COMSCORE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the related Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, or 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events in future periods may differ materially from those anticipated or implied in these forward-looking statements as a result of many factors, including those discussed under Item 1A , "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 10-K"), under Item 1A , "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, under Item 1A , "Risk Factors" in this 10-Q and elsewhere in this 10-Q. See also " Cautionary Note Regarding Forward-Looking Statements " at the beginning of this 10-Q. In an effort to contain the COVID-19 pandemic or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed "essential", isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. To date, these measures have had some impact on our business, including with respect to the timing of executing new or renewal contracts, the impact of closed movie theaters on our customers, customer payment delays and requests to modify contractual payment terms. These conditions have negatively impacted our liquidity and cash flows to some extent and are expected to continue to have an impact in future periods. As discussed in more detail below, we cannot quantify the impact that the COVID-19 pandemic and related government actions may have on our business or liquidity in the future. We have taken actions to mitigate the impact of COVID-19 and will continue to actively monitor the situation. We may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we cannot currently predict. See Item 1A , "Risk Factors" in this 10-Q and Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 for additional details. Overview We are a global information and analytics company that measures advertising, content, and the consumer audiences of each, across media platforms. We create our products using a global data platform that combines information on digital platforms (smartphones, tablets and computers), television ("TV") and movie screens with demographics and other descriptive information in a privacy-focused way. We have developed proprietary data science that enables measurement of person-level and household-level audiences, removing duplicated viewing across devices and over time. This combination of data and methods enables a common standard for buyers and sellers to transact on advertising. This helps companies across the media ecosystem better understand and monetize their audiences and develop marketing plans and products to more efficiently and effectively reach those audiences. Our ability to unify behavioral and other descriptive data enables us to provide audience ratings, advertising verification, and granular consumer segments that describe hundreds of millions of consumers. Our customers include digital publishers, television networks, movie studios, content owners, advertisers, agencies and technology providers. The platforms we measure include TV, smartphones, computers, tablets, over-the-top ("OTT") devices and movie theaters. The information we analyze crosses geographies, types of content and activities, including websites, mobile applications, video games, television and movie programming, e-commerce, and advertising. 21
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Results of Operations
The following table sets forth selected Condensed Consolidated Statements of
Operations data as a percentage of total revenues for each of the periods
indicated. Percentages may not add due to rounding.
Three Months Ended June 30 , Six Months Ended June 30,
2020 2019 2020 2019
(In thousands) Dollars % of Revenue Dollars % of Revenue Dollars % of Revenue Dollars % of Revenue
Revenues $ 88,566 100.0 % $ 96,888 100.0 % $ 178,094 100.0 % $ 199,182 100.0 %
Cost of revenues 44,949 50.8 % 51,994 53.7 % 90,747 51.0 % 105,401 52.9 %
Selling and marketing 16,007 18.1 % 23,329 24.1 % 35,220 19.8 % 48,169 24.2 %
Research and development 9,765 11.0 % 16,883 17.4 % 19,901 11.2 % 35,099 17.6 %
General and administrative 13,741 15.5 % 16,932 17.5 % 29,284 16.4 % 36,477 18.3 %
Investigation and audit related - - % 2,354 2.4 % - - % 3,196 1.6 %
Amortization of intangible assets 6,846 7.7 % 8,076 8.3 % 13,764 7.7 % 16,181 8.1 %
Impairment of goodwill - - % 224,272 231.5 % - - % 224,272 112.6 %
Impairment of intangible asset - - % 17,308 17.9 % - - % 17,308 8.7 %
Settlement of litigation, net - - % 5,000 5.2 % - - % 5,000 2.5 %
Impairment of right-of-use and
long-lived assets - - % - - % 4,671 2.6 % - - %
Restructuring - - % 2,949 3.0 % - - % 2,879 1.4 %
Total expenses from operations 91,308 103.1 % 369,097 381.0 % 193,587 108.7 % 493,982 248.0 %
Loss from operations (2,742) (3.1) % (272,209) (281.0) % (15,493) (8.7) % (294,800) (148.0) %
Interest expense, net (8,856) (10.0) % (8,242) (8.5) % (17,702) (9.9) % (15,001) (7.5) %
Other income (expense), net 1,477 1.7 % (3,081) (3.2) % 8,671 4.9 % (112) (0.1) %
Loss from foreign currency
transactions (944) (1.1) % (464) (0.5) % (140) (0.1) % (426) (0.2) %
Loss before income taxes (11,065) (12.5) % (283,996) (293.1) % (24,664) (13.8) % (310,339) (155.8) %
Income tax benefit 664 0.7 % 4,463 4.6 % 1,079 0.6 % 3,292 1.7 %
Net loss $ (10,401) (11.7) % $ (279,533) (288.5) % $ (23,585) (13.2) % $ (307,047) (154.2) %
Revenues
Our products and services are organized around solution groups that address
customer needs. Accordingly, we evaluate revenue around three solution groups:
•Ratings and Planning provides measurement of the behavior and characteristics
of audiences of content and advertising across television and digital platforms
including computers, tablets, smartphones, and other connected devices. These
products and services are designed to help customers find the most relevant
viewing audience, whether that viewing is linear, non-linear, online or
on-demand.
