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. While some of these Orders were relaxed or
lifted in different jurisdictions at various times through March 31, 2021, the overall impact of COVID-19 continues to have an adverse
impact on certain business activities across the world. 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
has 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 80% and 68% of the Company’s net revenue for the three months ended March
31, 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 an effective vaccine or other successful
mitigation of COVID-19 has been widely administered throughout the 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.
In
most jurisdictions, the Orders have been relaxed or lifted but considerable uncertainty remains about whether the Orders will need to
be reinstated as the spread of new variants of COVID-19 continues. 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:
|
|
●
|
Anticipated
operating results, including revenue and earnings.
|
|
|
●
|
The
expectation that our shareholders will approve the issuance of up to 39.6 million shares of our Common Stock to provide the remainder
of the consideration due for our business combination with Ariix, LLC (“Ariix”).
|
|
|
●
|
Expected
capital expenditure levels for 2021.
|
|
|
●
|
Volatility
in credit and market conditions.
|
|
|
●
|
Our
belief that we have sufficient liquidity to fund our business operations in 2021.
|
|
|
●
|
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.
|
|
|
●
|
Ability
to re-patriate cash from certain foreign markets.
|
|
|
●
|
Strategy
for customer retention and growth.
|
|
|
●
|
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 74% of the Company’s revenue is ordered and fulfilled online including auto-delivery
subscriptions, and more than 87% 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 human needs states addressing 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. We are selectively invested in emerging market areas whereby the combination of the business opportunity and
consumer demographics intersect to form an attractive investment profile for our model. These markets include Russia and the CIS countries,
the Southern Cone of Africa, and selected markets in Latin America and South East Asia.
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 months ended March 31, 2021, approximately 88% 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 the brands with 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
January 29, 2021, we entered into a letter of clarification (the “Clarification Letter”) to the Ariix merger agreement. The
Clarification Letter explained the intent of the parties as of the Ariix closing date whereby (i) a cash account of Ariix with a Chinese
bank that had a balance of $3.1 million remained an asset of the Sellers and, accordingly, was not conveyed to the Company, and (ii)
the number of shares of our Common Stock issuable to the sellers on the first anniversary of the closing date was reduced by 0.5 million
shares. In addition, the impact of the $3.1 million reduction of cash reduced the number of shares issuable by 0.6 million shares due
to the impact of the working capital adjustment and the Clarification Letter.
On
February 9, 2021, we notified Roth Capital Partners LLC of our election to terminate the ATM Agreement that was a significant source
of liquidity in 2019 and 2020. On February 11, 2021, we entered into a Sales Agreement with A.G.P./Alliance Global Partners, but the
maximum number of shares that may be sold pursuant to the Sales Agreement is currently limited to less than 5.0 million shares based
on the number of authorized shares of Common Stock available as of March 31, 2021. For the three months ended March 31, 2021, we did
not sell any shares pursuant to the ATM Agreement or the Sales Agreement.
On
February 16, 2021, we entered into a securities purchase agreement in connection with a private placement for an aggregate of approximately
14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing on
February 19, 2021, we received gross proceeds of approximately $58.0 million. After deducting placement agent fees, the net proceeds
amounted to approximately $53.8 million.
On
March 3, 2021, we entered into a Modification and Transition Addendum to Employment Agreement and Indemnification Agreement with Gregory
A. Gould, our Chief Financial Officer (the “Gould Agreement”). The Gould Agreement amends the employment agreement with Mr.
Gould whereby he will continue to serve as our Chief Financial Officer until July 2, 2021. The Gould Agreement also modifies the Indemnification
Agreement, dated December 28, 2019, between the Company and Mr. Gould. As part of the transition, Mr. Gould has received and will receive
additional cash compensation and we granted stock options for 125,000 shares of Common Stock that vest on July 2, 2021.
On
March 4, 2021, we entered into a letter of intent to acquire Aliven Inc. (“Aliven”), a Japan-based direct selling company.
Aliven currently generates approximately $20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Aliven
sells a portfolio of differentiated healthy products including skin care products infused with cultured stem cells, nutritional products,
and their patented far-infrared technology products designed for reduction of localized pain. Consideration for the acquisition of Aliven
is approximately 1.1 million shares of our Common Stock. Completion of the proposed transaction is subject to negotiation and execution
of a definitive agreement and the satisfaction of customary conditions to closing.
