topic 842. A summary of the updated policy is included in Note 2, Summary of Significant Accounting Policies. Prior to September 25, 2022, the Company accounted for leases under ASC Topic 840, Leases.
Lease Portfolio
The Company leases office space in Wilmington, MA, Douglas, GA, and Montreal, QC through operating lease arrangements. The Company has no finance lease agreements. The operating lease arrangements expire at various dates through June 2026.
Impact of Adoption
The Company utilized the cumulative effect adjustment method of adoption and, accordingly, recorded ROU assets and lease liabilities of $5.5 million and $6.4 million, respectively, on the balance sheet at September 25, 2022. The Company elected the following practical expedients in accordance with ASC Topic 842:
•Reassessment elections - The Company elected the package of practical expedients, and did not reassess whether any existing contracts are or contain a lease, provided a lease analysis was conducted under ASC Topic 840. To the extent leases were identified under ASC Topic 840, the Company did not reassess the classification of those leases. Additionally, to the extent initial direct costs were capitalized under ASC Topic 840 and are not amortized as a result of the implementation of ASC Topic 842, they were not reassessed.
•Short-term lease election - ASC Topic 842 allows lessees an option to not recognize ROU assets and lease liabilities arising from short-term leases. A short-term lease is defined as a lease with an initial term of 12 months or less. The Company elected to not recognize short-term leases as ROU assets and lease liabilities on the balance sheet. All short-term leases which are not included on the Company’s balance sheet will be recognized within lease expense. Leases that have an initial term of 12 months or less with an option for renewal will need to be assessed in order to determine if the lease qualifies for the short-term lease exception. If the option is reasonably certain to be exercised, the lease does not qualify as a short-term lease.
The following table presents the balance sheet location of the Company’s operating leases (in thousands):
| | | | | |
| December 24, 2022 |
ROU assets: | |
Other long-term assets | $ | 5,108 | |
| |
Lease Liabilities: | |
Accrued expenses and other current liabilities | $ | 1,917 | |
Other long-term liabilities | 4,057 | |
Total lease liabilities | $ | 5,974 | |
The following table presents maturities of the Company’s operating lease liabilities as of December 24, 2022, presented under ASC Topic 842 (in thousands):
| | | | | |
| December 24, 2022 |
Remaining fiscal year 2023 | $ | 1,718 | |
Fiscal year 2024 | 2,333 | |
Fiscal year 2025 | 2,035 | |
Fiscal year 2026 | 555 | |
Fiscal year 2027 and thereafter | — | |
Total future minimum payments | $ | 6,641 | |
Less: Implied interest | (667) | |
Total lease liabilities | $ | 5,974 | |
The following table presents future minimum rental payments under the Company’s noncancellable operating lease agreements as of September 24, 2022, presented under ASC Topic 840 (in thousands):
| | | | | |
| September 24, 2022 |
Fiscal year 2023 | $ | 2,301 | |
Fiscal year 2024 | 2,335 | |
Fiscal year 2025 | 2,037 | |
Fiscal year 2026 | 557 | |
Fiscal year 2027 and thereafter | — | |
Total future minimum payments | $ | 7,230 | |
As of December 24, 2022, the weighted-average remaining lease term and the weighted-average incremental borrowing rate of the Company’s operating leases was approximately 3.0 years and 7.5%, respectively. Operating cash flows for amounts included in the measurement of the Company’s operating lease liabilities were $0.5 million for the three months ended December 24, 2022.
6. Inventories
Inventories at December 24, 2022 and September 24, 2022 consist of the following (in thousands):
| | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
Raw materials and components | $ | 109,907 | | | $ | 88,999 | |
Finished goods | 1,007 | | | 2,901 | |
Total inventories | $ | 110,914 | | | $ | 91,900 | |
7. Property and Equipment
Property and equipment at December 24, 2022 and September 24, 2022 consists of the following (in thousands):
| | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
Computer equipment and software, furniture and fixtures, and test equipment | $ | 52,760 | | | $ | 45,818 | |
Leasehold improvements | 2,902 | | | 2,904 | |
Total property and equipment | 55,662 | | | 48,722 | |
Less accumulated depreciation | (25,416) | | | (23,844) | |
Property and equipment, net | $ | 30,246 | | | $ | 24,878 | |
Depreciation expense was $1.6 million for the three months ended December 24, 2022 and $1.2 million for the three months ended December 25, 2021.