•Analytics and Optimization includes activation and survey-based products that
provide end-to-end solutions for planning, optimization and evaluation of
advertising campaigns and brand protection.
•Movies Reporting and Analytics measures movie viewership and box office results
by capturing movie ticket sales in real time or near real time and includes box
office analytics, trend analysis and insights for movie studios and movie
theater operators worldwide.
We categorize our revenue along these three offerings; however, our cost
structure is tracked at the corporate level and not by our solution groups.
These costs include, but are not limited to, employee costs, costs to acquire
data, operational overhead, data centers, and our technology that supports
multiple solution groups.
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Revenues from these three solution groups for the three months ended
Three Months Ended June 30,
(In thousands) 2020 % of Revenue 2019 % of Revenue $ Variance % Variance
Ratings and Planning (1) $ 63,779 72.0 % $ 68,922 71.1 % $ (5,143) (7.5) %
Analytics and Optimization (1) 16,894 19.1 % 17,293 17.9 % (399) (2.3) %
Movies Reporting and Analytics 7,893 8.9 % 10,673 11.0 % (2,780) (26.0) %
Total revenues $ 88,566 100.0 % $ 96,888 100.0 % $ (8,322) (8.6) %
(1) In the second quarter of 2020, we began classifying revenue from certain new
and extended custom agreements for services that utilize our syndicated data
set, previously classified under Analytics and Optimization, as Ratings and
Planning. The impact was not material to either solution group.
Revenues decreased by $8.3 million , or 8.6%, for the three months ended June 30,
2020 as compared to the three months ended June 30, 2019 .
Ratings and Planning revenue is comprised of revenue from our digital,
television and cross-platform products. Ratings and Planning revenue decreased
$5.1 million in the three months ended June 30, 2020 as compared to the three
months ended June 30, 2019 . The decrease was largely driven by lower revenue
from our syndicated digital products due in part to the COVID-19 pandemic. While
retention of syndicated digital enterprise customers remained high, revenue from
our syndicated digital products represented 48% and 50% of our Ratings and
Planning revenue in the second quarter of 2020 and 2019, respectively. TV
revenues were higher due in part to our new partnership with LiveRamp,
additional deliveries of addressable TV solutions, and the impact of new Local
TV business entered into in 2019. Cross-platform revenues were lower due to
fewer customer deliveries.
Analytics and Optimization revenue decreased by $0.4 million in the three months
ended June 30, 2020 as compared to the three months ended June 30, 2019 . The
decrease was primarily due to a decline in activation usage and fewer deliveries
of lift and survey products, due in part to the COVID-19 pandemic, during the
second quarter of 2020. The decline was partially offset by approximately $1.0
million in revenue from a one-time recovery of revenue-sharing fees pertaining
to one of our lift products.
Movies Reporting and Analytics revenue decreased by $2.8 million in the three
months ended June 30, 2020 as compared to the three months ended June 30, 2019 .
Revenue was impacted by some smaller customers under short-term contracts
pausing service in connection with theater closures. We expect theater closures
to continue affecting movies revenue for the foreseeable future. During the
quarter ended June 30, 2020 , we signed or renewed contracts with eight
significant customers, including three major domestic studios and one
international studio. However, the uncertainty around theater re-openings
delayed the renewals of several customers.
