Casper Sleep 10Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 001-39214

Casper Sleep Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware			46-3987647
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
Three World Trade Center 175 Greenwich Street, Floor 39 New York, NY			10007
(Address of principal executive offices)			(Zip Code)

(347) 941-1871

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.000001 par value per share	CSPR	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ý

The number of shares of registrant's common stock outstanding as of August 10, 2020 was 40,151,546.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION (unaudited)
Item 1.	Consolidated Financial Statements	6
	Consolidated Balance Sheets as of June 3 0 , 2020 and December 31, 2019	6
	Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended June 30 , 2020 and 2019	7
	Consolidated Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity/(Deficit) for the three and six months ended June 3 0 , 2020 and 2019	8
	Consolidated Statement of Cash Flows for the six months ended June 3 0 , 2020 and 2019	10
	Notes to Unaudited Consolidated Interim Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signatures		46

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements about our future results of operations and financial position; the anticipated impact of the novel coronavirus on our business; our business strategy, and plans and objectives of management for future operations, including, among others, statements regarding our ongoing actions in response to the novel coronavirus outbreak, expected growth and market position, future capital expenditures and debt service obligations. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: the novel coronavirus outbreak could adversely impact our business, financial condition and results of operations; our ability to compete successfully in the highly competitive industries in which we operate; our ability to maintain and enhance our brand; the success of our retail store expansion plans; our ability to successfully implement our growth strategies related to launching new products; the effectiveness and efficiency of our marketing programs; our ability to manage our current operations and to manage future growth effectively; our past results may not be indicative of our future operating performance; our ability to attract new customers or retain existing customers; the growth of the market for sleep as a retail category and our ability to become a leader or maintain our leadership in the category; the impact of social media and influencers on our reputation; our ability to protect and maintain our intellectual property; our exclusive reliance on third-party contract manufacturers whose efforts we are unable to fully control; our ability to effectively implement strategic initiatives; our ability to transfer our supply chain and other business processes to a global scale; risks relating to our international operations and expansion; we are dependent on our retail partners; general economic and business conditions; we could be subject to system failures or interruptions and security breaches; risks relating to changing legal and regulatory requirements, and any failure to comply with applicable laws and regulations; we may be subject to product liability claims and other litigation; we may experience fluctuations in our quarterly operating results; we have and expect to continue to incur significant losses; risks relating to our indebtedness; our need for additional funding, which may not be available; risks relating to taxes; future sales by us our stockholders may cause the market price of our stock to decline; risks and additional costs relating to our status as a new public company; and the other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated in Item 1A, Part II of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

BASIS OF PRESENTATION

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” “Casper,” and similar references refer to Casper Sleep Inc. together with its subsidiaries.

Certain monetary amounts, percentages, and other figures included in this Quarterly Report on Form 10-Q have been subject to rounding adjustments. Percentage amounts included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Certain other amounts that appear in this Quarterly Report on Form 10-Q may not sum due to rounding.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Casper Sleep Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)



	As of
Assets	June 30, 2020		December 31, 2019
Current assets:
Cash and cash equivalents	$	98,218	$	67,578
Accounts receivable, net	23,375		31,059
Prepaid expenses and other current assets	14,134		23,924
Inventory, net	37,220		39,358
Total current assets	172,947		161,919
Property and equipment, net	68,849		66,262
Other assets	1,367		2,137
Total assets	$	243,163	$	230,318

Liabilities, Convertible Preferred Stock and Stockholders’ Equity/(Deficit)
Current liabilities:
Accounts payable	27,260		30,734
Accrued expenses	60,811		73,130
Deferred revenue	7,220		9,673
Other current liabilities	25,889		34,422
Total current liabilities	121,180		147,959
Other liabilities	73,992		69,492
Total liabilities	195,172		217,451
Convertible preferred stock, $0.000001 par value - 0 and 19,213 shares authorized; 0 and 19,181 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively	—		319,961
Stockholders’ equity/(deficit):
Common stock, $0.000001 par value - 170,000 and 0 shares authorized; 39,743 and 0 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively	—		—
Additional paid-in capital	432,143		18,097
Accumulated other comprehensive (loss) income	(221)		69
Accumulated deficit	(383,931)		(325,260)
Total stockholders’ equity/(deficit)	47,991		(307,094)
Total liabilities, convertible preferred stock and stockholders’ equity/(deficit)	$	243,163	$	230,318

See accompanying notes to consolidated financial statements (unaudited).