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 March 31, 2021 and 2020
Our
unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 are presented below (dollars
in thousands):
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
125,518
|
|
|
$
|
63,693
|
|
|
$
|
61,825
|
|
|
|
97
|
%
|
|
Cost of goods sold
|
|
|
38,117
|
|
|
|
22,169
|
|
|
|
15,948
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
87,401
|
|
|
|
41,524
|
|
|
|
45,877
|
|
|
|
110
|
%
|
|
Gross
margin
|
|
|
70
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
47,397
|
|
|
|
19,515
|
|
|
|
27,882
|
|
|
|
143
|
%
|
|
Selling, general and administrative
|
|
|
38,859
|
|
|
|
30,608
|
|
|
|
8,251
|
|
|
|
27
|
%
|
|
Depreciation
and amortization expense
|
|
|
4,675
|
|
|
|
1,781
|
|
|
|
2,894
|
|
|
|
162
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
90,931
|
|
|
|
51,904
|
|
|
|
39,027
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,530
|
)
|
|
|
(10,380
|
)
|
|
|
6,850
|
|
|
|
-66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,123
|
)
|
|
|
(572
|
)
|
|
|
(2,551
|
)
|
|
|
446
|
%
|
|
Loss from change in fair
value of derivatives, net
|
|
|
(9,613
|
)
|
|
|
(326
|
)
|
|
|
(9,287
|
)
|
|
|
2849
|
%
|
|
Interest
and other income (expense), net
|
|
|
(352
|
)
|
|
|
383
|
|
|
|
(735
|
)
|
|
|
-192
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(16,618
|
)
|
|
|
(10,895
|
)
|
|
|
(5,723
|
)
|
|
|
53
|
%
|
|
Income tax expense
|
|
|
(1,150
|
)
|
|
|
(723
|
)
|
|
|
(427
|
)
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(17,768
|
)
|
|
$
|
(11,618
|
)
|
|
$
|
(6,150
|
)
|
|
|
53
|
%
|
Presented
below is our net revenue, cost of goods sold, gross profit (loss) and gross margin by segment for the three months ended March 31, 2021
and 2020 (dollars in thousands):
|
|
|
Direct
/ Social Selling Segment
|
|
|
Direct
Store Segment
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
114,462
|
|
|
$
|
50,110
|
|
|
$
|
64,352
|
|
|
|
128
|
%
|
|
$
|
11,056
|
|
|
$
|
13,583
|
|
|
$
|
(2,527
|
)
|
|
|
(19
|
%)
|
|
Cost of goods sold
|
|
|
29,558
|
|
|
|
10,504
|
|
|
|
19,054
|
|
|
|
181
|
%
|
|
|
8,559
|
|
|
|
11,665
|
|
|
|
(3,106
|
)
|
|
|
(27
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
$
|
84,904
|
|
|
$
|
39,606
|
|
|
$
|
45,298
|
|
|
|
114
|
%
|
|
$
|
2,497
|
|
|
$
|
1,918
|
|
|
$
|
579
|
|
|
|
30
|
%
|
|
Gross
margin
|
|
|
74
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2021. 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
March 31, 2020 (in thousands):
|
Net revenue
|
|
$
|
4,784
|
|
|
Cost of goods sold
|
|
|
5,073
|
|
|
Gross loss
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(2,345
|
)
|
|
Commissions
|
|
|
(65
|
)
|
|
Depreciation
and amortization expense
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(2,730
|
)
|
Since
September 25, 2020, the Direct Store segment is primarily comprised of our legacy DSD and e-commerce lines of business (the “Retained
Business”) and our corporate overhead activities. 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.
Net
Revenue. Net revenue increased from $63.7 million for the three months ended March 31, 2020 to $125.5 million for the three months
ended March 31, 2021, an increase of $61.8 million or 97%. For the three months ended March 31, 2021, the increase in net revenue was
attributable to $68.1 million of net revenue generated by Ariix, partially offset by a reduction in net revenue for our legacy businesses
of $6.3 million.
Net
revenue for the Direct / Social Selling segment increased by $64.4 million from $50.1 million for the three months ended March 31, 2020
to $114.5 million for the three months ended March 31, 2021. This increase was attributable to $68.1 million of net revenue from the
Ariix reporting unit, partially offset by a reduction in net revenue of $3.8 million for the legacy portion of the Direct / Social Selling
segment. We believe the decrease in net revenue for the legacy portion of the Direct / Social Selling segment was primarily caused by
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 were in effect beginning in March 2020. Our direct-to-consumer selling model typically relies heavily on the
use of our Brand Partner sales force in close contact with our customers. However, the COVID-19 pandemic required alternative selling
approaches, such as through social media, which was less effective than in-person selling in certain regions. As a result, the legacy
portion of the Direct / Social Selling segment’s net revenue decreased by 8% for the three months ended March 31, 2021. The geographic
breakdown of this decrease was 16% in China, 5% in Japan, and 12% in all other foreign countries as a group. However, the legacy portion
of the Direct / Social Selling segment’s net revenue in the United States increased by 10% for the three months ended March 31,
2021.
