ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special
Note Regarding COVID-19
In
December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of
the virus resulted in a world-wide pandemic. By March 2020, the U.S. economy had been largely shut down by mass quarantines and government
mandated stay-in-place orders (the “Orders”) to halt the spread of the virus. Many of these Orders have been relaxed or lifted
in jurisdictions where large portions of the population have been vaccinated, but there is considerable uncertainty about whether the
Orders will need to be reinstated due to the ongoing spread of new variants of COVID-19. A significant portion of the worldwide population
remains unvaccinated, and uncertainty also exists about whether existing vaccines will be effective as new variants of COVID-19 emerge.
Accordingly, the overall impact of COVID-19 continues to have an adverse impact on global business activities. The Orders required some
of the Company’s employees to work from home when possible, and other employees were entirely prevented from performing their job
duties at times. The world-wide response to the pandemic resulted in a significant downturn in economic activity and there is no assurance
that government stimulus programs will successfully restore the economy to the levels that existed before the pandemic. If an economic
recession or depression is sustained, it could have a material adverse effect on the Company’s business as consumer demand for
its products could decrease.
Foreign
jurisdictions accounted for approximately 78% and 68% of the Company’s net revenue for the six months ended June 30, 2021 and the
year ended December 31, 2020, respectively. The impact of COVID-19 was a significant contributing factor for the year ended December
31, 2020, which resulted in decreases in net revenue in foreign countries as a group. While the Company’s direct-to-consumer selling
model typically relies heavily on the use of its Brand Partner sales force in close contact with customers, the pandemic has required
alternative selling approaches such as through social media. Until vaccines or other successful mitigation of COVID-19 have been widely
administered throughout the global population, no assurance can be provided that the Company will be able to avoid future reductions
in net revenue using alternative selling approaches that avoid direct contact with customers. While the current disruption to the Company’s
business is expected to be temporary, the long-term financial impact on the Company’s business cannot be reasonably estimated at
this time.
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). All statements other than statements of historical facts contained in this Report, including statements
regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations,
are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,”
“potential,” “predict,” “project,” “should,” “will,” “would”
and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but
the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited
to, information concerning:
|
●
|
Our
anticipated operating results, including revenue and earnings.
|
|
●
|
Our
expected capital expenditure levels.
|
|
●
|
The
volatility in credit and market conditions.
|
|
●
|
Our
belief that we have sufficient liquidity to fund our business operations for the next 12 months.
|
|
●
|
Our
ability to bring new products to market in an ever-changing and difficult regulatory environment.
|
|
●
|
Our
expectations about the extent and duration of COVID-19 on our business.
|
|
●
|
Our
ability to re-patriate cash from certain foreign markets.
|
|
●
|
Our
strategy for customer retention and growth.
|
|
●
|
Our
risk management strategy.
|
|
●
|
Our
ability to capture cost and revenue synergies, and successfully integrate our combination with Ariix.
|
|
●
|
Our
ability to deliver profitable organic revenue growth.
|
|
●
|
Our
ability to manage our growth.
|
We
have based these forward-looking statements largely on our current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations
and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions,
including those described in Item 1A. “Risk Factors” of our 2020 Annual Report on Form 10-K as filed with the SEC
on March 18, 2021 (the “2020 Form 10-K”). Moreover, we operate in very competitive and rapidly changing markets. New risks
emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on
our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated
or implied in the forward-looking statements.
You
should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events
and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements in this Report are
made as of the date of the filing, and except as required by law, we disclaim and do not undertake any obligation to update or revise
publicly any forward-looking statements in this Report. You should read this Report and the documents that we reference in this Report
and have filed with the Securities and Exchange Commission (“SEC”) with the understanding that our actual future results,
levels of activity and performance, as well as other events and circumstances, may be materially different from what we expect.
Overview
You
should read the following discussion and analysis of our financial condition and results of operations together with (i) our financial
statements and related notes included in Part I, Item 1 of this Report, (ii) our audited financial statements for the years ended December
31, 2020 and 2019 set forth in Item 8 of the 2020 Form 10-K, and (iii) the related Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 of the 2020 Form 10-K.
Certain
figures, such as interest rates and other percentages included in this section, have been rounded for ease of presentation. Percentage
figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such
amounts prior to rounding. For this reason, percentage and dollar amounts in this section may vary slightly from those obtained by performing
the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that
appear in this section may similarly not sum due to rounding.
Our
Business Model
We
are an organic and healthy products company intending to become the world’s leading social selling and distribution company. NewAge,
Inc. is a purpose-driven firm dedicated to providing healthy products to consumers and inspiring them to “Live Healthy.”
We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt with industry leading social
selling tools and technologies. More than 72% of the Company’s revenue is ordered and fulfilled online including auto-delivery
subscriptions, and more than 85% of our products are delivered directly to consumers’ homes.
We
compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within the
category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products
and brands. We differentiate our products utilizing our patents, proprietary formulas and production process and trade secrets and focus
our functional differentiation utilizing different combinations of:
|
●
|
Phytonutrients
and micronutrients
|
|
●
|
Plant-based
ingredients
|
|
●
|
CBD
|
|
●
|
Noni
|
|
●
|
Clean/non-toxic
ingredients
|
Utilizing
these functionally differentiated ingredients, we intend to build ‘hundred-million dollar’ focus brands in each of our respective
platforms. For example, Tahitian Noni already meets this standard, is our largest brand, and has sold more than $7.0 billion since its
inception, including approximately $400 million cumulatively recognized by us since our acquisition of Morinda in December 2018. We have
multiple studies and human trials validating Tahitian Noni’s efficacy and benefits for reducing inflammation and strengthening
the body’s protection against viruses. Also, within the health and wellness platform is our LIMU brand, a fucoidan-rich beverage
sourced from seaweed. We have two core brands within the healthy appearance platform including TeMana, a unique skin care portfolio that
is infused with Tahitian Noni, and Lucim, a line of clean skin care products expanding worldwide that was launched in 2020. In the nutritional
performance platform, we commercialize a full line of weight management and other products including nutritional supplements and nutraceuticals
and are building out our core brands within the platform.
We
believe that the major trend in consumer goods is direct delivery, e-commerce ordering and fulfillment, with purchase intent being driven
by social media and friends and family. According to Euromonitor International’s 2019 Lifestyles Survey, the largest driver of
purchase intent in every major region of the world was friends and family recommendations and related social media posts. We further
believe that these fundamental trends negate the historic advantage of traditional manufacturers geared toward sale of their products,
utilizing traditional media, merchandized in traditional retail outlets.
We
believe one of NewAge’s competitive advantages is its network of more than 400,000 Brand Partners and customers around the world,
and its own DSD system that provides near captive distribution in our respective market areas. We have developed a robust infrastructure
and set of execution capabilities across more than 50 countries, with a primary focus on our core markets of Japan, Greater China, Western
Europe, and North America.
NewAge
has the scale and infrastructure underpinning what we believe to be a differentiated and disruptive business strategy. NewAge believes
that what, where, when and how consumers are buying consumable products is transforming. Commercializing our portfolio of healthy brands
through primarily a direct-route-to-market, utilizing proprietary and industry-leading social selling technology, and connecting with
consumers on their terms with our team of more than 400,000 Brand Partners and customers enables us to take advantage of the fundamental
disintermediation happening in consumer product goods.
Operating
Segment Overview
Since
the consummation of the business combination with Morinda in December 2018, our operating segments have consisted of the Noni by NewAge
segment and the NewAge segment. Upon completion of the business combination with Ariix, which comprised a portion of the Noni by NewAge
segment, we renamed this segment as the Direct / Social Selling segment to better reflect the overall characteristics shared by the business
units that comprise this segment.
The
net revenue and total assets of the Direct / Social Selling segment increased significantly with the closing of our acquisition of Ariix
on November 16, 2020. The Direct / Social Selling segment is engaged in the development, manufacturing, and marketing of products in
three core category platforms including health and wellness, healthy appearance, and nutritional performance. The Direct / Social Selling
segment has manufacturing operations in Tahiti, Germany, Japan, the United States, and China. The Direct / Social Selling segment’s
products are sold and distributed in more than 50 countries using Brand Partners through our direct-to-consumer selling network and e-commerce
business model. For the three and six months ended June 30, 2021, approximately 87% of the net revenue of the Direct / Social Selling
segment was generated outside the Unites States.