8. Income Taxes
The Company is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its allocable share of any taxable income or loss of Symbotic Holdings, LLC. The remaining share of Symbotic Holdings income or loss is non-taxable to the Company and is not reflected in current or deferred income taxes. The Company’s foreign subsidiaries are subject to income tax in its local jurisdictions.
The Company’s financial reporting predecessor, Legacy Warehouse, was a limited liability company that was treated as a partnership for U.S. federal income tax purposes and for most applicable state and local income tax purposes. As a partnership, Legacy Warehouse was not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Legacy Warehouse was passed through to and included in the taxable income or loss of its members on a pro rata basis, subject to applicable tax regulations. No provision, except for certain foreign subsidiaries which are taxed in their respective foreign jurisdictions, was made in the consolidated financial statements for income taxes. Because Legacy Warehouse was the Company’s financial reporting predecessor and not subject to entity level income tax, and because its foreign subsidiaries had a full valuation allowance against their deferred tax assets, no current or deferred income tax provision or benefit was recorded for the three months ended December 25, 2021.
The Company recorded a current tax expense of $0.3 million for the three months ended December 24, 2022. The Company incurred a pre-tax loss for the period and recorded a full valuation allowance against its deferred tax assets, but incurred state tax expense by Symbotic LLC at the flow-through entity level. The effective tax rate for the three months ended December 24, 2022 is (0.37)% and differs from the federal statutory income tax rate primarily due to the flow-through entity level state taxes and the effect of the full valuation allowance against its net federal, state, and foreign deferred taxes.
As of December 24, 2022, the Company continues to conclude that the negative evidence regarding its ability to realize its deferred tax assets outweighs the positive evidence, and the Company has a full valuation allowance against its federal, state, and foreign net deferred tax assets. The Company has a history of cumulative pre-tax losses for the three previous fiscal years which it believes represents significant negative evidence in evaluating whether its deferred tax assets are realizable. Given these cumulative losses, lack of forecast history, the competitive environment, and uncertainty of general economic conditions, the Company does not believe it can rely on projections of future taxable income exclusive of reversing taxable temporary differences to support the realization of its deferred tax assets. In upcoming quarters, the Company will continue to evaluate both the positive and negative evidence surrounding its ability to realize its deferred tax assets.
Tax Receivable Agreement
As of December 24, 2022 future payments under the Tax Receivable Agreement (“TRA”) with respect to the purchase of Symbotic Holdings Units which occurred as part of or subsequent to the Business Combination are expected to be $114.8 million. Payments made under the TRA represent payments that otherwise would have been made to taxing authorities in the absence of attributes obtained by the Company as a result of exchanges by its pre-IPO members. Such amounts will be paid only when a cash tax savings is realized as a result of attributes subject to the TRA. That is, payments under the TRA are only expected to be made in periods following the filing of a tax return in which the Company is able to utilize certain tax benefits to reduce its cash taxes paid to a taxing authority. The impact of any changes in the projected obligations under the TRA as a result of changes in the geographic mix of the Company’s earnings, changes in tax legislation and tax rates or other factors that may impact the Company’s tax savings will be reflected in income or loss before taxes on the consolidated statement of operations in the period in which the change occurs. As of December 24, 2022, no TRA liability was recorded based on current projections of future taxable income taking into consideration the Company’s full valuation allowance against its net deferred tax asset.
9. Fair Value Measures
The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market
Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability
The following table presents the Company’s financial assets measured and recorded at fair value on a recurring basis using the above input categories as of December 24, 2022 and September 24, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
Money market funds | $ | 268,920 | | | $ | — | | | $ | — | | | $ | 268,920 | | | $ | 333,388 | | | $ | — | | | $ | — | | | $ | 333,388 | |
U.S. Treasury securities | — | | | 146,295 | | | — | | | 146,295 | | | — | | | — | | | — | | | — | |
Total assets | $ | 268,920 | | | $ | 146,295 | | | $ | — | | | $ | 415,215 | | | $ | 333,388 | | | $ | — | | | $ | — | | | $ | 333,388 | |
The Company had no liabilities measured and recorded at fair value on a recurring basis as of December 24, 2022 and September 24, 2022.
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At December 24, 2022, Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.
At December 24, 2022, the amortized cost of the Company’s U.S. Treasury securities is $146.3 million, with unrealized gains of less than $0.1 million and unrealized losses of less than $0.1 million, resulting in a fair value of $146.3 million. Though the amortized cost basis is equal to the fair value at December 24, 2022, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. In making the determination as to whether unrealized losses are other-than-temporary, the Company considered the length of time and extent to which each investment has been in an unrealized loss position if applicable, the financial condition and near-term prospects of the issuers, the issuers’ credit rating, and the time to maturity, which for the U.S. Treasury securities held by the Company is due within one year of the balance sheet date. Included in the amortized cost of $146.3 million is $49.5 million of cash and cash equivalents related to U.S. Treasury securities with an original maturity of three months or less.
