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" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"), 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 , home to our fabrication and test space, features state-of-the-art capabilities to test against a wide range of factors affecting sleep quality, driving our innovation throughout the Sleep Economy.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 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 multi-channel approach enables us to meet consumers where they want to shop, servicing them throughout their entire purchase journey. We believe our channels are complementary and create a synergistic "network effect" that increases sales as a whole, As ofSeptember 30, 2021 , we distributed our products directly to our customers inNorth America through our e-commerce platform, our 72Casper stores, and more than 25 retail partners. 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 2020 Form 10-K, for a discussion of the factors that generally are expected to impact our business. Agreement and Plan of Merger OnNovember 14, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withMarlin Parent, Inc. , aDelaware corporation ("Parent"), andMarlin Merger Sub Inc. , aDelaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and intoCasper Sleep Inc. , withCasper Sleep Inc. surviving the merger as a wholly-owned subsidiary of Parent (the "Merger"). Parent and Merger Sub are subsidiaries of an investment vehicle managed byDurational Capital Management LP , aU.S. -based private equity firm. See Note 20, Subsequent Events appearing elsewhere in this Quarterly Report on Form 10-Q for additional information.
Impact of COVID-19 Pandemic
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--------------------------------------------------------------------------------preparedness plans to help protect the safety of our employees and customers, while safely continuing business operations.
In order to protect the health and safety of our employees, 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. As of the date of this Quarterly Report on Form 10-Q, all of our 72Casper stores are open and operating, with each offering walk-in shopping, private in-store appointments, and curbside pick-up services. 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, including, where appropriate, limiting in-store hours and capacity consistent with public health guidance and best practices. We also 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 nine months endedSeptember 30, 2021 , and in particular in the first half of 2021, the COVID-19 pandemic continued to adversely impact sales in our retail stores, primarily due to limitations in service offerings and continuing depressed rates of retail foot traffic in certain locations as a result of restrictions on retail businesses and shifting consumer preferences in response to COVID-19. We also continue to work 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. During the third quarter of 2021, we continued to experience increased upstream supply chain disruptions due to industry-wide components and raw materials constraints critical to mattress production, extensive labor shortages and shipping constraints resulting, in part, from the ongoing COVID-19 pandemic, as well as the lingering effects of severe weather in the southern region ofthe United States in the first quarter of 2021, among other factors. As a result of the aforementioned upstream supply chain disruptions, during the third quarter of 2021, we experienced and continue to experience increased delivery times for certain of our products and constraints on our ability to meet demand from certain of our retail partners and in our direct-to-consumer channel, as well as higher costs of goods sold with respect to certain of our products. To mitigate the impacts of these disruptions, we are actively diversifying and expanding our supplier base, continuing to work closely with our suppliers to reallocate production and increase our levels of safety stock inventory, and renegotiating certain logistics costs. We have also implemented price increases across certain product lines. There remains significant uncertainty around the impact of the COVID-19 pandemic on the global supply chain, and we expect certain upstream supply chain disruptions to continue to impact our suppliers and logistics providers at least through the fourth quarter of 2021. We continue to partner closely with these providers to attempt to mitigate any potential product or delivery supply chain constraints in future quarters. Substantially all of our retail partners, including our largest partners, were open for business, both in-store and online, during the third quarter of 2021, and as of the date of this Quarterly Report on Form 10-Q, substantially all of our retail partners have resumed their in-store operations. Accordingly, we have not experienced any material issues to date with respect to our accounts receivable from our retail partners or needed to materially increase our allowances for accounts receivable balances. We are, however, continuing to work closely with our retail partners to monitor the situation. The COVID-19 pandemic has impacted, and we expect will continue to impact, our revenues, results of operations and financial condition. At this time, however, there remains 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 with respect to our customers, employees, supply chain, and retail partners. The future impact that COVID-19 will have on our financial position and operating results remains subject to numerous uncertainties, including the efficacy and rate of adoption of vaccination programs, the spread of new strains of COVID-19, such as the Delta variant, duration of the pandemic, governmental and public health actions, impacts on our supply chain, the effect on customer demand, and changes to our 32 --------------------------------------------------------------------------------
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 I, Item 1.A. of our 2020 Form 10-K.
