The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in Part I, "Item 1A. Risk Factors" in this Annual Report. All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.
Overview
We are a technology-enabled consumer products platform that uses "data science"
(which includes but is not limited to, machine learning, natural language
processing, and data analytics) to design, develop, market and sell products.
We were founded on the premise that if a company selling consumer packaged goods
was founded today, it would apply data science, the synthesis of massive
quantities of data and the use of social proof to validate high caliber product
offerings as opposed to over-reliance on brand value and other traditional
marketing tactics. Today, we predominantly operate through online retail
channels such as Amazon.com ("Amazon") and Walmart, Inc.
We have launched and sold hundreds of SKUs on e-commerce platforms. Through the
success of a number of those products we have incubated our own brands. We also
have purchased brands and products when we believe it is advantageous. Today,
we own and operate fourteen brands that sell products in multiple categories,
including home and kitchen appliances, kitchenware, heating, cooling and air
quality appliances (dehumidifiers, humidifiers and air conditioners), health and
beauty products and essential oils. Our fourteen brands include, hOmeLabs;
Vremi; Squatty Potty; Xtava; RIF6; Aussie Health ; Holonix; Truweo; Mueller;
Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; and Photo Paper
Direct.
Seasonality of activities and product range
Our individual product categories are typically affected by seasonal sales trends primarily resulting from the timing of the summer season for certain of our environmental appliance products and the fall and holiday season for our small kitchen appliances and accessories. With our current mix of environmental appliances, the sales of those products tend to be significantly higher in the summer season. Further, our small kitchen appliances and accessories tend to have higher sales during the fourth quarter, which includesThanksgiving and the December holiday season. As a result, our operational results, cash flows, cash and inventory positions may fluctuate materially in any quarterly period depending on, among other things, adverse weather conditions, shifts in the timing of certain holidays and changes in our product mix. Each of our products typically goes through the Launch phase and depending on its level of success is moved to one of the other phases as further described below:
I. Launch phase: During this phase, we leverage our technology to target
opportunities identified using AIMEE (
e-commerce engine) and other sources. During this period and due to
the combination of rebates and marketing investments, our net margin
for a product can be as low as approximately minus 35%. The net margin is
calculated by taking net income less cost of goods sold, less
fulfillment, online advertising and selling costs. These costs mainly
reflect the estimated variable costs associated with the sale of a product.
ii. Maintenance phase: our goal is that each product we launch enters the
support the phase and become profitable, with a target average of 15% positive
net margin, within approximately three months of launch on average. Report
margin primarily reflects a combination of manual and automated tools
adjustments to prices and marketing expenses. Over time, our products benefit
from economies of scale stemming from purchasing power both with
manufacturers and with fulfillment providers.
iii. Milk phase or Liquidate phase: if a product does not enter the maintenance phase
phase or if customer satisfaction of the product (i.e. ratings) is
unsatisfactory, then it will go into the liquidation phase and we will sell
through the remaining inventory. In order to enter the milk phase, we
believe that a product must be well received and become a strong leader
in its category both in terms of customer satisfaction and volume sold compared to
to its competition. Dairy-phase products that have reached
profitability should benefit from pricing power and we expect their
profitability to increase accordingly. To date, none of our products have
achieved the milk phase and we can provide no assurance that any of our
products will do so in the future.
To date, our operating results have included a mix of products in the launch and
sustain phases, and we expect such results to include a mix of products in all
phases at any given period. Product mix can affect our gross profit and the
variable portion of our sales and distribution expenses. Ultimately, we believe
that the future cash flow generated by our products in the sustain phase will
outpace the amount that we will reinvest into launching new products, driving
net revenue and profitability at the company level while we continue to invest
in growth and technology. Due to the impact of the COVID-19 pandemic on the
global supply chain, we have been
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forced to increase our inventory on hand to avoid disruption in sales. The
unpredictability of container availability, space on vessels and shipping lead
times, as well as associated manufacturing lead time, has forced us to secure
more inventory upfront. Having more inventory on hand not only impacts our
working capital but also requires us to increase our storage capacity (warehouse
network) which of itself has a capital impact.
The following table shows the number of new product launches included in our net sales that have reached, or are expected to reach, more than approximately
Year-Ended December 31,
2019 2020 2021
Launches of new products 32 37 40
Our direct revenue growth may be affected by the timing and season of product launches as well as the impact of mergers and acquisitions.
Further due to the COVID-19 pandemic's impact on the global supply chain, we have paused the launch of new products. The sharp increase in shipping costs has made our target competitive pricing difficult to achieve and the current unpredictability of container availability makes it more difficult for us to maintain the required inventory levels, which in turn makes the potential and profitable success of product launches even more difficult to achieve in this current environment. Furthermore, we have concerns about the impact ofRussia's invasion ofUkraine on our business including its effects on the global economy, supply chain and financial markets. We will continue to evaluate the impacts of this, in addition to the impacts of the COVID-19 pandemic, on our business.