With
the changing economics in the retail brand beverage sector exacerbated by COVID-19, on September 24, 2020, we sold our Brands Within
Reach, LLC (“BWR”) subsidiary and the rights to substantially all of our U.S. retail brands to focus on the more profitable,
larger scale, higher potential Direct / Social Selling segment of our business. BWR and the U.S. retail brands were included in the Direct
Store segment through the disposal date and are referred to herein as the “Divested Business”. For periods after disposal
of the Divested Business, the Direct Store segment is primarily comprised of our DSD network that distributes snacks, beverages, and
other products direct to stores in Colorado and surrounding states, to wholesale distributors, key account owned warehouses and international
accounts using several distribution channels.
Recent
Developments
On
May 14, 2021, our shareholders approved the issuance of shares of Common Stock to settle the remaining merger consideration related to
our November 2020 business combination with Ariix. By obtaining approval to issue shares of Common Stock, we eliminated the possibility
of being required to pay $163.3 million in cash. We will issue 11.7 million shares of our Common Stock as soon as the Sellers provide
detailed issuance instructions, and 2.9 million shares are issuable by January 16, 2022. We are also obligated to issue 20.1 million
shares of our Common Stock on November 16, 2021. However, this number of shares is subject to subsequent adjustments based on the outcome
of potential indemnification claims by either party. Under the Amended Ariix Merger Agreement, indemnification claims awarded to either
party will be settled by increasing or decreasing the number of shares based on a fixed conversion price of $5.53 per share. Accordingly,
we are required to continue to account for the shares issuable on November 16, 2021 as a derivative liability until the number of shares
is fixed.
On
May 14, 2021, our shareholders approved an increase in authorized shares of Common Stock and the Reincorporation in Delaware. On May
24, 2021, we reincorporated to the State of Delaware under a plan of conversion, dated May 14, 2021. Pursuant to the plan of conversion,
we also adopted new bylaws. As a result of the reincorporation, each outstanding share of our Common Stock as a Washington corporation
automatically converted into an outstanding share of our Common Stock as a Delaware corporation. In addition, each outstanding stock
option and warrant, or right to acquire shares of our Common Stock as a Washington corporation converted into an equivalent stock option,
warrant, or right to acquire, upon the same terms and conditions for the same number of shares of our Common Stock as a Delaware corporation.
As a Delaware corporation, we have the authority to issue up to 400.0 million shares of Common Stock and up to 1.0 million shares of
Preferred Stock.
On
June 1, 2021, we entered into an Asset Purchase Agreement (“APA”) with Aliven, Inc. (“Aliven”) that was accounted
for as a business combination. Aliven is a Japan-based direct selling company that we acquired to accelerate growth with our direct-to-consumer
business model in Japan and to expand our portfolio of healthy products. The total purchase consideration consisted of approximately
1.1 million shares of our Common Stock with a fair value of approximately $2.6 million.
In
July 2021, we were informed that forgiveness of our PPP Loans was approved by the SBA for approximately $9.7 million, including accrued
interest through June 30, 2021. The forgiveness of these PPP Loans will be recognized in the third quarter of 2021 when the lender legally
released us of our obligations to repay the debts.
These
recent developments are discussed further under the caption Liquidity and Capital Resources.
Key
Components of Consolidated Statements of Operations
For
a description of the key components of our condensed consolidated statements of operations, please refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K.
Critical
Accounting Policies and Significant Judgments and Estimates
For
a discussion of our critical accounting policies, please refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations in the 2020 Form 10-K.
Results
of Operations
Three
Months Ended June 30, 2021 and 2020
Our
unaudited condensed consolidated statements of operations for the three months ended June 30, 2021 and 2020 are presented below (dollars
in thousands):
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
124,040
|
|
|
$
|
62,637
|
|
|
$
|
61,403
|
|
|
|
98
|
%
|
Cost
of goods sold
|
|
|
40,241
|
|
|
|
24,559
|
|
|
|
15,682
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
83,799
|
|
|
|
38,078
|
|
|
|
45,721
|
|
|
|
120
|
%
|
Gross
margin
|
|
|
68
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
43,320
|
|
|
|
18,405
|
|
|
|
24,915
|
|
|
|
135
|
%
|
Selling,
general and administrative
|
|
|
41,042
|
|
|
|
26,277
|
|
|
|
14,765
|
|
|
|
56
|
%
|
Depreciation
and amortization expense
|
|
|
4,723
|
|
|
|
1,761
|
|
|
|
2,962
|
|
|
|
168
|
%
|
Loss
on disposal of Divested Business
|
|
|
4,339
|
|
|
|
-
|
|
|
|
4,339
|
|
|
|
n/a
|
|
Impairment
of right-of-use assets
|
|
|
-
|
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
93,424
|
|
|
|
46,843
|
|
|
|
46,581
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(9,625
|
)
|
|
|
(8,765
|
)
|
|
|
(860
|
)
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,040
|
)
|
|
|
(600
|
)
|
|
|
(2,440
|
)
|
|
|
407
|
%
|
Gain
from change in fair value of derivatives
|
|
|
30,829
|
|
|
|
20
|
|
|
|
30,809
|
|
|
|
154045
|
%
|
Interest
and other income (expense), net
|
|
|
(53
|
)
|
|
|
342
|
|
|
|
(395
|
)
|
|
|
(115
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
18,111
|
|
|
|
(9,003
|
)
|
|
|
27,114
|
|
|
|
(301
|
)%
|
Income
tax expense
|
|
|
(740
|
)
|
|
|
(551
|
)
|
|
|
(189
|
)
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
17,371
|
|
|
$
|
(9,554
|
)
|
|
$
|
26,925
|
|
|
|
(282
|
)%
|
Presented
below is our net revenue, cost of goods sold, gross profit and gross margin by segment for the three months ended June 30, 2021 and 2020
(dollars in thousands):
|
|
Direct
/ Social Selling Segment
|
|
|
Direct
Store Segment
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
109,752
|
|
|
$
|
46,861
|
|
|
$
|
62,891
|
|
|
|
134
|
%
|
|
$
|
14,288
|
|
|
$
|
15,776
|
|
|
$
|
(1,488
|
)
|
|
|
(9
|
)%
|
Cost
of goods sold
|
|
|
29,272
|
|
|
|
10,958
|
|
|
|
18,314
|
|
|
|
167
|
%
|
|
|
10,969
|
|
|
|
13,601
|
|
|
|
(2,632
|
)
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
80,480
|
|
|
$
|
35,903
|
|
|
$
|
44,577
|
|
|
|
124
|
%
|
|
$
|
3,319
|
|
|
$
|
2,175
|
|
|
$
|
1,144
|
|
|
|
53
|
%
|
Gross
margin
|
|
|
73
|
%
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
As
discussed above under the caption Operating Segment Overview, on September 24, 2020, we sold the Divested Business, which was
a component of our Direct Store segment and included in our consolidated statements of operations through the disposal date. Accordingly,
the Divested Business is excluded from our results of operations for the three months ended June 30, 2021. However, for the three months
ended June 30, 2021, we did recognize an additional loss on disposal of the Divested Business of $4.3 million related to a note receivable
we no longer expect to collect and certain disputed payables. Presented below is a summary of the operating loss of the Divested Business
that is included in our historical results for the three months ended June 30, 2020 (in thousands):
Net
revenue
|
|
$
|
5,938
|
|
Cost
of goods sold
|
|
|
6,269
|
|
Gross
loss
|
|
|
(331
|
)
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Selling,
general and administrative
|
|
|
(2,081
|
)
|
Commissions
|
|
|
(40
|
)
|
Depreciation
and amortization expense
|
|
|
(31
|
)
|
|
|
|
|
|
Operating
loss
|
|
$
|
(2,483
|
)
|
Since
September 25, 2020, the Direct Store segment is primarily comprised of our legacy DSD and e-commerce lines of business (the “Retained
Business”). Please refer to the captions below for further discussion with respect to our net revenue, cost of goods sold, gross
profit and gross margin by segment, including the results of operations of the Divested Business and the Retained Business of the Direct
Store segment for the three months ended June 30, 2021 and 2020.
Net
Revenue. Net revenue increased from $62.6 million for the three months ended June 30, 2020 to $124.0 million for the three months
ended June 30, 2021, an increase of $61.4 million or 98%. For the three months ended June 30, 2021, the increase in net revenue was attributable
to net revenue generated by Ariix for $65.7 million and Aliven for $1.6 million, partially offset by reductions in net revenue for our
legacy businesses of $4.5 million.