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 estimates of
variable consideration, including product returns, customer discounts and
allowances.
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,
however, the current supply chain disruptions have caused margins to be
negatively impacted and inconsistent with this historical trend. In addition,
our ability to continue to reduce the cost of our products is critical to
increasing our gross margin over the long-term.
Operating Expenses
Operating expenses consist of sales and marketing, and general and
administrative expenses, including research and development.
Sales and Marketing. Sales and marketing expenses represent the largest
component of our operating expenses and consist primarily of advertising and
marketing promotions of our products and services as well as consulting and
contractor expenses. We expect our sales and marketing expenses to increase in
absolute dollars
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as we continue to promote our offerings. At the same time, we also anticipate
that these expenses will decrease as a percentage of our sales revenue over
time, as we improve marketing efficiencies and grow channels that require lower
sales and marketing support.
General and Administrative. 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. 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 being a public company. However, we expect our general and administrative
expenses to decrease as a percentage of our sales revenue over time, as we scale
our business.
Restructuring. Restructuring expense consists of costs associated with
implementing strategic changes in the Company's business structure including
reductions in work force, lease exit costs related to the sublease and
consolidation of certain corporate office space and exiting of certain lines of
business or geographies.
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 15, Income Taxes 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
given period. Our results and quarterly comparability may also be affected by
broader market factors and conditions, such as the COVID-19 pandemic and
industry-wide supply chain disruptions. The full extent to which these factors
impact our seasonality and quarterly comparability will depend on numerous
evolving
34
--------------------------------------------------------------------------------factors that we are not able to accurately predict due to the uncertainty related to the pandemic, unusual weather conditions and other economic uncertainties.
Results of Operations Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 The following table sets forth information comparing the components of operations and comprehensive loss for the periods indicated. Three months ended September 30, Period over Period Change Three months ended September 30, 2021 2020 Dollar Percentage 2021 2020 (in thousands, except percentages) (as a % of Revenue) Revenue$ 156,534 $ 123,464 $ 33,070 26.8 % 100.0 % 100.0 % Cost of goods sold 92,632 54,944 37,688 68.6 % 59.2 % 44.5 % Gross profit 63,902 68,520 (4,618) (6.7) % 40.8 % 55.5 % Operating expenses Sales and marketing 38,431 42,565 (4,134) (9.7) % 24.6 % 34.5 % General and administrative 46,140 39,518 6,622 16.8 % 29.5 % 32.0 % Restructuring 2,394 155 2,239 1444.5 % 1.5 % 0.1 % Total operating expenses 86,965 82,238 4,727 5.7 % 55.6 % 66.6 % Loss from operations (23,063) (13,718) (9,345) 68.1 % (14.7) % (11.1) % Other (income) expense: Net interest expense 2,212 2,127 85 4.0 % 1.4 % 1.7 % Other (income) expense, net (17) (9) (8) 88.9 % - % - % Total other expenses, net 2,195 2,118 77 3.6 % 1.4 % 1.7 % Loss before income taxes (25,258) (15,836) (9,422) 59.5 % (16.1) % (12.8) % Income tax expense 16 20 (4) (20.0) % - % - % Net loss$ (25,274) $ (15,856) $ (9,418) 59.4 % (16.1) % (12.8) % Revenue Revenue was$156.5 million for the three months endedSeptember 30, 2021 , an increase of$33.1 million , or 26.8%, compared to$123.5 million for the three months endedSeptember 30, 2020 . Revenue increased as a result of higher sales through our direct-to-consumer and retail partnership channels and the introduction of new products for the three months endedSeptember 30, 2021 . Direct-to-consumer revenue increased$6.6 million , or 7.4%, compared to the three months endedSeptember 30, 2020 , driven primarily by higher sales in our retail stores due to limited operations in the prior year. Sales to retail partners were up$26.4 million , or 78.6%, compared to the three months endedSeptember 30, 2020 . This increase was driven by revenue growth with our existing retail partners, the introduction of new retail partners compared to the comparable period in the prior year to end the quarter with more than 25 partners, and the expansion of our product offerings. Gross Profit and Cost of Goods Sold Gross profit was$63.9 million for the three