Casper Sleep Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	110,196	$	95,227	$	223,240	$	184,664
Cost of goods sold	53,131		48,535		113,211		94,400
Gross profit	57,065		46,692		110,029		90,264
Operating expenses
Sales and marketing expenses	33,181		39,838		70,655		69,443
General and administrative expense	42,017		33,250		89,004		64,134
Restructuring expenses	4,129		—		5,440		—
Total operating expenses	79,327		73,088		165,099		133,577
Loss from operations	(22,262)		(26,396)		(55,070)		(43,313)
Other (income) expense
Net interest expense	2,152		285		4,308		542
Other (income) expense, net	(219)		279		(733)		554
Total other expenses, net	1,933		564		3,575		1,096
Loss before income taxes	(24,195)		(26,960)		(58,645)		(44,409)
Income tax expense	10		(33)		26		(33)
Net loss	(24,205)		(26,927)		(58,671)		(44,376)
Other comprehensive income (loss)
Currency translation adjustment	(737)		(103)		(290)		95
Total comprehensive loss	$	(24,942)	$	(27,030)	$	(58,961)	$	(44,281)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.61)	$	(2.56)	$	(1.74)	$	(4.24)
Weighted-average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted	39,708,401		10,537,349		33,808,771		10,476,854

See accompanying notes to consolidated financial statements (unaudited).

Casper Sleep Inc. and Subsidiaries

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity/(Deficit)

(In thousands, except share and per share amounts)

(Unaudited)


	Convertible Preferred Stock				Casper Sleep Inc, Stockholders

	Preferred Stock				Common Stock						Class A common stock					Class B common stock						Additional paid-in capital	Accumulated other comprehensive (loss) income	Accumulated deficit	Total stockholders’ equity/(deficit)
	Shares	Amount		Shares	Amount		Shares	Amount		Shares		Amount
Balance at December 31, 2019	19,212,912	$	319,961	—	$	—	9,190,858	$	—	1,466,078		$	—	$	18,097	$	69	$	(325,260)	$	(307,094)
Initial public offering, net of issuance costs of $11.8 million	—	—		8,350,000	—		—	—		—		—		88,206		—		—		88,206
Conversion of redeemable convertible preferred stock to common stock	(19,212,912)	(319,961)		20,485,054	—		—	—		—		—		319,961		—		—		319,961
Common stock conversion	—	—		10,656,936	—		(9,190,858)	—		(1,466,078)		—		—		—		—		—
Exercise of employee stock options	—	—		4,332	—		—	—		—		—		47		—		—		47
Exercise of stock warrants	—	—		181,133	—		—	—		—		—		3		—		—		3
Stock based compensation expense	—	—		—	—		—	—		—		—		2,661		—		—		2,661
Other comprehensive income	—	—		—	—		—	—		—		—		—		447		—		447
Net loss	—	—		—	—		—	—		—		—		—		—		(34,466)		(34,466)
Balance at March 31, 2020	—	$	—	39,677,455	$	—	—	$	—	—		$	—	$	428,975	$	516	$	(359,726)	$	69,765
Initial public offering, net of issuance costs of $11.8 million	—	$	—	—	$	—	—	$	—	—		$	—	$	(207)	$	—	$	—	$	(207)
Exercise of employee stock options	—	—		65,827	—		—	—		—		—		91		—		—		91
Exercise of stock warrants	—	—		—	—		—	—		—		—		—		—		—		—
Stock based compensation expense	—	—		—	—		—	—		—		—		3,284		—		—		3,284
Other comprehensive income	—	—		—	—		—	—		—		—		—		(737)		—		(737)
Net loss	—	—		—	—		—	—		—		—		—		—		(24,205)		(24,205)
Balance at June 30, 2020	—	$	—	39,743,282	$	—	—	$	—	—		$	—	$	432,143	$	(221)	$	(383,931)	$	47,991

Casper Sleep Inc. and Subsidiaries

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity/(Deficit)

(In thousands, except share and per share amounts)

(Unaudited)






