(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with our financial statements, related notes and other financial information appearing elsewhere in this Quarterly Report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below, elsewhere in this Quarterly Report, particularly in Part II, Item 1A, "Risk Factors". Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Since inception, we have incurred net losses and cash outflows from operations. Management expects that operating losses and negative cash flows from operating activities will continue in the foreseeable future as we continue to work to fund our operations and as we progress through our review of strategic alternatives. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, as of December 31, 2021 we concluded that there was substantial doubt about our ability to continue as a going concern. Similarly, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of, and for the year ended December 31, 2021, describing the existence of substantial doubt about our ability to continue as a going concern. As of March 31, 2022, there continues to be substantial doubt about our ability to continue as a going concern.
On May 11, 2022 the Company secured interim financing of $10.0 million from Ron Johnson, the chair of its board of directors and Chief Executive Officer, to help fund its operations as it pursues strategic alternatives, which has a scheduled maturity date of November 11, 2022 and will be repayable upon written demand of the holder at any time on or after such date. The Note was approved by the Audit Committee of the Company's board of directors pursuant to the Company's Related Party Transaction Policy. (See Note 17, "Subsequent Events and Related Party Transactions", to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the terms of the financing.) Additionally, in early May 2022, the Company received a $6.1 million customer prepayment for future services reasonably expected to be rendered over the course of May 2022, which is subject to adjustment for certain chargebacks and other adjustments. The Company is also seeking to obtain additional customer prepayments. There is no guarantee that we will be successful in our further negotiations or that any prepayments received will be adequate to support our current operations or provide sufficient cash flow to meet our obligations in the near term. We expect any such prepayments would negatively impact our cash flows in future periods for which our services have been prepaid.
The Company's estimated cash and cash equivalents, which includes the $10 million of related party financing and $6.1 million of customer prepayments against second quarter sales, was $36.1 million as of May 12, 2022. The Company is in discussions with multiple financing sources to attempt to secure additional interim financing by early June 2022, which is needed to continue operations and fund other liquidity needs. In the absence of additional sources of liquidity, management anticipates that existing cash resources will not be sufficient to meet operating and liquidity needs beyond early June 2022. There is no assurance that management will be able to obtain additional liquidity or be successful in raising additional funds or that such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on our existing stockholders. In addition, we are unable to determine at this time whether any of these potential sources of liquidity will be adequate to support our operations or provide sufficient cash flows to us to meet our obligations as they become due and continue as a going concern. In the event we determine that additional sources of liquidity will not be available to us or will not allow us to meet our obligations as they become due, we may need to file a voluntary petition for relief under the United States Bankruptcy Code in order to implement a restructuring plan or liquidation. Strategic Review
the event we are not able to successfully consummate a strategic transaction, or obtain additional financing as discussed above, or will not be able to meet our obligations as they become due, we may need to file a voluntary petition for relief under the United States Bankruptcy Code in order to implement a restructuring plan or liquidation.
Enjoy was incorporated in the state of Delaware in May 2014, and is headquartered in Palo Alto, California. Enjoy operates Mobile Stores providing in home delivery, set up and a full shopping experience for companies.
We currently operate in over 80 locations across the United States, Canada and the United Kingdom. The Company has two reportable segments which are determined by geography: North America and Europe. The North America segment consists of operations within the United States and Canada and the Europe segment currently consists of operations within the United Kingdom.
Enjoy started with a simple question, "What if the best of the store could come to you?" Over the last eight years we built and optimized our Mobile Store, a new channel that pairs the convenience of online shopping with the personal touch of an in-store retail experience brought together in the comfort of end customers' (the "Consumer") homes.
Over the past twenty five years, eCommerce has disrupted the retail industry in virtually every category, shifting commerce from physical stores to the home. While eCommerce channels greatly expanded choices and increased convenience with fulfillment to customers' doorsteps, they have not addressed the importance of an interactive shopping experience that customers desire for products, such as technology. Enjoy provides set-up and activation, and also assists customers in purchasing hardware, accessories, and subscription services in the comfort of the home. This Mobile Store shopping experience creates a unique and deep retail experience for Consumers that does not exist with traditional retail channels. We further believe that this represents the next disruption in the consumer shopping experience.
We maintain multi-year contractual relationships with leading telecommunications and technology companies, which are our "Business Partners" or "Customers." Our revenue stems from a variety of service, set-up and delivery fees that are paid to us by our Customers. During a visit from our Mobile Store, the Consumer pays for products and services directly to our Customers via secure mobile point-of-sale devices. On confirmation of the purchase, our Customers then remit our fees directly to us.