months endedSeptember 30, 2021 , a decrease of$4.6 million , or 6.7%, compared to$68.5 million for the three months endedSeptember 30, 2020 . Cost of goods sold was$92.6 million for the three months endedSeptember 30, 2021 , an increase of$37.7 million , or 68.6%, compared to$54.9 million for the three months endedSeptember 30, 2020 . Gross margin for the three months 35 -------------------------------------------------------------------------------- endedSeptember 30, 2021 was 40.8% compared to 55.5% for the three months endedSeptember 30, 2020 . The decrease in gross margin was driven largely by an increase in product and other logistical costs due to supply chain disruptions resulting from industry-wide components and raw materials constraints critical to mattress production, extensive labor shortages, and shipping constraints, coupled with a shift in channel mix to lower margin retail partnerships, partially offset by a shift in our direct to consumer product mix related to new products compared to the prior year period. Sales and Marketing Sales and marketing expenses were$38.4 million for the three months endedSeptember 30, 2021 , a decrease of$4.1 million , or 9.7%, compared to$42.6 million for the three months endedSeptember 30, 2020 . Sales and marketing expenses decreased as we reduced spend given the limited availability of certain products due to supply chain constraints as well as rising media costs. Sales and marketing expenses as a percentage of revenue was 24.6% for the three months endedSeptember 30, 2021 , compared to 34.5% for the three months endedSeptember 30, 2020 , due to the growth of our retail partnership channel which requires lower sales and marketing support. General and Administrative General and administrative expenses were$46.1 million for the three months endedSeptember 30, 2021 , an increase of$6.6 million , or 16.8%, compared to$39.5 million for the three months endedSeptember 30, 2020 . General and administrative expenses increased primarily due to higher payroll to support the growth of the business, partially offset by lower occupancy expenses. General and administrative expenses as a percentage of revenue were 29.5% for the three months endedSeptember 30, 2021 compared to 32.0% for the three months endedSeptember 30, 2020 due primarily to improved efficiency as revenue growth outpaced operating expenses. Restructuring Restructuring expenses were$2.4 million for the three months endedSeptember 30, 2021 , an increase of$2.2 million compared to$0.2 million for the three months endedSeptember 30, 2020 . The increase in restructuring expenses primarily relates to certain severance and other employee separation costs and other lease exit costs associated with the sublease and consolidation of office space into theNew York metro area as the Company continues to refine strategic shifts in its business structure, including adapting to a hybrid work environment. Total Other Expense, Net Total other expenses, net were$2.2 million for the three months endedSeptember 30, 2021 and generally in line as compared to$2.1 million for the three months endedSeptember 30, 2020 . 36
-------------------------------------------------------------------------------- Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 The following table sets forth information comparing the components of operations and comprehensive loss for the periods indicated. Nine Months Ended September 30, Period over Period Change Nine Months Ended
September 30,
2021 2020 Dollar Percentage 2021 2020
(in thousands, except percentages) (as a % of Revenue)
Revenue $ 435,969 $ 346,704 $ 89,265 25.7 % 100.0 % 100.0 %
Cost of goods sold 232,850 168,155 64,695 38.5 % 53.4 % 48.5 %
Gross profit 203,119 178,549 24,570 13.8 % 46.6 % 51.5 %
Operating expenses
Sales and marketing 118,858 113,220 5,638 5.0 % 27.3 % 32.7 %
General and administrative 138,802 128,522 10,280 8.0 % 31.8 % 37.1 %
Restructuring 20,379 5,595 14,784 264.2 % 4.7 % 1.6 %
Total operating expenses 278,039 247,337 30,702 12.4 % 63.8 % 71.3 %
Loss from operations (74,920) (68,788) (6,132) 8.9 % (17.2) % (19.8) %
Other (income) expense:
Net interest expense 6,509 6,435 74 1.1 % 1.5 % 1.9 %
Other (income) expense, net (1,283) (742) (541) 72.9 % (0.3) % (0.2) %
Total other expenses, net 5,226 5,693 (467) (8.2) % 1.2 % 1.6 %
Loss before income taxes (80,146) (74,481) (5,665) 7.6 % (18.4) % (21.5) %
Income tax expense 52 46 6 13.0 % - % - %
Net loss $ (80,198) $ (74,527) $ (5,671) 7.6 % (18.4) % (21.5) %
Revenue
Revenue was $436.0 million for the nine months ended September 30, 2021 , an
increase of $89.3 million , or 25.7%, compared to $346.7 million for the nine
months ended September 30, 2020 . Revenue increased as a result of higher sales
through our direct-to-consumer and retail partnership channels and the
introduction of new products, partially offset by the closure of our European