Revenues for these three solution groups for the six months ended June 30, 2020
and 2019 were as follows:
Six Months Ended June 30,
(In thousands) 2020 % of Revenue 2019 % of Revenue $ Variance % Variance
Ratings and Planning (1) $ 127,300 71.5 % $ 139,499 70.0 % $ (12,199) (8.7) %
Analytics and Optimization (1) 32,395 18.2 % 38,751 19.5 % (6,356) (16.4) %
Movies Reporting and Analytics 18,399 10.3 % 20,932 10.5 % (2,533) (12.1) %
Total revenues $ 178,094 100.0 % $ 199,182 100.0 % $ (21,088) (10.6) %
(1) In the second quarter of 2020, we began classifying revenue from certain new
and extended custom agreements for services that utilize our syndicated data
set, previously classified under Analytics and Optimization, as Ratings and
Planning. The impact was not material to either solution group.
Revenues decreased by $21.1 million , or 10.6%, for the six months ended June 30,
2020 as compared to the six months ended June 30, 2019 .
Ratings and Planning revenue decreased by $12.2 million in the six months ended
June 30, 2020 as compared to the six months ended June 30, 2019 . The decrease
was largely driven by lower revenue from our syndicated digital products due in
part to the COVID-19 pandemic. While retention of syndicated digital enterprise
customers remained high, revenue from our syndicated digital products
represented 49% and 51% of our Ratings and Planning revenue for the six months
ended June 30, 2020 and 2019, respectively. TV revenues were lower as a result
of the effects of consolidation of certain customers. The decrease was partially
offset by increases from our new partnership with LiveRamp, additional
deliveries of addressable TV solutions, and the impact of new Local TV business
entered into in 2019. Cross-platform revenues were lower due to fewer customer
deliveries.
Analytics and Optimization revenue decreased by $6.4 million in the six months
ended June 30, 2020 as compared to the six months ended June 30, 2019 , due to
lower sales and deliveries across all products in this solution group, due in
part to the COVID-19 pandemic, in the first six months of 2020. These declines
were partially offset by approximately $1.0 million in revenue from a one-time
recovery of revenue-sharing fees pertaining to one of our lift products.
Movies Reporting and Analytics revenue decreased by $2.5 million in the six
months ended June 30, 2020 as compared to the six months ended June 30, 2019 .
Revenue was impacted by some smaller customers under short-term contracts
pausing service in connection with theater closures. We expect theater closures
to continue affecting movies revenue for the foreseeable future. During the
quarter ended June 30, 2020 , we signed or renewed contracts with eight
significant customers, including three major domestic studios and one
international studio. However, the uncertainty around theater re-openings
delayed the renewals of several customers.
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Cost of Revenues
Cost of revenues consists primarily of expenses related to producing our
products, operating our network infrastructure, the recruitment, maintenance and
support of our consumer panels and amortization of capitalized fulfillment
costs. Expenses associated with these areas include employee costs including
salaries, benefits, stock-based compensation and other related personnel costs
of network operations, survey operations, custom analytics and technical
support, all of which are expensed as they are incurred. Cost of revenues also
includes costs to obtain multichannel video programming distributor ("MVPD")
data sets and panel, census based and other data sets used in our products as
well as operational costs associated with our data centers, including
depreciation expense associated with computer equipment and internally developed
software that supports our panels and systems. Additionally, cost of revenues
includes allocated overhead, lease expense and other facilities-related costs.
Cost of revenues for the three months ended June 30, 2020 and 2019 were as
follows:
Three Months Ended June 30,
(In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change
Data costs $ 15,459 17.5 % $ 16,737 17.3 % $ (1,278) (7.6) %
Employee costs 9,862 11.1 % 14,137 14.6 % (4,275) (30.2) %
Systems and bandwidth costs 6,034 6.8 % 5,495 5.7 % 539 9.8 %
Panel costs 4,832 5.5 % 4,884 5.0 % (52) (1.1) %
Lease expense and depreciation 4,187 4.7 % 3,853 4.0 % 334 8.7 %
Sample and survey costs 1,421 1.6 % 1,489 1.5 % (68) (4.6) %
Technology 1,416 1.6 % 1,444 1.5 % (28) (1.9) %
Professional fees 747 0.8 % 1,920 2.0 % (1,173) (61.1) %
Royalties and resellers 382 0.4 % 802 0.8 % (420) (52.4) %
Other 609 0.7 % 1,233 1.3 % (624) (50.6) %
Total cost of revenues $ 44,949 50.8 % $ 51,994 53.7 % $ (7,045) (13.5) %
Cost of revenues decreased $7.0 million , or 13.5%, for the three months ended
June 30, 2020 as compared to the three months ended June 30, 2019 . Employee
costs decreased $4.3 million primarily due to a reduction in headcount. Data
costs decreased by $1.3 million primarily due to reclassification of costs to
systems and bandwidth to better reflect the nature of services provided.