Enjoy delivers a broad assortment of telecommunications and technology products and accessories, which are provided by our Customers. Our mobile retail sales team ("Experts") provide set-up, activation and demonstration of the products we deliver. We assist Consumers in evaluating and selecting a myriad of accessories, media sources, protection, broadband, and other services. We also assist in the trade-in and upgrade of our customers' products. We strive to deliver our customers' products with same-day or next-day frequency, matching the speed of traditional eCommerce channels but with an experience.
Consumers initiate their purchase on our Customers' eCommerce sites, service centers or retail locations. The Consumer selects at-home delivery and a delivery window. Consumer orders flow seamlessly from our Customers' eCommerce sites to Enjoy via deeply integrated technology platforms. This results in near-zero Consumer acquisition costs for Enjoy.
Our inventory is 100% consigned to us by our Customers and maintained in secure warehouses at our market locations. These warehouse locations also serve as the base of operations for our Mobile Store fleets and as the operating center for the market in which they serve. Our warehouses also provide meeting, training and support services for our Experts. Our warehouses and Mobile Store vehicle fleet are fully leased. We currently operate in over 80 locations which provide access to over 50% of the population in the markets that we serve, representing over 200 million addressable consumers.
Our business is enabled by highly sophisticated, proprietary sets of technology applications, systems and data science tools. To deliver and optimize millions of retail experiences, we built our technology platform from the ground up to support customer integrations, smart logistics and a variety of solutions to empower our Experts in providing the best and most personalized experience for every Consumer.
Our Experts are central to the at-home retail experience we provide for Consumers. Our Experts are 100% Enjoy employees and have the skills and training to be deeply knowledgeable about the products and services that we offer. We believe our Experts bring a world-class and deeply engaging shopping experience to Consumers.
We believe Enjoy is positioned to benefit from several long-term trends that will continue to expand the demand for Commerce-at-Home. These trends include but may not be limited to: 1) the growth in online shopping and the need for speed and convenience, 2) a more mobile workforce, which includes increased telecommuting and work-from-home arrangements, all of which have been accelerated by the COVID-19 pandemic, 3) increasingly connected homes enabled by technology and telecommunications and 4) the rapid expansion of subscription- based services delivered through online channels.
Factors Affecting Our Business
Consumer Discretionary Spending
We rely on consumer discretionary spending and may be adversely affected by economic downturns and other macroeconomic conditions or trends. Our business and operating results are subject to global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment, higher consumer debt levels, reductions in net worth, and declines in asset values and related market uncertainty, fluctuating commodity prices, inflation and general uncertainty regarding the overall future political and economic environment. Consumer purchases of technology may decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Such economic uncertainty may slow the rate at which individuals choose to purchase new technology, upgrade existing technology or purchase services, subscriptions or accessories.
Online Consumer Shopping Behaviors and Commerce-at-Home
Our business is affected by online shopping behavior and growth of eCommerce. Our revenue stems primarily from online purchases originating at our Customers websites or customer service centers. The global online shopping market is large and growing as a percentage of global retail purchases. Consumers are diversifying their purchases for delivery at home, and the COVID-19 pandemic has accelerated this trend. With some consumers still wary of buying in-store, they have increased demand for new product categories purchased online and delivered to their homes. Consumers are also increasing their purchases of at home services through online channels. Although there has been an increased demand in eCommerce business in the marketplace, COVID-19 safety protocols materially reduced the percent of our indoor Consumer engagements, which negatively impacted our business.
Changes in Consumer Behavior and Lifestyles
Our business is affected by changes in consumer behavior and lifestyles at home and work and the role that mobile technology plays in enabling these changes. Mobile technology has grown rapidly over the past four decades and reliance on smartphones is predicted to increase as more features become available. Smartphone and mobile technology represent the primary product categories in our revenues. Furthermore, work-from-home and remote-work have been growing steadily. While the COVID-19 pandemic has dramatically increased work-from- home arrangements over the past year, the underlying trends towards a more flexible work environments and telecommuting suggest that these trends will continue. Studies suggest flexible work environments create more productive and happier workforce. Advancements in technology have allowed remote workers to collaborate in increasingly effective ways. These trends are likely to accelerate Commerce-at-Home.
Product Innovation Lifecycles
Our business is affected by upgrade cycles in smartphone and consumer technology. Consumer trends in the length of the average replacement cycle for technology are linked to advancements in performance and features of these devices. Our Customers produce or sell leading brands and are quick to bring innovations to market.
