CASPER SLEEP INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and other factors set forth in other parts of this Quarterly Report on Form 10-Q. Overview As a pioneer of the evolving business of sleep, or what we call the Sleep Economy, we bring the benefits of cutting-edge sleep technology, data, and insights directly to consumers. We focus on building direct relationships, providing a human experience, and making shopping for sleep joyful. We meet consumers wherever they are, online and in person, providing a fun and engaging experience, while reducing the hassles associated with traditional purchases. Our products seek to address real life sleep challenges by optimizing for a variety of factors that impact sleep, like; the microclimate under the covers by regulating humidity and temperature; comfort and support, through the use of high-quality materials and ergonomic designs; and the ambience and sleep environment, through smart devices that provide sleep-conducive lighting. We also work to address "the little things" in our products, offering innovative features to make the sleep experience better and less stressful.Casper Labs innovates throughout the Sleep Economy. Based inSan Francisco ,Casper Labs has over 25,000 square feet of fabrication and test space, featuring state-of-the-art capabilities to test against a wide range of factors affecting sleep quality.Casper Labs controls every aspect of our product offerings, including design and construction, material performance requirements, manufacturing protocols, supplier selection, packaging specifications, and quality assurance. We believe that no other company in the category has our level of product development talent, resources, or expertise. We distribute our products through a flexible, multi-channel approach combining our direct-to-consumer channel, including our e-commerce platform and retail stores, with our retail partnerships. Our presence in physical retail stores has proven complementary to our e-commerce channel, as we believe interaction with multiple channels has created a synergistic "network effect" that increases system-wide sales as a whole. We believe our multi-channel expansion creates synergies and that these channels, to date, have proven to be complementary, not cannibalistic. Please see "Factors Affecting our Financial Condition and Results of Operations" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed onMarch 19, 2020 , for a discussion of the factors that generally are expected to impact our business. Impact of COVID-19 PandemicCasper is closely monitoring how the spread of the COVID-19 pandemic caused by the novel coronavirus is affecting its employees, customers and business operations. We have developed and implemented preparedness plans to help protect the safety of our employees and customers, while safely continuing business operations. 29 -------------------------------------------------------------------------------- In order to protect the health and safety of our employees, particularly given the severity of the pandemic inNew York andCalifornia ,, we have continued to limit access to our corporate offices and our corporate workforce has spent and continues to spend a significant amount of time working from home during this period. Access to our offices will remain limited until we are able to safely and responsibly re-open them on a broader basis in accordance with governmental and public health guidance, as well as health and safety policies tailored to our operations. Beginning inmid-March 2020 , we temporarily closed our retail stores inNorth America in response to government and public health guidance and implemented an employee furlough program, which was initially applicable to almost all of our retail employees. As regulatory restrictions on retail businesses have lifted or been modified, beginning inmid-May 2020 , we have been reopening our retail store operations inNorth America in accordance with government and public health guidance. As of the date of this filing, 57 of our stores have reopened. In each instance, available services vary based on the regulatory requirements and public health guidance applicable to that location, including walk-in shopping, private in-store appointments, curbside pick-up services, and virtual appointments. The health and safety of our customers and employees remain our top priority, and we have implemented and continuously update a suite of COVID-19-related operating policies and protocols as part of our retail operations. We continuously monitor developments related to COVID-19 in locations where we have retail operations, and have developed procedures to enable us to responsibly and efficiently open or close our stores and adjust our service offerings as needed in response to changing COVID-19 conditions and applicable guidance from government and public health officials. During the three months endedJune 30, 2020 , sales were adversely impacted in our retail stores due to temporary closures, limitations in service offerings and significant reductions in retail foot traffic as a result of restrictions on retail businesses and shifting consumer preferences in response to COVID-19. We have also worked with our manufacturing, logistics and other supply chain partners to build communication and monitoring processes for key