	Convertible Preferred Stock						Casper Sleep Inc, Stockholders

	Preferred Stock				Common Stock							Class A common stock					Class B common stock						Additional paid-in capital	Accumulated other comprehensive (loss) income	Accumulated deficit	Total stockholders’ deficit
	Shares	Amount		Shares	Amount			Shares	Amount		Shares		Amount
Balance at December 31, 2018	16,524,147	$	238,802	—	$	—		9,110,359	$	—	1,287,712		$	—	$	8,750	$	(419)	$	(232,220)	$	(223,889)
Exercise of vested employee stock options	—	—		—	—			68,499	—		8,079		—		89		—		—		89
Common stock conversion	—	—		—	—			—	—		—		—		—		—		—		—
Stock based compensation expense	—	—		—	—			—	—		—		—		1,650		—		—		1,650
Other comprehensive income	—	—		—	—			—	—		—		—		—		198		—		198
Series D funding	1,481,734	43,127		—	—			—	—		—		—		—		—		—		—
Net loss	—	—		—	—			—	—		—		—		—		—		(17,449)		(17,449)
Balance at March 31, 2019	18,005,881	$	281,929	—	$	—		9,178,858	$	—	1,295,791		$	—	$	10,489	$	(221)	$	(249,669)	$	(239,401)
Exercise of vested employee stock options	—	$	—	—	$	—		5,000	$	—	145,889		$	—	$	931	$	—	$	—	$	931
Common stock conversion	—	—		—	—			—	—		—		—		—		—		—		—
Stock based compensation expense	—	—		—	—			—	—		—		—		1,876		—		—		1,876
Other comprehensive income	—	—		—	—			—	—		—		—		—		(103)		—		(103)
Series D funding	118,412	4,563		—	—			—	—		—		—		—		—		—		—
Net loss	—	—		—	—			—	—		—		—		—		—		(26,927)		(26,927)
Balance at June 30, 2019	18,124,293	$	286,492	—	$	—		9,183,858	$	—	1,441,680		$	—	$	13,296	$	(324)	$	(276,596)	$	(263,624)

See accompanying notes to consolidated financial statements (unaudited).

Casper Sleep Inc. and Subsidiaries

Consolidated Statement of Cash Flows

(In thousands, except per share amounts)

(Unaudited)



	Six Months Ended June 30,
	2020		2019
Cash flows used in operating activities:
Net loss	$	(58,671)	$	(44,376)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ²	7,735		2,525
Stock based compensation expense	5,945		3,526
Other	1,553		1,922

Changes in assets and liabilities:
Accounts receivable, net	7,684		(2,524)
Prepaid expenses and other current assets	9,790		(5,769)
Inventory, net	1,533		(5,088)
Other assets	764		(1,791)
Accounts payable	(3,019)		14,256
Accrued expenses	(12,319)		10,480
Deferred revenue	(2,453)		(1,818)
Other liabilities	(4,975)		3,850
Net cash used in operating activities	(46,433)		(24,807)
Cash flows used in investing activities:
Purchases of property and equipment¹	(10,777)		(25,107)
Note receivable	—		464
Net cash used in investing activities	(10,777)		(24,643)
Cash flows provided by financing activities:
Exercise of stock options and warrants	141		1,020
Proceeds from equity issuance	87,999		47,690
Proceeds from borrowings			2,400
Repayment on borrowings	—		(2,922)
Net cash provided by financing activities	88,140		48,188
Effect of exchange rate changes	(290)		95
Net change in cash and cash equivalents	30,640		(1,167)
Cash and cash equivalents at beginning of period	67,578		28,355
Cash and cash equivalents at end of the period	$	98,218	$	27,188

Supplemental disclosure of cash paid for:
Interest paid	(2,822)		(360)

Supplemental schedule of noncash financing activity:
Series Seed preferred units converted to common stock	1,826		—
Series A preferred units converted to common stock	12,983		—
Series B preferred units converted to common stock	54,895		—
Series C preferred units converted to common stock	169,098		—
Series D preferred units converted to common stock	81,159		—
Class A common stock converted to common stock	—		—
Class B common stock converted to common stock	—		—
Reclass of deferred financing costs to additional paid in capital	5,696		—
Deferred financing costs included in accounts payable and accrued expenses	1,145		—

1 Purchases of property and equipment is net of fixed assets purchases that are included in accounts payable amounting to $19 at June 30, 2020 and $1,988 at June 30, 2019.

2 .Depreciation and amortization for the six months ended June 30, 2020 consists of $6,344 recorded in general and administrative expenses and $1,391 recorded in restructuring expenses on the Consolidated Statements of Operations and Comprehensive Loss.

See accompanying notes to consolidated financial statements (unaudited)

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(1) Description of Business

Casper Sleep Inc. and its subsidiaries (the “Company” or “Casper”) design and sell premium sleep products including mattresses, pillows, sheets, and other sleep-centric products. The Company’s head office is located at 175 Greenwich Street, 3 World Trade Center, New York, NY, and the Company has additional office locations in Berlin, Germany, and San Francisco, CA, as well as retail locations and pop-up stores throughout the United States (“U.S.”) and Canada.