Overview of financial operations
Net Revenue-We derive our revenue from the sale of consumer products, primarily in theU.S. We sell products directly to consumers through online retail channels and through wholesale channels. Direct-to-consumer sales (i.e., direct net revenue), which is currently the majority of our revenue, is done through various online retail channels. We sell on Amazon.com,Walmart.com , and our own websites, with substantially all of our sales made through Amazon.com. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at the shipment date. Cost of Goods Sold-Cost of goods sold consists of the book value of inventory sold to customers during the reporting period and the amortization of inventory step-up from acquisitions. Book value of inventory includes the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from our manufacturers to our warehouses, as applicable. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices, less expected disposal costs.The Office of the U.S. Trade Representative has imposed additional tariffs on products imported fromChina . We contract manufacturers, predominantly inChina , through purchase orders, for our consumer products. As such, this exposes us to risks associated with doing business globally, including changes in tariffs, which impact a significant number of our products. We can provide no assurances that future tariff increases will not be enacted. These increases may affect the way we order products, as well as the amount of product we order. If tariff increases are enacted in the future, our pricing actions are expected to be intended to offset the full gross margin impact from such tariffs. Further, we have been affected by the COVID-19 pandemic and related global supply chain disruption. Together, these have led to substantial increases in the costs of our supply chain, specifically, the costs of shipping containers, which we rely on to import our goods. We have increased pricing, when possible, to offset the full gross margin impact which at times has led to reduced sales velocity on certain products at certain times of the year. There are no assurances that these pricing actions will not reduce customer orders in the future. 39 --------------------------------------------------------------------------------
Expenses
Research and
Sales and Distribution Expenses- Sales and distribution expenses consist of
online advertising costs, marketing and promotional costs, sales and e-commerce
platform commissions, fulfillment, including shipping and handling, and
warehouse costs (i.e., sales and distribution variable expenses). Sales and
distribution expenses also include employee compensation and benefits and other
related fixed costs. Shipping and handling expenses are included in our
consolidated statements of operations in sales and distribution expenses. This
includes inbound, pick and pack costs and outbound transportation costs to ship
goods to customers performed by e-commerce platforms or incurred directly by us,
through our own direct fulfillment platform, which leverages AIMEE and our
third-party logistics partners. Our sales and distribution expenses,
specifically our logistics expenses and online advertising, will vary quarter to
quarter as they are dependent on our sales volume, our product mix (i.e.,
products in the launch phase or sustain phase) and whether we fulfill products
ourselves, i.e., fulfillment by merchant ("FBM"), or through e-commerce platform
service providers, i.e., fulfillment by Amazon ("FBA") or fulfilled by Walmart
("WFS"). After a product launches and reaches the sustain phase, we seek to
maintain the product within its targeted level of profitability. This
profitability can be impacted as each product has a unique fulfillment cost due
to its size and weight. As such, products with less expensive fulfillment costs
as a percentage of net revenue may allow for a lower gross margin, while still
maintaining their targeted profitability level. Conversely, products with higher
fulfillment costs will need to achieve a higher gross margin to maintain their
targeted level of profitability. We are FBM One Day and Two Day Prime certified,
allowing us to deliver our sales through Amazon, to approximately 76% of the
U.S. , within one day and to over 99% of the U.S. within two days, based on our
sales history. We continually review the locations and capacity of our
third-party warehouses to ensure we have the appropriate geographic reach, which
helps to reduce the average last mile shipping zones to the end customer and as
such our speed of delivery improves while our shipping costs to customers
decrease, prior to the impacts on shipping providers' rates.
General and Administrative Expenses-General and administrative expenses include
compensation and employee benefits for executive management, finance
administration, legal, and human resources, facility costs, insurance, travel,
professional service fees and other general overhead costs, including the costs
of being a public company.
Interest Expense, Net- Interest expense, net includes the interest cost from our
credit facility and term loans, and includes amortization of deferred finance
costs and debt discounts from our credit facility (the "Credit Facility") with
MidCap Funding IV Trust ("MidCap") and our term loans with High Trail
Investments SA LLC ("High Trail SA ") and High Trail Investments ON LLC ("High
Trail ON" and, together with High Trail SA , "High Trail").
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Operating results
Comparison of the years ended
The following table summarizes our results of operations for the years-endedDecember 31, 2020 and 2021, together with the changes in those items in dollars and percentage: Year-Ended December 31, Change 2020 2021 Amount % (in thousands, except percentages) NET REVENUE$ 185,704 $ 247,767 $ 62,063 33.4 % COST OF GOODS SOLD 100,958 125,904 24,946 24.7 GROSS PROFIT 84,746 121,863 37,117 43.8 OPERATING EXPENSES: Sales and distribution expenses (1) 68,005 127,369 59,364 87.3 Research and development expenses (1) 8,130 9,837 1,707 21.0 General and administrative expenses (1) 30,631 45,099 14,468 47.2 Settlement of a contingent earnout liability - 4,164 4,164 100.0 Change in fair value of contingent earn-out liabilities 12,731 (30,529 ) (43,260 ) -339.8 TOTAL OPERATING EXPENSES: 119,497 155,940 36,443 30.5 OPERATING LOSS (34,751 ) (34,077 ) 674 -1.9 INTEREST EXPENSE-net 4,979 12,655 7,676 154.2 CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY - 3,254 3,254 100.0 LOSS ON EXTINGUISHMENT OF DEBT 2,037 138,859 136,822 6,716.8 CHANGE IN FAIR VALUE OF WARRANT LIABILITY 21,338 26,455 5,117 24.0 LOSS ON INITIAL ISSUANCE OF WARRANTS - 20,147 20,147 100.0 OTHER EXPENSE (INCOME)-net (27 ) 45 72 -266.7 LOSS BEFORE INCOME TAXES (63,078 ) (235,492 ) (172,414 ) 273.3 PROVISION FOR INCOME TAXES 48 532 484 1008.3 NET LOSS$ (63,126 ) $ (236,024 ) $ (172,898 ) 273.9 %
(1) Amounts include stock-based compensation expense as follows:
Years-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Sales and distribution
expenses $ 2,533 $ 6,809 $ 4,276 168.8 %
Research and development
expenses 3,965 5,339 1,374 34.7 %
General and administrative
expenses 16,218 16,839 621 3.8 %
Total stock-based
compensation expense $ 22,716 $ 28,987 $ 6,271 27.6 %
41
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The following table sets forth the components of our results of operations as a
percentage of net revenue:
Year-Ended
December 31,
2020 2021
NET REVENUE 100.0 % 100.0 %
COST OF GOODS SOLD 54.4 50.8
GROSS PROFIT 45.6 49.2
OPERATING EXPENSES:
Sales and distribution expenses 36.6
51.4
Research and development expenses 4.4
4.0
General and administrative expenses 16.5
18.2
Settlement of a contingent earnout liability -
1.7
Change in fair value of contingent earn-out liabilities 6.9 (12.3 ) TOTAL OPERATING EXPENSES: 64.4 63.0 OPERATING LOSS (18.8 ) (13.8 ) INTEREST EXPENSE-net 2.7 5.1 CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY -
1.3
LOSS ON EXTINGUISHMENT OF DEBT 1.1
56.0
CHANGE IN FAIR VALUE OF WARRANT LIABILITY 11.5
10.7
LOSS ON INITIAL ISSUANCE OF WARRANTS - 8.1 OTHER EXPENSE (INCOME)-net - - LOSS BEFORE INCOME TAXES (34.1 ) (95.0 ) PROVISION FOR INCOME TAXES - 0.3 NET LOSS (34.1 )% (95.3 )% Net Revenue
Turnover by product categories:
The following table sets forth our net revenue disaggregated by product
categories:
Year-Ended
December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Direct $ 164,218 $ 235,817 $ 71,599 43.6 %
Wholesale 20,150 11,528 (8,622 ) (42.8 )%