aspects of our product and delivery supply chain. To date, certain of our suppliers and logistics providers have experienced supply constraints or labor shortages due to the COVID-19 outbreak. As a result, during the three months endedJune 30, 2020 , we have been impacted by industry-wide supply chain constraints, which have increased delivery times for certain of our products through our e-commerce platform and impacted order fulfillment for certain of our retail partners. We are actively qualifying and on-boarding new suppliers and expect these additional capabilities to significantly mitigate any inventory constraints within the upcoming quarter. As a result, the COVID-19 pandemic has impacted, and we expect will continue to impact, our revenues, results of operations and financial condition. In response, we have taken proactive measures focused on optimizing our business model and cash management. As part of these measures, we ceased or reduced rent payments to a majority of our retail store landlords during the closure period for each store. We have been actively negotiating with our landlords on rent deferrals and abatements related to this closure period and have resumed rent payments for the majority of our reopened locations. Although we expect to favorably resolve these negotiations with our landlords, there can be no assurances in that regard, and all or some of these landlords could claim that our failure to pay rent is a default under our leases. Further, beginning inmid-March 2020 , we reduced our corporate personnel by approximately 21%, and inApril 2020 , we announced that we had initiated the wind-down of our European operations. We are also carefully monitoring shifting consumer behavior from physical retail stores to our online platform. Beginning in lateMarch 2020 , we have observed continued strength in our e-commerce sales due in part to changing consumer behavior during the COVID-19 pandemic, an acceleration of the shift to online shopping by consumers, and a multi-year high in e-commerce marketing efficiency due to recent declines in advertising costs. It remains uncertain, however, whether these trends will continue as the pandemic and the responses to it evolve. In addition, while the stores of certain of our retail partners were and have remained temporarily closed due to the COVID-19 pandemic, our largest partners remained open for business both in-store and online, and we have not experienced a material negative impact on retail partnership sales. Further, we have not experienced any material issues to date with respect to our accounts receivables from our retail partners, nor have we needed to materially 30 --------------------------------------------------------------------------------
increase our allowances for accounts receivable balances. We are, however, continuing to work closely with our retail partners to monitor the situation.
At this time, however, there is significant uncertainty relating to the
trajectory of the COVID-19 pandemic and impact of related responses. We will
continue to closely monitor the impact of COVID-19 on our business, including
how it is impacting our customers, employees, supply chain, and retail partners.
The future impact that COVID-19 will have on our financial position and
operating results, however, may be affected by numerous uncertainties, including
the duration of the outbreak, governmental and public health actions, impacts on
our supply chain, the effect on customer demand, and changes to our operations.
See "Risk Factors-The COVID-19 pandemic has affected, and could continue to
adversely affect, our business, financial condition and results of operations"
in Part II, Item 1.A. of this Quarterly Report on Form 10-Q.
Components of our Results of Operations
Revenue
Revenue is comprised of global sales through our direct-to-consumer channels and
our retail partnerships. Revenue reflects the impact of product returns as well
as discounts for certain sales programs and promotions.
Revenue comprises the consideration received or receivable for the sale of goods
and services in the ordinary course of our activities net of returns and
promotions.
Promotions are occasionally offered, primarily in the form of discounts, and are
recorded as a reduction of gross revenue at the date of revenue recognition. We
typically accept sales returns during a 30- or 100-night trial period, depending
on the product, with our mattresses having a 100-night trial period. A sales
return accrual is estimated based on historical return rates and is then
adjusted for any current trends as appropriate. Returns are netted against the
sales allowance reserve for the period. Sales are recognized as deferred revenue
at the point of sale and are recognized as revenue upon the delivery to the
consumer. Revenue through our direct-to-consumer channels is recognized upon
in-store or home delivery to the consumer, as applicable, and retail partnership
revenue is recognized upon the transfer of control, on a per contract basis.
Cost of Goods Sold
Cost of goods sold consists of costs of purchased merchandise, including
freight, duty, and non-refundable taxes incurred in delivering goods to our
consumers and distribution centers, packaging and component costs, warehousing
and fulfillment costs, damages, and excess and obsolete inventory write-downs.