Professional fees decreased $1.2 million primarily due to a decrease in
consulting services.
Cost of revenues for the six months ended June 30, 2020 and 2019 were as
follows:
Six Months Ended June 30,
(In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change
Data costs $ 30,726 17.3 % $ 32,798 16.5 % $ (2,072) (6.3) %
Employee costs 20,142 11.3 % 29,102 14.6 % (8,960) (30.8) %
Systems and bandwidth costs 11,792 6.6 % 10,776 5.4 % 1,016 9.4 %
Panel costs 9,948 5.6 % 10,322 5.2 % (374) (3.6) %
Lease expense and depreciation 8,134 4.6 % 7,264 3.6 % 870 12.0 %
Technology 2,863 1.6 % 2,916 1.5 % (53) (1.8) %
Sample and survey costs 2,677 1.5 % 3,938 2.0 % (1,261) (32.0) %
Professional fees 1,842 1.0 % 4,252 2.1 % (2,410) (56.7) %
Royalties and resellers 1,369 0.8 % 1,708 0.9 % (339) (19.8) %
Other 1,254 0.7 % 2,325 1.2 % (1,071) (46.1) %
Total cost of revenues $ 90,747 51.0 % $ 105,401 52.9 % $ (14,654) (13.9) %
Cost of revenues decreased $14.7 million , or 13.9%, for the six months ended
June 30, 2020 as compared to the six months ended June 30, 2019 . Employee costs
decreased $9.0 million primarily due to a reduction in headcount and a decrease
in stock-based compensation expense. Professional fees decreased $2.4 million
primarily due to a decrease in consulting services. Data costs decreased $2.1
million primarily due reclassification of costs to systems and bandwidth to
better reflect the nature of the services provided. Sample and survey costs
decreased $1.3 million due to lower sales and deliveries of digital custom
marketing solutions.
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Selling and Marketing Selling and marketing expenses consist primarily of employee costs, including salaries, benefits, commissions, stock-based compensation and other related costs for personnel associated with sales and marketing activities. It also includes costs related to online and offline advertising, industry conferences, promotional materials, public relations, other sales and marketing programs and allocated overhead, which is comprised of lease expense and other facilities-related costs, and depreciation expense generated by general purpose equipment and software. Selling and marketing expenses for the three months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 13,322 15.0 %$ 18,591 19.2 %$ (5,269) (28.3) % Lease expense and depreciation 1,283 1.4 % 1,599 1.7 % (316) (19.8) % Professional fees 557 0.6 % 754 0.8 % (197) (26.1) % Travel - - % 880 0.9 % (880) (100.0) % Other 845 1.0 % 1,505 1.6 % (660) (43.9) % Total selling and marketing (31.4) % expenses$ 16,007 18.1 %$ 23,329 24.1 %$ (7,322) Selling and marketing expenses decreased by$7.3 million , or 31.4%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 , largely attributable to a decrease in employee costs as a result of lower headcount, a decrease in sales commissions, and lower travel costs resulting from the COVID-19 pandemic. Selling and marketing expenses for the six months endedJune 30, 2020 and 2019 were as follows: Six Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 28,482 16.0 %$ 38,954 19.6 %$ (10,472) (26.9) % Lease expense and depreciation 2,670 1.5 % 3,205 1.6 % (535) (16.7) % Professional fees 1,263 0.7 % 1,460 0.7 % (197) (13.5) % Travel 622 0.3 % 1,704 0.9 % (1,082) (63.5) % Other 2,183 1.2 % 2,846 1.4 % (663) (23.3) % Total selling and marketing (26.9) % expenses$ 35,220 19.8 %$ 48,169 24.2 %$ (12,949) Selling and marketing expenses decreased by$12.9 million , or 26.9%, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Employee costs decreased$10.5 million as a result of lower headcount, a decrease in sales commissions, and a decrease in stock-based compensation expense. Travel costs decreased$1.1 million primarily due to the reduction in travel resulting from the COVID-19 pandemic. Research and Development Research and development expenses include product development costs, consisting primarily of employee costs including salaries, benefits, stock-based compensation and other related costs for personnel associated with research and development activities, third-party expenses to develop new products and third-party data costs and allocated overhead, which is comprised of lease expense and other facilities-related costs, and depreciation expense related to general purpose equipment and software. Research and development expenses for the three months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 7,323 8.3 %$ 13,018 13.4 %$ (5,695) (43.7) % Technology 1,072 1.2 % 1,040 1.1 % 32 3.1 % Lease expense and depreciation 1,037 1.2 % 1,498 1.5 % (461) (30.8) % Professional fees 232 0.3 % 840 0.9 % (608) (72.4) % Other 101 0.1 % 487 0.5 % (386) (79.3) % Total research and development (42.2) % expenses$ 9,765 11.0 %$ 16,883 17.4 %$ (7,118) Research and development expenses decreased by$7.1 million , or 42.2%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Employee costs decreased$5.7 million as a result of lower headcount and a decrease in stock-based compensation expense. Professional fees decreased$0.6 million primarily due to a decrease in consulting services. 25