Managed PaaS 1,336 422 (914 ) (68.4 )%
Net revenue $ 185,704 $ 247,767 $ 62,063 33.4 %
42
-------------------------------------------------------------------------------- Net revenue increased$62.1 million , or 33.4%, during the year-endedDecember 31, 2021 to$247.8 million , compared to$185.7 million for the year-endedDecember 31, 2020 . The increase in net revenue was primarily attributable to an increase in direct net revenue of$71.6 million , or a 43.6% increase. Direct net revenue consists of both organic net revenue and net revenue from our mergers and acquisitions ("M&A"). For the year-endedDecember 31, 2021 , organic revenue was$118.4 million and revenue from our M&A businesses was$120.9 million . For the year-endedDecember 31, 2020 , organic revenue was$147.9 million and revenue from our M&A businesses was$16.3 million . Our organic revenue decreased by$29.5 million , or 19.9%, during the year-endedDecember 31, 2021 , as compared to the year-endedDecember 31, 2020 . This decrease was primarily driven by reduced sales volume, which we attribute to both reduced demand due to the reopening of brick & mortar retail, and increased sale prices due to global supply chain disruptions and inventory shorts due to delayed receipt of goods. Included in our organic net revenue for the year-endedDecember 31, 2021 is approximately$15.7 million of revenue for products launched in 2021. Included in our organic net revenue for the year-endedDecember 31, 2020 is approximately$23.6 million of revenue for products launched in 2020. We also saw a decrease in wholesale revenue of$8.6 million versus the prior year, primarily from a decrease in the sale of personal protective equipment ("PPE") in the year-endedDecember 31, 2021 . Finally, we saw a decrease in Managed PaaS revenue of$0.9 million in the year-endedDecember 31, 2021 . Year-EndedDecember 31, 2020 2021 (in thousands)
Heating, air conditioning and air quality
kitchen appliances
29,711 43,180 Health and beauty 26,070 15,579 Personal protective equipment 15,488 6,073
Cookware, cookware and gadgets 14,868 22,933 Home office
7,669 12,352 Housewares 3,277 33,951 Essential oils and related accessories - 27,444 Other 8,861 12,148 Total net product revenue 184,368 247,345 Managed PaaS 1,336 422 Total net revenue$ 185,704 $ 247,767 Heating, cooling and air quality accounted for$73.7 million in net revenue for the year-endedDecember 31, 2021 compared to$78.4 million for the year-endedDecember 31, 2020 . This decrease was primarily driven by reduced sales volume, which we attribute to both reduced e-commerce demand due to the reopening of brick & mortar retail, and increased sale prices due to global supply chain disruptions and inventory shorts due to delayed receipt of goods. Kitchen appliances accounted for$43.2 million in net revenue for the year-endedDecember 31, 2021 compared to$29.7 million in net revenue for the corresponding period in 2020, an increase of$13.5 million from new products launched and growth in our existing products during the year-endedDecember 31, 2021 , including M&A businesses. Cookware, kitchen tools and gadgets accounted for approximately$22.9 million in net revenue for the year-endedDecember 31, 2021 compared to$14.9 million in net revenue for the corresponding period in 2020, an increase of$8.1 million from new products launched and growth in our existing products during the year-endedDecember 31, 2021 , including M&A businesses. Net revenue from housewares increased approximately$30.7 million from growth in our existing products and new products obtained through M&A businesses. We started selling essential oils and related accessories in 2021 via M&A, which generated$27.4 million in net revenue for the year-endedDecember 31, 2021 .
Cost of Goods Sold and Gross Margin
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Cost of goods sold $ 100,958 $ 125,904 $ 24,946 24.7 %
Gross profit $ 84,746 $ 121,863 $ 37,117 43.8 %
43
-------------------------------------------------------------------------------- Cost of goods sold increased by$24.9 million from$100.9 million for the year-endedDecember 20, 2020 to$125.9 million for the year-endedDecember 21, 2021 . The increase in cost of goods sold was primarily attributable to an increase of$42.9 million from our M&A businesses, offset by a$10.5 million decrease in cost of goods sold from our organic business and$7.5 million from PPE. Gross profit improved from 45.6% for the year-endedDecember 31, 2020 to 49.2% for the year-endedDecember 31, 2021 . The improvement in gross margin was due to a change of product mix as our net revenue from our M&A businesses, which have a higher gross margin of 59.2% than our organic business of 40.9%. The majority of our M&A businesses' net revenue tends to be from smaller products that have higher gross margins versus our organic business, which tend to be oversized goods that have lower gross margins. We expect to see future impacts in our gross margin on both our M&A and organic businesses as the international shipping container crisis continues to drive shipping container costs higher and cause reductions in delivery reliability and other, which also increases related shipping container delivery costs, and other inflationary pressures.
Selling and distribution costs
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Selling and distribution costs
87.3%
Sales and distribution expenses which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), increased to$127.4 million for the year-endedDecember 31, 2021 from$68.0 million for the year-endedDecember 31, 2020 . This increase is primarily attributable to the increase in the volume of products sold in the year- endedDecember 31, 2021 , of$43.1 million as our e-commerce platform commissions, online advertising, selling and logistics expenses increased to$103.3 million in the year- endedDecember 31, 2021 as compared to$60.2 million in the prior period. Our sales and distribution fixed costs (e.g., salary and office expenses) increased to$17.3 million for the year- endedDecember 31, 2021 from$5.2 million for the year-endedDecember 31, 2020 primarily due to approximately$4.1 million of bad debt reserve from our dispute with a certain PPE supplier, approximately$2.0 million of professional fees from transition services charges from certain of our M&A businesses, and headcount expenses of$5.2 million . Sales and distribution expenses for the year- endedDecember 31, 2021 included an increase in stock-based compensation expense of$4.3 million as the prior period included reversals of expense of certain restricted stock awards granted pursuant to the 2019 Equity Plan, which restricted stock awards were canceled upon termination of certain employees. As a percentage of net revenue, sales and distribution expenses increased to 51.4% for the year-endedDecember 31, 2021 from 36.6% for the year-endedDecember 31, 2020 primarily from an increase in last mile shipping costs, bad debt reserve (1.7% as a percentage of net revenue), professional fees from transition services (0.8% as a percentage of net revenue) and stock-based compensation expense (1.7% as a percentage of net revenue). E-commerce platform commissions, online advertising, selling and logistics expenses included within sales and distribution expenses, as a percentage of net revenue, were 41.7% for the year-endedDecember 31, 2021 as compared to 32.4% for the year-endedDecember 31, 2020 . This increase is predominantly due to product mix and to the increase in last mile shipping costs, specifically around oversized goods, due to the demand on those third-party providers' delivery networks. We expect to see these cost increases continue in the near-term.
Research and development costs
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Research and development costs
The increase in research and development expenses was primarily attributable to an increase of stock-based compensation expense of approximately$1.4 million from expenses of certain restricted stock awards granted. 44
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General and administrative expenses
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
General and administrative expenses
The increase in general and administrative expenses was primarily due to an increase of professional fees of approximately$4.1 million related to M&A costs, including legal, audit and internal control related fees, an increase in intangibles amortization of approximately$6.0 million and$1.3 million reserve related to the litigation settlement.