Gross Profit and Gross Margin
We calculate gross profit as revenue less cost of goods sold. We calculate gross
margin as gross profit divided by net revenue for a specific period of time.
Gross margin in our direct-to-consumer channel, including company-owned retail
stores and e-commerce sales, is generally higher than that on sales to our
retail partnerships.
Our gross margin may in the future fluctuate from period to period based on a
number of factors, including cost of purchased merchandise and components, the
mix of products and services we sell and the mix of channels through which we
sell our products. We have historically experienced that gross margin, by
product, tends to increase over time as we realize cost efficiencies as a result
of economies of scale, sourcing strategies and product re-engineering programs.
Operating Expenses
Operating expenses consist of sales and marketing, general and administrative
expenses and restructuring expenses.
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Sales and Marketing Expenses. Sales and marketing expenses represent the
largest component of our operating expenses and consist primarily of advertising
and marketing costs associated with our products and services as well as
consulting and contractor expenses. While we expect a decrease in sales and
marketing expenses in the short-term due to the impact of the COVID-19 pandemic,
on a long-term basis, we expect our sales and marketing expenses to increase in
absolute dollars as we continue to promote our offerings. At the same time, on a
long-term basis, we also anticipate that these expenses will decrease as a
percentage of our revenue over time, as we improve marketing efficiencies and
grow channels that require lower incremental sales and marketing support.
General and Administrative Expenses. General and administrative expenses
consist of personnel-related costs for our retail operations, finance, legal,
human resources, and IT functions, as well as litigation expenses, credit card
fees, professional services, rent and operating costs associated with our retail
stores, depreciation and amortization, and other administrative expenses.
General and administrative expenses also include research and development
expenses consisting primarily of personnel related expenses, consulting and
contractor expenses, tooling, test equipment and prototype materials. While we
expect a decrease in general and administrative expenses in the short-term due
to the impact of the COVID-19 pandemic, on a long-term basis, we expect our
general and administrative expenses to increase in absolute dollars due to the
growth of our business and related infrastructure as well as legal, accounting,
insurance, investor relations and other compliance costs associated with
becoming a public company. On a long-term basis, we also expect our general and
administrative expenses to decrease as a percentage of our sales revenue over
time, as we scale our business.
Restructuring Expenses. Restructuring expenses relate to costs associated with
strategic shifts in our business structure including exiting certain lines of
business and geographies. Such costs include severance and other employee
separation costs, contract termination expenses and asset impairment.
Income Tax Expense
We account for income taxes in accordance with ASC Topic 740, Income Taxes-Under
this method, deferred tax assets and liabilities are determined based on the
temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. We classify all deferred income tax assets
and liabilities as noncurrent on our balance sheet. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized within the
provision for (benefit from) income taxes on the consolidated statement of
operations and comprehensive loss in the period that includes the enactment
date.
We reduce deferred tax assets, if necessary, by a valuation allowance if it is
more likely than not that we will not realize some or all of the deferred tax
assets. In making such a determination, we consider all available positive and
negative evidence, including taxable income in prior carryback years (if
carryback is permitted under the relevant tax law), the timing of the reversal
of existing taxable temporary differences, tax-planning strategies and projected
future taxable income. Please refer to Note 10 to our unaudited consolidated
financial statements appearing elsewhere in this Quarterly Report on Form 10-Q
for additional information on the composition of these valuation allowances and
for information on the impact of U.S. tax reform legislation. We recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by taxing authorities,
based on the technical merits of the position.
We recognize interest and penalties related to uncertain tax positions within
the provision for (benefit from) income taxes on our consolidated statement of
operations and comprehensive loss.
Seasonality and Quarterly Comparability
Our revenue includes a seasonal component, with the highest sales activity
normally occurring during the second and third quarters of the year due to
back-to-school, home moves and other seasonal factors, along with seasonal
promotions we offer during these quarters. The timing of on-boarding new retail
partnerships, which typically launch with large inventory buy-ins, and the
timing of launching new products may also impact comparability between periods.