Net
revenue for the Direct / Social Selling segment increased by $62.9 million from $46.9 million for the three months ended June 30, 2020
to $109.8 million for the three months ended June 30, 2021. This increase was attributable to net revenue from our newly acquired businesses
of $65.7 million for Ariix and $1.6 million for Aliven, for a total of $67.3 million. This increase due to our newly acquired businesses
was partially offset by a reduction in net revenue of $4.5 million for the legacy portion of the Direct / Social Selling segment. The
decrease in net revenue for the legacy portion of the Direct / Social Selling segment was a result of (i) closure and/or consolidation
of a number of smaller, non-core, unprofitable markets on a standalone basis, and (ii) lower quantities of products purchased
by consumers during the COVID-19 pandemic and the related mass quarantines and government mandated stay-in-place orders that have been
in effect in varying degrees since March 2020.
Net
revenue for the Direct Store segment decreased by $1.5 million from $15.8 million for the three months ended June 30, 2020 to $14.3 million
for the three months ended June 30, 2021. This decrease was attributable to a reduction in net revenue of $5.9 million due to our disposal
of the Divested Business in September 2020, partially offset by an increase in net revenue for the Retained Business of the Direct Store
segment of $4.5 million or 45%. This increase in net revenue for the Retained Business of the Direct Store segment was attributable to
new customers and expansion of the product portfolio for our DSD business.
Cost
of goods sold. Cost of goods sold increased from $24.6 million for the three months ended June 30, 2020 to $40.2 million for
the three months ended June 30, 2021, an increase of $15.7 million. Cost of goods sold for the Direct / Social Selling segment
increased by $18.3 million, partially offset by a decrease in cost of goods sold of $2.6 million for the Direct Store
segment. Cost of goods sold as a percent of net revenue improved to 32% for the three months ended June 30, 2021 as
compared to 39% for the three months ended June 30, 2020. This seven-percentage point improvement was driven by a shift in segment
product mix and target cost synergies associated with the merger with Ariix.
The
increase in cost of goods sold for the Direct / Social Selling segment of $18.3 million was primarily attributable to the cost of products
sold by Ariix for $19.1 million and Aliven for $0.2 million. Cost of goods sold for the legacy business of the Direct / Social Selling
segment decreased by $1.1 million or 10% which was identical to the 10% reduction in net revenue for the legacy business of the Direct
/ Social Selling segment as discussed above. In order to partially mitigate the effects of COVID-19 for the three months ended June 30,
2021 and 2020, we offered additional discounts and promotions to the customers of the legacy business of the Direct / Social Selling
Segment that are reflected in cost of goods sold.
For
the three months ended June 30, 2021, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $0.2
million that related to the sale of inventories acquired as part of the Ariix business combination. The fair value of work-in-process
and finished goods inventories on the closing date of the Ariix business combination exceeded the historical carrying value, which represented
an element of built-in profit on the closing date that was charged to cost of goods sold as a portion of the related inventories were
sold for the three months ended June 30, 2021.
Cost
of goods sold for the Direct Store segment decreased by $2.6 million from $13.6 million for the three months ended June 30, 2020 to $11.0
million for the three months ended June 30, 2021. The decrease in cost of goods sold for the Direct Store segment was due to the elimination
of cost of goods sold related to the Divested Business which amounted to $6.3 million for the three months ended June 30, 2020. This
decrease was partially offset by an increase in cost of goods sold for the Retained Business of $3.6 million or 50%, from $7.3 million
for the three months ended June 30, 2020 to $11.0 million for the three months ended June 30, 2021. The increase in cost of goods sold
for the Retained Business was primarily attributable to higher product costs associated with a 45% increase in net revenue.
Gross
profit. Gross profit increased from $38.1 million for the three months ended June 30, 2020 to $83.8 million for the three months
ended June 30, 2021, an increase of $45.7 million or 120%. The increase in gross profit consisted of $44.6 million attributable to the
Direct / Social Selling segment and $1.1 million attributable to the Direct Store segment. The improvement in gross profit for the Direct
/ Social Selling segment was attributable to gross profit generated by Ariix for $46.6 million and $1.4 million for Aliven for a total
of $48.0 million for the three months ended June 30, 2021. These increases attributable to our newly acquired businesses were partially
offset by a reduction in gross profit of $3.4 million related to the legacy business of the Direct / Social Selling segment that resulted
from lower sales caused by the COVID-19 pandemic. For each of the three months ended June 30, 2021 and 2020, gross margin for the legacy
business of the Direct / Social Selling segment was 77%. For the three months ended June 30, 2021, the aggregate gross margin for the
businesses acquired from Ariix and Aliven was 71%.
The
Direct Store segment accounted for an increase in gross profit of $1.1 million for the three months ended June 30, 2021, driven by cost
of goods sold that decreased by 19% whereas net revenue decreased by only 9%. The Divested Business accounted for approximately $0.3
million of negative gross profit for the three months ended June 30, 2020, whereas the Retained Business generated an additional $0.8
million of gross profit for the three months ended June 30, 2021. The Retained Business generated gross profit of approximately $2.5
million and gross margin of 25% for the three months ended June 30, 2020, compared to gross profit of $3.3 million and gross margin of
23% for the three months ended June 30, 2021.
Consolidated
gross margin increased from 61% for the three months ended June 30, 2020 to 68% for the three months ended June 30, 2021. Gross margin
for the Direct / Social Selling segment decreased from 77% for the three months ended June 30, 2020 to 73% for the three months ended
June 30, 2021. Gross margin for the Direct Store segment increased from 14% for the three months ended June 30, 2020 to 23% for the three
months ended June 30, 2021.
Commissions.
Commissions were $43.3 million for the three months ended June 30, 2021 compared to $18.4 million for the three months ended
June 30, 2020, an increase of $24.9 million. For the three months ended June 30, 2021, commissions for the Direct / Social Selling segment
included an aggregate of $27.5 million related to the businesses acquired from Ariix and Aliven, partially offset by a reduction in commissions
for our legacy businesses of $2.6 million. Commissions for our legacy businesses decreased by 14%, primarily due to the decrease in net
revenue for the legacy portion of the Direct / Social Selling segment of 10% and the elimination of commissions related to the Divested
Business.
Selling,
general and administrative expenses. SG&A expenses increased from $26.3 million or 42% of net revenue for the three
months ended June 30, 2020 to $41.0 million or 33% of net revenue for the three months ended June 30, 2021, an increase of $14.8
million that was partially offset by a reduction of $2.1 million related to the Divested Business. The reduction in SG&A as a
percent of net revenue reflects the leverage of a consolidated growing business. The net increase in SG&A of $14.8 million
was comprised of increases in compensation and benefits expense of $7.8 million, professional fees of $3.2 million, transaction fees
related to the sale of products of $1.1 million, communications expenses of $1.0 million, market costs of $0.7 million, travel and other
business expenses of $0.7 million, and occupancy costs of $0.3 million.
For
the three months ended June 30, 2021, approximately $15.5 million of our SG&A expenses related to the businesses acquired from Ariix
and Aliven, including compensation and benefits costs of $8.7 million, professional fees of $1.7 million, transaction fees related to
the sale of products of $1.2 million, communications expenses of $0.8 million, and occupancy costs of $0.6 million. For the three months
ended June 30, 2021, SG&A expenses related to corporate overhead activities and our legacy businesses decreased by $0.7 million which
was primarily due to a reduction in compensation and benefits and marketing costs.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses increased from $1.7 million for
the three months ended June 30, 2020 to $4.7 million for the three months ended June 30, 2021, an increase of $3.0 million. This increase
was primarily attributable to amortization expense of $2.9 million related to identifiable intangible assets of $131.8 million acquired
in our business combination with Ariix in November 2020.
Loss
on disposal of Divested Business. In September 2020, we sold our BWR subsidiary and substantially all U.S. retail brands and
recognized a loss of $3.4 million. Based on recent communications with the Buyer, we determined that collection of a $2.5 million note
receivable and accrued interest of $0.2 million is unlikely. Additionally, we were informed that BWR refuses to pay approximately $1.6
million of supplier obligations that we may ultimately be responsible to settle. Accordingly, we recognized additional losses related
to the disposal of the Divested Business of $4.3 million for the three months ended June 30, 2021.