The Company comprises Casper Sleep Inc. and its wholly-owned subsidiaries, Casper Science LLC, Casper Sleep Retail LLC, and Casper Sleep Limited (“Casper UK Holdco”). Casper UK Holdco wholly-owns Casper Sleep GmbH, Casper Sleep (UK) Limited, and Casper Sleep SAS. 

(2) Initial Public Offering

On February 10, 2020, the Company completed the initial public offering (the “IPO”) of its common stock pursuant to a Registration Statement on Form S-1. In the IPO, the Company sold an aggregate of 8,350,000 shares of common stock at a public offering price of $12.00 per share. Upon consummation of the offering on February 10, 2020, the Company received net proceeds of approximately $88.2 million, after deducting underwriting discounts and commissions of $6.5 million and offering expenses of $5.5 million. Upon the completion of the IPO, all outstanding shares of the Company's convertible preferred stock and Class A and Class B common stock were converted into common stock. 

(3) Basis of Presentation

The Company presents its financial statements on a consolidated basis of all its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. All figures expressed, except share amounts, are represented in U.S. dollars in thousands.  The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our consolidated financial statements for the year ended December 31, 2019. The information included in the accompanying unaudited financial statements reflects all adjustments, all of which are of a normal, recurring nature, that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The information set forth in the accompanying unaudited financial statements may be subject to normal year-end adjustments. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the presentation of the current period consolidated financial statements.  

(4) Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the valuation of deferred income tax assets, deferred revenue, the valuation of stock-based compensation and warrants, the product returns reserve, the inventory obsolescence reserve and accounts receivable and allowance for doubtful accounts. 

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(5) Summary of Significant Accounting Policies

Segment Information

The Company operates in 1 operating segment within the United States, Canada and Europe, providing sleep products through various sales channels. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”). The Company’s CODM is its Chief Executive Officer. The role of the CODM is to make decisions about allocating resources and assessing performance. The Company's business operates in 1 operating segment as all of the Company's sales channels are complementary and are analyzed in an identical way, with the CODM evaluating the Company's financial information, resources and performance of these resources on a consolidated basis. Since the Company operates in 1 operating segment, all required financial segment information can be found in the consolidated financial statements. 

(a) Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.

(b) Accounts Receivable, net

Accounts receivable, net was composed primarily of amounts due from retail partners of $20,455 and $25,262, and from financial institutions related to credit card sales amounting to $3,545 and $5,797, as of June 30, 2020 and December 31, 2019 respectively.

Inventories primarily consist of merchandise purchased for sale, as well as costs to deliver merchandise to Casper’s logistics providers and retail stores. The Company’s inventory is stated using weighted average costing. The Company performs an analysis to determine whether it is appropriate or not to maintain a reserve for excess and obsolete inventory. The reserve is based on historical experience related to the disposal of identified inventory, specifically through sales to retail partners, clearance sales and, ultimately, the expected recoverable value. The value of older inventory can be impacted by new product launches, which can make certain older items obsolete. A lower of cost or market assessment is performed on inventory and reserves established when the net realizable value exceeds the historic cost. Most of Casper’s inventory is just-in-time and most products have been recently introduced and in existence for less than two years. The Company performs a review of all on hand inventory to determine if any items are deemed obsolete based on specific facts and circumstances.

Storage costs, indirect administrative overhead and certain selling costs related to inventories are expensed in the period incurred.

Inventory consists of the following:


	June 30, 2020		December 31, 2019
Raw materials	$	500	$	680
Finished goods	33,863		32,945
Inventory in transit	2,857		5,733

Total inventory	$	37,220	39,358

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

Raw materials consist of replacement parts and components used in the creation of products. Finished goods is comprised of completed goods including mattresses, pillows, sheets, dog beds, Glow lights, and furniture.

Inventory in transit is either purchased inventory coming from outside the United States or inventory being transferred between warehouses or from warehouse to retail location.

The Company writes down inventory as a result of excess and obsolete inventories, or when it believes that the net realizable value of inventories is less than the carrying value, in accordance with ASU 2015-11, Simplifying the Measurement of Inventory, which was adopted in 2016.

(d) Revenue Recognition

Revenue transactions associated with the sale of goods and services comprise a single performance obligation, which consists of the sale of products to customers either to the Company’s retail partners or through its direct-to-consumer (“DTC”) channel. Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the customers, based on the terms of sale. The transfer of control typically occurs at a point in time based on consideration of when the customer has an obligation to pay for the goods, and physical possession of, legal title to, and the risks and rewards of ownership of the goods has been transferred, and the customer has accepted the goods. Revenue from retail partnership transactions is generally recognized at the time products are shipped based on contractual terms with the customer. Revenue from our DTC channel is generally recognized at the point of sale in our retail stores and at the time of delivery for e-commerce transactions.