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Research and development expenses for the six months endedJune 30, 2020 and 2019 were as follows: Six Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 14,597 8.2 %$ 26,788 13.4 %$ (12,191) (45.5) % Lease expense and depreciation 2,226 1.2 % 3,066 1.5 % (840) (27.4) % Technology 2,149 1.2 % 2,119 1.1 % 30 1.4 % Professional fees 621 0.3 % 2,209 1.1 % (1,588) (71.9) % Other 308 0.2 % 917 0.5 % (609) (66.4) % Total research and development (43.3) % expenses$ 19,901 11.2 %$ 35,099 17.6 %$ (15,198) Research and development expenses decreased by$15.2 million , or 43.3%, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Employee costs decreased$12.2 million as a result of lower headcount and a decrease in stock-based compensation expense. Professional fees decreased$1.6 million primarily due to a decrease in consulting services. General and Administrative General and administrative expenses consist primarily of employee costs including salaries, benefits, stock-based compensation and other related costs, and related expenses for executive management, finance, human capital, legal and other administrative functions, as well as professional fees, overhead, including allocated overhead, which is comprised of lease expense and other facilities-related costs, depreciation expense related to general purpose equipment and software, and expenses incurred for other general corporate purposes. General and administrative expenses for the three months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 6,968 7.9 %$ 8,548 8.8 %$ (1,580) (18.5) % Professional fees 2,754 3.1 % 4,770 4.9 % (2,016) (42.3) % Bad debt expense 1,098 1.2 % 118 0.1 % 980 NM (1) Technology 553 0.6 % 268 0.3 % 285 106.3 % Lease expense and depreciation 526 0.6 % 651 0.7 % (125) (19.2) % Other 1,842 2.1 % 2,577 2.7 % (735) (28.5) % Total general and administrative (18.8) % expenses$ 13,741 15.5 %$ 16,932 17.5 %$ (3,191) (1) Not meaningful (NM). General and administrative expenses decreased by$3.2 million , or 18.8%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Professional fees decreased$2.0 million primarily due to fees incurred in the three months endedJune 30, 2019 related to the issuance of Common Stock and warrants inJune 2019 and reduced audit fees in 2020 as compared to 2019. Employee costs decreased$1.6 million primarily as a result of lower headcount and stock-based compensation in the second quarter of 2020 as compared with 2019. These decreases were offset by an increase in bad debt expense of$1.0 million primarily due to increased reserves related to customers more impacted by the current economic environment. General and administrative expenses for the six months endedJune 30, 2020 and 2019 were as follows: Six Months Ended June 30, (In thousands) 2020 % of Revenue 2019 % of Revenue $ Change % Change Employee costs$ 13,532 7.6 %$ 19,809 9.9 %$ (6,277) (31.7) % Professional fees 7,365 4.1 % 9,559 4.8 % (2,194) (23.0) % Bad debt expense 1,590 0.9 % - - % 1,590 NM (1) Technology 1,116 0.6 % 412 0.2 % 704 170.9 % Lease expense and depreciation 1,112 0.6 % 1,311 0.7 % (199) (15.2) % Transition services agreement - - % 667 0.3 % (667) (100.0) % Other 4,569 2.6 % 4,719 2.4 % (150) (3.2) % Total general and administrative (19.7) % expenses$ 29,284 16.4 %$ 36,477 18.3 %$ (7,193) (1) Not meaningful (NM). General and administrative expenses decreased by$7.2 million , or 19.7%, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . A decrease of$6.3 million in employee costs in 2020 compared to 2019 was primarily due to$3.3 million in severance costs for executives who exited inMarch 2019 , as well as lower headcount and a decrease in stock-based compensation expense. Professional fees decreased$2.2 million primarily due to fees related to the issuance of Common Stock and warrants inJune 2019 and reduced audit fees in 2020 as compared to 2019. These decreases were offset by an increase in bad debt expense of$1.6 million primarily due to increased reserves related to customers impacted by the current economic environment. 26