operations at the end of the second quarter of 2020. North America sales were up
$101.2 million , or 30.2%, for the nine months ended September 30, 2021 compared
to the same period in the prior year and our European operations, which we
closed at the end of the second quarter of 2020, had revenue of $11.9 million
for the nine months ended September 30, 2020 . Direct-to-consumer revenues
increased $28.1 million , or 10.8% compared to the nine months ended
September 30, 2020 driven primarily by higher sales in our retail stores in
North America due to limited operations in the prior year, partially offset by
our European operations which did not contribute to revenue for the nine months
ended September 30, 2021 . Although all of our 72 stores were open and operating
as of the end of the third quarter of 2021, operations in certain locations were
limited in the first half of 2021 due to public health and government pandemic
orders within the nine months ended September 30, 2021 . North America
direct-to-consumer revenue increased $39.7 million , or 15.9%, compared to the
nine months ended September 30, 2020 . Sales to retail partners increased by
$61.2 million , or 71.5%, compared to the nine months ended September 30, 2020 .
This increase was driven by revenue growth with our existing partners, the
introduction of several new retail partners compared to the same comparable
period in the prior year to end the quarter with more than 25 retail partners,
and the expansion of our product offerings. North America retail partnership
revenue increased $61.5 million , or 72.2%, compared to the nine months ended
September 30, 2020 . Additionally, during the nine months ended September 30,
2021 , we believe our revenue was negatively impacted by supply chain constraints
that extended the time required to fulfill customer orders and resulted in lost
orders. We have taken active measures which we expect to mitigate these supply
chain issues in future periods.
37
--------------------------------------------------------------------------------Gross Profit and Cost of Goods Sold
Gross profit was$203.1 million for the nine months endedSeptember 30, 2021 , an increase of$24.6 million , or 13.8%, compared to$178.5 million for the nine months endedSeptember 30, 2020 . Cost of goods sold was$232.8 million for the nine months endedSeptember 30, 2021 , an increase of$64.7 million , or 38.5%, compared to$168.2 million for the nine months endedSeptember 30, 2020 . Gross margin for the nine months endedSeptember 30, 2021 was 46.6%, down 490 basis points from 51.5% for the nine months endedSeptember 30, 2020 . The decrease in gross margin in the nine months endedSeptember 30, 2021 was largely driven by an increase in product and other logistical costs due to supply chain disruptions resulting from industry-wide components and raw materials constraints critical to mattress production as well as extensive labor shortages, a shift in channel mix to lower margin partnerships, and a shift in product mix particularly with respect to products sold to our retail partners. These impacts were partially offset by an increase on certain products in the first half of 2021, a shift in our direct to consumer product mix as well as benefit from the discontinuation of our European operations for the nine months endedSeptember 30, 2021 . Sales and Marketing Sales and marketing expenses were$118.9 million for the nine months endedSeptember 30, 2021 , an increase of$5.6 million , or 5.0%, compared to$113.2 million for the nine months endedSeptember 30, 2020 . Sales and marketing expenses increased as we continued to invest in driving traffic to our e-commerce website, marketing our products to consumers and building our brand. Sales and marketing expenses as a percentage of revenue were 27.3% for the nine months endedSeptember 30, 2021 , compared to 32.7% for the nine months endedSeptember 30, 2020 , due to the growth of our retail partnership channel which requires lower sales and marketing support. General and Administrative General and administrative expenses were$138.8 million for the nine months endedSeptember 30, 2021 , an increase of$10.3 million , or 8.0%, compared to$128.5 million for the nine months endedSeptember 30, 2020 . General and administrative expenses increased primarily due to the operating costs related to our expanded retail presence of 7 net new stores compared to the nine months endedSeptember 30, 2020 , as well as expenses related to being a public company. General and administrative expenses as a percentage of revenue decreased from 37.1% for the nine months endedSeptember 30, 2020 to 31.8% for the nine months endedSeptember 30, 2021 reflecting improved efficiency as revenue growth outpaced operating expenses. Restructuring Restructuring expenses were$20.4 million for the nine months endedSeptember 30, 2021 , an increase of$14.8 million compared to$5.6 million for the nine months endedSeptember 30, 2020 . The increase in restructuring expenses primarily relates to the sublease and consolidation of office space as the Company continues to refine strategic shifts in its business structure, in addition to severance costs. Total Other Expenses, Net Total other expenses, net were$5.2 million for the nine months endedSeptember 30, 2021 , a decrease of$0.5 million , or 8.2%, compared to$5.7 million for the nine months endedSeptember 30, 2020 . The decrease in total other expenses, net was primarily due to adjustments to indirect tax provisions. 38 --------------------------------------------------------------------------------