10. Related Party Transactions
Insurance Coverage
Prior to the fiscal quarter ended December 24, 2022, the Company was covered under the C&S Wholesale Grocers, Inc. (“C&S”) workers’ compensation, general liability, auto liability risk, and technology errors and omissions insurance which C&S managed through the utilization of high deductible insurance policies. C&S is an affiliate of the Company as the same individual, certain of his family members and certain affiliated entities and trusts of the individual and his family members, in the aggregate, control both entities. The Company paid $0.5 million to C&S related to this insurance coverage during the three months ended December 25, 2021. The amounts were expensed to operations as incurred.
Aircraft Time Sharing Agreement
In December 2021 and May 2022, the Company entered into aircraft time-sharing agreements with C&S whereby the Company’s officials, employees, and guests are permitted to use the two C&S aircrafts on an as-needed and as-available basis, with no minimum usage being required. As there is no defined period of time stated within these aircraft time-sharing agreements, the Company does not consider these to meet the definition of a lease, and as such, records payments in the period in which the obligation for the payment is incurred. The Company incurred expense of $0.1 million related to usage of the aircrafts for the three months ended December 24, 2022. No expense was recorded for the three months ended December 25, 2021 related to these aircraft time-sharing agreements.
Usage of Facility and Employee Services
In the fourth quarter of fiscal year 2022, the Company entered into a license arrangement with C&S whereby C&S is providing receiving and logistics services for the Company within a C&S distribution facility. The arrangement also provides for C&S employees assisting with certain of the Company’s operations. The Company incurred $0.3 million of expense related to this arrangement for the three months ended December 24, 2022.
Customer Contracts
The Company has customer contracts with C&S relating to systems implementation, software maintenance services and the operations of a warehouse automation system. Revenue of $5.5 million and $0.8 million was recognized for the three months ended December 24, 2022 and December 25, 2021, respectively, relating to these customer contracts. There were no accounts receivable due from C&S at December 24, 2022 and September 24, 2022. There was $15.5 million of deferred revenue relating to contracts with C&S at December 24, 2022 and $0.5 million of deferred revenue relating to contracts with C&S at September 24, 2022.
11. Commitments and Contingencies
Contingencies
Liabilities for any loss contingencies arising from claims, assessments, litigation, fines, penalties, and other matters are recorded when it is probable that the liability has been incurred and the amount of the liability can be reasonably estimated. As of December 24, 2022, the Company has made appropriate provisions related to such matters and does not believe that such matters will have a material adverse effect on the Company’s consolidated operations, financial position, or liquidity.
Indemnifications
In the ordinary course of business, the Company enters into various contracts under which it may agree to indemnify other parties for losses incurred from certain events as defined in the relevant contract, such as litigation, regulatory penalties, or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification obligations. As a result, the Company believes the estimated fair value of these obligations is minimal. Accordingly, the Company has no liabilities recorded for these obligations as of December 24, 2022 and September 24, 2022.
Warranty
The Company provides a limited warranty on its warehouse automation systems and has established a reserve for warranty obligations based on estimated warranty costs. The reserve is included as part of accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets.
Activity related to the warranty accrual is as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| December 24, 2022 | | December 25, 2021 |
Balance at beginning of period | $ | 9,004 | | | $ | 3,735 | |
Provision | 2,217 | | | 920 | |
Warranty usage | (1,231) | | | (685) | |
Balance at end of period | $ | 9,990 | | | $ | 3,970 | |
12. Net Loss per Share
Basic earnings per share of Class A common stock is computed by dividing net loss attributable to common shareholders by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net loss attributable to common shareholders adjusted for the assumed exchange of all potentially dilutive securities, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the Business Combination, the membership structure of Warehouse Technologies LLC included units which shared in the profits and losses of Warehouse Technologies LLC. The Company analyzed the calculation of earnings per unit for periods prior to the Business Combination and determined that it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the Business Combination on June 7, 2022.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock (in thousands, except per share information):
| | | | | |
| Three Months Ended |
| December 24, 2022 |
Numerator - basic and diluted | |
Net loss | $ | (67,986) | |
Less: Net loss attributable to the noncontrolling interest | (60,793) | |
Net loss attributable to common stockholders | $ | (7,193) | |
Denominator - basic and diluted | |
Weighted-average shares of Class A common shares outstanding | 58,235,506 |
Loss per share of Class A common stock - basic and diluted | $ | (0.12) | |
The Company’s Class V-1 Common Stock and Class V-3 Common Stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class V-1 Common Stock and Class V-3 Common Stock under the two-class method has not been presented.
Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. All of the Company’s outstanding RSUs and shares issuable under the ESPP, as well as the Warrant Units were excluded in the calculation of diluted net loss per share as the effect would be anti-dilutive.
The Company uses the treasury stock method and the average market price per share during the period for calculating any potential dilutive effect of the ESPP and Warrant Units. The average stock price for the three months ended December 24, 2022 was $11.60. As of December 24, 2022, there were 4,040 and 2,192,339 potentially dilutive common stock equivalents related to the ESPP and Warrant Units, respectively.
13. Stock-Based Compensation and Warrant Units
Employee Stock Purchase Plan
On June 3, 2022, the Company’s stockholders approved, and on June 7, 2022, the Company’s board of directors adopted the 2022 Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes the issuance of up to a total of 1,266,604 shares of common stock to participating employees, and allows eligible employees to purchase shares of Class A Common Stock at a 15% discount from the fair market value of the stock as determined on specific dates at six-month intervals. The offering periods for the ESPP generally start on the first trading day on or after January 1st and July 1st of each year. However, the first offering period for the ESPP commenced on the first trading day after October 1, 2022 and ends on December 31, 2022, with the second offering period commencing on the first trading day after January 1, 2023 and ending on June 30, 2023.
Stock-Based Compensation
The following two tables show stock-based compensation expense by award type and where the stock-based compensation expense is recorded in the Company’s consolidated statements of operations (in thousands):
| | | | | |
| Three Months Ended |
| December 24, 2022 |
RSUs | 49,223 | |
Employee stock purchase plan | 317 | |
Total stock-based compensation expense | 49,540 | |
Effect of stock-based compensation expense on income by line item (in thousands):
| | | | | |
| Three Months Ended |
| December 24, 2022 |
Cost of revenue, Systems | $ | 7 | |
Cost of revenue, Software maintenance and support | 9 | |
Cost of revenue, Operation services | 296 | |
Research and development | 22,828 | |
Selling, general, and administrative | 26,400 | |
Total stock-based compensation expense | $ | 49,540 | |
Warrant Units
On May 20, 2022, in connection with its entry into the 2nd Amended and Restated Master Automation Agreement, the Company issued Walmart a warrant to acquire up to an aggregate of 258,972 Legacy Warehouse Class A Units (“May 2022 Warrant”), subject to certain vesting conditions. The May 2022 Warrant had a grant date fair value of $224.45. In connection with the closing of the Business Combination, the May 2022 Warrant was converted into a new warrant to acquire up to an aggregate of 15,870,411 common units of Symbotic Holdings (“June 2022 Warrant” and, the common units of Symbotic Holdings issuable thereunder, the “Warrant Units”). As of December 24, 2022, the June 2022 Warrant had not vested, as vesting is tied to the installation commencement date for certain Systems which the Company is installing in Walmart’s 42 regional distribution centers. Upon vesting, units may be acquired at an exercise price of $10.00 per unit. The Warrant Units contain customary anti-dilution, down-round, and change-in-control provisions. The right to purchase units in connection with the June 2022 Warrant expires on June 7, 2027.
14. Segment and Geographic Information
The Company operates as one operating segment. Revenue and property and equipment, net by geographic region, based on physical location of the operations recording the sale or the assets are as follows:
Revenue by geographical region for the three months ended December 24, 2022 and December 25, 2021 are as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| December 24, 2022 | | December 25, 2021 |
United States | $ | 205,420 | | | $ | 76,238 | |
Canada | 892 | | | 826 | |
Total revenue | $ | 206,312 | | | $ | 77,064 | |
Percentage of revenue generated outside of the United States | — | % | | 1 | % |
Total property and equipment, net by geographical region at December 24, 2022 and at September 24, 2022 are as follows (in thousands):
| | | | | | | | | | | |
| December 24, 2022 | | September 24, 2022 |
United States | $ | 29,066 | | | $ | 23,640 | |
Canada | 1,180 | | | 1,238 | |
Total property and equipment, net | $ | 30,246 | | | $ | 24,878 | |
Percentage of property and equipment, net held outside of the United States | 4 | % | | 5 | % |
15. Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements were issued. Other than as described in these condensed consolidated financial statements, the Company did not identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.