REED'S, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Overview During the second quarter of 2020, the Company fully utilized their expanded network of co-packers and implemented an upgraded set of quality protocols. We also launched our Reed's Really RealGinger Ale and Reed's Wellness Shots. In addition to our traditional sales channels, the Company is utilizing their ecommerce platform that includes their branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans. A public equity offering, which closed onApril 20, 2020 , provided the Company with funds for working capital and general corporate purposes. These funds will provide the support necessary to execute our 2020 strategy that includes driving growth while strategically reducing operating costs. The Company remains focused on driving sales growth and improving margin. The sales growth focus is on channel expansion, new product introduction and improved sales execution. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs. COVID-19 Considerations In the quarter endedJune 30, 2020 , the COVID-19 pandemic did not have a material net impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand
for our products.
Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. For the three months endedJune 30, 2020 , we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. ThroughJune 30, 2020 , the COVID-19 pandemic has not negatively impacted the Company's liquidity position as of such date. Shipments to customers in the second quarter were up 16% from the first quarter of the year. Our working capital onJune 30, 2020 improved to$7,576 , as compared to$3,173 onMarch 31, 2020 . Lastly, our unused borrowing capacity under our line of credit improved to$6,704 , as compared to$2,961 atMarch 31, 2020 . ThroughJune 30, 2020 , we continue to generate cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. We have also not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.
1
Results of Operations - Three months ended
The following table sets forth key statistics for the three months ended
Three Months Ended June 30, Pct.
2020 2019 Change
Gross sales (A) $ 12,229 $ 10,758 14 %
Less: Promotional and other
allowances (B) 1,376 1,278 8 %
Net sales $ 10,853 $ 9,480 14 %
Cost of goods produced (C) 7,865 7,048 12 %
% of Gross sales 64 % 66 %
% of Net sales 72 % 74 %
Cost of goods sold - idle capacity
(D) - 159 -100 %
% of Net sales - % 2 %
Gross profit $ 2,988 $ 2,273 31 %
% of Net sales 28 % 24 %
Expenses
Delivery and handling $ 1,480 $ 1,436 3 %
% of Net sales 14 % 15 %
Dollar per case ($) 2.3 2.4
Selling and marketing 1,585 3,194 -50 %
% of Net sales 15 % 34 %
General and administrative 1,348 1,749 -23 %
% of Net sales 12 % 18 %(Gain)/Loss on sales of assets 9 -
100 %
Total Operating expenses 4,422 6,379 -31 %
Loss from operations $ (1,434 ) $ (4,106 ) -65 %
Interest expense and other expense (316 ) (354 )
-11 %
Net loss $ (1,750 ) $ (4,460 ) -61 %
Loss per share - basic and diluted $ (0.03 )$ (0.13 ) -77 % Weighted average shares outstanding - basic & diluted 59,514,620 33,666,664 77 %
(A) Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales have been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers. 2
(B) Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company's agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. (C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold. (D) Cost of goods sold - idle capacity: Cost of goods sold - idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Cost goods sold - idle capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
Sales, Cost of Sales, and Gross Margins
The following chart sets forth key statistics for the transition of the
Company's top line activity from the second quarter of 2019 through the second
quarter of 2020.