Revenue is recognized net of estimates of variable consideration, including product returns, customer discounts and allowances. Casper determines these estimates based on contract terms, evaluations of historical experience, anticipated trends, and other factors. The actual amount of customer returns and customer allowances, which is inherently uncertain, may differ from our estimates.

The duration of contractual arrangements with our customers is typically less than one year. Payment terms with retail partners vary depending on creditworthiness and other considerations, with the most common being net 30 days. Payment is due at the time of sale for DTC transactions.

We have elected to account for shipping and handling as fulfillment activities, and not as separate performance obligations. Shipping and handling fees billed to customers are included in net sales. All shipping and handling activity costs are recognized as costs of goods sold at the time the related revenue is recognized. Sales taxes collected from customers and remitted directly to government authorities are excluded from net sales and cost of goods sold.

Revenue is comprised of global sales through our DTC channels and our retail partnerships, and reflects the impact of product returns as well as discounts for certain sales programs 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 DTC 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.

Disaggregated Revenue Data

The following tables disaggregate our net sales by geography and channel for the periods indicated:

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,
	2020		2019
North America Region	$	104,967	$	89,318
EU Regions	5,229		5,909
Total	$	110,196	$	95,227

Direct to Consumer	$	80,961	$	77,085
Retail Partnerships	29,235		18,142
Total	$	110,196	$	95,227


	Six Months Ended June 30,
	2020		2019
North America Region	$	211,326	$	172,387
EU Regions	11,914		12,277
Total	$	223,240	$	184,664

Direct to Consumer	$	171,265	$	157,158
Retail Partnerships	51,975		27,506
Total	$	223,240	$	184,664

(e) Cost of Goods Sold

Cost of goods sold consists of costs of purchased merchandise, including freight, duty, vendor rebates, and nonrefundable taxes incurred in delivering goods and services to customers and distribution centers, packaging and component costs, warehousing and fulfillment costs, damages, and excess and obsolete inventory write-downs.

(f) Sales and Marketing expenses

Sales and marketing expenses consist primarily of advertising and marketing promotions of the Company’s products as well as sponsorship costs, consulting and contractor expenses. Advertising and other promotional costs are expensed as incurred.

(g) General and Administrative expenses

General and administrative expenses consist of personnel-related costs for our retail stores, 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. Research and development expenses are included within general and administrative and consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment, and prototype materials.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(h) Restructuring expenses

On April 21, 2020, in response to the COVID-19 pandemic, the Company announced a number of restructuring actions focused on cost savings and renewed focus on commercial operations in North America. Specifically, the Company implemented a reduction in personnel and announced the wind down of its European operations. In connection with these actions, during the second quarter of 2020, the Company incurred approximately $4,129 of restructuring expenses including $1,500 related to separation costs for 80 employees,$1,327 related to contract termination costs, $1,022 of asset impairments and $280 of other expenses.

During the three months ended March 31, 2020, the Company also announced plans to close its retail outlet stores. Costs associated with the retail store closures amounted to $1,311 and were previously presented in general and administrative expenses in the prior period consolidated financial statements. These costs have been presented in restructuring expenses in the current period consolidated financial statements.

The Company estimates total costs associated with restructuring activities announced in the second quarter to be $4,435.


	Three Months Ended June 30, 2020
	EU Closure		US		Total
Severance and benefits	$	400	$	1,100	$	1,500
Contract termination	1,327		—		1,327
Asset impairments	791		231		1,022
Other expenses	172		108		280
Total	$	2,690	$	1,439	$	4,129


	Six Months Ended June 30, 2020
	EU Closure		US		Total
Severance and benefits	$	400	$	1,110	$	1,510
Contract termination	1,327		320		1,647
Asset impairments	791		1,212		2,003
Other expenses	172		108		280
Total	$	2,690	$	2,750	$	5,440

The Company's accrued liabilities for the restructuring expenses at June 30, 2020 was $2,544, which is presented in accrued expenses in the consolidated balance sheets.