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Investigation and Audit Related We did not incur any expenses related to the previously disclosed Audit Committee investigation and prior-year audits during the three and six months endedJune 30, 2020 . The investigation and audit related expenses for the three and six months endedJune 30, 2019 related to ongoing fees for the previously disclosedSEC investigation which was resolved inSeptember 2019 . We do not expect to incur additional expenses for this matter. Impairment ofGoodwill and Intangible Asset In the second quarter of 2019, as a result of a sustained decline in our stock price and market capitalization, changes in management, and lower revenue, among other factors, we performed an interim impairment review of our goodwill and long-lived assets. Our reporting unit did not pass the goodwill impairment test, and as a result we recorded a$224.3 million impairment charge in the second quarter of 2019. Also in the second quarter of 2019, changes in our projected revenue in certain non-U.S. geographic markets due to the changing international competitive landscape, as well as significant reductions in international staffing during the quarter, resulted in a change in our long-term view of the viability of our strategic alliance intangible asset. Our assessment yielded that the benefit of the strategic alliance would not be realized, and as a result we recorded a$17.3 million impairment charge in the second quarter of 2019. There were no comparable charges in the three or six months endedJune 30, 2020 . Impairment of Right-of-use and Long-lived Assets In the first quarter of 2020, we recorded a$4.7 million impairment charge related to our facility lease right-of-use assets and associated leasehold improvements for certain properties currently on the market for sublease. The impairment charge was driven by changes in our projected undiscounted cash flows for certain properties, primarily as a result of changes in the real estate market related to the COVID-19 pandemic, that led to an increase in the estimated marketing time and a reduction of expected receipts. Interest Expense, Net Interest expense, net consists of interest income and interest expense. Interest income primarily consists of interest earned from our cash and cash equivalent balances. Interest expense relates to interest on our senior secured convertible notes ("Notes"), secured term note (the "Secured Term Note") and our finance leases. During the three months endedJune 30, 2020 and 2019, we incurred interest expense, net of$8.9 million and$8.2 million , respectively, and$17.7 million and$15.0 million during the six months endedJune 30, 2020 and 2019, respectively. The increase in interest expense, net for the three months endedJune 30, 2020 compared with the three months endedJune 30, 2019 was primarily due to the issuance of the Secured Term Note inDecember 2019 . The increase in interest expense, net for the six months endedJune 30, 2020 compared with the six months endedJune 30, 2019 was primarily driven by the interest rate reset feature on the Notes, which reset the interest rate from 6.0% to 12.0% inJanuary 2019 , and the issuance of the Secured Term Note inDecember 2019 . Other Income (Expense), Net Other income (expense), net represents income and expenses incurred that are generally not part of our regular operations. The following is a summary of other income (expense), net for the three and six months endedJune 30, 2020 and 2019: Six Months Ended June Three Months Ended June 30, 30, (In thousands) 2020 2019 2020 2019 Change in fair value of financing derivatives$ 2,300 $ (3,000) $ 4,687 $ 1,100 Change in fair value of warrants liability (758) - 3,893 - Change in fair value of investment in equity securities - (304) - (2,016) Other (65) 223 91 804 Total other income (expense), net$ 1,477 $
(3,081)
Other income, net for the three and six months endedJune 30, 2020 was driven primarily by the gain from the changes in fair value of our financing derivatives offset by the change in fair value of our warrants liability. Other expense, net for the three and six months endedJune 30, 2019 primarily relates to gains and losses from the changes in fair value of our financing derivatives, and the loss due to the decline in the fair value of our investment in equity securities, which were disposed in 2019. 27