2020 2019 Q2 Per Case H1 Per Case
Q1 Q2 H1 Q2 vs PY H1 vs PY Q1 Q2 H1 2020 2019 vs PY 2020 2019 vs PY
Cases:
Reed's 288 335 623 19 % 20 % 238 281 519
Virgil's 262 308 570 4 % 3 % 257 296 553
Total Core 550 643 1,193 12 % 11 % 495 577 1,072
Non Core 2 - 2 -100 % -91 % 20 2 22
Candy 8 8 16 -11 % -11 % 9 9 18
Total 560 651 1,211 11 % 9 % 524 588 1,112
Gross Sales:
Core $ 10,175 $ 11,940 $ 22,115 14 % 13 % $ 9,098 $ 10,455 $ 19,553 $ 18.5 $ 18.1 2 % $ 18.5 $ 18.2 2 %
Non Core 102 33 136 14 % -36 % 181 29 211 - 14.5 -100 % 67.5 9.5 607 %
Candy 274 256 530 -7 % 3 % 241 274 515 32.0 30.4 5 % 33.1 28.6 16 %
Total $ 10,551 $ 12,229 $ 22,781 14 % 12 % $ 9,520 $ 10,758 $ 20,279 $ 18.8 18.3 3 % 18.8 18.2 3 %
Discounts: Total $ (1,028 ) $ (1,376 ) $ (2,405 ) 8 % 2 % $ (1,071 ) $ (1,278 ) $ (2,349 ) $ (2.1 ) $ (2.2 ) -3 % $ (2.0 ) $ (2.1 ) -6 %
COGS:
Core $ (6,414 ) $ (7,674 ) $ (14,088 ) 12 % 14 % $ (5,469 ) $ (6,843 ) $ (12,312 ) $ (11.9 ) $ (11.9 ) 2 % $ (11.8 ) $ (11.1 ) 7 %
Non Core (59 ) (15 ) (74 ) -46 % -62 % (167 ) (28 ) (195 ) - (14.0 ) -100 % (37.0 ) (8.9 ) 317 %
Candy (180 ) (176 ) (356 ) -1 % 6 % (159 ) (177 ) (336 ) (22.0 ) (19.7 ) 12 % (22.3 ) (18.7 ) 19 %
Idle Plant - - - -100 % 6 % (150 ) (159 ) (309 ) - (0.3 ) -100 % - (0.3 ) -100 %
Total $ (6,653 ) $ (7,865 ) $ (14,518 ) 9 % 10 % $ (5,945 ) $ (7,207 ) $ (13,152 ) $ (12.1 ) $ (12.3 ) -3 % $ (12.0 ) $ (11.8 ) 0 %
Gross Margin: $ 2,870 $ 2,988 $ 5,858 31 % 23 % $ 2,504 $ 2,273 $ 4,777 $ 4.6 $ 3.9 19 % $ 4.8 $ 4.3 13 %
as % Net Sales 30 % 28 % 29 % 30 % 24 % 27 %
3
As part of the Company's ongoing initiative to simplify and streamline
operations by reducing the number of SKUs, the Company has identified core
products on which to place its strategic focus. These core products consist of
Reed's and Virgil's branded beverages. Beginning in 2020, our Wellness Shots are
captured in Non-core products. Non-core products for 2019 consist primarily of
slower selling discontinued Reed's and Virgil's SKUs.
Sales
As a result of our decision to focus on the core Reed's and Virgil's beverage
brands and simplify operations by reducing the overall number of SKUs that we
offer, the Company's core beverage volume for the quarter ended June 30, 2020 ,
represents 99% of all beverage volume.
Core brand gross revenue increased by 14% to $11,940 compared to the same period
last year, driven by Reed's volume growth of 19%. The result is an increase in
total gross revenue of 14%, to $12,229 from $10,758 during the same period last
year. Price on our core brands increased $0.40 per case or 2% year over year,
while volume grew 12% as compared to the same period last year.
Discounts as a percentage of gross sales decreased to 11% in the second quarter
of 2020 from 12% in the same period last year. As a result, net sales revenue
grew 14% in the second quarter of 2020 to $10,853 , compared to $9,480 in the
same period last year.
Cost of Goods Sold and Produced
Cost of goods sold increased$658 during the second quarter of 2020 as compared to the same period last year. As a percentage of net sales, cost of goods sold in the second quarter of 2020 improved to 72% as compared to 76% for the same period last year.
The total cost of goods per case decreased to$12.06 per case in the second quarter of 2020 from$12.25 per case for the same period last year. The cost of goods sold per case on core brands increased to$11.92 during the second quarter of 2020, from the$11.86 for the same period last year. Then increase on core brands is driven by$198 reserve related to packing material from the transition to the FDA mandated nutritional fact requirements disclosure. We are continuing to work with suppliers and co-packers to improve our processes and maximize
cost efficiencies. Gross Margin
Gross margin increased to 28% for the second quarter of 2020, compared to 24% during the same period last year.
Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses increased by$44 in the second quarter of 2020 to$1,480 from$1,436 in the same period last year, driven by increased volumes. Delivery costs in the second quarter of 2020 were 14% of net sales and$2.27 per case, compared to 15% of net sales and$2.44 per case during the same period last year.