These factors can also impact our working capital and/or inventory balances in a
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given period. Further, the full extent to which the COVID-19 pandemic may impact
our seasonality and quarterly comparability will depend on numerous evolving
factors that we are not be able to accurately predict due to the uncertainty
related to the pandemic as of the date of this Quarterly Report on Form 10-Q.
Results of Operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 The following table sets forth information comparing the components of operations and comprehensive loss for the periods indicated.
Three months ended June 30 Period over Period Change Three months ended June 30
2020 2019 Dollar Percentage 2020 2019
(as a % of
sales revenue
(in thousands, except percentages) net)
Revenue $ 110,196 $ 95,227 $ 14,969 15.7 % 100.0 % 100.0 %
Cost of goods sold 53,131 48,535 4,596 9.5 % 48.2 % 51.0 %
Gross profit 57,065 46,692 10,373 22.2 % 51.8 % 49.0 %
Operating expenses
Sales and marketing expenses 33,181 39,838 (6,657) (16.7) % 30.1 % 41.8 %
General and administrative expense 42,017 33,250 8,767 26.4 % 38.1 % 34.9 %
Restructuring expenses 4,129 - 4,129 100.0 % 3.7 % - %
Total operating expenses 79,327 73,088 6,239 8.5 % 72.0 % 76.8 %
Loss from operations (22,262) (26,396) 4,134 (15.7) % (20.2) % (27.7) %
Other (income) expense:
Net interest expense 2,152 285 1,867 655.1 % 2.0 % 0.3 %
Other (income) expense, net (219) 279 (498) (178.5) % (0.2) % 0.3 %
Total other expenses, net 1,933 564 1,369 242.7 % 1.8 % 0.6 %
Loss before income taxes (24,195) (26,960) 2,765 (10.3) % (22.0) % (28.3) %
Income tax (benefit) expense 10 (33) 43 (129.3) % - % - %
Net loss (24,205) (26,927) 2,722 (10.1) % (22.0) % (28.3) %
Other comprehensive income (loss)
Currency translation adjustment (737) (103) (634) 615.5 % (0.7) % (0.1) %
Total comprehensive loss $ (24,942) $ (27,030) $ 2,088 (7.7) % (22.6) % (28.4) %
Revenue
Revenue was $110.2 million for the three months ended June 30, 2020 , an increase
of $15.0 million , or 15.7%, compared to $95.2 million for the three months ended
June 30, 2019 . Revenue increased as a result of increased sales through our
direct-to-consumer and retail partnership channels and the introduction of new
products. Direct-to-consumer sales increased $3.9 million , or 5.0% compared to
the three months ended June 30, 2019 driven by the strength of our e-commerce
channel, which was partially offset by the loss of sales in our retail stores
due to the impact of COVID-19-related closures. The e-commerce channel benefited
from an acceleration of consumer home spending to online purchases during the
pandemic, as well as macro trends including a focus on comfort and wellness. We
temporarily closed our North American retail stores beginning on March 17, 2020
due to the COVID-19 outbreak. Beginning in mid-May 2020 , we have been reopening
our retail store operations in North America with various levels of service
offerings based on the applicable local government and public health guidance.
We ended the second quarter with a retail presence of 59 stores, an increase of
27 net new stores
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compared with our retail footprint in the second quarter of 2019. Although 57 of
our stores were open and operating as of the end of the second quarter, our
revenue from our retail stores was significantly below pre-COVID-19 levels due
to limited store operations. Despite certain of our retail partners' stores
being temporarily closed due to the COVID-19 pandemic, our largest partners have
remained open for business both in-stores and online. Sales to retail partners
increased $11.1 million , or 61.1% compared to the three months ended June 30,
2019 , driven by growth of sales activity with existing partners, the
introduction of 6 new partners compared to the same period in the prior year to
end the quarter with 18 partners, and the expansion of our product offerings.