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Loss from Foreign Currency Transactions Our foreign currency transactions are recorded as a result of fluctuations in the exchange rate between the transactional currency and the functional currency of foreign subsidiary transactions. Our international currency exposures that relate to the translation toU.S. Dollars are in a net liability position and our international currency exposures that relate to the translation fromU.S. Dollars are in a net asset position. TheU.S. Dollar strengthened during the first quarter of 2020 which was offset by weakness of theU.S. Dollar in the second quarter of 2020. This resulted in losses for our positions when translated toU.S. Dollars during the second quarter of 2020 and minimal losses for the first half of 2020. For the three and six months endedJune 30, 2020 , the loss from foreign currency transactions was$0.9 million and$0.1 million , respectively. The losses were primarily driven by fluctuations in the Chilean Peso against theU.S. Dollar and Euro. For the three and six months endedJune 30, 2019 , the gain from foreign currency transactions was immaterial. Benefit for Income Taxes A valuation allowance has been established against our netU.S. federal and state deferred tax assets, including net operating loss carryforwards. As a result, our income tax position is primarily related to foreign tax activity. During the three and six months endedJune 30, 2020 , we recorded an income tax benefit of$0.7 million and$1.1 million , respectively, resulting in an effective tax rate of (6.0)% and (4.4)%, respectively. During the three and six months endedJune 30, 2019 , we recorded an income tax benefit of$4.5 million and$3.3 million , respectively, resulting in an effective tax rate of (1.6)% and (1.1)%, respectively. These effective tax rates differ from theU.S. federal statutory rate primarily due to the effects of foreign tax rate differences,U.S. state legislative changes and changes in the valuation allowance against our domestic deferred tax assets. The COVID-19 pandemic has a global reach, and many countries are introducing measures that provide relief to taxpayers in a variety of ways. We are currently evaluating these measures, including the CARES Act inthe United States , but these did not have an impact on our income tax provision for the three and six months endedJune 30, 2020 . Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Footnote 2
,
Summary of Significant Accounting Policies.
Non-GAAP Financial Measures
To provide investors with additional information regarding our financial
results, and to comply with a covenant under our Notes (described below), we are
disclosing herein Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") and non-GAAP net loss, each of which are non-GAAP
financial measures used by our management to understand and evaluate our core
operating performance and trends. We believe that these non-GAAP financial
measures provide useful information to investors and others in understanding and
evaluating our operating results, as they permit our investors to view our core
business performance using the same metrics that management uses to evaluate our
performance.
EBITDA is defined as GAAP net income (loss) plus or minus interest, taxes,
depreciation and amortization of intangible assets and finance leases. We define
Adjusted EBITDA as EBITDA plus or minus stock-based compensation expense as well
as other items and amounts that we view as not indicative of our core operating
performance, specifically: charges for matters relating to the prior-year Audit
Committee investigation, such as litigation and investigation-related costs,
costs associated with tax projects, audits, consulting and other professional
fees; other legal proceedings specified in the Notes; settlement of certain
litigation; restructuring expense; transaction costs related to the issuance of
equity securities; non-cash impairment charges; and non-cash changes in the fair
value of financing derivatives, warrants liability and investments in equity
securities.
We define non-GAAP net loss as GAAP net income (loss) plus or minus stock-based
compensation expense and amortization of intangible assets, as well as other
items and amounts that we view as not indicative of our core operating
performance, specifically: charges for matters relating to the prior-year Audit
Committee investigation, such as litigation and investigation-related costs,
costs associated with tax projects, audits, consulting and other professional
fees; other legal proceedings specified in the Notes; settlement of certain
litigation; restructuring expense; transaction costs related to the issuance of
equity securities; non-cash impairment charges; and non-cash changes in the fair
value of financing derivatives, warrants liability and investments in equity
securities.