Net
revenue for the Direct Store segment decreased by $2.5 million from $13.6 million for the three months ended March 31, 2020 to $11.1
million for the three months ended March 31, 2021. This decrease was attributable to a reduction in net revenue of $4.8 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 $2.3 million. The increase in net revenue for the Retained Business of the Direct Store segment resulted
from increased net revenue for our DSD business due to new customers and expansion of the product portfolio.
Cost
of goods sold. Cost of goods sold increased from $22.2 million for the three months ended March 31, 2020 to $38.1 million for
the three months ended March 31, 2021, an increase of $15.9 million. Cost of goods sold for the Direct / Social Selling segment increased
by $19.1 million, partially offset by a decrease in cost of goods sold of $3.1 million for the Direct Store segment.
The
increase in cost of goods sold for the Direct / Social Selling segment of $19.1 million was primarily attributable to the cost of products
sold by Ariix of $19.0 million. Cost of goods sold for the legacy business of the Direct / Social Selling segment increased by $0.1 million
or 1% in comparison to the 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 for the three months ended March 31, 2021, 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. The
effects of these higher discounts and promotions compared to the three months ended March 31, 2020 contributed to cost of goods sold
that increased by 1%, whereas net revenue for the legacy business of the Direct / Social Selling segment decreased by 8%.
For
the three months ended March 31, 2021, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $0.5
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 the related inventories were sold for the
three months ended March 31, 2021.
Cost
of goods sold for the Direct Store segment decreased by $3.1 million from $11.7 million for the three months ended March 31, 2020 to
$8.6 million for the three months ended March 31, 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 $5.1 million for the three months ended March 31,
2020. This decrease was partially offset by an increase in cost of goods sold for the Retained Business of $2.0 million or 30%, from
$6.6 million for the three months ended March 31, 2020 to $8.6 million for the three months ended March 31, 2021. The increase in cost
of goods sold for the Retained Business was primarily attributable to higher product costs associated with a 26% increase in net revenue.
Gross
profit. Gross profit increased from $41.5 million for the three months ended March 31, 2020 to $87.4 million for the three months
ended March 31, 2021, an increase of $45.9 million or 110%. The increase in gross profit consisted of $45.3 million for the Direct /
Social Selling segment and $0.6 million for the Direct Store segment. The improvement in gross profit for the Direct / Social Selling
segment was primarily attributable to $49.1 million of gross profit generated by Ariix, partially offset by a reduction in gross profit
of $3.8 million related to the legacy business of the Direct / Social Selling segment due to lower sales due to the COVID-19 pandemic
in combination with our increased use of discounts and promotions. Gross margin for the legacy business of the Direct / Social Selling
segment was 77% in comparison to gross margin of 72% for the business acquired from Ariix.
The
Direct Store segment accounted for an increase in gross profit of $0.6 million for the three months ended March 31, 2021, driven by net
revenue that decreased by 19% whereas cost of goods sold decreased by 27%. The Divested Business accounted for approximately $0.3 million
of negative gross profit for the three months ended March 31, 2020, whereas the Retained Business generated an additional $0.3 million
of gross profit for the three months ended March 31, 2021. The Retained Business generated gross profit of approximately $2.2 million
and gross margin of 25% for the three months ended March 31, 2020, compared to gross profit of $2.5 million and gross margin of 23% for
the three months ended March 31, 2021.
Consolidated
gross margin increased from 65% for the three months ended March 31, 2020 to 70% for the three months ended March 31, 2021. Gross margin
for the Direct / Social Selling segment decreased from 79% for the three months ended March 31, 2020 to 74% for the three months ended
March 31, 2021. Gross margin for the Direct Store segment increased from 14% for the three months ended March 31, 2020 to 23% for the
three months ended March 31, 2021.
Commissions.