Key Operating Metrics and Non-GAAP Financial Measures
We prepare and analyze operating and financial data to assess the performance of our business and allocate our resources. The key operating performance and financial metrics and indicators we use are set forth below. The following table sets forth our key performance indicators for the three and nine months endedSeptember 30, 2021 and 2020, respectively. Three months ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2021 2020 2021 2020 Gross margin 40.5 % 55.5 % 46.6 % 51.5 % Adjusted EBITDA$ (12,058) $ (7,495) $ (29,348) $ (41,817) 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 interest (income) expense, income tax expense and depreciation and amortization as further adjusted to exclude the impact of stock-based compensation expense, restructuring costs, costs associated with legal settlements and transactions costs 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 it to be an important supplemental measure 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 39 -------------------------------------------------------------------------------- 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 measure does not reflect our cash expenditures; • such measure does 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 a measure 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 this non-GAAP measure only supplementally. As noted in the table below, Adjusted 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, restructuring, and costs associated with legal settlements, 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: Three months ended Nine months ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Net loss$ (25,274) $ (15,856) $ (80,198) $ (74,527) Income tax expense 16 20 52 46 Interest expense 2,212 2,127 6,509 6,435
Depreciation and amortization 4,288 3,313 12,255 9,656
Stock based compensation(a) 4,306 3,746 11,655 9,691
Restructuring(b) 2,394 155 20,379 5,595
Legal settlements(c) - (1,000) - 500
Transaction costs(d) - - - 787
Adjusted EBITDA $ (12,058) $ (7,495) $ (29,348) $ (41,817)
(a) Represents non-cash stock-based compensation expense.
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(b) The 2020 costs are associated with implementing strategic changes in the
companies' business structure including reductions in work force and exiting of
certain lines of business or geographies. The 2021 costs include lease exit
costs and asset impairments associated with the consolidation of office space
into the New York metro area and certain severance and other employee separation
costs.
(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
Revolving Credit Facility (as defined herein), our Amended Subordinated Facility
(as defined herein), and working capital from operations. Cash, cash equivalents
and restricted cash consist primarily of cash on deposit with banks. As of
September 30, 2021 , we had $43.1 million of cash and cash equivalents.
On October 25, 2021 , we filed a Registration Statement on Form S-3 (File No.
333-60487) (the "Form S-3") with the Securities and Exchange Commission ("SEC")
in relation to the registration of common stock, preferred stock, debt
securities, warrants and/or units of any combination thereof in the aggregate
amount of up to $150.0 million . Also on October 25, 2021 , we entered into an
Open Market Sale Agreement (the "Sales Agreement"), with Jefferies LLC , or
Jefferies, as sales agent, pursuant to which we may, from time to time, issue
and sell common stock with an aggregate value of up to $50.0 million in "at the
market offerings" under our Form S-3. Sales of common stock, if any, pursuant to
the Sales Agreement, may be made in sales deemed to be an "at the market
offering" as defined in Rule 415(a) of the Securities Act, including sales made
directly through the New York Stock Exchange or on any other existing trading
market for our common stock. As of the date of this filing, no securities have
been sold pursuant to the Sales Agreement.
Funding Requirements
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, 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 Revolving
Credit Facility, our Amended Subordinated Facility and cash on hand.