Change in fair value of conditional price supplements
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Settlement of a contingent earn-out
liability $ - $ 4,164 $ 4,164 100.0 %
Change in fair value of contingent
earn-out liabilities $ 12,731 $ (30,529 ) $ (43,260 ) -339.8 %
The settlement of a contingent earn-out liability was due to the difference of
fair value of the shares issued on the settlement date versus the fair value of
the earn-out on the date of the settlement.
The increase in change in fair value of contingent earn-out liabilities was
related to our M&A, which includes re-assessment of the estimated fair value of
contingent consideration as part of the purchase price, primarily driven by the
fluctuation of our share price since the date of each acquisition and
contribution margin projections.
Interest expense, net
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Interest expense $ 4,979 $ 12,655 $ 7,676 154.2 %
The increase in interest expense was primarily related to the increase in loan
interest and related amortization of deferred financing fees and warrant
discounts compared to the prior period's credit facility and term loan, which
had lower borrowings and less amortization of deferred financing fees and
warrant discounts compared to this current period.
Loss on extinguishment of debt
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Loss on extinguishment of debt
6716.8%
The increase is attributable to the payment and termination of theDecember 2020 Note (as defined in Note 6 to our consolidated financial statements included in this Annual Report), theFebruary 2021 Note (as defined in Note 6 to our consolidated financial statements included in this Annual Report) and our prior credit facility, which resulted in$29.8 million in loss on extinguishment of debt consisting of unamortized deferred finance costs, the extinguishment of the majority of theApril 2021 Note loan, which resulted in$107.0 million in loss on extinguishment of debt and the extinguishment of the High Trail Note loan, which resulted in$2.1 million in loss on extinguishment of debt.
Change in fair market value of warrant liabilities
45 --------------------------------------------------------------------------------
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Change in fair market value of warrant
liability $ 21,338 $ 26,455 $ 5,117 24.0 %
Loss on initial issuance of warrants $ - $ 20,147
The increase is attributable to the change in the fair value of warrant liability from warrants in connection with theDecember 2020 Note and theFebruary 2021 Note from the increase of our share price since the issuances of the warrants. The loss on initial issuance of warrants for the year-endedDecember 31, 2021 was primarily driven by the increase of our share price since the issuance of the warrants.
Change in fair value of derivative liability
Year-Ended December 31, Change
2020 2021 Amount %
(in thousands, except percentages)
Change in fair market value of
derivative liability $ - $ 3,254 $ 3,254 100.0 %
The increase is attributable to the High Trail term loan, as we fair valued certain derivatives embedded in the term loan, primarily around default interest rates.
Comparison of the years ended
For a discussion regarding our financial condition and results of operations for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 , please refer to the discussion under the heading "Results of Operations-Comparison of the Years EndedDecember 31, 2020 and 2019" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021 , as amended by Amendment No. 1 filed with the SEC on April 29, 2021 and Amendment No. 2 filed with the SEC onSeptember 24, 2021 .
Cash and capital resources
Cash flow for the years ended
The following table provides information on our cash flows for the years ended
Year- EndedDecember 31, 2020 2021 (in thousands)
Cash provided (used) by operating activities
Cash used in investing activities
(39,054 ) (44,905 ) Cash provided by financing activities 32,319
95,569
Effect of exchange rate on cash (48 )
(477) Net change in cash and restricted cash for the period
Net cash provided by operating activities was$6.1 million for the year-endedDecember 31, 2020 , resulting from our net cash losses from operations of$2.4 million , offset by cash from working capital of$8.5 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable. 46 -------------------------------------------------------------------------------- Net cash used by operating activities was$42.0 million for the year-endedDecember 31, 2021 , resulting from our net cash losses from operations of$24.4 million and cash usage from working capital of$17.6 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable.
Net cash used in investing activities for the year
Net cash used in investing activities of$44.9 million for the year-endedDecember 31, 2021 was primarily for the acquisition of the assets fromHealing Solutions, LLC ("Healing Solutions") for$15.3 million , the assets fromSquatty Potty, LLC for$19.0 million and the acquisition ofPhoto Paper Direct Ltd. of$10.6 million .
Net cash provided by financing activities
For the year-endedDecember 31, 2020 , cash provided by financing activities of$32.3 million was primarily from the net proceeds of ourAugust 2020 underwritten public offering of$23.4 million and borrowings from the High Trail term loan, net of$35.8 million , which was offset by net repayments on the Credit Facility of$10.1 million and repayments of the Horizon Term Loan of$16.0 million . For the year-endedDecember 31, 2021 , cash provided by financing activities of$95.6 million was primarily from proceeds from borrowings from the High TrailApril 2021 Notes of$110.0 million , proceeds from cancellation of a warrant of$16.9 million and proceeds from an equity offering of$36.7 million , net, proceeds from exercise of stock options of$9.0 million , borrowings of$20.0 million of Midcap credit facility offset by repayments of the High TrailDecember 2020 Note andFebruary 2021 Note of$59.5 million , repayments of the High TrailApril 2021 Note of$10.1 million , repayments of the High TrailDecember 2021 Note of$27.5 million and$10.5 million of repayments of notes issued to certain sellers in connection with our M&A activity.
Cash flow for the years ended
For a discussion regarding our financial condition and results of operations for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 , please refer to the discussion under the heading "Liquidity and Capital Resources-Comparison of the Years EndedDecember 31, 2020 and 2019" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021 , as amended by Amendment No. 1 filed with the SEC on April 29, 2021 and Amendment No. 2 filed with the SEC onSeptember 24, 2021 .
Sources of liquidity and business continuity
As an emerging growth company, we have been dependent on outside capital through
the issuance of equity to investors and borrowings from lenders (collectively
"outside capital") since our inception to execute our growth strategy of
investing in organic growth at the expense of short-term profitably and
investing in incremental growth through mergers and acquisitions ("M&A
strategy"). In addition, our recent financial performance has been adversely
impacted by the COVID-19 global pandemic and related global shipping disruption,
in particular with respect to substantial increases in supply chain costs for
shipping containers (See COVID-19 Pandemic and Supply Chain disclosure
below). As a result, we have incurred significant losses and will remain
dependent on outside capital for the foreseeable future until such time that we
can realize our strategy of growth by generating profits through our organic
growth and M&A strategy, and reduce our reliance on outside capital.
Given the inherent uncertainties associated with executing our growth strategy,
as well as the uncertainty associated with the ongoing COVID-19 global pandemic
and related global supply chain disruption, we can provide no assurance that we
will be able to obtain
47
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sufficient outside capital or generate sufficient cash from operations to fund
our obligations as they become due over the next twelve months from the date
these consolidated financial statements were issued.