Changes in Products and Services Offered by Our Customers
In addition to our base fee earned from our Customers for delivery and setup of products, our revenues are affected by add-on digital subscription services and device protection plans purchased by Consumers. Digital subscription services such as news, music, movies, gaming apps and entertainment have been growing as consumers have shifted their consumption behaviors from traditional sources of content to online and on-demand formats. Our business is also affected by consumer adoption of device protection plans and other support services provided by our Customers. We believe that the growth in subscription services driven by both consumer adoption rates and new services will continue.
Availability of Inventory from Our Customers
We carry consigned inventory provided by our Customers. This inventory is either manufactured or procured by our Customers and delivered to our warehouses. We cannot guarantee with certainty that we will have adequate inventory at all times to support our business. At times, our business can face disruptions stemming from inventory shortages driven by new product releases with high consumer demand, supply constraints, political, environmental or other factors.
Seasonal Sales Trends
We have experienced and expect to continue to experience seasonal fluctuations in sales due to the spending patterns of Consumers. Our revenue has generally been lowest in the first and second calendar quarters due to lower consumer demand following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced smartphone and consumer technology, which usually take place in the third calendar quarter and which tend to drive sales in that quarter and the following quarter. Further, our revenue tends to be higher in the third and fourth calendar quarter due to seasonal sales such as "Black Friday" and "Cyber Monday," as Consumers tend to make higher purchases during the holiday season. Our revenue for the second calendar quarter is generally the lowest of the year followed by the first calendar quarter. We expect these seasonality trends to continue.
Restricted Stock Unit Grants
In March 2022, the Company granted restricted stock units ("March 2022 RSUs") underlying approximately 7.9 million shares of the Company's common stock under the 2021 Equity Incentive Plan. The March 2022 RSUs vest upon satisfaction of service vesting requirements. The service-based vesting requirements are primarily satisfied as follows:
Key Performance Metrics
We regularly review several metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. The reasons we believe these key performance metrics are useful to investors are provided below.
Daily Mobile Stores - Daily Mobile Stores represent the number of Mobile Stores we operate on a given day. This is calculated by dividing the total number of visit-serving Expert shifts in a given reporting period by the number of calendar days in that period. A visit-serving Expert shift is defined as an Expert that is scheduled to serve Consumers on a given day. We believe this is the primary measure of scale and growth of our retail footprint.
Daily Revenue Per Mobile Store - Daily Revenue Per Mobile Store is defined as the average daily revenue generated per Daily Mobile Store. This metric is calculated by dividing the revenue generated in a given reporting period by the product of Daily Mobile Stores and the number of days in that given reporting period. We believe growth in Daily Revenue Per Mobile Store is a key driver for increasing the Company's profitability.
Mobile Store Profit (Loss) and Mobile Store Margin - Mobile Store Profit (Loss) is a measure prepared in accordance with GAAP and is defined as revenue less cost of revenue. Mobile Store Margin is Mobile Store Profit (Loss) as a percentage of revenue. We view this metric as an important measure of business performance as it captures Mobile Store profitability and provides comparability across reporting periods.
Segment Income (Loss) - Segment Income (Loss) is defined as revenue less cost of revenue, operational expenses directly related to each segment and excludes certain corporate expenses. We view this metric as an important measure of business performance as it captures Mobile Store and segment profitability and provides comparability across reporting periods.
Adjusted EBITDA - Adjusted EBITDA is defined as net loss, adjusted for interest expense, provision for income taxes, depreciation and amortization, stock-based compensation, loss on convertible loans, one time transaction related costs, interest income and other expenses not considered a core part of our operations. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section below for further discussion.
The following tables present our key performance metrics for the periods presented (in thousands except Daily Mobile Stores amounts):
Three Months Ended March 31, 2022 North America Europe Consolidated Daily Mobile Stores 649 129 778 Daily Revenue Per Mobile Store $ 355 $ 281 $ 343 Mobile Store Loss $ (9,042 ) $ (1,744 ) $ (10,786 ) Mobile Store Margin (43.5 )% (53.5 )% (44.9 )% Segment Loss $ (32,072 ) $ (7,011 ) Adjusted EBITDA $ (51,522 ) Three Months Ended March 31, 2021 North America Europe Consolidated Daily Mobile Stores 427 152 579 Daily Revenue Per Mobile Store $ 404 $ 280 $ 371 Mobile Store Loss $ (3,122 ) $ (1,700 ) $ (4,822 ) Mobile Store Margin (20.1 )% (44.4 )% (24.9 )% Segment Loss $ (19,298 ) $ (5,872 ) Adjusted EBITDA $ (34,076 )
Results of Operations
Components of Results of Operations
Revenue consists of service fees paid to us by our Customers for bringing their products and services to Consumers. These fees are comprised of fixed service fees per visit and variable fees based on the sale of accessories, solutions and subscription services. The composition of these fees and the rate of services paid vary by Customer per the terms of our contracts with them. Our fees are reduced by chargebacks and consigned inventory that is lost, damaged or stolen. Chargebacks are based upon Consumer cancellation of services and subscriptions within a pre-specified timeframe.