We performed an assessment to determine whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about its ability to
continue as a going concern for the twelve-month period following the date the
financial statements were issued. We have historically incurred significant
operating losses and generated negative cash flows from operations, resulting in
a significant accumulated deficit. We have historically funded our operations
primarily through the issuance of common stock and debt. Given the uncertainty
as to when we will become cash flow positive, primarily due to supply chain
constraints which has negatively impacted the Company;s gross margin, the
maturity date of our Amended Subordinated Facility, which is October 31, 2022 ,
and the maturity date of our Revolving Credit Facility, which is the earlier of
(a) November 10, 2023 or (b) 91 days prior to the earliest maturity date, of our
Amended Subordinated Facility (i.e., August 1, 2022 ) we believe that our current
level of cash and cash equivalents are not sufficient to fund ongoing operations
for the twelve-month period after the financial statements are issued. The
existence of these conditions raises substantial doubt about our ability to
continue as a going concern for the twelve-month period following the date the
financial statements are issued.
41
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We will require additional liquidity to continue our operations over the next
twelve months. In addition to securing additional capital pursuant to the Bridge
Loans and entering into the proposed transaction with Durational Capital
Management LP and raising additional capital, we are also focused on identifying
operational improvements and related cost savings and will work to implement any
identified savings in 2022. We also intend to raise additional funds by way of
refinancing our debt or through private or public offerings. While we believe in
the viability of our strategy to generate sufficient revenue, reduce costs and
in our ability to raise additional funds, there can be no assurances that we
will be able to obtain additional liquidity when needed or under acceptable
terms, if at all. Our ability to continue as a going concern is dependent upon
our ability to further implement our business plan and generate sufficient
revenue and our ability to obtain additional financing. If we obtain additional
capital by issuing equity under the Sales Agreement or otherwise, the interests
of our existing stockholders will be diluted and this dilution could be
material. If we incur additional indebtedness, that indebtedness may contain
significant financial and other covenants and higher interest rates 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-We will need additional financing to execute our business
plan, to fund our operations and to continue as a going concern" in this Form
10-Q.
Our capital expenditures consist primarily of retail infrastructure, leasehold
improvements, product development and computers and hardware.
The following table shows summary cash flow information for the nine months
ended September 30, 2021 and 2020:
Nine months ended
September 30,
(in thousands) 2021 2020
Net cash used in operating activities $ (38,412) $ (46,986)
Net cash used in investing activities (10,606) (12,559)
Net cash provided by financing activities 29
88,611
Effect of exchange rate changes 7
(516)
Net change in cash, cash equivalents, and restricted cash
$ 28,550 Operating Activities. Net cash used in operating activities consists of net loss adjusted for certain non-cash items, including stock-based compensation, property and equipment depreciation, long-term deferred rent and deferred income taxes, as well as the effect of changes in inventory and other working capital amounts. For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$38.4 million and was comprised primarily of net loss of$80.2 million , decreased by$30.2 million related to non-cash adjustments, primarily related to depreciation and amortization, stock-based compensation and asset impairments. Changes in working capital decreased cash used in operating activities by$11.6 million , primarily due to an increase in inventory of$40.8 million , an increase in accounts receivable of$3.5 million and an increase in prepaid expenses of$1.4 million , partially offset by an increase in accrued expenses of$22.3 million , an increase in accounts payable of$22.7 million , and increase in other liabilities of$8.1 million and an increase in deferred revenue of$4.2 million . The increase in inventory is primarily driven by an effort to increase levels of safety stock of certain products. Despite this increase, we are experiencing industry-wide challenges to meet the volume for our higher demand mattress products. For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$47.0 million and was comprised primarily of net loss of$74.5 million , decreased by$23.1 million related to non-cash adjustments, primarily related to depreciation and amortization, and stock-based compensation. Changes in working capital decreased cash used in operating activities by$4.5 million , primarily due to a decrease in 42 --------------------------------------------------------------------------------
accounts receivable of