Commissions were $47.4 million for the three months ended March 31, 2021 compared to $19.5 million for the three months
ended March 31, 2020, an increase of $27.9 million. For the three months ended March 31, 2021, commissions for the Direct / Social
Selling segment consisted of $29.8 million related to the business acquired from Ariix, partially offset by a reduction in commissions
for our legacy businesses of $1.9 million. Commissions for our legacy businesses decreased by 10%, 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 $30.6 million for the three months ended March 31, 2020
to $38.9 million for the three months ended March 31, 2021, an increase of $8.3 million. The increase of $8.3 million was comprised of
increases in compensation and benefits expense of $6.2 million, professional fees of $1.8 million, transaction fees related to the sale
of products of $1.1 million, occupancy costs of $0.8 million, and communications expenses of $0.8 million. Total increases in SG&A
totaled $10.7 million and were partially offset by a reduction in marketing costs of $2.1 million, and travel expenses of $0.2 million.
For
the three months ended March 31, 2021, approximately $13.4 million of our SG&A expenses related to the business acquired from Ariix,
including compensation and benefits costs of $7.9 million, professional fees of $1.5 million, transaction fees related to the sale of
products of $1.1 million, occupancy costs of $0.9 million, and communications expenses of $0.8 million. For the three months ended March
31, 2021, SG&A expenses for the legacy businesses of the Direct / Social Selling and Direct Store segments decreased by $5.1 million.
This decrease in SG&A expenses included $2.3 million due to our disposal of the Divested Business in September 2020, a reduction
in marketing costs of $2.6 million, and a reduction in compensation and benefits of $2.0 million. These reductions in SG&A for the
legacy businesses of the Direct / Social Selling and Direct Store segments total $6.9 million and were partially offset by increases
in severance expense of $1.4 million and professional fees of $0.3 million.
In
April and August 2020, we initiated restructuring plans that resulted in termination of employment for approximately 150 employees with
annualized compensation cost in the aggregate amount of approximately $9.6 million. The reduction in compensation and benefits of $2.0
million discussed above was primarily driven by savings from these restructuring activities implemented in April and August 2020.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses increased from $1.8 million for
the three months ended March 31, 2020 to $4.7 million for the three months ended March 31, 2021, an increase of $2.9 million. This increase
was primarily attributable to amortization expense of $3.0 million related to identifiable intangible assets of $131.8 million acquired
in our business combination with Ariix in November 2020.
Interest
expense. Interest expense increased from $0.6 million for the three months ended March 31, 2020 to $3.1 million for the three
months ended March 31, 2021, an increase of $2.5 million. For the three months ended March 31, 2021, interest expense of $3.1 million
was attributable to (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 $2.2 million related to the Senior Notes, and (iii) imputed interest expense of
$0.3 million related to our deferred lease financing obligation and business combination obligations. Based on the 1.0% contractual rate,
interest expense related to our PPP Loans amounted to less than $0.1 million for the three months ended March 31, 2021.
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 March
31, 2021, the overall effective interest rate was approximately 49.7%, including the 8.0% stated rate.
For
the three months ended March 31, 2020, interest expense was primarily attributable to (i) interest expense of $0.2 million based on the
contractual rates under our credit facility with East West Bank (the “EWB Credit Facility”), which we terminated on December
1, 2020, based on a weighted average interest rate of 5.1% and weighted average borrowings outstanding of $15.0 million for the three
months ended March 31, 2020, (ii) accretion of discount for a total of $0.2 million related to the Morinda business combination liabilities
and the EWB Credit Facility, (iii) accrued dividends on the debt-classified Series D preferred stock of $0.1 million, and (iv) imputed
interest expense of $0.1 million related to our deferred lease financing obligation.
Loss
from change in fair value of derivatives, net. Our net loss from change in fair value of derivatives increased from $0.3 million
for the three months ended March 31, 2020 to $9.6 million for the three months ended March 31, 2021, an increase of $9.3 million. For
the three months ended March 31, 2021, the net loss of $9.6 million was comprised of a loss related to the Ariix business combination
derivative liability of $11.3 million, partially offset by a gain of $1.7 million related to warrants issued in the February 2021 Private
Placement as discussed below under the caption Liquidity and Capital Resources. As discussed below, changes in the fair value
of derivative liabilities can be extremely volatile from period to period since the related valuations are heavily influenced by changes
in the market price of our Common Stock.