Gross Profit and Cost of Goods Sold
Gross profit was $57.1 million for the three months ended June 30, 2020 , an
increase of $10.4 million , or 22.2%, compared to $46.7 million for the three
months ended June 30, 2019 . Cost of goods sold was $53.1 million for the three
months ended June 30, 2020 , an increase of $4.6 million , or 9.5%, compared to
$48.5 million for the three months ended June 30, 2019 . Gross margin for the
three months ended June 30, 2020 was 51.8% compared to 49.0% for the three
months ended June 30, 2019 . The increase in gross profit was primarily driven by
favorable product mix related to our new mattress line launched in March 2020 ,
as well as lower logistics costs due to a change in service provider.
Sales and Marketing Expense
Sales and marketing expenses were $33.2 million for the three months ended June
30, 2020 , a decrease of $6.7 million , or 16.7%, compared to $39.8 million for
the three months ended June 30, 2019 . Sales and marketing expenses decreased due
to reduced advertising spend resulting from lower online and offline media costs
and improved marketing efficiencies. Sales and marketing expenses as a
percentage of revenue was 30.1% for the three months ended June 30, 2020 ,
compared to 41.8% for the three months ended June 30, 2019 , due to a 15.7%
increase in revenue and the improved marketing efficiency.
General and Administrative Expenses
General and administrative expenses were $42.0 million for the three months
ended June 30, 2020 , an increase of $8.8 million , or 26.4%, compared to $33.3
million for the three months ended June 30, 2019 . General and administrative
expenses increased primarily due to the operating costs related to our expanded
retail presence of 27 net new stores compared to the second quarter of 2019, as
well as new expenses related to being a public company, such as the
implementation of new equity plans.. General and administrative expenses as a
percentage of revenue increased from 34.9% for the three months ended June 30,
2019 to 38.1% for the three months ended June 30, 2020 reflecting our increased
investment in retail store operations and expenses related to being a public
company.
Restructuring Expenses
Restructuring expenses were $4.1 million for the three months ended June 30,
2020 . There were no restructuring expenses recorded in the same period of the
prior year. Restructuring expenses relate to costs associated with strategic
shifts in our business structure including exiting certain lines of business and
geographies. Associated costs include severance and other employee separation
costs, contract termination expenses and asset impairment.
Total Other Expenses, Net
Total other expenses, net were $1.9 million for the three months ended June 30,
2020 , an increase of $1.4 million , or 242.7%, compared to $0.6 million for the
three months ended June 30, 2019 . The increase in total other expenses, net was
due to interest incurred on higher outstanding balances of our debt facilities.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
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Six months ended June 30 Period over Period Change Six months ended June 30
2020 2019 Dollar Percentage 2020 2019
(as a % of
sales revenue
(in thousands, except percentages) net)
Revenue $ 223,240 $ 184,664 $ 38,576 20.9 % 100.0 % 100.0 %
Cost of goods sold 113,211 94,400 18,811 19.9 % 50.7 % 51.1 %
Gross profit 110,029 90,264 19,765 21.9 % 49.3 % 48.9 %
Operating expenses
Sales and marketing expenses 70,655 69,443 1,212 1.7 % 31.6 % 37.6 %
General and administrative expense 89,004 64,134 24,870 38.8 % 39.9 % 34.7 %
Restructuring expenses 5,440 - 5,440 100.0 % 2.4 % - %
Total operating expenses 165,099 133,577 31,522 23.6 % 74.0 % 72.3 %
Loss from operations (55,070) (43,313) (11,757) 27.1 % (24.7) % (23.5) %
Other (income) expense:
Net interest expense 4,308 542 3,766 694.9 % 1.9 % 0.3 %
Other (income) expense, net (733) 554 (1,287) (232.2) % (0.3) % 0.3 %
Total other expenses, net 3,575 1,096 2,479 226.2 % 1.6 % 0.6 %
Loss before income taxes (58,645) (44,409) (14,236) 32.1 % (26.3) % (24.0) %
Income tax (benefit) expense 26 (33) 59 (179.6) % - % - %
Net loss (58,671) (44,376) (14,295) 32.2 % (26.3) % (24.0) %
Other comprehensive income (loss)
Currency translation adjustment (290) 95 (385) (405.3) % (0.1) % 0.1 %