Since our inception, we have been able to successfully raise a substantial
amount of outside capital to fund our growth strategy. However, as of
December 31, 2021 , we have had no firm commitments of additional outside capital
from current or prospective investors or lenders. Furthermore, given the
inherent uncertainties associated with our growth strategy, we may be unable to
remain in compliance with the financial covenants required by the credit
facility agreement over the next twelve months. These uncertainties raise
substantial doubt about our ability to continue as a going concern.
In order to alleviate substantial doubt, we plan to continue to closely monitor
our operating forecast, pursue additional sources of outside capital, and pursue
our M&A strategy. If we are (a) unable to improve our operating results, (b)
obtain additional outside capital on terms that are acceptable to us to fund our
operations and M&A strategy, and/or (c) secure a waiver or forbearance from the
lender if we are unable to remain in compliance with the financial covenants
required by the credit facility agreement, we may make significant changes to
our operating plan, such as delay expenditures, reduce investments in new
products, delay the development of our software, reduce our sale and
distribution infrastructure, or otherwise significantly reduce the scope of our
business. Moreover, if we breach the financial covenants required by the credit
facility agreement and fails to secure a waiver or forbearance from the lender,
such breach or failure could accelerate the repayment of the outstanding
borrowings under the credit facility agreement or the exercise of other rights
or remedies the lender may have under applicable law. We can provide no
assurance a waiver or forbearance will be granted or the outstanding borrowings
under the credit facility will be successfully refinanced on terms that are
acceptable to the Company.
COVID-19 Pandemic and Supply Chain-The full impact of the COVID-19 pandemic and
Supply Chain, including the impact associated with preventive and precautionary
measures that we, other businesses and governments are taking, continues to
evolve.
During 2021, we have been impacted by COVID-19 pandemic and related global
shipping disruption. Together these have led to substantial increases in supply
chain costs, in particular shipping containers, which we rely on to import our
goods, has reduced the reliability and timely delivery of such shipping
containers and has substantially increased our last mile shipping costs on its
oversized goods. These cost increases have been particularly substantial to
oversized goods, which is a material part of our business. The reduced
reliability and delivery of such shipping containers is forcing us to spend more
on premium shipping to ensure goods are delivered, if at all, and the lack of
reliability and timely delivery has further down chain impacts as it takes
longer for containers to be offloaded and returned. Further, this global
shipping disruption is forcing us to increase our inventory on-hand including
advance ordering and taking possession of inventory earlier than expected
impacting its working capital.
Third party last mile shipping partners, such as UPS and FedEx, continue to
increase the cost of delivering goods to the end consumers as their delivery
networks continue to be impacted by the COVID-19 pandemic. The COVID-19 pandemic
continues to bring uncertainty to consumer demand as price increases related to
raw materials, the importing of goods, including tariffs, and the cost of
delivering goods to consumers has led to inflation across the U.S. Coupled with
the recent reopening of the majority of the country, we have noticed changes to
consumer buying habits, which may have reduced demand for its products.
COVID-19 continues to bring uncertainty to consumer demand as price increases
related to raw materials, the importing of goods, including tariffs, and the
cost of delivering goods to consumers has led to inflation across the U.S.
Coupled with continued changes in governmental restrictions and requirements,
which continued to vary across the majority of the country, the Company has
noticed changes to consumer buying habits, which may have reduced demand for its
products. Further, we have increased the sale prices for our products to offset
the increased supply chain costs, which has also led to reduced demand for our
goods. Reduced demand for our products and increased prices affecting consumer
demand generally have also made forecasting more difficult.
We continue to consider the impact of COVID-19 and the supply chain on the assumptions and estimates used when preparing our consolidated financial statements, including inventory valuation and asset impairment long-term. These assumptions and estimates may change as the current situation evolves or as new events occur, and as additional information is obtained. If the economic conditions caused by COVID-19 and the supply chain worsen beyond what is currently estimated by management, these future changes could have an adverse impact on our results of operations, our financial condition and our cash.
Debt repayment
OnAugust 9, 2021 , our lender,High Trail Investments SA LLC ("High Trail SA ") andHigh Trail Investments ON LLC ("High Trail ON" and, together withHigh Trail SA , "High Trail") notified us that High Trail declared an event of default under theApril 2021 48 -------------------------------------------------------------------------------- Notes (as defined in Note 6 to our consolidated financial statements included in this Annual Report) as a result of our failure to maintain Adjusted EBITDA ( primarily due to the impacts of supply chain), as required under the terms of our then-existing debt arrangements with High Trail. OnSeptember 22, 2021 , we reached an agreement with High Trail to pay down and amend our outstanding secured term debt. We paid off the remaining$25.0 million High Trail Term Loan as ofDecember 31, 2021 (see the discussion under the heading MidCap Credit FacilityDecember 2021 below). Pursuant to ASC 470, Debt, we concluded the High Trail Term Loan transaction resulted in the extinguishment of the High Trail Term Loan in the amount of$2.5 million of extinguishment of which has been classified within loss on extinguishment of debt on the consolidated statements of operations.
MidCap Credit Facility –
OnDecember 22, 2021 , we entered into a Credit Facility with MidCap, pursuant to which, among other things, (i) the lenders party thereto as lenders (the "Lenders") agreed to provide a revolving credit facility in a principal amount of up to$40.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) we agreed to issue toMidCap Funding XXVII Trust a warrant to purchase up to an aggregate of 200,000 shares of our common stock, in exchange for the Lenders extending loans and other extensions of credit to us under the Credit Facility. The credit facility contains a financial covenant that requires us to maintain a minimum unrestricted cash balance of (a)$12.5 million during the period fromFebruary 1st through and includingMay 31st of each calendar year, and (b)$15.0 million at all other times thereafter. At its election, we may elect to comply with an alternative financial covenant that would require us to maintain a minimum borrowing availability under the credit facility of$10.0 million at all times. We currently do not anticipate electing the alternative financial covenant over the next twelve months and are in compliance with the minimum liquidity covenant as of the date these consolidated financial statements were issued. OnDecember 22, 2021 , we used$27.6 million of the net proceeds from the initial borrowing under the Credit Facility to repay all amounts owed under those certain senior secured promissory notes issued by us to High Trail in an initial principal amount of$110.0 million , as amended. We expect to use the remaining proceeds of any loans under the Credit Facility for working capital and general corporate purposes.