Pursuant
to the Amended Ariix Merger Agreement (as defined in Note 3 to our unaudited condensed consolidated financial statements included in
Part I, Item 1 of this Report), we are required to seek approval from our shareholders to issue up to an aggregate of 39.6 million shares
of Common Stock at up to three shareholder meetings. If our shareholders fail to approve the settlement in shares of Common Stock, we
will be required to make cash payments of $163.3 million within 90 days after the third shareholder meeting. This obligation to issue
shares or pay cash is being accounted for as a derivative liability with a fair value of approximately $90.9 million as of December 31,
2020 and $99.2 million as of March 31, 2021. In January 2021, the derivative liability was reduced from $90.9 million to $87.8 million
as a result our agreement to transfer $3.1 million of cash pursuant to the Clarification Letter executed on January 29, 2021, as described
further in the aforementioned Note 3 to our financial statements. Upon completion of an updated valuation as of March 31, 2021, the fair
value of the derivative liability increased from $87.8 million to $99.2 million, which resulted in a non-cash loss of $11.3 million for
the three months ended March 31, 2021. This increase in fair value was primarily driven by an increase in the market price of our Common
Stock from $2.63 as of December 31, 2020 to $2.86 as of March 31, 2021.
Pursuant
to a private placement of Units (as defined in Note 7 to our unaudited condensed consolidated financial statements included in Part I,
Item 1 of this Report) in February 2021, we issued 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million
shares of Common Stock. 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 indexed to our shares of Common Stock. Therefore, the warrants are required to be
recorded at fair value and classified as liabilities beginning on the issuance date. The fair value of this warrant liability decreased
from $14.1 million on the issuance date to $12.4 million as of March 31, 2021, for a decrease of $1.7 million. Accordingly, we recognized
a gain from change in fair value of the warrant liability of $1.7 million for the three months ended March 31, 2021. The reduction in
fair value of the warrant liability was primarily driven by a decrease in the market price of our Common Stock from $3.15 as of February
19, 2021 to $2.86 as of March 31, 2021.
For
the three months ended March 31, 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 three months
ended March 31, 2021 and income of $0.4 million for the three months ended March 31, 2020. For the three months ended March 31, 2021,
interest and other income (expense), net was primarily comprised of foreign exchange losses of $0.5 million, partially offset by interest
income of $0.1 million. Interest and other income (expense), net for the three months ended March 31, 2020 consisted of foreign exchange
gains of $0.4 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 three months ended March 31, 2021 and 2020, we recognized income tax expense of $1.2 million and $0.7 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 March 31, 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 three months ended March 31, 2021, we incurred a net loss of $19.5 million and cash used in our operating activities amounted to
$2.1 million. For the year ended December 31, 2020, we incurred a net loss of $39.3 million and cash used in our operating activities
amounted to $34.3 million. As of March 31, 2021, our working capital amounted to $47.2 million, and we had an accumulated deficit of
$171.3 million. As of March 31, 2021, we had cash and cash equivalents of $90.6 million.
On
November 16, 2020, we completed our business combination with Ariix for total purchase consideration with an estimated fair value of
approximately $155.1 million. As a result of the closing, we were obligated to issue 19.7 million shares of our Common Stock and to pay
$10.0 million to the members of Ariix (the “Sellers”). During the three months ended March 31, 2021, we issued the 19.7 million
shares of Common Stock and made the $10.0 million cash payment. Pursuant to the Amended Ariix Merger Agreement and exclusive of the impact
of the working capital adjustment discussed below, we were required to seek approval from our shareholders to issue up to 40.1 million
shares of our Common Stock to settle the remainder of the merger consideration. On January 29, 2021, we entered into 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
to 39.6 million shares. In addition, the impact of the $3.1 million reduction of cash reduced the number of shares issuable by 0.6 million
shares of Common Stock due to the impact of the working capital adjustment. If our shareholders fail to approve the issuance of up to
an aggregate of 39.6 million shares of Common Stock (as subsequently adjusted for the impact of working capital adjustments) at up to
three shareholder meetings held after the closing date, we will be required to make cash payments of $163.3 million within 90 days after
the third shareholder meeting. Based on our expectation that shareholder meetings would be held at intervals of approximately six months,
if we are ultimately required to make a cash payment of $163.3 million it is expected that it would not be due before the third quarter
of 2022.
The
Amended Ariix Merger Agreement requires our payment of cash or issuance of shares of Common Stock with a value of $10.0 million on May
16, 2021, unless such payment is reduced or eliminated through a working capital adjustment if the working capital of Ariix is less than
$11.0 million as of the closing date. Based on the preliminary balance sheet provided by Ariix as of the closing date, working capital
amounted to a negative $18.0 million, resulting in a $29.0 million shortfall of the targeted working capital set forth in the Amended
Ariix Merger Agreement. Ariix also had $5.0 million of long-term accrued business combination liabilities as of the closing date which
were required to be repaid pursuant to the Amended Ariix Merger Agreement. Based on Ariix’s failure to meet the working capital
requirements of the Amended Ariix Merger Agreement, we expect to eliminate the requirement to make the $10.0 million payment on May 16,
2021. We also believe there will be a reduction in the number of shares issuable to the Sellers from 39.6 million shares of Common Stock
to approximately 34.6 million shares as a result of the working capital adjustment.