Total comprehensive loss $ (58,961) $ (44,281) $ (14,680) 33.2 % (26.4) % (24.0) %
Revenue
Revenue was $223.2 million for the six months ended June 30, 2020 , an increase
of $38.6 million , or 20.9%, compared to $184.7 million for the six months ended
June 30, 2019 . Revenue increased as a result of higher sales through our
direct-to-consumer and retail partnership channels and the introduction of new
products. Direct-to-consumer sales increased $14.1 million , or 9.0% compared to
the six months ended June 30, 2019 due to strength in our e-commerce channel and
an expanded retail presence of 59 stores, a net increase of 27 stores compared
with our retail footprint in the second quarter of 2019. We temporarily closed
our North American retail stores beginning on March 17, 2020 due to the COVID-19
outbreak. Beginning in mid-May 2020 , we have been reopening our retail store
operations in North America with various levels of service offerings based on
the applicable local government and public health guidance. Although 57 of our
59 stores were open and operating as of the end of the second quarter, our
revenue from our retail stores was significantly below pre COVID-19 levels due
to limited store operations. Sales to retail partners increased $24.5 million ,
or 89.0% compared to the six months ended June 30, 2019 , driven by growth of
sales activity with existing partners, the introduction of 12 new partners
compared to the same period in the prior year to end the quarter with 18
partners, and the expansion of our product offerings.
Gross Profit and Cost of Goods Sold
Gross profit was $110.0 million for the six months ended June 30, 2020 , an
increase of $19.8 million , or 21.9%, compared to $90.3 million for the six
months ended June 30, 2019 . Cost of goods sold was $113.2 million for the six
months ended June 30, 2020 , an increase of $18.8 million , or 19.9%, compared to
$94.4 million for the
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six months ended June 30, 2019 . Gross margin for the six months ended June 30,
2020 was 49.3% compared to 48.9% for the six months ended June 30, 2019 . The
increase in gross margin in the six months ended June 30, 2020 was driven by the
positive impact of supply chain initiatives designed to reduce product unit
costs, favorable product mix related to our new mattress line launched in March
2020 and, in the second quarter of 2020, lower logistics costs, partially offset
by a 70 basis points charge in the first quarter of 2020 associated with a
change in our logistics provider, which we expect will have an ongoing benefit
to cost of goods sold, and increased discounting in the first quarter of 2020
compared to the same period in the prior year mainly due to clearance sale
initiatives of prior models.
Sales and Marketing Expense
Sales and marketing expenses were $70.7 million for the six months ended June
30, 2020 , an increase of $1.2 million , or 1.7%, compared to $69.4 million for
the six months ended June 30, 2019 . Sales and marketing expenses increased as we
continued to invest in driving traffic to our e-commerce website, market our
products to consumers and build our brand. Sales and marketing expenses as a
percentage of revenue was 31.6% for the six months ended June 30, 2020 , compared
to 37.6% for the six months ended June 30, 2019 , and reflective of our ability
to maintain efficiency, even as our overall investment in sales and marketing
increased.
General and Administrative Expenses
General and administrative expenses were $89.0 million for the six months ended
June 30, 2020 , an increase of $24.9 million , or 38.8%, compared to $64.1 million
for the six months ended June 30, 2019 . General and administrative expenses
increased primarily due to the operating costs related to our expanded retail
presence of 27 net new stores compared to the second quarter of 2019, as well as
expenses related to being a public company. General and administrative expenses
as a percentage of revenue increased from 34.7% for the six months ended June
30, 2019 to 39.9% for the six months ended June 30, 2020 reflecting our
increased investment in retail store operations and expenses related to being a
public company.
Restructuring Expenses
Restructuring expenses were $5.4 million for the six months ended June 30, 2020 .