Accrued restructuring balance as at December 31, 2019	$	—
Charges accrued during the three month period ended March 31, 2020	330
Payments made during the three month period ended March 31, 2020	(10)

Accrued restructuring balance as at March 31, 2020	$	320

Charges accrued during the three month period ended June 30, 2020	3,107
Payments made during the three month period ended June 30, 2020	(883)

Accrued Restructuring balance as of June 30, 2020	$	2,544

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(i) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist primarily of prepaid media placement for media campaigns that have not yet run, prepaid rent and office related expenses, and other prepaid expenses. In addition, the Company had tenant allowance receivable of $6,282 and $8,072 as of June 30, 2020 and December 31, 2019 respectively.

(j) Stock-Based Compensation

Compensation cost for all stock-based awards, including options to purchase stock and restricted stock units (“RSUs”) is measured at fair value on the date of grant and recognized over the service period. The fair value of stock options is estimated on the date of grant using a Black-Scholes model.

The fair value of RSUs awarded is estimated on the date of grant based on the fair value of our common stock. Compensation cost is recognized on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures.

See Note 8 for a complete description of the accounting for stock-based awards. The Company also issues stock-based awards to some of its non-employee consultants. The Company accounts for equity awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, which requires the fair value of an award to a non-employee be remeasured at fair value as the award vests. Upon completion of the underlying performance obligation, or the vesting period, these cease to be revalued.

Stock-based compensation cost amounted to $3,284 and $5,945 for the three and six months ended June 30, 2020, respectively, and $1,876 and $3,526 for the three and six months ended June 30, 2019, respectively. These amounts include stock-based compensation to employees and non-employees.

(k) Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

Depreciation expense on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of furniture, fixtures, computers, technology hardware, and vehicles range from 3 to 5 years. The Company’s purchased software is amortized over 7 years. Leasehold improvements are depreciated over the shorter of their useful life or the related lease term (without consideration of option renewal terms).

Property and equipment consist of the following:


	June 30, 2020		December 31, 2019
Leasehold improvements	$	47,022	$	46,370
Computer software	2,226		1,733
Furniture and fixtures	21,209		21,063
Computer Equipment	4,399		3,590
Machinery and Equipment	2,033		2,185
Construction in progress	11,132		4,658
Property and equipment, gross	$	88,021	$	79,599
Less: accumulated depreciation	(19,172)		(13,337)
Property and equipment, net	$	68,849	$	66,262

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

Depreciation expense related to property and equipment was $3,606 and $7,735 for the three and six months ended June 30, 2020, respectively and $1,413 and $2,525 for the three and six months ended June 30, 2019, respectively.

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined using various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

As described in footnote (h) ("Restructuring expenses") above, the Company recorded an impairment charge related to restructuring actions of $411 and $1,391 for the three and six months ended June 30, 2020 as a result of permanently closing 3 outlet stores, abandoning selected product development activities resulting in impairment of related production assets and exiting our European operations. This expense is presented within restructuring expenses on the consolidated statement of operations and comprehensive loss. NaN impairment losses were recognized in 2019.

(l) Income Taxes

The Company accounts 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 basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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.

The Company reduces deferred tax assets, by a valuation allowance if it is more likely than not that the Company will not realize some or all of the deferred tax assets. In making such a determination, the Company considers 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. The Company recognizes 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.

The Company recognizes interest and penalties related to uncertain tax positions within the provision for (benefit from) income taxes in the consolidated statement of operations and comprehensive loss.

(m) Deferred Rent

Rental payments under operating leases are expensed on a straight-line basis after consideration of rent holidays, tenant allowances, step rent provisions and escalation clauses. Differences between rental expense (recognized from the date of possession) and actual rental payments are recorded as deferred rent. Deferred rent was $7,675 and $6,734 as of June 30, 2020 and December 31, 2019, respectively. Deferred rent is presented in other liabilities.

(n) Intangibles

The Company’s intangible assets consist of patents and domain names stated at cost. For intangible assets whose lives are determined to be indefinite, Casper qualitatively evaluates these for impairment.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(o) Other Current Liabilities

Other current liabilities consist of the following:



	June 30, 2020		December 31, 2019
Product return reserve	$	7,098	$	10,610
Short term debt	15,868		15,868
Other	2,923		7,944
Total Other Current Liabilities	$	25,889	$	34,422

(p) Basic and Diluted Loss per Common Share

The Company uses the two-class method to compute net loss per common share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. These participating securities include shares of each series of the Company’s convertible preferred stock, which have non-forfeitable rights to participate in any dividends declared on the Company’s common stock. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings.

Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses.

Diluted net income per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period or date of issuance, if later. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period.