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were$1,585 during the second quarter of 2020, compared to$3,194 during the same period last year. As a percentage of net sales, selling and marketing costs decreased to 15% during the second quarter of 2020, as compared to 34% during the same period last year. The decrease represents a lapping of the "Fooled Your Mom" campaign in the second quarter of 2019 and a lower level of digital advertising, event sampling and agency fees. In addition, personnel and travel related costs declined. 4
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the second quarter of 2020 to$1,348 from$1,749 , a decrease of$401 over the same period last year. Decrease was driven by$365 for option forfeiture/expiration and lower personnel and travel related costs. Loss from Operations The loss from operations was$1,434 for the second quarter of 2020, as compared to a loss of$4,106 in the same period last year driven by increase gross profit and reductions in operating expenses discussed above. Interest and Other Expense Interest and other expense for the second quarter of 2020, consisted of$303 of interest expense and expenses related to the change in fair value of our warrant liability of$13 . During the same period last year, interest expense was$294 , and expense related to the change in fair value of our warrant liability was$60 . Modified EBITDA In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set forth below is a reconciliation of net loss to Modified EBITDA for the three
months ended
Three Months Ended June 30,
2020 2019
Net loss $ (1,750 ) $ (4,460 )
Modified EBITDA adjustments:
Depreciation and amortization 37 34
Interest expense 303
294
Stock option and other noncash compensation (36 )
623
Change in fair value of warrant liability 13
60 Severance - 6 Total EBITDA adjustments $ 317$ 1,017 Modified EBITDA$ (1,433 ) $ (3,443 ) 5 We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following: ? Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
? Modified EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Modified EBITDA does not reflect future interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts; and
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Modified EBITDA does not reflect any cash requirements for such replacements.
Results of Operations - Six months ended
The following table sets forth key statistics for the six months ended
Six Months Ended June 30, Pct.
2020 2019 Change
Gross sales (A) $ 22,781 $ 20,279 12 %
Less: Promotional and other
allowances (B) 2,405 2,350 2 %
Net sales $ 20,376 $ 17,929 14 %
Cost of goods produced (C) 14,518 12,843 13 %
% of Gross sales 64 % 63 %
% of Net sales 71 % 72 %
Cost of goods sold - idle capacity
(D) - 309 -100 %
% of Net sales - % 2 %
Gross profit $ 5,858 $ 4,777 23 %
% of Net sales 29 % 27 %
Expenses
Delivery and handling $ 2,743 $ 2,466 11 %
% of Net sales 13 % 14 %
Dollar per case ($) 2.3 2.2
Selling and marketing 3,510 5,208 -33 %
% of Net sales 17 % 29 %
General and administrative 3,295 4,120 -20 %
% of Net sales 16 % 23 %(Gain)/Loss on sales of assets (6 ) (30 )
-80 %
Total Operating expenses 9,542 11,764 -19 %
Loss from operations $ (3,684 ) $ (6,987 ) -47 %
Interest expense and other expense (646 ) (737 )
-12 %
Net loss $ (4,330 ) $ (7,724 ) -44 %
Loss per share - basic and diluted$ (0.08 ) $ (0.25 ) -68 % Weighted average shares outstanding - basic & diluted 53,554,913 31,397,760 71 % 6
(A) Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales have been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers. (B) Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company's agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. (C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold. (D) Cost of goods sold - idle capacity: Cost of goods sold - idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Cost goods sold - idle capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
Sales, Cost of Sales, and Gross Margins
The following chart sets forth key statistics for the transition of the
Company's top line activity from the six-month period ending
7 As part of the Company's ongoing initiative to simplify and streamline operations by reducing the number of SKUs, the Company has identified core products on which to place its strategic focus. These core products consist ofReed's and Virgil's branded beverages. Beginning in 2020, our Wellness Shots are captured in Non-core products. Non-core products for 2019 consist primarily of slower selling discontinuedReed's and Virgil's SKUs. Sales As a result of our decision to focus on the coreReed's and Virgil's beverage brands and simplify operations by reducing the overall number of SKUs that we offer, the Company's core beverage volume for the first six months of 2020, represents 99% of all beverage volume. Core brand gross revenue increased by 13% to$22,115 compared to the same period last year, driven byReed's volume growth of 20%. The result is an increase in total gross revenue of 12%, to$22,781 from$20,279 during the same period last year. Price on our core brands increased$0.28 per case or 2% year over year, while volume grew 11% as compared to the same period last year. Discounts as a percentage of gross sales decreased to 11% in the first six months of 2020 from 12% in the same period last year. The decrease in our promotions was driven by lower promotional activity primarily due to the impacts of COVID-19 as promotional execution became a lower priority at retail. As a result, net sales revenue grew 14% in the first six months of 2020 to$20,376 , compared to$17,929 in the same period last year.
Cost of Goods Sold and Produced
Cost of goods sold increased$1,366 during the first six months of 2020 as compared to the same period last year. As a percentage of net sales, cost of goods sold in the first six months of 2020 improved to 71% as compared to 73% for the same period last year. The total cost of goods per case increased to$11.99 per case in the first six months of 2020 from$11.83 per case in the same period last year. The increase is driven by utilization of higher costed inventory remaining from 2019 in the first quarter and a$198 reserve recorded related to packaging material from transition to the FDA mandated nutritional fact requirements disclosure. The cost of goods sold per case on core brands increased to$11.80 during the first six months of 2020, from the$11.07 for the same period last year. We are continuing to work with suppliers and co-packers to improve our processes and maximize cost efficiencies. Gross Margin
Gross margin increased to 29% for the first six months of 2020, compared to 27% during the same period last year.
Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses increased by$277 in the first six months of 2020 to$2,743 from$2,466 in the same period last year, driven by increased volumes. Delivery costs in the six months of 2020 were 13% of net sales and$2.27 per case, compared to 14% of net sales and$2.22 per case during the same period last year. The per case rate increase was driven by market forces impacted
by COVID-19.
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were$3,510 during the first six months of 2020, compared to$5,208 during the same period last year. As a percentage of net sales, selling and marketing costs decreased to 17% during the first six months of 2020, as compared to 29% during the same period last year. The decrease represents a lapping of the "Fooled 8 Your Mom" campaign which ran in the second quarter of 2019 as well as the Catalina retail register coupon program, which has yet to be used in 2020 and a lower level of digital advertising, event sampling and agency fees. In addition, personnel and travel related costs declined.
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the first six months of 2020 to$3,295 from$4,120 , a decrease of$825 over the same period last year. The decrease was driven by forfeiture/expiration of options in the amount of$365 , the lapping of a$220 one-time final transition cost incurred in 2019 related to our plant sale and a reduction temp staffing of$146 and lower personnel and travel related costs. Loss from Operations
The loss from operations was
Interest and Other Expense Interest and other expense for the first six months of 2020, consisted of$639 of interest expense and expense related to the change in fair value of our warrant liability of$7 . During the same period last year, interest expense was$629 , and expense related to the change in fair value of our warrant liability was$108 . Modified EBITDA In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set forth below is a reconciliation of net loss to Modified EBITDA for the six
months ended
Six Months Ended June 30,
2020 2019
Net loss $ (4,330 ) $ (7,724 )
Modified EBITDA adjustments:
Depreciation and amortization 86 70
Interest expense 639
629
Stock option and other noncash compensation 744
1,229
Change in fair value of warrant liability 7
108 Severance - 39 Total EBITDA adjustments$ 1,476 $ 2,075 Modified EBITDA$ (2,854 ) $ (5,649 ) 9 We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following: ? Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
? Modified EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Modified EBITDA does not reflect future interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts; and
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Modified EBITDA does not reflect any cash requirements for such replacements.
Liquidity and Capital Resources
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
For the six months endedJune 30, 2020 , the Company recorded a net loss of$4,330 and used cash in operations of$5,028 . As ofJune 30, 2020 , we had a cash balance of$1,112 with borrowing capacity of$6,704 , a stockholder's equity of$2,866 and a working capital of$2,257 , compared to a cash balance of$913 with borrowing capacity of$3,235 , stockholders' equity of$1,147 and a working capital of$4,885 atDecember 31, 2019 . InApril 2020 , the Company conducted a public offering of 15,333,334 shares of its common stock at$0.375 per share, resulting in net proceeds to the Company of$5,310 .
On
The PPP loan agreement is datedApril 20, 2020 , matures onApril 20, 2022 , bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing onNovember 2020 , and is unsecured and guaranteed by theU.S. Small Business Administration . The loan term may be extended toApril 20, 2025 , if mutually agreed to by the Company and lender. We applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as ofJune 30, 2020 . Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices. 10
Critical Accounting Policies and Estimates
Revenue Recognition
The Company recognizes revenue in accordance with ASU 2014-09, Revenue from
Contracts with Customers (Topic 606), ("ASC 606"). The underlying principle of
ASC 606 is to recognize revenue to depict the transfer of goods or services to
customers at the amount expected to be collected. ASC 606 creates a five-step
model that requires entities to exercise judgment when considering the terms of
contract(s), which include (1) identifying the contract or agreement with a
customer, (2) identifying our performance obligations in the contract or
agreement, (3) determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing revenue as
each performance obligation is satisfied.
The Company does not have any significant contracts with customers requiring
performance beyond delivery, and contracts with customers contain no incentives
or discounts that could cause revenue to be allocated or adjusted over time.
Shipping and handling activities are performed before the customer obtains
control of the goods and therefore represent a fulfillment activity rather than
a promised service to the customer. Revenue and costs of sales are recognized
when control of the products transfers to our customer, which generally occurs
upon shipment from our facilities. The Company's performance obligations are
satisfied at that time.
All of the Company's products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements.
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