Earnings contingent liability considerations
As ofDecember 1, 2020 , the acquisition date of the assets of the e-commerce business under the brands Mueller, Pursteam, Pohl and Schmitt and Spiralizer (the "Smash Assets"), the initial fair value amount of the earn-out payment was appropriately$9.8 million . As ofDecember 31, 2020 , the fair value amount of the earn-out payment with respect to the Smash Assets was approximately$22.5 million representing a change of fair value impact of approximately$12.7 million . As ofDecember 31, 2021 , the fair value amount of the earn-out payment with respect to the Smash Assets was approximately$5.2 , representing a year-endedDecember 31, 2021 . As part of the acquisition of the certain assets of Healing Solutions (the "Healing Solutions Assets"), Healing Solutions was entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurs: (i) prior to the date that is nine months following the Closing Date, we were to issue 528,670 shares of our common stock to Healing Solutions; (ii) on or after the date that is nine months following the Closing Date but before the date that is 12 months following the Closing Date, we were to issue 396,502 shares of common stock to Healing Solutions; or (iii) on or after the date that is 12 months following the Closing Date but before the date that is 15 months following the Closing Date (the date that is 15 months following the Closing Date, the "Earn-Out Termination Date"), we were to issue 264,335 shares of common stock to Healing Solutions; or after 15 months, we would not have any obligation to issue any shares of our common stock to Healing Solutions. As ofFebruary 2, 2021 , the acquisition date of the Healing Solutions Assets, the initial fair value amount of the earn-out payment with respect to the Healing Solutions Assets was appropriately$16.5 million . InNovember 2021 , we issued 1.4 million shares of common stock in full settlement of the earn-out. As ofDecember 31, 2021 there was no earn-out liability related to Healing Solutions. As part of the acquisition of the assets ofSquatty Potty, LLC (the "Squatty Potty Assets"), Squatty Potty is entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurred in the 12 months endingDecember 31, 2021 , the earn-out payment amount was to be$3.9 million and if the parties terminate the transition service agreement prior to the date that is nine months following the Closing Date, we are to pay an additional$3.9 million . 49 -------------------------------------------------------------------------------- As ofMay 5, 2021 , the acquisition date the Squatty Potty Assets, the initial fair value amount of the earn-out payment with respect to the Squatty Potty Assets was appropriately$3.5 million . As ofDecember 31, 2021 , the fair value amount of the earn-out payment with respect to the Squatty Potty Assets was approximately$4.0 million , representing a net change of fair value impact of approximately$0.5 million for year-endedDecember 31, 2021 . As ofMay 5, 2021 , the acquisition date ofPhoto Paper Direct Ltd. ("Photo Paper Direct"), the initial fair value amount of the earn-out payment with respect to Photo Paper Direct was appropriately$0.9 million . As ofDecember 31, 2021 , the fair value amount of the earn-out payment with respect to the Photo Paper Direct acquisition was approximately$0.0 million as the earnout was not achieved, representing a net change of fair value impact of approximately$0.9 million for the year-endedDecember 31, 2021 .
Open Inventory Purchase Orders
As ofDecember 31, 2020 and 2021, the Company had open inventory purchase orders of$55.0 million and$32.3 million , respectively, placed with vendors waiting to be fulfilled. Non-GAAP Financial Measures We believe that our financial statements and the other financial data included in this Annual Report have been prepared in a manner that complies, in all material respects, with generally accepted accounting principles in theU.S. ("GAAP"). However, for the reasons discussed below, we have presented certain non-GAAP measures herein. We have presented the following non-GAAP measures to assist investors in understanding our core net operating results on an on-going basis: (i) Contribution Margin; (ii) Contribution margin as a percentage of net revenue; (iii) EBITDA (iv) Adjusted EBITDA; and (v) Adjusted EBITDA as a percentage of net revenue. These non-GAAP financial measures may also assist investors in making comparisons of our core operating results with those of other companies. As used herein, Contribution margin represents gross profit less amortization of inventory step-up from acquisitions (included in cost of goods sold) and e-commerce platform commissions, online advertising, selling and logistics expenses (included in sales and distribution expenses). As used herein, Contribution margin as a percentage of net revenue represents Contribution margin divided by net revenue. As used herein, EBITDA represents net loss plus depreciation and amortization, interest expense, net and provision for income taxes. As used herein, Adjusted EBITDA represents EBITDA plus stock-based compensation expense, changes in fair-market value of earn-outs, amortization of inventory step-up from acquisitions (included in cost of goods sold), changes in fair-market value of warrant liability, professional fees related to acquisitions, loss from extinguishment of debt and other expenses, net. As used herein, Adjusted EBITDA as a percentage of net revenue represents Adjusted EBITDA divided by net revenue. Contribution margin, EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to loss from operations or net loss, as determined under GAAP. We present Contribution margin and Contribution margin as a percentage of net revenue, as we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to gross profit, provides useful supplemental information for investors. Specifically, Contribution margin and Contribution margin as a percentage of net revenue are two of our key metrics in running our business. All product decisions made by us, from the approval of launching a new product and to the liquidation of a product at the end of its life cycle, are measured primarily from Contribution margin and/or Contribution margin as a percentage of net revenue. Further, we believe these measures provide improved transparency to our stockholders to determine the performance of our products prior to fixed costs as opposed to referencing gross profit alone. In the reconciliation to calculate contribution margin, we add e-commerce platform commissions, online advertising, selling and logistics expenses ("sales and distribution variable expense"), to gross margin to inform users of our financial statements of what our product profitability is at each period prior to fixed costs (such as sales and distribution expenses such as salaries as well as research and development expenses and general administrative expenses). By excluding these fixed costs, we believe this allows users of our financial statements to understand our products performance and allows them to measure our products performance over time. We present EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net loss, provide useful supplemental information for investors. We use these measures with financial measures prepared in accordance with GAAP, such as sales and gross margins, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors. We believe EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue are useful to investors in assessing the operating performance of our business without the effect of non-cash items. 50 -------------------------------------------------------------------------------- Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue should not be considered in isolation or as alternatives to net loss, loss from operations or any other measure of financial performance calculated and prescribed in accordance with GAAP. Neither EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue may not be comparable to similar titled measures in other organizations because other organizations may not calculate Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue in the same manner as we do. Our presentation of Contribution margin and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from such terms or by unusual or non-recurring items. We recognize that EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue, have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:
• our capital expenditures or future capital expenditure requirements or
Mergers and Acquisitions;
• interest charges or cash requirements necessary to service interest
expenses or principal repayments associated with indebtedness;
• depreciation and amortization, which are non-monetary expenses, although
depreciated and depreciated assets will likely need to be replaced
the future, or any cash requirements for the replacement of assets;
• changes in cash requirements for our working capital needs; or
• changes in fair value of contingent earn-out liabilities, warrant
liabilities, and amortization of inventory step-up from acquisitions
(included in cost of goods sold).