(q) Foreign Currency

The functional currency of the Company's international operating subsidiaries is the local currency. The Company translates the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates for the annual period are derived from month-end spot rates for revenues, costs and expenses. The Company records translation gains and losses in accumulated other comprehensive loss as a component of stockholders' equity/(deficit). Foreign currency transaction gains and losses are included in net loss for the period.

(r) Convertible Preferred Stock

On February 10, 2020, upon the closing of the Company's IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 20,485,054 shares of common stock. 

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(6) Fair Value of Financial Instruments

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1 inputs are based on quoted prices in active markets for identical assets or liabilities.

•Level 2 inputs are based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 inputs are based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities, and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value. Such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets.

The following summarizes assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of June 30, 2020 and December 31, 2019:


	Fair Value					Cash and Cash Equivalents
	June 30, 2020		December 31, 2019	June 30, 2020		December 31, 2019
Assets
Cash	38,630		22,451	38,630		22,451
Level 1:
Money market funds	59,588		45,127	59,588		45,127
Cash and cash equivalents	$	98,218	67,578	$	98,218	67,578

Liabilities
Level 2:
Preferred stock warrant liabilities	—		(666)	—		—
Total	$	98,218	66,912	$	98,218	67,578

(7) Debt

Senior Secured Facility

On April 27, 2016, the Company entered into a loan and security agreement (“Senior Secured Facility”) with Pacific Western Bank that provides for a $15,000 revolving credit line (“Revolving Line”). No significant debt issuance costs were incurred as part of the transaction. The Company is obligated to pay ongoing commitment fees equal to $9 annually. On November 20, 2017, Casper amended this line of credit to raise the borrowing limit to $30,000. On August 14, 2018, the Senior Secured Facility was amended to modify reporting covenants. On December 12, 2018, the Senior Secured Facility was modified to increase

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

the ancillary services sublimit from $4,000 to $10,000. On March 1, 2019, the Senior Secured Facility was amended to modify the borrowing limit to $25,000 as well as other covenants. On September 1, 2019, the Senior Secured Facility was amended to extend the maturity date of the Revolving Line to September 1, 2020, increase the amount of allowable capital expenditures from $39,000 to $55,000, and increase the borrowing base percentage from 150% to 300% of the most recent average trailing three month gross profit. On August 6, 2020, the Senior Secured Facility was amended to extend the maturity date by 90 days.

Subject to certain terms of the loan agreement, the Company may borrow, prepay and re-borrow amounts under the Revolving Line at any time and amounts repaid or prepaid may be re-borrowed. Interest rates on borrowings under the Revolving Line will be based on the greater of the prime rate or three and a half percent (3.5%). The prime rate is defined as the rate of interest announced by the bank.

The Senior Secured Facility contains certain customary financial, affirmative, and negative covenants, including a minimum net revenue, a minimum cash balance to be held at Pacific Western Bank, a limit on the Company’s ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or make distributions, and certain other restrictions on the Company’s activities each defined specifically in the agreement. Casper was in compliance with all terms and covenants in the Senior Secured Facility as of June 30, 2020.

The outstanding balance of the Revolving Line was $15,868 as of June 30, 2020. Interest expense incurred on the Revolving Line was $151 and $335 for the three and six months ended June 30, 2020, respectively.

Subordinated Facility

On March 1, 2019, Casper Sleep Inc., Casper Science LLC and Casper Sleep Retail LLC entered into a growth capital loan and security facility agreement with TriplePoint Venture Growth BDC Corp., as lender and collateral agent, and TriplePoint Capital LLC, as lender (or, together with TriplePoint Venture Growth BDC Corp., TriplePoint), which provided for a $50,000 growth capital loan facility (the “Subordinated Facility”). The Subordinated Facility allows for expansion up to an additional $50,000 upon request and approval following full utilization of the initial loan, and has a maturity, at our option, of up to five years.

Borrowings under the Subordinated Facility accrue interest at the prime rate (which, as defined in the Subordinated Facility, shall be as published in the Wall Street Journal with a floor of 5.25%) plus an applicable margin set forth in the table of terms. The table of terms sets forth 18 options that range on term, amortization, interest rate and other features that can range from an annual interest rate of the prime rate plus 0.0% margin for a three months interest only term and up to a prime plus 7.25% margin for 48 months interest only term. End of term payments range from 0.25% of each advance for a three-month term up to 8.25% for each advance with a 48 month repayment option. The Subordinated Facility also has a 1.25% one-time facility fee for the committed amount, which is initially $50,000.

As of June 30, 2020, the Company was in compliance with all covenants under the Subordinated Facility and the outstanding balance of the loans was $50,000. Interest expense incurred on the loan $1,835 and $3,670 for the three and six months ended June 30, 2020, respectively.