Cost of revenue
Cost of revenue primarily consists of salaries, benefits and other expenses related to the Company's Experts, fleet vehicle costs, and other expenses directly related to the performance of each Expert field visit. These expenses will increase in proportion to the growth of our Mobile Stores. We expect these expenses to decrease as a percentage of revenue for the next several years.
Operations and technology
Operations and technology expenses primarily consist of technology, facility and overhead costs directly related to the operation of our Mobile Stores. This includes lease and operating expenses for our warehouses, inventory management and storage, facility supplies and depreciation expense. We also include costs for employees who directly or indirectly support our Experts, including supervisory and operations management, inventory management, fulfillment and research and development costs. We expect operations and technology expenses to increase in future periods to support our growth, including bringing on additional warehouse facilities and continuing to invest in technology improvements to support the selling experience for Consumers, selling tools for our sales professionals and to drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments. We expect these expenses to decrease as a percentage of revenue over the next several years.
General and administrative
General and administrative expenses primarily consist of personnel-related expenses for our general corporate functions. This includes our leadership team, employees involved in finance, human resources, legal and workplace services, enterprise and financial information technology systems and marketing. We expect to increase general and administrative expenses as we grow our infrastructure to support operating as a public company and the overall growth in our business. While these expenses may vary from period to period as a percentage of revenue, we expect them to decrease as a percentage of revenue over the next several years.
Loss on convertible loans
Unrealized loss on convertible loans consists of the change in the fair value of our convertible loans. The convertible loans were converted to common stock as part of the Merger.
Interest income consists of interest earned on our cash and cash equivalents.
Interest expense includes mainly the interest incurred on our outstanding indebtedness, as well as amortization of deferred financing costs, mainly debt origination and commitment fees.
Other income, net
Other income during the periods presented consisted primarily of fair value gains and losses related to the issued stock warrants as well as gains and losses from foreign currency transactions.
Income tax provision
Our provision for income taxes consists of state minimum taxes in the United States and foreign taxes. We have a full valuation allowance for our net United States federal and state deferred tax assets primarily consisting of net operating loss carryforwards, accruals, and reserves. We expect to maintain this full valuation allowance for the foreseeable future.
Comparison of Results of Operations Comparison of the Three Months Ended March 31, 2022 and 2021 The following table is a reference for the discussion that follows: Three Months Ended March 31, Change (dollars in thousands) 2022 2021 $ % Revenue $ 24,024 $ 19,346 $ 4,678 24.2 % Operating expenses: Cost of revenue* 34,810 24,168 $ 10,642 44.0 % Operations and technology* 27,332 19,233 $ 8,099 42.1 % General and administrative* 19,680 12,098 $ 7,582 62.7 % Total operating expenses 81,822 55,499 $ 26,323 47.4 % Loss from operations (57,798 ) (36,153 ) $ (21,645 ) 59.9 % Loss on convertible loans - (1,865 ) $ 1,865 (100.0 )% Interest expense (38 ) (1,407 ) $ 1,369 (97.2 )% Interest income 2 2 $ (0 ) (22.4 )% Other income, net 2,623 134 $ 2,489 1857.5 % Loss before provision for income taxes (55,211 ) (39,289 ) $ (15,922 ) 40.5 % Provision for income taxes 34 177 $ (143 ) (81.0 )% Net loss (55,245 ) $ (39,466 ) $ (15,779 ) 40.0 %
* To conform to current presentation, the Company reclassified certain costs within each of its operating expense line items in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021. These changes have no impact on the Company's previously reported consolidated net loss and comprehensive loss, cash flows, or basic and diluted net loss per share amounts for the periods presented.
Revenue for the three months ended March 31, 2022 compared to the respective prior period increased by $4.7 million, or 24.2%, primarily due to an overall . . .
May 16, 2022
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