Additionally, Adjusted EBITDA excludes non-cash expense for stock-based
compensation, which is and is expected to remain a key element of our overall
long-term incentive compensation package.
We also recognize that Contribution margin and Contribution margin as a
percentage of net revenue have limitations as analytical financial measures. For
example, Contribution margin does not reflect:
• general and administrative expenses necessary to operate our business;
• research and development expenses necessary for the development, operation
and support of our software platform;
• the fixed cost portion of our selling and distribution costs, including
stock-based compensation expense; or
• changes in fair value of contingent earn-out liabilities, warrant
liabilities, and amortization of inventory step-up from acquisitions
(included in cost of goods sold).
Year-Ended December 31,
2019 2020 2021
(in thousands, except percentages)
Gross profit $ 45,040 $ 84,746 $ 121,863
Contribution margin $ 2,489 $ 25,123 $ 25,038
Gross profit as a percentage of net revenue 39.4 % 45.6 % 49.2 %
Contribution margin as a percentage of net revenue 2.2 % 13.5 % 10.1 %
Net Loss $ (58,789 ) $ (63,126 ) $ (236,024 )
EBITDA $ (54,191 ) $ (57,547 ) $ (215,511 )
Adjusted EBITDA $ (19,469 ) $ 2,494 $ (7,159 )
Net loss as a percentage of net revenue (51.4 )% (34.0 )% (95.3 )%
Adjusted EBITDA as a percentage of net revenue (17.0 )% 1.3 % (2.9 )%
Adjusted EBITDA
EBITDA represents net loss plus depreciation and amortization, interest expense,
net and provision for income taxes. Adjusted EBITDA represents EBITDA plus
stock-based compensation expense, changes in fair-market value of earn-outs,
amortization of inventory step-up from acquisitions (included in cost of goods
sold), change in fair-market value of warrant liability, professional fees
related to acquisitions, loss from extinguishment of debt and other expenses,
net. As used herein, Adjusted EBITDA as a percentage of net revenue represents
Adjusted EBITDA divided by net revenue.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA to
net loss, which is the most directly comparable financial measure presented in
accordance with GAAP:
51
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Year-Ended December 31,
2019 2020 2021
(in thousands, except percentages)
Net loss $ (58,789 ) $ (63,126 ) $ (236,024 )
Add:
Provision for income taxes 29 48 532
Interest expense, net 4,386 4,979 12,655
Depreciation and amortization 183 552 7,326
EBITDA (54,191 ) (57,547 ) (215,511 )
Other expense (income), net 41 (27 ) 45
Change in fair value of contingent earn-out
liabilities - 12,731 (30,529 )
Settlement of a contingent earnout liability - -
4,164
Amortization of inventory step-up from acquisitions (included in cost of goods sold) 583
5,458
Change in fair market value of warrant liability - 21,338
26,455
Derivative liability discount related to term loan - -
3,254
Loss on extinguishment of debt - 2,037
138,859
Loss on initial issuance of warrants - -
20,147
Professional fees related to acquisitions 663
1,450
Transition costs from acquisitions - -
2,076
Professional and legal fees related to Photo Paper Direct acquisition - -
1,586
Reserve on dispute with PPE supplier - - 4,100 Litigation reserve - - 1,300 Reserve on barter credits - - 1,000 Stock-based compensation expense 34,681 22,716
28,987
Adjusted EBITDA$ (19,469 ) $ 2,494 $ (7,159 ) Net loss as a percentage of net revenue (51.4 )% (34.0 )% (95.3 )% Adjusted EBITDA as a percentage of net revenue (17.0 )% 1.3 % (2.9 )% Contribution Margin Contribution margin represents gross profit less amortization of inventory step-up from acquisitions (included in cost of goods sold) and e-commerce platform commissions, online advertising, selling and logistics expenses (included in sales and distribution expenses). Contribution margin as a percentage of net revenue represents Contribution margin divided by net revenue. The following table provides a reconciliation of Contribution margin to gross profit and Contribution margin as a percentage of net revenue to gross profit as a percentage of net revenue, which are the most directly comparable financial measures presented in accordance with GAAP. Year-Ended December 31, 2019 2020 2021 (in thousands, except percentages) Gross Profit$ 45,040 $ 84,746 $ 121,863 Add: Amortization of inventory step-up from acquisitions (included in cost of goods sold) - 583 5,458 Reserve on barter credits - - 1,000 Less: E-commerce platform commissions, online advertising, selling and logistics expenses (42,551 ) (60,206 ) (103,283 ) Contribution margin$ 2,489 $ 25,123 $ 25,038 Gross Profit as a percentage of net revenue 39.4 % 45.6 % 49.2 % Contribution margin as a percentage of net revenue 2.2 % 13.5 % 10.1 % 52
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Significant Accounting Policies and Use of Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates.
Revenue recognition – We recognize revenue in accordance with
We derive our revenue from the sale of consumer products. We sell our products directly to consumers through online retail channels and through wholesale channels. For direct-to-consumer sales, we consider customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For wholesale sales, we consider the customer purchase order to be the contract. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment date. As a result, we have a present and unconditional right to payment and record the amount due from the customer in accounts receivable.
Revenue from sales of consumer products is recorded at the net selling price (transaction price), which includes an estimate of future returns based on historical rates of return.
There is judgment in using historical trends to estimate future returns and estimates for newly launched products that do not have historical data.
Our refund obligation for sales returns was
Warrant Liability-The fair values of the outstanding warrants were measured using the Monte Carlo Simulation model. Due to the complexity of the warrants issued, we use an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. Inputs used to determine estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term result in a directionally similar impact to the periodic fair value measurement of the outstanding warrant liability, and are recorded within the Change in fair market value of warrant line item on the statement of operations.
The fair value of the warrant liability has been
Accounting for contingent consideration-Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include management's assumptions about the likelihood of payment based on the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurement as discussed in Note 6 to our consolidated financial statements included in this Annual Report. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.
Contingent liabilities related to price supplements have been
53 -------------------------------------------------------------------------------- Accounting for Business Combinations-We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based upon their estimated fair values at the acquisition date. These fair values are typically estimated with assistance from independent valuation specialists. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, contingent consideration arrangements, and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Examples of critical estimates in the valuation of certain intangible assets that we have acquired or may acquire in the future include, but are not limited to:
• future cash flows expected from product sales or other customer contracts;
• expected fulfillment costs including marketing, warehousing and product
sales; • the acquired company's brand and competitive position, as well as
assumptions about the period during which the acquired brand will continue to be
used in the combined company's product portfolio; • cost of capital and discount rates; and
• estimate the useful lives of the assets acquired as well as the rate or
how the assets will be depreciated.