On
November 30, 2020, we entered into a securities purchase agreement for a private placement that resulted in the issuance of 8.00% Original
Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”). For the months
of February 2021 through April 2021, the holders of the Senior Notes were entitled to request that we make principal payments up to $1.0
million per month and we made these payments as required. Beginning in May 2021 and continuing for each subsequent month until the stated
principal balance is repaid, the holders of the Senior Notes are entitled to request that we make principal payments up to $2.0 million
per month.
On
February 16, 2021, we entered into a securities purchase agreement in connection with a private placement of an aggregate of approximately
14.6 million shares of our Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing,
we received net proceeds of approximately $53.8 million.
On
March 3, 2021, we entered into the Gould Agreement with Gregory A. Gould, our Chief Financial Officer that amends an employment agreement
and indemnification agreement whereby Mr. Gould will continue to serve as our Chief Financial Officer until July 2, 2021. As part of
the transition, Mr. Gould will receive additional cash compensation in excess of $1.4 million. Pursuant to the terms of the Senior Notes,
an event of default would exist if we fail to replace Mr. Gould with a suitable candidate to serve as our Chief Financial Officer within
120 days of Mr. Gould’s termination date. We expect to hire a suitable replacement for Mr. Gould by the prescribed deadline.
On
March 4, 2021, we entered into a letter of intent to acquire Aliven, a Japan-based direct selling company that currently generates approximately
$20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Consideration for the acquisition of Aliven
is expected to be approximately 1.1 million shares of our Common Stock with no material cash payments anticipated. Completion of the
proposed transaction is subject to further negotiation and execution of a definitive agreement and the satisfaction of customary conditions
to closing.
During
the 12-month period ending March 31, 2022, cash payments will be required to settle obligations of approximately $35.5 million, consisting
of up to $24.5 million of principal and interest under our Senior Notes, operating lease payments of $9.4 million, and $1.6 million payable
under the Gould Agreement. We believe our cash and cash equivalents of $90.6 million will be sufficient to fund our contractual obligations
and working capital requirements for the next 12 months.
Please
refer to the sections below for further discussion about our recent financing activities.
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 the third anniversary of the effectiveness of a registration statement required to be filed within 30 days after the closing pursuant
to a separate registration rights agreement. Exercise of the warrants is subject to a beneficial ownership limitation of 4.99% (or 9.99%
at the option of the purchasers). 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 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 an initial registration statement on Form S-3 covering the resale of the shares of Common
Stock and the Warrant Shares with the SEC on March 18, 2021. We also agreed that the registration statement must be declared effective
by the SEC no later than April 19, 2021 assuming the SEC does not perform a “full review” of the Form S-3, and effectiveness
must be maintained within prescribed deadlines set forth in the registration rights agreement. This registration statement was declared
effective by the SEC on March 29, 2021. If we fail to maintain the effectiveness of the registration statement on Form S-3, 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
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 commencing on December 31, 2020 and continuing monthly thereafter. As of December 31, 2020, the unaccreted discount related to
the Senior Notes was approximately $7.9 million. As of December 31, 2020, the discount was being accreted to interest expense using the
effective interest method that resulted in an overall effective interest rate of approximately 42.3%, including the 8.0% stated rate.
As
a post-closing deliverable, we were required to provide certain historical financial statements of Ariix to the lenders by January 4,
2021. The required financial statements were not available by the deadline, which would have resulted in a default under the securities
purchase agreement. The lenders agreed to amend the Senior Notes to extend the deadline 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. The amendment fee of $1.1 million is being accounted
for as an additional discount related to the Senior Notes. Accordingly, as of March 31, 2021, the overall effective interest rate was
49.7%, including the 8.0% stated rate.
For
the months of February 2021 through April 2021, the holders of the Senior Notes are entitled to request that we make principal payments
up to $1.0 million per month. 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. All principal payments are required to be paid within five
business days of the date that notice is provided by the holders of the Senior Notes. The maturity date of the Senior Notes is on December
1, 2022. However, if the holders of the Senior Notes continue to exercise their rights to demand the maximum principal payments permitted
in each month, the Senior Notes would be repaid in full by July 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.
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. 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 at least until March 2022. The Senior Notes contain certain restrictions and covenants, which restrict
the Company’s 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.
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%.