Interest
expense. Interest expense increased from $0.6 million for the three months ended June 30, 2020 to $3.0 million for the three
months ended June 30, 2021, an increase of $2.4 million. For the three months ended June 30, 2021, interest expense of $3.0 million includes
(i) interest expense paid in cash of $0.6 million based on the contractual rate of 8.0% under the Senior Notes entered into in December
2020, (ii) accretion of discount of $2.1 million related to the Senior Notes, and (iii) imputed interest expense of $0.2 million related
to our deferred lease financing obligation and business combination obligations. As of June 30, 2021, the overall effective interest
rate for the Senior Notes was approximately 46.8%, including the 8.0% stated rate.
For
the three months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense of $0.2 million based on the
contractual rates under our former credit facility with East West Bank (the “EWB Credit Facility”) based on a weighted average
interest rate of 5.3% and weighted average borrowings outstanding of $14.3 million, (ii) accretion of discount for a total of $0.2 million,
(iii) imputed interest expense of $0.1 million related to our deferred lease financing obligation, and (iv) cash settlements under our
interest rate swap agreement, unused line fees and other interest charges of $0.1 million.
Gain
from change in fair value of derivatives. For the three months ended June 30, 2021, we recognized a gain from changes in fair
value of derivatives of $30.8 million. This gain consisted of (i) $24.1 million related to the Ariix business combination derivative
liabilities discussed in Note 3 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report,
and (ii) $6.7 million related to warrants issued in the February 2021 Private Placement as discussed in Note 7 to our unaudited condensed
consolidated financial statements.
The
fair value of derivative liabilities can be extremely volatile from period to period since the related valuations are heavily influenced
by the then current market price of our Common Stock. The closing price for shares of our Common Stock decreased by 26% from $3.03 per
share as of March 31, 2021 to $2.23 per share as of June 30, 2021. This decrease in the value of our shares was the principal factor
that reduced fair value and resulted in the aggregate gains from changes in fair value of derivatives of $30.8 million for the three
months ended June 30, 2021.
Interest
and other income (expense), net. Interest and other income (expense), net amounted to a loss of $0.1 million for the three months
ended June 30, 2021 and income of $0.3 million for the three months ended June 30, 2020. For the three months ended June 30, 2021, interest
and other income (expense), net of $0.1 million was primarily comprised of foreign exchange losses of $0.1 million and a loss on the
sale of property and equipment of $0.1 million, partially offset by interest income of $0.1 million. Interest and other income (expense),
net for the three months ended June 30, 2020 consisted of foreign exchange gains of $0.2 million and interest income of $0.1 million.
Income
tax expense. For the three months ended June 30, 2021 and 2020, we recognized income tax expense of $0.7 million and $0.6 million,
respectively. Income tax expense primarily consisted of foreign income taxes associated with profitable foreign markets.
Inflation
and changing prices. For the three months ended June 30, 2021 and 2020, the impact of inflation and changing prices have not
had a significant impact on our net revenue, cost of goods sold and operating expenses.
Six
Months Ended June 30, 2021 and 2020
Our
unaudited condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020 are presented below (dollars
in thousands):
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
249,558
|
|
|
$
|
126,330
|
|
|
$
|
123,228
|
|
|
|
98
|
%
|
Cost
of goods sold
|
|
|
78,358
|
|
|
|
46,728
|
|
|
|
31,630
|
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
171,200
|
|
|
|
79,602
|
|
|
|
91,598
|
|
|
|
115
|
%
|
Gross
margin
|
|
|
69
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
90,717
|
|
|
|
37,920
|
|
|
|
52,797
|
|
|
|
139
|
%
|
Selling,
general and administrative
|
|
|
79,901
|
|
|
|
56,885
|
|
|
|
23,016
|
|
|
|
40
|
%
|
Depreciation
and amortization expense
|
|
|
9,398
|
|
|
|
3,542
|
|
|
|
5,856
|
|
|
|
165
|
%
|
Loss
on disposal of Divested Business
|
|
|
4,339
|
|
|
|
-
|
|
|
|
4,339
|
|
|
|
n/a
|
|
Impairment
of right-of-use assets
|
|
|
-
|
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
184,355
|
|
|
|
98,747
|
|
|
|
85,608
|
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(13,155
|
)
|
|
|
(19,145
|
)
|
|
|
5,990
|
|
|
|
(31
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(6,163
|
)
|
|
|
(1,172
|
)
|
|
|
(4,991
|
)
|
|
|
426
|
%
|
Gain
(loss) from change in fair value of derivatives
|
|
|
21,216
|
|
|
|
(306
|
)
|
|
|
21,522
|
|
|
|
(7033
|
)%
|
Interest
and other income (expense), net
|
|
|
(405
|
)
|
|
|
725
|
|
|
|
(1,130
|
)
|
|
|
(156
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,493
|
|
|
|
(19,898
|
)
|
|
|
21,391
|
|
|
|
(108
|
)%
|
Income
tax expense
|
|
|
(1,890
|
)
|
|
|
(1,274
|
)
|
|
|
(616
|
)
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(397
|
)
|
|
$
|
(21,172
|
)
|
|
$
|
20,775
|
|
|
|
(98
|
)%
|
Presented
below is our net revenue, cost of goods sold, gross profit and gross margin by segment for the six months ended June 30, 2021
and 2020 (dollars in thousands):
|
|
Direct
/ Social Selling Segment
|
|
|
Direct
Store Segment
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
224,214
|
|
|
$
|
96,971
|
|
|
$
|
127,243
|
|
|
|
131
|
%
|
|
$
|
25,344
|
|
|
$
|
29,359
|
|
|
$
|
(4,015
|
)
|
|
|
(14
|
)%
|
Cost
of goods sold
|
|
|
58,830
|
|
|
|
21,462
|
|
|
|
37,368
|
|
|
|
174
|
%
|
|
|
19,528
|
|
|
|
25,266
|
|
|
|
(5,738
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
165,384
|
|
|
$
|
75,509
|
|
|
$
|
89,875
|
|
|
|
119
|
%
|
|
$
|
5,816
|
|
|
$
|
4,093
|
|
|
$
|
1,723
|
|
|
|
42
|
%
|
Gross
margin
|
|
|
74
|
%
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
As
discussed above, the Divested Business is excluded from our results of operations for the six months ended June 30, 2021 except for an
additional loss on disposal of the Divested Business of $4.3 million related to a note receivable we no longer expect to collect and
certain disputed payables. Presented below is a summary of the operating loss of the Divested Business that is included in our historical
results for the six months ended June 30, 2020 (in thousands):
Net
revenue
|
|
$
|
10,722
|
|
Cost
of goods sold
|
|
|
11,342
|
|
Gross
loss
|
|
|
(620
|
)
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Selling,
general and administrative
|
|
|
(4,426
|
)
|
Commissions
|
|
|
(105
|
)
|
Depreciation
and amortization expense
|
|
|
(62
|
)
|
|
|
|
|
|
Operating
loss
|
|
$
|
(5,213
|
)
|
Please
refer to the captions below for further discussion with respect to our net revenue, cost of goods sold, gross profit and gross margin
by segment, including the results of operations of the Divested Business and the Retained Business of the Direct Store segment for the
six months ended June 30, 2021 and 2020.
Net
Revenue. Net revenue increased from $126.3 million for the six months ended June 30, 2020 to $249.6 million for the six months
ended June 30, 2021, an increase of $123.2 million or 98%. For the six months ended June 30, 2021, the increase in net revenue was attributable
to net revenue generated by Ariix for $133.9 million and Aliven for $1.6 million, partially offset by a reduction in net revenue for
our legacy businesses of $8.2 million.
Net
revenue for the Direct / Social Selling segment increased by $127.2 million from $97.0 million for the six months ended June 30, 2020
to $224.2 million for the six months ended June 30, 2021. This increase was attributable to net revenue from our newly acquired businesses
of $133.9 million for Ariix and $1.6 million for Aliven, for a total of $135.5 million. This increase due to our newly acquired businesses
was partially offset by a reduction in net revenue of $8.2 million for the legacy portion of the Direct / Social Selling segment. The
decrease in net revenue for the legacy portion of the Direct / Social Selling segment was a result of (i) closure and/or consolidation
of a number of smaller, non-core, unprofitable markets on a standalone basis, and (ii) lower quantities of products purchased
by consumers during the COVID-19 pandemic and the related mass quarantines and government mandated stay-in-place orders that have been
in effect in varying degrees since March 2020.