Refer to Note 16 – Acquisitions of our consolidated financial statements included in this annual report – for more information.
Subsequent measurement of
We engaged a third-party valuation specialist to assist in performing our goodwill test inDecember 2021 . For goodwill, impairment testing is based upon the best information available using a combination of the discounted cash flow method (a form of the income approach), the guideline public company method, and guideline transaction method (both market approaches). Under the income approach, or discounted cash flow method, the significant assumptions used are projected net revenue, projected contribution margin (product operating margin before fixed costs), fixed costs, terminal growth rates and the cost of capital. Projected net revenue, projected contribution margin and terminal growth rates were determined to be significant assumptions because they are the three primary drivers of the projected cash flows in the discounted cash flow fair value model. Cost of capital is another significant assumption as the discount rate is used to calculate the current fair value of those projected cash flows. Under the guideline public company method, and guideline transaction method, significant assumptions relate to the selection of appropriate guideline companies and transactions and the valuation multiples used in the market analysis.
We believe that the assumptions and estimates made are reasonable and appropriate, and changes in our assumptions and estimates could have a material impact on our reported financial results. In addition, sustained declines in our stock price and related market capitalization could impact key assumptions in the overall estimated fair values of our reporting unit and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations. We began to experience improvement in our operating margins and additional improvement in our products performance before the inclusion of fixed costs. These improvements, coupled with our acquisitions, supported our conclusion that we would generate significant improvements in the operating results. SinceDecember 31, 2020 , we had an additional increase in the amount of goodwill through acquisitions made in 2021. Although we have experienced volatility in our share price and short-term forecasts, impacting our going concern analysis due lender covenant risks, we believe we have had no triggering events as our overall long-term forecasts remain materially the same as ofDecember 31, 2021 . However, if we continue to experience downward share price volatility or there are material reductions in long-term forecasts the excess fair-value over our carrying value could be reduced significantly and could lead to a triggering event and ultimately to a goodwill impairment charge. We performed a full step one impairment test at12/31/2021 and concluded no impairment and that our estimated fair-values exceeded our carrying values by 21% as of the year-endedDecember 31, 2021 . 54 -------------------------------------------------------------------------------- We will continue to closely monitor actual results versus expectations as well as whether and to what extent any significant changes in current events or conditions, including changes to the impacts of COVID-19 on our business, result in corresponding changes to our expectations about future estimated cash flows, discount rates and market multiples. If our adjusted expectations of the operating results do not materialize, if the discount rate increases (based on increases in interest rates, market rates of return or market volatility) or if market multiples decline, we may be required to record goodwill impairment charges, which may be material. While we believe our conclusions regarding the estimates of fair value of our reporting units are appropriate, these estimates are subject to uncertainty and by nature include judgments and estimates regarding various factors. These factors include the rate and extent of growth in the markets that our reporting units serve, the realization of future sales price and volume increases, fluctuations in exchange rates, fluctuations in price and availability of key raw materials, future operating efficiencies and, as it pertains to discount rates, the volatility in interest rates and costs of equity.
Subsequent measurement of intangible assets – Intangible assets with finite lives are amortized over their estimated useful life on a straight-line basis.
We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization. We test these assets for potential impairment whenever our management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset's useful life and the impact of an event or circumstance on either an asset's useful life or carrying value involve significant judgment regarding estimates of the future cash flows associated with each asset.
Intangible assets were
JOBS Act InApril 2012 , the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" ("EGC") can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. In addition, as an EGC, we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an EGC until the earlier of (i) the last day of the fiscal year in which we have total annual gross revenues of$1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, orDecember 31, 2024 ; (iii) the date on which we have issued more than$1.0 billion in non-convertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSecurities and Exchange Commission (the "SEC") (i.e., the first day of the fiscal year after we have (1) more than$700.0 million in outstanding common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, (2) been public for at least 12 months, and (3) are not eligible to be deemed a "smaller reporting company" because we do not meet the revenue test of the definition of "smaller reporting company", which includes an initial determination that our annual revenues are more than$100.0 million for the most recently completed fiscal year).
Recent accounting pronouncements
The JOBS Act permits an emerging growth company to take advantage of an extended
transition period to comply with new or revised accounting standards applicable
to public companies. We have elected to use this extended transition period
until we are no longer an emerging growth company or until we affirmatively and
irrevocably opt out of the extended transition period. As a result, our
financial
55
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statements may not be comparable to companies that comply with new or revised accounting pronouncements as of the public company effective dates.
Accounting standards adopted
InFebruary 2016 , the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). This ASU requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. InJuly 2019 , the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and it will be effective for annual reporting periods beginning afterDecember 15, 2021 , with early adoption permitted. The new guidance was adopted onJanuary 1, 2022 with no material impact on our consolidated financial statements. We adopted this standard by electing the package of practical expedients without hindsight, which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the adoption date. We have several corporate office leases which are classified as operating leases, for which we are required to record a right-of-use asset and a lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expenses on a straight-line basis for these leases. OnJanuary 1, 2022 , we recorded an aggregate of approximately$0.7 million of right-of-use assets and corresponding$0.7 million of lease liabilities upon adoption of this standard. Right-of-use assets and corresponding lease liabilities are included in the prepaid and other assets and accrued and other liabilities line item respectively on the consolidated balance sheets. InAugust 2018 , the FASB issued ASU No. 2018-15, "Customer's Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). Under the new guidance, customers apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This will result in certain implementation costs being capitalized; the associated amortization charge will, however, be recorded as an operating expense. Under the previous guidance, costs incurred when implementing a cloud computing arrangement deemed to be a service contract were recorded as an operating expense when incurred. ASU 2018-15 will be effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted. The new guidance was adopted onJanuary 1, 2022 with no material impact on our consolidated financial statements. InAugust 2020 , the FASB issued ASU No. 2020-06, "Debt-Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging-Contracts in Entity's Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency. ASU 2020-06 will be effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted. The new guidance was adopted onJanuary 1, 2022 with no material impact on our consolidated financial statements.
Recently issued accounting pronouncements
InJune 2016 , the FASB issued ASU 2016-13: Financial Instruments - Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. InJuly 2019 , the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning afterDecember 15, 2022 , with early adoption permitted. While we have not completed our evaluation of the impact of adoption of this standard, we do not expect it to have a material impact on our condensed consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. This standard is effective for fiscal years beginning afterDecember 15, 2021 , and for interim periods beginning afterDecember 15, 2022 with early adoption permitted. While we have not completed our evaluation of the impact of adoption of this standard, we do not expect it to have a material impact on our condensed consolidated financial statements. 56
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