Business
Combination Liabilities
The
table below summarizes the net carrying value and the range of cash settlements for the Ariix business combination liabilities as of
March 31, 2021 (in thousands):
|
|
|
Net
|
|
|
Maximum
|
|
|
|
|
Carrying
|
|
|
Cash
|
|
|
|
|
Value
|
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
Derivative liability to former
owners of Ariix
|
|
$
|
99,159
|
(1)
|
|
$
|
163,265
|
(1)
|
|
Clarification Letter obligation
|
|
|
1,664
|
(2)
|
|
|
1,664
|
(2)
|
|
Assumed business combination obligations from
Ariix:
|
|
|
|
|
|
|
|
|
|
Variable payments in LIMU
acquisition
|
|
|
3,574
|
(3)
|
|
|
4,030
|
(3)
|
|
Variable payments in Zennoa
acquisition
|
|
|
2,086
|
(4)
|
|
|
2,370
|
(4)
|
|
Zennoa
consideration payable in May 2021
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,833
|
|
|
$
|
171,679
|
|
|
|
(1)
|
Pursuant
to the Amended Ariix Merger Agreement, we are required to seek approval from our shareholders
to issue up to an aggregate of 39.6 million shares of Common Stock at up to three shareholder
meetings held after November 16, 2020 (the “Ariix Closing Date”). If our shareholders
fail to approve the settlement in shares of Common Stock, we will be required to make cash
payments of $163.3 million within 90 days after the third shareholder meeting. This obligation
to issue shares or pay cash is accounted for as derivative liability with a fair value of
approximately $99.2 million as of March 31, 2021.
|
|
|
(2)
|
Represents
the remaining obligation to transfer funds from a cash account in China pursuant to the Clarification
Letter discussed above.
|
|
|
(3)
|
On
May 31, 2019, Ariix completed a business combination with The LIMU Company, LLC (“LIMU”)
that provided for a cash payment of $3.0 million on the closing date and $5.0 million of
deferred consideration payable based on 5.0% of monthly post-closing sales related to the
LIMU business. Through March 31, 2021, total payments made by Ariix and us amounted to approximately
$1.0 million, resulting in a remaining balance due to the former owners of LIMU of $4.0 million.
This obligation is collateralized and subject to a security agreement until the entire amount
is paid in full. The net carrying value of $3.6 million represents the estimated fair value
of this obligation as of March 31, 2021.
|
|
|
(4)
|
On
November 27, 2019, Ariix completed a business combination with Zennoa, LLC (“Zennoa”)
that provided for fixed cash payments of $2.25 million and deferred consideration of $2.5
million that is payable based on annualized sales from the Zennoa business for the latest
completed month (the “Zennoa Sales Metric”). Payments related to the deferred
consideration commenced in December 2020 and are computed using a variable percentage based
on the Zennoa Sales Metric. No amounts are payable if the Zennoa Sales Metric is less than
$6.0 million, and payments ranging from 3% to 5% of monthly sales are payable if the Zennoa
Sales Metric exceeds $6.0 million. The net carrying value of the Zennoa deferred consideration
of $2.1 million represents the estimated fair value of this obligation as of March 31, 2021.
|
Cash
Flows Summary
Presented
below is a summary of our operating, investing and financing cash flows for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,141
|
)
|
|
$
|
(13,521
|
)
|
|
Investing activities
|
|
|
(10,287
|
)
|
|
|
(1,417
|
)
|
|
Financing activities
|
|
|
49,935
|
|
|
|
(2,000
|
)
|
Cash
Flows Used in Operating Activities
For
the three months ended March 31, 2021 and 2020, we recognized net losses of $17.8 million and $11.6 million, respectively. The following
adjustments are taken into account to reconcile our net loss to net cash used in operating activities for the three months ended March
31, 2021 and 2020 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,768
|
)
|
|
$
|
(11,618
|
)
|
|
Non-cash expenses, net
|
|
|
22,595
|
|
|
|
5,127
|
|
|
Non-cash gains
|
|
|
(47
|
)
|
|
|
(39
|
)
|
|
Net changes in operating
assets and liabilities
|
|
|
(6,921
|
)
|
|
|
(6,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,141
|
)
|
|
$
|
(13,521
|
)
|
For
the three months ended March 31, 2021 and 2020, we incurred net non-cash expenses of $22.6 million and $5.1 million, respectively. Significant
non-cash expenses include a net loss from the change in fair value of derivatives, depreciation and amortization expense, non-cash lease
expense, and stock-based compensation expense. For the three months ended March 31, 2021, non-cash charges included $9.6 million related
to the net change in the fair value of derivative liabilities, $4.8 million of depreciation and amortization expense, $4.0 million of
non-cash lease expense, $2.3 million of accretion expense related to debt obligations, and stock-based compensation of $2.0 million.