Net
revenue for the Direct Store segment decreased by $4.0 million from $29.3 million for the six months ended June 30, 2020 to $25.3 million
for the six months ended June 30, 2021. This decrease was attributable to a reduction in net revenue of $10.7 million due to our disposal
of the Divested Business in September 2020, partially offset by an increase in net revenue for the Retained Business of the Direct Store
segment of $6.7 million or 36%. This increase in net revenue for the Retained Business of the Direct Store segment was attributable to
new customers and expansion of the product portfolio for our DSD business.
Cost
of goods sold. Cost of goods sold increased from $46.7 million for the six months ended June 30, 2020 to $78.3 million for the
six months ended June 30, 2021, an increase of $31.6 million. Cost of goods sold for the Direct / Social Selling segment increased by
$37.4 million, partially offset by a decrease in cost of goods sold of $5.7 million for the Direct Store segment. Cost of goods sold
as a percent of net revenue improved to 31% for the six months ended June 30, 2021 as compared to 37% for the six months ended June 30,
2020. This six-percentage point improvement was driven by a shift in segment product mix and target cost synergies associated with the
merger with Ariix.
The
increase in cost of goods sold for the Direct / Social Selling segment of $37.4 million was primarily attributable to the cost of products
sold by Ariix for $38.1 million and Aliven for $0.2 million. Cost of goods sold for the legacy business of the Direct / Social Selling
segment decreased by $1.0 million or 5% in comparison to an 8% reduction in net revenue for the legacy business of the Direct / Social
Selling segment as discussed above. In order to partially mitigate the effects of COVID-19, since March 2020 we have been offering additional
discounts and promotions to the customers of the legacy business of the Direct / Social Selling Segment that are reflected in cost of
goods sold.
For
the six months ended June 30, 2021, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $0.7
million that related to the sale of inventories acquired as part of the Ariix business combination. The fair value of work-in-process
and finished goods inventories on the closing date of the Ariix business combination exceeded the historical carrying value, which represented
an element of built-in profit on the closing date that was charged to cost of goods sold as a portion of the related inventories were
sold for the six months ended June 30, 2021.
Cost
of goods sold for the Direct Store segment decreased by $5.7 million from $25.3 million for the six months ended June 30, 2020 to $19.5
million for the six months ended June 30, 2021. The decrease in cost of goods sold for the Direct Store segment was due to the elimination
of cost of goods sold related to the Divested Business which amounted to $11.3 million for the six months ended June 30, 2020. This decrease
was partially offset by an increase in cost of goods sold for the Retained Business of $5.6 million or 40%, from $13.9 million for the
six months ended June 30, 2020 to $19.5 million for the six months ended June 30, 2021. The increase in cost of goods sold for the Retained
Business was primarily attributable to higher product costs associated with the 36% increase in net revenue discussed above.
Gross
profit. Gross profit increased from $79.6 million for the six months ended June 30, 2020 to $171.2 million for the six months
ended June 30, 2021, an increase of $91.6 million or 115%. The increase in gross profit consisted of $89.9 million attributable to the
Direct / Social Selling segment and $1.7 million attributable to the Direct Store segment. The improvement in gross profit for the Direct
/ Social Selling segment was attributable to gross profit generated by Ariix for $95.8 million and $1.4 million for Aliven, for a total
of $97.2 million for the six months ended June 30, 2021. These increases attributable to our newly acquired businesses were partially
offset by a reduction in gross profit of $7.3 million related to the legacy business of the Direct / Social Selling segment that resulted
from lower sales caused by the COVID-19 pandemic. Gross margin for the legacy business of the Direct / Social Selling segment was 77%
for the six months ended June 30, 2021 and 78% for the six months ended June 30, 2020. For the six months ended June 30, 2021, the aggregate
gross margin for the businesses acquired from Ariix and Aliven was 72%.
The
Direct Store segment accounted for an increase in gross profit of $1.7 million for the six months ended June 30, 2021, driven by cost
of goods sold that decreased by 23% whereas net revenue decreased by only 14%. The Divested Business accounted for
approximately $0.6 million of negative gross profit for the six months ended June 30, 2020, whereas the Retained Business generated
an additional $1.1 million of gross profit for the six months ended June 30, 2021. The Retained Business generated gross profit of
approximately $4.7 million and gross margin of 25% for the six months ended June 30, 2020, compared to gross profit of $5.8 million
and gross margin of 23% for the six months ended June 30, 2021.
Consolidated
gross margin increased from 63% for the six months ended June 30, 2020 to 69% for the six months ended June 30, 2021. Gross margin for
the Direct / Social Selling segment decreased from 78% for the six months ended June 30, 2020 to 74% for the six months ended June 30,
2021. Gross margin for the Direct Store segment increased from 14% for the six months ended June 30, 2020 to 23% for the six months ended
June 30, 2021.
Commissions.
Commissions were $90.7 million for the six months ended June 30, 2021 compared to $37.9 million for the six months ended June
30, 2020, an increase of $52.8 million. For the six months ended June 30, 2021, commissions for the Direct / Social Selling segment included
an aggregate of $57.3 million related to the businesses acquired from Ariix and Aliven, partially offset by a reduction in commissions
for our legacy businesses of $4.5 million. Commissions for our legacy businesses decreased by 12%, primarily due to the decrease in net
revenue for the legacy portion of the Direct / Social Selling segment of 8% and the elimination of commissions related to the Divested
Business.
Selling,
general and administrative expenses. SG&A expenses increased from $56.9 million or 45% of net revenue for the six
months ended June 30, 2020 to $79.9 million or 32% of net revenue for the six months ended June 30, 2021, an increase of $23.0
million that was partially offset by a reduction of $4.4 million related to the Divested Business. The reduction in SG&A as a
percent of net revenue reflects the leverage of a consolidated growing business. The net increase in SG&A of $23.0 million
was comprised of increases in compensation and benefits expense of $14.0 million, professional fees of $5.0 million, transaction fees
related to the sale of products of $2.2 million, communications expenses of $1.7 million, occupancy costs of $1.1 million, and travel
and other business expenses of $0.4 million, and is net of a reduction in marketing costs of $1.4 million.
For
the six months ended June 30, 2021, approximately $28.9 million of our SG&A expenses related to the businesses acquired from Ariix
and Aliven, including compensation and benefits costs of $16.5 million, professional fees of $3.3 million, transaction fees related to
the sale of products of $2.3 million, occupancy costs of $1.5 million, and communications expenses of $1.6 million. For the six months
ended June 30, 2021, SG&A expenses related to corporate overhead activities and our legacy businesses decreased by $5.8 million which
was primarily due to a reduction in marketing costs and compensation and benefits.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses increased from $3.5 million for
the six months ended June 30, 2020 to $9.4 million for the six months ended June 30, 2021, an increase of $5.9 million. This increase
was primarily attributable to amortization expense of $5.7 million related to identifiable intangible assets of $131.8 million acquired
in our business combination with Ariix in November 2020.
Loss
on disposal of Divested Business. In September 2020, we sold our BWR subsidiary and substantially all U.S. retail brands and
recognized a loss of $3.4 million. Based on recent communications with the Buyer, we determined that collection of a $2.5 million note
receivable and accrued interest of $0.2 million is unlikely. Additionally, we were informed that BWR refuses to pay approximately $1.6
million of supplier obligations that we may ultimately be responsible to settle. Accordingly, we recognized additional losses related
to the disposal of the Divested Business of $4.3 million for the six months ended June 30, 2021.
Interest
expense. Interest expense increased from $1.2 million for the six months ended June 30, 2020 to $6.2 million for the six months
ended June 30, 2021, an increase of $5.0 million. For the six months ended June 30, 2021, interest expense of $6.2 million includes (i)
interest expense paid in cash of $1.2 million based on the contractual rate of 8.0% under our Senior Notes, (ii) accretion of discount
of $4.4 million related to the Senior Notes, and (iii) imputed interest expense of $0.5 million related to our deferred lease financing
obligation and business combination obligations.
As
of December 31, 2020, the overall effective interest rate on the Senior Notes was approximately 42.3%, including the 8.0% stated rate.
On January 4, 2021, the lenders agreed to amend the Senior Notes in exchange for the issuance of 400,000 shares of Common Stock with
a fair value of approximately $1.1 million as of the issuance date. This amount was accounted for as a modification of the Senior Notes
that resulted in an additional discount of $1.1 million. This amendment fee and other lender-initiated changes that affect the timing
and amount of principal payments are accounted for prospectively as a revision of the effective interest rate. Accordingly, as of June
30, 2021, the overall effective interest rate was approximately 46.8%, including the 8.0% stated rate.