Our use of these non-GAAP financial measures has limitations as an analytical
tool, and investors should not consider these measures in isolation or as a
substitute for analysis of our results as reported under GAAP. The limitations
of such non-GAAP measures include the following:
•Adjusted EBITDA does not reflect tax or interest payments that represent a
reduction in cash available to us (or, in the case of interest paid in Common
Stock, that represent additional dilution to our existing stockholders);
•Depreciation and amortization are non-cash charges and the assets being
depreciated may have to be replaced in the future. Adjusted EBITDA does not
reflect cash capital expenditure requirements for such replacements or for new
capital expenditure requirements;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
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•Adjusted EBITDA and non-GAAP net loss do not reflect cash payments relating to
fees incurred in connection with issuance of equity securities, restructuring,
litigation and the prior-year Audit Committee investigation, such as litigation
and investigation-related costs, costs associated with tax projects, audits and
other professional, consulting or other fees incurred in connection with our
prior-year audits and certain legal proceedings, all of which have represented a
reduction in cash available to us;
•Adjusted EBITDA and non-GAAP net loss do not consider the impact of stock-based
compensation and similar arrangements that represent dilution to our existing
stockholders;
•Adjusted EBITDA and non-GAAP net loss do not consider impairment of goodwill,
long-lived assets and right-of-use assets, which represents a decline in the
value of our assets;
•Adjusted EBITDA and non-GAAP net loss do not consider possible cash gains or
losses related to our financing derivatives, warrants liability or investment in
equity securities; and
•Other companies, including companies in our industry, may calculate any of
these non-GAAP financial measures differently, which reduces their usefulness as
comparative measures.
Because of these and other limitations, you should consider Adjusted EBITDA and
non-GAAP net loss alongside GAAP-based financial performance measures, including
GAAP revenue and various cash flow metrics, net income (loss) and our other GAAP
financial results. Management addresses the inherent limitations associated with
using non-GAAP financial measures through disclosure of such limitations,
presentation of our financial statements in accordance with GAAP and a
reconciliation of Adjusted EBITDA and non-GAAP net loss to the most directly
comparable GAAP measure, net income (loss).
Under our Notes, we are required to disclose Consolidated EBITDA, a non-GAAP
financial measure, on a quarterly basis. Consolidated EBITDA, as defined for
purposes of the Notes, was the same as Adjusted EBITDA as presented below.
The following table presents a reconciliation of net loss (GAAP) to Adjusted
EBITDA for each of the periods identified:
Six Months Ended June
Three Months Ended June 30, 30,
(In thousands) 2020 2019 2020 2019
Net loss (GAAP) $ (10,401) $ (279,533) $ (23,585) $ (307,047)
Interest expense, net 8,856 8,242 17,702 15,001
Amortization of intangible assets 6,846 8,076 13,764 16,181
Depreciation 3,404 3,005 6,788 6,111
Amortization expense of finance leases 394 787 784 1,361
Income tax benefit (664) (4,463) (1,079) (3,292)
EBITDA 8,435 (263,886) 14,374 (271,685)
Adjustments:
Stock-based compensation expense 2,346 4,304 5,004 11,257
Investigation and audit related - 2,354 - 3,196
Settlement of certain litigation, net - 5,000 - 5,000
Restructuring - 2,949 - 2,879
Impairment of goodwill - 224,272 - 224,272
Impairment of intangible asset - 17,308 - 17,308
Private placement issuance cost - 1,154 - 1,154
Impairment of right-of-use and long-lived
assets - - 4,671 -
Other (income) expense, net (1) (1,542) 3,304 (8,434) 916
Adjusted EBITDA $ 9,239 $ (3,241) $ 15,615 $ (5,703)
(1) Adjustments to other (income) expense, net reflect non-cash changes in the
fair value of financing derivatives, warrants liability and equity securities
investment included in other income (expense), net and certain legal expenses
defined by the Notes and classified as general and administrative expenses on
our Condensed Consolidated Statements of Operations and Comprehensive Loss. We
sold our investment in equity securities in 2019.
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The following table presents a reconciliation of net loss (GAAP) to non-GAAP net loss for each of the periods identified:
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