Net
changes in our operating assets and liabilities can have a significant impact on operating cash flow. For the three months ended March
31, 2021, changes in operating assets and liabilities used $7.1 million of operating cash flows. This amount consisted of (i) reductions
in accounts payable of $6.5 million primarily due to payments to Ariix’s suppliers and service providers, (ii) a reduction in accrued
liabilities of $5.8 million, including cash payments related to operating lease liabilities of $2.7 million, payout of accrued compensation
of $1.9 million that was driven by calendar 2020 performance bonus payments, and a reduction in deferred revenue of $1.6 million. The
total reduction in accounts payable and accrued liabilities was $12.3 million, which was partially offset by reductions in (i) inventories
of $4.6 million that were primarily due to the integration of Ariix where we adjusted purchasing activity based on product demand planning,
(ii) prepaid expenses and other assets of $0.5 million, and (iii) accounts receivable of $0.2 million, to arrive at $7.1 million of net
cash outflows due to changes in operating assets and liabilities.
For
the three months ended March 31, 2020, changes in operating assets and liabilities used $7.0 million of operating cash flow. The primary
use of operating cash flows for the three months ended March 31, 2020 was due to a reduction in other accrued liabilities of $8.9 million,
a decrease in accounts payable of $0.7 million, and an increase in accounts receivable of $0.5 million. These changes resulted in a total
decrease in operating cash flow of $10.1 million and were partially offset by changes in operating assets and liabilities that increased
our operating cash flows, including reductions in inventories of $3.1 million, and prepaid expenses, deposits and other assets of $0.1
million. The $8.9 million decrease in accrued liabilities was primarily attributable to a payment of income tax liabilities of $13.1
million that arose from the sale of our land and building in Tokyo, Japan in March 2019.
Cash
Flows from Investing Activities
For
the three months ended March 31, 2021, cash used in investing activities was $10.3 million. This amount was attributable to a cash payment
of $10.0 million pursuant to the Amended Ariix Merger Agreement, and (ii) purchases of equipment of $0.3 million for the Direct / Social
Selling segment.
For
the three months ended March 31, 2020, cash used in investing activities was $1.4 million. This amount was primarily attributable cash
payments for capital expenditures of $1.6 million, partially offset by proceeds from the sale of equipment of $0.2 million. Our capital
expenditures consisted of $1.5 million in our Direct / Social Selling segment and $0.1 million in our Direct Store segment.
Cash
Flows from Financing Activities
Our
financing activities generated net cash proceeds of $49.9 million for the three months ended March 31, 2021. The principal sources of
cash from our financing activities for the three months ended March 31, 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 265,000 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) a $2.1 million payment of business combination liabilities primarily related to our
acquisition of Ariix, (ii) principal payments under the Senior Notes of $2.0 million, and (iii) an aggregate of $0.2 million of payments
for offering costs and reductions in our deferred lease financing obligation.
For
the three months ended March 31, 2020, our financing activities resulted in net cash outflows of $2.0 million. The principal source of
cash from our financing activities for the three months ended March 31, 2020 consisted of cash proceeds of $8.3 million from the issuance
of approximately 4.9 million shares of Common Stock pursuant to the ATM Agreement. For the three months ended March 31, 2020, our cash
outflows consisted of principal repayments under our former credit facility with East West Bank of $10.1 million, payments of $0.2 million
that reduced our deferred lease financing obligation, and payments of $0.1 million for debt issuance costs. For the three months ended
March 31, 2020, our principal payments to East West Bank consisted of $0.4 million under the term loan and $9.7 million under the revolver.
Off-Balance
Sheet Arrangements
During
the three months ended March 31, 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 months ended March 31, 2021
and 2020 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,768
|
)
|
|
$
|
(11,618
|
)
|
|
EBITDA Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,123
|
|
|
|
572
|
|
|
Income tax expense
|
|
|
1,150
|
|
|
|
723
|
|
|
Depreciation
and amortization expense
|
|
|
4,774
|
|
|
|
1,879
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(8,721
|
)
|
|
|
(8,444
|
)
|
|
Adjusted EBITDA Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
1,962
|
|
|
|
1,357
|
|
|
Loss
from change in fair value of derivatives, net
|
|
|
9,613
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
2,854
|
|
|
$
|
(6,761
|
)
|
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
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.