For
the six months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense of $0.2 million based on the
contractual rates under our former EWB Credit Facility based on a weighted average interest rate of 5.3% and weighted average borrowings
outstanding of $14.3 million, (ii) accretion of discount for a total of $0.2 million, (iii) imputed interest expense of $0.1 million
related to our deferred lease financing obligation and (iv) cash settlements under our interest rate swap agreement, unused line fees
and other interest charges of $0.1 million.
For
the six months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense based on the contractual rates
under the EWB Credit Facility of $0.4 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding
of $14.5 million, (ii) accretion of discount for a total of $0.3 million related to the Morinda business combination liabilities and
the EWB Credit Facility, (iii) imputed interest expense of $0.3 million related to our deferred lease financing obligation, (iv) cash
settlements under our interest rate swap agreement of $0.1 million, and (v) unused line fees and other interest charges of $0.1 million.
Gain
from change in fair value of derivatives. For the six months ended June 30, 2021, we recognized a gain from changes in fair value
of derivatives of $21.2 million compared to a loss of $0.3 million for the three months ended June 30, 2020. This gain of $21.2 million
consisted of (i) $12.8 million related to the Ariix business combination derivative liabilities discussed in Note 3 to our unaudited
condensed consolidated financial statements included in Part I, Item 1 of this Report, and (ii) $8.4 million related to warrants issued
on February 16, 2021, as discussed in Note 7 to our unaudited condensed consolidated financial statements.
The
fair value of derivative liabilities can be extremely volatile from period to period since the related valuations are heavily influenced
by the current market price of our Common Stock. The closing price for shares of our Common Stock decreased by 15% from $2.63 per share
as of December 31, 2020, to $2.23 per share as of June 30, 2021. This 15% decrease in the value of our shares was the principal factor
that reduced fair value and resulted in the $12.8 million gain related to the Ariix business combination derivative liabilities for the
six months ended June 30, 2021. The closing price for shares of our Common Stock decreased by 37% from $3.52 per share as of February
16, 2021 when the warrants were issued, to $2.23 per share as of June 30, 2021. This 37% decrease in the value of our shares was the
principal factor that resulted in the $8.4 million gain related to the warrant derivative liability for the six months ended June 30,
2021.
For
the six months ended June 30, 2020, we were subject to an interest rate swap agreement entered into in connection with our former EWB
Credit Facility. The fair value of this derivative liability increased by $0.3 million due to a decline in interest rates which resulted
in our recognition of a loss for $0.3 million. The swap agreement provided for a total notional amount of $10.0 million at a fixed interest
rate of approximately 5.4% through May 1, 2023, in exchange for a floating rate indexed to the prime rate plus 0.5%. We terminated this
swap agreement when we terminated the EWB Credit Facility in December 2020.
Interest
and other income (expense), net. Interest and other income (expense), net amounted to a loss of $0.4 million for the six months
ended June 30, 2021 and income of $0.7 million for the six months ended June 30, 2020. For the six months ended June 30, 2021, interest
and other income (expense), net was primarily comprised of foreign exchange losses of $0.7 million, and a loss of $0.1 million related
to the sale of property and equipment, partially offset by interest income of $0.3 million. Interest and other income (expense), net
for the six months ended June 30, 2020 consisted of foreign exchange gains of $0.6 million and interest income of $0.1 million, partially
offset by a loss of $0.1 million related to the sale of property and equipment.
Income
tax expense. For the six months ended June 30, 2021 and 2020, we recognized income tax expense of $1.9 million and $1.3 million,
respectively. Income tax expense primarily consisted of foreign income taxes associated with profitable foreign markets.
Inflation
and changing prices. For the six months ended June 30, 2021 and 2020, the impact of inflation and changing prices have not had
a significant impact on our net revenue, cost of goods sold and operating expenses.
Liquidity
and Capital Resources
Overview
For
the six months ended June 30, 2021, we incurred an operating loss of $13.2 million and cash used in our operating activities was $5.6
million. For the year ended December 31, 2020, we incurred an operating loss of $34.9 million and cash used in our operating activities
was $34.3 million. As of June 30, 2021, we had an accumulated deficit of $152.2 million.
In
February 2021, we entered into a securities purchase agreement in connection with a private placement of units that consisted of an aggregate
of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of Common Stock. At
the closing, we received net proceeds of approximately $53.8 million. As of June 30, 2021, we had cash and cash equivalents of $80.9
million and the current portion of restricted cash was $5.6 million, for a total of $86.5 million. As of June 30, 2021, we had working
capital of $53.9 million.
During
the 12-month period ending on June 30, 2022, cash payments will be required to settle certain obligations, including up to $25.1 million
of principal and interest under our Senior Notes discussed below, operating lease payments of $9.1 million, and deferred consideration
related to business combinations of $1.1 million. We believe our existing cash and cash equivalents of $80.9 million and the current
portion of restricted cash of $5.6 million will be sufficient to fund our contractual obligations and working capital requirements at
least through August 2022.
Please
refer to the sections below for further discussion about our recent financing activities and business combination obligations.
February
2021 Private Placement
On
February 16, 2021, we entered into a securities purchase agreement in connection with a private placement for the issuance of an aggregate
of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares (the “Warrant
Shares”) of Common Stock. At the closing on February 19, 2021, we received gross proceeds of approximately $58.0 million. Roth
Capital Partners, LLC acted as the exclusive placement agent in exchange for a fee equal to 7% of the gross proceeds. After deducting
the placement agent fees, the net proceeds were approximately $53.8 million.
The
warrants have an initial exercise price of $5.00 per share, subject to adjustment in certain circumstances. The warrants are exercisable
until March 29, 2024. In the event of certain fundamental transactions, the holders of the warrants could be entitled to a net cash settlement
whereby the warrants are not considered to be indexed to our shares of Common Stock. Accordingly, the warrants are required to be recorded
at fair value and classified as derivative liabilities. The net proceeds from the private placement of approximately $53.8 million were
allocated to the initial fair value of the warrants for $14.1 million and the remainder of $39.7 million was allocated to the shares
of Common Stock.
Pursuant
to the registration rights agreement, we filed a registration statement covering the resale of the shares of Common Stock and the Warrant
Shares that was declared effective by the SEC on March 29, 2021 and that has continued to remain effective since that date. If we fail
to maintain the effectiveness of the registration statement, the investors would be entitled to liquidated damages equal to 2.0% of the
aggregate subscription amount on each 30-day anniversary of such failure.
Senior
Notes
On
November 30, 2020, we entered into a securities purchase agreement for a private placement of (i) 8.00% Original Issue Discount Senior
Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) 800,000 shares of Common Stock
referred to as Commitment Shares, (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share, and
(iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share. The Senior Notes bear interest at an
annual rate of 8.0% applied to the contractual principal balance with such accrued interest payable in cash monthly.
For
the months of February 2021 through April 2021, the holders of the Senior Notes requested that we make principal payments up to $1.0
million per month which were paid timely. Beginning in May 2021 and continuing for each subsequent month, the holders of the Senior Notes
are entitled to request that we make principal payments of up to $2.0 million per month. The holders of the Senior Notes requested principal
payments of $1.0 million in May 2021 and $2.0 million in June 2021 that we paid timely. The maturity date of the Senior Notes is on December
1, 2022. However, if the holders of the Senior Notes exercise their rights to demand the maximum principal payments permitted in each
future month, the Senior Notes would be repaid in full by August 2022. We may prepay all or a portion of the outstanding principal amount
of the Senior Notes at any time, subject to a prepayment fee of 3.0% of the outstanding principal balance through December 1, 2021.
We
were required to maintain restricted cash balances of $18.0 million until February 2021. Beginning in February 2021, the requirement
to maintain restricted cash balances was reduced to $8.0 million until such time and to the extent that the outstanding stated principal
balance of the Senior Notes is reduced below $8.0 million. Assuming the holders of the Senior Notes continue to exercise their rights
to demand the maximum principal payments permitted in each month, the stated principal balance is expected to exceed $8.0 million until
April 2022. As of June 30, 2021, approximately $5.6 million of this restricted cash balance is classified as a current asset since those
funds may be utilized to make principal payments that are classified within current maturities of long-term debt.