There were no restructuring expenses recorded in the same period of the prior
year. Restructuring expenses relate to costs associated with strategic shifts in
our business structure including exiting certain lines of business and
geographies. Associated costs include severance and other employee separation
costs, contract termination expenses and asset impairment.
Total Other Expenses, Net
Total other expenses, net were $3.6 million for the six months ended June 30,
2020 , an increase of $2.5 million , or 226.2%, compared to $1.1 million for the
six months ended June 30, 2019 . The increase in total other expenses, net was
due to interest incurred on higher outstanding balances of our debt facilities.
Key Operating Metrics and Non-GAAP Financial Measures
We prepare and analyze operating and financial data to assess the performance of
our business and allocate our resources. The key operating performance and
financial metrics and indicators we use are set forth below. The following table
sets forth our key performance indicators for the three and six months ended
June 30, 2020 and 2019, respectively.
Three months ended Six months ended
June 30, June 30,
(in thousands, except percentages) 2020 2019 2020 2019 Gross margin 51.8 % 49.0 % 49.3 % 48.9 % Adjusted EBITDA (11,435) (22,661)$ (34,322) $ (36,994) 36
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Gross Margin. Gross margin is defined as gross profit divided by revenue.
Adjusted EBITDA. Adjusted EBITDA is a supplemental measure of our performance
that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA
is not a measurement of our financial performance under GAAP and should not be
considered as an alternative to net income or any other performance measure
derived in accordance with GAAP.
We define Adjusted EBITDA as net loss before net interest expense, income tax
expense and depreciation and amortization as further adjusted to exclude the
impact of stock-based compensation expense, restructuring expenses, legal
settlements and expenses incurred in connection with our initial public
offering. We caution investors that amounts presented in accordance with our
definition of Adjusted EBITDA may not be comparable to similar measures
disclosed by our competitors, because not all companies and analysts calculate
Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we
consider them to be important supplemental measures of our performance and
believe it is frequently used by securities analysts, investors, and other
interested parties in the evaluation of companies in our industry. Management
believes that investors' understanding of our performance is enhanced by
including this non-GAAP financial measure as a reasonable basis for comparing
our ongoing results of operations.
Management uses Adjusted EBITDA:
• as a measurement of operating performance because it assists us in comparing
the operating performance of our business on a consistent basis, as it removes
the impact of items not directly resulting from our core operations;
• for planning purposes, including the preparation of our internal annual
operating budget and financial projections;
• to evaluate the performance and effectiveness of our operational strategies;
and
• to evaluate our capacity to expand our business.
By providing this non-GAAP financial measure, together with the reconciliation,
we believe we are enhancing investors' understanding of our business and our
results of operations, as well as assisting investors in evaluating how well we
are executing our strategic initiatives. Adjusted EBITDA has limitations as an
analytical tool, and should not be considered in isolation, or as an alternative
to, or a substitute for net income or other financial statement data presented
in our consolidated financial statements as indicators of financial performance.
Some of the limitations are:
• such measures do not reflect our cash expenditures;
• such measures do not reflect changes in, or cash requirements for, our working
capital needs;
• although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future and such
measures do not reflect any cash requirements for such replacements; and
• other companies in our industry may calculate such measures differently than
we do, limiting their usefulness as comparative measures.
Due to these limitations, Adjusted EBITDA should not be considered as measures
of discretionary cash available to us to invest in the growth of our business.
We compensate for these limitations by relying primarily on our GAAP results and
using these non-GAAP measures only supplementally. As noted in the table below,
Adjusted
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EBITDA includes adjustments to exclude the impact of stock-based compensation
expense and material infrequent items, including but not limited to the costs of
our initial public offering and restructuring, among other items. It is
reasonable to expect that these items will occur in future periods. However, we
believe these adjustments are appropriate because the amounts recognized can
vary significantly from period to period, do not directly relate to the ongoing
operations of our business and may complicate comparisons of our internal
operating results and operating results of other companies over time. In
addition, Adjusted EBITDA includes adjustments for other items that we do not
expect to regularly record following our initial public offering. Each of the
normal recurring adjustments and other adjustments described in this paragraph
and in the reconciliation table below help management with a measure of our core
operating performance over time by removing items that are not related to
day-to-day operations.