Investing Activities. Our net cash used in investing activities consists of purchases of property and equipment which were$10.6 million and$12.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Financing Activities. For the nine months endedSeptember 30, 2021 , net cash used in financing activities primarily consisted of proceeds from borrowings of$3.0 million , which was offset by repayments of$3.0 million of borrowings resulting in net cash used in financing activities of$0.0 million . For the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$88.6 million , primarily from the issuance of equity in our initial public offering. Revolving Credit Facility OnNovember 10, 2020 , we refinanced the loan and security agreement previously entered into withPacific Western Bank (as amended, the "Prior Credit Facility") by entering into a credit agreement (the "Credit Agreement") by and among theCompany, Casper Science LLC andCasper Sleep Retail LLC (collectively, the "Loan Parties"), andWells Fargo Bank, National Association ("Wells Fargo"), providing for a senior secured asset-based revolving credit facility of up to$30.0 million , with an uncommitted accordion of an additional$15.0 million (the "Revolving Credit Facility"). The Credit Agreement provides that up to$10.0 million of the Revolving Credit Facility is available for issuances of letters of credit, and up to$5.0 million is available for swingline loans. As of the date of this Quarterly Report on Form 10-Q, we had$16.0 million outstanding pursuant to the Revolving Credit Facility, with$2.9 million remaining available for borrowing. See Note 11, Debt for additional
The Revolving Credit Facility matures on the earlier of
Borrowings under the Revolving Credit Facility will be subject to an applicable margin of (i) when Average Daily Availability (as defined in the Credit Agreement) is greater than or equal to 50% of the Loan Cap (as defined in the Credit Agreement), 2.50% for LIBOR loans or 1.50% for base rate loans, as well as a letter of credit fee of 2.50%, and (ii) when Average Daily Availability is less than 50% of the Loan Cap, 2.75% for LIBOR loans or 1.75% for base rate loans, as well as a letter of credit fee of 2.75%, in each case subject to adjustments on the first day of each fiscal quarter commencing onJanuary 1, 2021 . Amended Subordinated Facility OnMarch 1, 2019 , theCompany, Casper Science LLC andCasper Sleep Retail LLC entered into a growth capital loan and security facility agreement with TriplePoint Venture Growth BDC Corp., as lender and collateral agent, andTriplePoint Capital LLC , as lender (or, together with TriplePoint Venture Growth BDC Corp., "TriplePoint"), which was subsequently amended onNovember 10, 2020 to, among other things, permit the incurrence of the Revolving Credit Facility (the "Amended Subordinated Facility").
As of
Bridge Financing; Further Amendment to the Credit Agreement
OnNovember 14, 2021 (the "Effective Date"), we entered into an amendment to the Amended Subordinated Facility to, among other things, permit the incurrence of additional Borrowings under the Amended Subordinated Facility in an aggregate principal amount not to exceed$30.0 million (the "Bridge Loans"). The Bridge Loans will accrue interest at a floating rate of prime plus 6.75% margin per annum, require a one-time, upfront facility fee equal to 1.00% of the funded amount, an end of term fee equal to 10.0% of the 43 -------------------------------------------------------------------------------- funded amount and a success fee of (x)$0.15 million if the Merger closes on or beforeJanuary 15, 2022 and (y)$0.30 million if the Merger closes afterJanuary 15, 2022 (in each case, payable only upon completion of the Merger). If the Merger does not close on or beforeMarch 15, 2022 , we will be required to issue common stock warrants to our Bridge Loans lender with warrant coverage equal to 40% of the outstanding amounts under the Bridge Loans, at an exercise price equal to equal to the average of our common stock closing price for the five-trading day period ending onMarch 15, 2022 .
The Bridge Loan will mature upon the earlier of the consummation of the Merger and 211 days after the Effective Date.
As of
Contractual Obligations There have been no material changes to our contractual obligations during the nine months endedSeptember 30, 2021 from those previously disclosed in our 2020 Form 10-K and Form 10-Q for the six months endedJune 30, 2021 . Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any material off-balance sheet arrangements other than leases. See Note 14, Leases to our unaudited consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for additional information. Recent Accounting Pronouncements See Note 18, Recently Issued Accounting Pronouncements to our unaudited consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for further information on certain accounting standards that have been recently adopted or that have not yet been required to be implemented and may be applicable to our future operations. Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies from our disclosure reported in "Critical Accounting Policies and Estimates" of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K.
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