Our
obligations under the Senior Notes are secured by substantially all of our assets, including all personal property and all proceeds and
products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit
accounts and a lien on certain real estate. The Senior Notes contain certain restrictions and covenants, which restrict our ability
to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances.
The Senior Notes also require that we comply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA,
minimum revenue, and a maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements.
As of June 30, 2021, we were in compliance with all covenants related to the Senior Notes. The Senior Notes contain customary
events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of
representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse
effect defaults, change of management defaults, and a change in control. Upon the occurrence of an event of default, the outstanding
obligations may be accelerated and become immediately due and payable and interest on the obligations increases to an annual rate of
12.0%.
PPP
Loans
Pursuant
to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”), we obtained a PPP Loan in April 2020 for approximately $6.9 million. In May 2020, Ariix obtained a PPP loan for approximately
$2.8 million, and we assumed this obligation in connection with the business combination. These PPP Loans are unsecured and guaranteed
by the SBA, bear interest at a fixed rate of 1.0% per annum and provide for maturity dates on the second anniversary of the respective
loan agreements. We applied to the respective lenders to request forgiveness of both PPP Loans, with the amounts that may be forgiven
equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred during the permitted
period as calculated in accordance with the terms of the CARES Act. The eligibility for the PPP Loans, expenditures that qualify toward
forgiveness, and the final balance of the PPP Loans that may be forgiven are subject to audit and final approval by the SBA.
In
July 2021, we were informed that forgiveness of both PPP Loans was approved by the SBA for approximately $9.7 million including accrued
interest through June 30, 2021. We will recognize forgiveness of the PPP Loans during the third quarter of 2021 when the lender legally
released us of our obligation to repay the PPP Loans.
Business
Combination Liabilities
On
November 16, 2020 (the “Ariix Closing Date”), we completed a business combination with Ariix, LLC (“Ariix”) for
total purchase consideration of $155.1 million that consisted of (i) 19.7 million shares of Common Stock with a fair value of $54.2 million,
(ii) $10.0 million payable in cash, (iii) fair value of $37.0 million related to 14.5 million shares of Common Stock that were subject
to shareholder approval (the “Fixed Shares”), and (iv) fair value of $53.9 million related to up to 25.5 million shares of
Common Stock that are subject to variation based on the outcome of working capital adjustments and potential indemnification claims (the
“Variable Shares”). If our shareholders had failed to approve the issuance of the Fixed Shares and the Variable Shares, we
would have been required to make cash payments of $163.3 million to the sellers (the “Sellers”) of Ariix. Accordingly, we
accounted for the obligations to issue the Fixed Shares and the Variable Shares or pay $163.3 million of cash as derivative liabilities
with an aggregate fair value of $90.9 million on the Ariix Closing Date. During the first quarter of 2021, we issued the 19.7 million
shares of Common Stock and made the $10.0 million cash payment.
In
January 2021, we entered into a letter of clarification (the “Clarification Letter”) that explained the intent of the parties,
whereby a cash account of Ariix with a Chinese bank that had a balance of $3.1 million remained an asset of the Sellers, and the number
of shares of our Common Stock issuable to the Sellers was reduced by 0.5 million shares. Based on the terms of the Clarification Letter,
a $29.0 million working capital shortfall on the opening balance sheet of Ariix, and the failure of Ariix to repay $5.0 million of business
combination liabilities prior to the closing date, the number of Variable Shares issuable to the Sellers has been reduced from 25.5 million
shares to approximately 20.1 million shares. In addition, we were obligated to pay up to $10.0 million of interim merger consideration
on May 16, 2021, but this payment was eliminated as a result of the working capital shortfall.
On
May 14, 2021, our shareholders approved the issuance of the Fixed Shares and the Variable Shares. The Fixed Shares are issuable for 11.7
million shares as soon as the Sellers provide detailed issuance instructions, and the remaining 2.9 million shares are issuable by January
16, 2022. Since the conditions that required accounting for the Fixed Shares as a derivative liability were eliminated upon receipt of
shareholder approval, the fair value of the Fixed Shares of $30.3 million as of May 14, 2021, has been reclassified from a liability
to a component of stockholders’ equity.
The
Variable Shares are issuable on November 16, 2021. However, the number of shares is subject to subsequent adjustments based on the outcome
of potential indemnification claims by either party, whereby indemnification claims awarded to either party through November 16, 2021
will be settled by increasing or decreasing the number of Variable Shares based on a fixed conversion price of $5.53 per share. Accordingly,
we are required to continue to account for the Variable Shares as a derivative liability until the number of shares becomes fixed. As
of June 30, 2021, the fair value of the Variable Shares derivative liability amounted to $44.8 million. While the Variable Shares are
accounted for as a derivative liability, there are no circumstances under which we could be required to pay cash to the Sellers to settle
this liability. As of June 30, 2021 and December 31, 2020, our business combination liabilities consisted of the following (in thousands):
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Liabilities
to former owners of Ariix:
|
|
|
|
|
|
|
|
|
Fair
value of Fixed Shares derivative liability
|
|
$
|
-
|
|
|
$
|
37,028
|
|
Fair
value of Variable Shares derivative liability
|
|
|
44,773
|
|
|
|
53,846
|
|
Total
derivative liabilities
|
|
|
44,773
|
|
|
|
90,874
|
|
Short-term
debt payable in cash
|
|
|
-
|
|
|
|
10,000
|
|
Business
combination liabilities assumed from Ariix:
|
|
|
|
|
|
|
|
|
Fair
value of deferred consideration payable:
|
|
|
|
|
|
|
|
|
LIMU
|
|
|
3,495
|
|
|
|
3,656
|
|
Zennoa
|
|
|
1,885
|
|
|
|
2,196
|
|
Short-term
debt for Zennoa
|
|
|
-
|
|
|
|
850
|
|
Total
|
|
|
50,153
|
|
|
|
107,576
|
|
Less
current portion
|
|
|
1,140
|
|
|
|
11,750
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion
|
|
$
|
49,013
|
|
|
$
|
95,826
|
|
Aliven
Business Combination
On
June 1, 2021 (the “Aliven Closing Date”) we entered into an Asset Purchase Agreement (“APA”) with Aliven, Inc.
(“Aliven”) that was accounted for using the acquisition method of accounting under ASC 805, Business Combinations,
and using the fair value concepts set forth in ASC 820, Fair Value Measurement. Aliven is a Japan-based direct selling company.
We entered into the APA to accelerate growth with its direct-to-consumer business model in Japan and to expand its portfolio of healthy
products. Pursuant to the APA, we acquired the assets and assumed the liabilities of Aliven for total purchase consideration that consisted
of approximately 1.1 million shares of our Common Stock with a fair value of approximately $2.6 million.
Cash
Flows Summary
Presented
below is a summary of our operating, investing and financing cash flows for the six months ended June 30, 2021 and 2020 (in thousands):
|
|
2021
|
|
|
2020
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,560
|
)
|
|
$
|
(23,596
|
)
|
Investing
activities
|
|
|
(10,765
|
)
|
|
|
(1,821
|
)
|
Financing
activities
|
|
|
43,459
|
|
|
|
20,748
|
|
Cash
Flows Used in Operating Activities
For
the six months ended June 30, 2021, we recognized a net loss of $0.4 million compared to a net loss of $21.2 million for the six months
ended June 30, 2020. The following adjustments are taken into account to reconcile our net loss to net cash used in operating activities
for the six months ended June 30, 2021 and 2020 (in thousands):
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(397
|
)
|
|
$
|
(21,172
|
)
|
Non-cash
expenses, net of deferred tax benefit
|
|
|
27,091
|
|
|
|
9,661
|
|
Non-cash
loss (gain) from change in fair value of derivatives
|
|
|
(21,216
|
)
|
|
|
306
|
|
Net
changes in operating assets and liabilities
|
|
|
(11,038
|
)
|
|
|
(12,391
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
$
|
(5,560
|
)
|
|
$
|
(23,596
|
)
|
For
the six months ended June 30, 2021 and 2020, we incurred net non-cash expenses of $27.1 million and $9.7 million, respectively.