The following table reconciles Adjusted EBITDA to the most directly comparable
GAAP financial performance measure, which is net loss:
Six months ended
Three months ended June 30, June 30,
(in thousands) 2020 2019 2020 2019
Net loss (24,205) (26,927) $ (58,671) $ (44,376)
Income tax expense 10 (33) 26 (33)
Net interest expense 2,152 285 4,308 542
Depreciation and amortization 3,195 1,534 6,343 2,686
Stock based compensation(a) 3,284 1,876 5,945 3,526
Restructuring(b) 4,129 - 5,440 -
Legal settlements(c) - 138 1,500 138
Transaction costs(d) - 466 787 523
Adjusted EBITDA (11,435)
(22,661) $ (34,322) $ (36,994)
(a) Represents non-cash stock-based compensation expense.
(b) Represents costs associated with strategic shifts in our business structure
including exiting certain lines of business and geographies. Associated costs
include severance and other employee separation costs, contract termination
expenses and asset impairment.
(c) Amounts related to litigation settlements.
(d) Represents expenses incurred for professional, consulting, legal, and
accounting services performed in connection with our initial public offering,
which are not indicative of our ongoing costs and which were discontinued
following the completion of our initial public offering.
Liquidity and Capital Resources
Sources of Funds
Our principal sources of liquidity are our cash and cash equivalents, our Senior
Secured Facility (as defined herein), our Subordinated Facility (as defined
herein), and working capital from operations. Cash and cash equivalents consist
primarily of cash on deposit with banks and investments in money market funds.
As of June 30, 2020 , we had $98.2 million of cash and cash equivalents.
Funding Requirements
38--------------------------------------------------------------------------------
Our primary requirements for liquidity and capital are to fund operating losses as we continue to scale our business, for increased working capital requirements and inventory management to meet increased consumer demand, for increased capital expenditures to grow our retail store presence, as well as for general corporate needs. Historically, these cash requirements have been met through funds raised by the sale of common equity, utilization of our Senior Secured Facility and cash provided by gross margin. We believe that our sources of liquidity and capital will be sufficient to finance our growth strategy and resulting operations, planned capital expenditures and the additional expenses we expect to incur for at least the next 12 months. However, we cannot assure you that cash provided by operating activities or cash and cash equivalents will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future or we are unable to refinance our Senior Secured Facility prior to its maturity, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all. See "Risk Factors-Risks Related to Our Business-Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . In response to the COVID-19 pandemic, we have taken proactive measures focused on optimizing our business model and cash management. We implemented an employee furlough program, which was initially applicable to almost all our retail employees, reduced our corporate personnel by approximately 21%, and initiated the wind-down of our European operations, which is expected to be largely completed by the end of 2020. In total, we expect these actions to result in more than$10 million in annualized savings and approximately$1.0 million in employee-related expenses. While the extent to which the COVID-19 pandemic will impact our business, financial condition and results of operations is uncertain, coupled with the$98.2 million in cash and cash equivalents on our balance sheet as ofJune 30, 2020 , we believe these restructuring initiatives will further strengthen our balance sheet position and provide us with the flexibility and resilience to weather the COVID-19 pandemic. See "Risk Factors-The COVID-19 pandemic has affected, and could continue to adversely affect, our business, financial condition and results of operations" in Part II, Item 1.A. of this Quarterly Report on Form 10-Q. Our capital expenditures consist primarily of retail infrastructure, leasehold improvements, product development and computers and hardware. InDecember 2018 , we signed an agreement for a headquarters inNew York for a period of 15 years with a five-year renewal option. Rent payments began on the new headquarters inJanuary 2020 . Historical Cash Flows The following table shows summary cash flow information for the six months endedJune 30, 2020 and 2019:
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