Significant non-cash expenses include depreciation and amortization expense, non-cash lease expense, accretion of debt discount, and
stock-based compensation expense. For the six months ended June 30, 2021, non-cash expenses include $9.6 million of depreciation and
amortization expense, $6.2 million of non-cash lease expense, $4.4 million of accretion of debt discount related to the Senior Notes,
stock-based compensation expense of $4.2 million, and a loss related to an uncollectible note receivable of $2.7 million. For
the six months ended June 30, 2021, we recognized a non-cash gain from changes in the fair value of derivative liabilities of $21.2 million.
Net
changes in our operating assets and liabilities can have a significant impact on operating cash flow. For the six months ended June 30,
2021, changes in operating assets and liabilities used $11.0 million of operating cash flows. This amount consisted of (i) reductions
in accounts payable of $5.8 million primarily due to payments to Ariix’s suppliers and service providers, (ii) a reduction in accrued
liabilities of $11.5 million, including cash payments related to operating lease liabilities of $5.2 million, a reduction in deferred
revenue of $4.4 million, and a reduction in accrued commissions of $1.4 million. The total reduction in accounts payable and accrued
liabilities was $17.3 million, which was partially offset by reductions in (i) inventories of $4.7 million that were primarily due to
the integration of Ariix where we adjusted purchasing activity based on product demand planning, and (ii) prepaid expenses and other
assets of $1.6 million, to arrive at $11.0 million of net cash outflows due to changes in operating assets and liabilities.
For
the six months ended June 30, 2020, changes in operating assets and liabilities used $12.4 million of operating cash flows. The primary
uses of operating cash flows for the six months ended June 30, 2020 were from (i) a reduction in other accrued liabilities of $12.9 million,
(ii) an increase in accounts receivable of $2.3 million, and (iii) a decrease in accounts payable of $0.6 million. These changes that
used operating cash flow totaled $15.8 million and were partially offset by changes in operating assets and liabilities that increased
our operating cash flows, including a decrease in inventories of $2.8 million, and a reduction in prepaid expenses, deposits and other
assets of $0.5 million. The $13.2 million decrease in accrued liabilities was primarily attributable to payment of income tax liabilities
of $13.1 million in March 2020 that arose from the sale of real estate in Tokyo, Japan in March 2019.
Cash
Flows from Investing Activities
For
the six months ended June 30, 2021, cash used in investing activities was $10.8 million. This amount was attributable to a cash payment
for merger consideration of $10.0 million pursuant to our business combination with Ariix, and (ii) purchases of equipment of $0.8 million
primarily for the Direct / Social Selling segment.
For
the six months ended June 30, 2020, our investing cash flows consisted of cash payments for capital expenditures of $2.0 million, partially
offset by proceeds from the sale of equipment of $0.2 million. Our capital expenditures consisted of $1.8 million in our Direct / Social
Selling segment and $0.2 million in our Direct Store segment.
Cash
Flows from Financing Activities
Our
financing activities generated net cash proceeds of $43.5 million and $20.7 million for the six months ended June 30, 2021 and 2020,
respectively. The principal sources of cash from our financing activities for the six months ended June 30, 2021 consisted of (i) net
proceeds of $53.8 million from our February 2021 private placement that resulted in the issuance of an aggregate of approximately 14.6
million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares, and (ii) proceeds of $0.5 million from the
exercise of stock options that resulted in the issuance of approximately 288,000 shares of Common Stock. These sources of cash flow from
financing activities totaled $54.3 million and were partially offset by cash outflows for (i) principal payments under the Senior Notes
of $6.0 million, (ii) a $4.5 million payment of business combination liabilities primarily related to our acquisition of Ariix, and (iii)
an aggregate of $0.4 million of payments for offering costs and reductions in our deferred lease financing obligation.
For
the six months ended June 30, 2020, the principal source of cash from our financing activities consisted of net cash proceeds of $25.1
million from the issuance of approximately 16.1 million shares of Common Stock pursuant to our former At the Market Offering Agreement
(the “ATM Agreement”) with Roth Capital Partners, LLC, and cash proceeds of $6.9 million under a PPP Loan obtained in April
2020. For the six months ended June 30, 2020, our cash outflows primarily consisted of principal repayments under our former EWB Credit
Facility of $10.5 million, payments of $0.3 million related to the deferred lease financing obligation, payments of $0.3 million related
to business combination obligations, and total payments of $0.2 million for debt issuance costs and offering costs related to the ATM
Agreement. For the six months ended June 30, 2020, our principal payments under our former EWB Credit Facility included $0.8 million
under the term loan and $9.7 million to repay the revolver.
Off-Balance
Sheet Arrangements
During
the six months ended June 30, 2021 and 2020, we did not have any relationships with unconsolidated organizations or financial partnerships,
such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet
arrangements.
Recent
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that
are adopted by us as of the specified effective date. Unless otherwise discussed in Note 1 to our condensed consolidated financial statements
included in Part I, Item 1 of this Report, we believe that the impact of recently issued standards that are not yet effective will not
have a material impact on our financial position or results of operations upon adoption. For additional information on recently issued
accounting standards, please refer to the section titled Recent Accounting Pronouncements under Note 1 to our condensed consolidated
financial statements.
Non-GAAP
Financial Measures
The
primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may be useful to investors
and to enable investors to evaluate our results in the same way we do. We also present the non-GAAP financial measures because we believe
they assist investors in comparing our performance across reporting periods on a consistent basis, as well as comparing our results against
the results of other companies, by excluding items that we do not believe are indicative of our core operating performance. Specifically,
we use these non-GAAP measures as measures of operating performance; to prepare our annual operating budget; to allocate resources to
enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and
comparability with past financial performance; to facilitate a comparison of our results with those of other companies, many of which
use similar non-GAAP financial measures to supplement their GAAP results; and in communications with our Board of Directors concerning
our financial performance. Investors should be aware however, that not all companies define these non-GAAP measures consistently. We
provide in the tables below a reconciliation from the most directly comparable GAAP financial measure to each non-GAAP financial measure
presented. Due to a valuation allowance for our deferred tax assets, there were no income tax effects associated with any of our non-GAAP
adjustments.
EBITDA
and Adjusted EBITDA. The calculation of our EBITDA and Adjusted EBITDA is presented below for the three and six months ended June
30, 2021 and 2020 (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
17,371
|
|
|
$
|
(9,554
|
)
|
|
$
|
(397
|
)
|
|
$
|
(21,172
|
)
|
EBITDA
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
3,040
|
|
|
|
600
|
|
|
|
6,163
|
|
|
|
1,172
|
|
Income
tax expense
|
|
|
740
|
|
|
|
551
|
|
|
|
1,890
|
|
|
|
1,274
|
|
Depreciation
and amortization expense
|
|
|
4,822
|
|
|
|
1,873
|
|
|
|
9,596
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
25,973
|
|
|
|
(6,530
|
)
|
|
|
17,252
|
|
|
|
(14,974
|
)
|
Adjusted
EBITDA Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
2,187
|
|
|
|
1,092
|
|
|
|
4,149
|
|
|
|
2,449
|
|
Loss
on disposal of Divested Business
|
|
|
4,339
|
|
|
|
-
|
|
|
|
4,339
|
|
|
|
-
|
|
Loss
(gain) from change in fair value of derivatives
|
|
|
(30,829
|
)
|
|
|
(20
|
)
|
|
|
(21,216
|
)
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
1,670
|
|
|
$
|
(5,458
|
)
|
|
$
|
4,524
|
|
|
$
|
(12,219
|
)
|
EBITDA
is defined as net income (loss) adjusted to exclude amounts recorded under GAAP for interest expense, income tax expense, and depreciation
and amortization expense. For the calculation of Adjusted EBITDA, we also exclude the following items for the periods presented:
Stock-based
compensation expense: Our compensation strategy includes the use of stock-based compensation to attract and retain employees, directors
and consultants. This strategy is principally aimed at aligning the employee interests with those of our shareholders and to achieve
long-term employee retention, rather than to motivate or reward operational performance for any particular period. As a result, stock-based
compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.
Loss
on disposal of Divested Business: We have excluded the loss on disposal of Divested Business that was primarily related to an uncollectible
note receivable and certain liabilities to former suppliers. As a result, this loss was unrelated to current operational decisions and
performance.
Loss
(gain) from change in fair value of derivatives: We have excluded derivative gains and losses since they can be highly volatile from
period to period based on factors that are outside the control of our core business activities. Specifically, the variations that impact
fair value heavily depend on the trading price of our Common Stock and global interest rates. As a result, gains and losses from changes
in the fair value of derivatives vary for reasons that are generally unrelated to operational decisions and performance in any particular
period.