See Note 14 for additional information on warrants issued in conjunction with the Subordinated Facility.

(8) Stock-Based Compensation

During the six months ended June 30, 2020, the Company granted 90,505 stock options.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

 During the six months ended June 30, 2020, options to purchase 70,159 shares of common stock were exercised. The intrinsic value, which is the difference between the market value of the stock and the exercise price of the stock options, of those options exercised was $389.

The total number of options vested during the six months ended June 30, 2020, was 634,701 at a total fair value of $5,693.

During the six months ended June 30, 2020, the Company extended the term of certain fully vested stock options for certain employees resulting in the immediate recognition of incremental stock-based compensation expense of $6.

As of June 30, 2020, the total unrecognized stock-based compensation expense related to stock options was $27,659. The Company expects to recognize this expense over the remaining weighted- average period of approximately 2.88 years.

Restricted Stock Units and Performance Stock Units

In February 2020 and in connection with the IPO, the Company's Board of Directors adopted the Company's 2020 Equity Incentive Plan, which became effective upon the filing of the associated Form S-8 on February 11, 2020.

During the six months ended June 30, 2020, the Company granted 1,917,308 restricted stock units (“RSUs”), and 259,616 performance stock units (“PSUs”), of which 323,779 units were forfeited. During the three months ended June 30, 2020, the Company granted 178,780 restricted stock units (“RSUs”), and 0 performance stock units (“PSUs”), of which 320,129 units were forfeited. The fair value of the units granted was equal to the average stock price on the grant date.

Total stock-based compensation expense of $1,621 and $2,228 was recognized for the three and six months ended June 30, 2020, respectively, and is included within general and administrative expense. Total stock-based compensation expense of $0 was recognized for the three and six months ended June 30, 2019, respectively. The Company expects to recognize the expense over the remaining vesting period of four years for new hire grants, and three years for all other employee and director grants.

The PSUs earned will vest within one year from the grant date based on the Company's performance. As of June 30, 2020, the Company recognized $0 on the PSUs, as the performance metrics are not expected to be achieved based on the fiscal year 2020 forecast.

The following table summarizes the activity related to the Company's RSUs and PSUs:

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)


Restricted Stock Units and Performance Stock Units	Outstanding shares	Weighted Average Grant Date Fair Value
Balance as of January 1, 2020	—	$	—
Granted	2,176,924	8.58
Vested and converted to shares	—	—
Forfeited or canceled	(323,779)	8.75
Balance as of June 30, 2020	1,853,145	$	8.55

(9) Significant Risks and Uncertainties Including Business and Credit Concentrations

Risks and Uncertainties

In December 2019, the COVID-19 disease caused by the novel coronavirus was reported in the media, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On March 11, 2020, the WHO characterized COVID-19 as a pandemic. The broader implications of the COVID-19 pandemic on the Company’s results of operations and overall financial performance remain uncertain. The Company has experienced and may continue to experience constrained supply or slowed customer demand that could materially adversely impact the Company’s business, results of operations and overall financial performance in future periods. As there remains a high degree of uncertainty around the impacts of the COVID-19 pandemic, the Company addresses and evaluates the impacts frequently.

At this stage of the Company's development, the ability to generate positive operating cash flows is a risk. The Company has incurred a net loss from operations and net operating cash outflows for the three and six months ended June 30, 2020, the years 2019 and 2018 and since inception and has an accumulated deficit. As a result, the Company continues to rely upon investors who contributed cash to cover the Company's current operating expenses and obligations and has the ability to draw down on the line of credit. The Company's success will depend in part on its ability to continue to attract new customers, retain existing customers, and curate and market its products. There can be no assurance that the Company will be able to achieve any or all of these success factors. The Company estimates that it will have adequate liquidity to fund operations through August 12, 2021. In the future, if the Company is unable to attain positive cash flow from operations it will need to raise adequate financing or issue additional debt to maintain its current level of operations and growth.

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash investments with high-credit quality financial institutions. A significant portion of the Company’s accounts receivable is with its credit card processors and retail partnerships. The Company believes no significant credit risk exists with respect to these financial instruments.

Concentrations

As of June 30, 2020, three customers comprised 32%, 18% and 15% of the Company's accounts receivable balance. As of December 31, 2019, one customer comprised 49% of the Company’s accounts receivable balance.

One customer accounted for 12% of the Company’s revenue for the six months ended June 30, 2020. No customer accounted for more than 10% of the Company’s revenue in the six months ended June 30, 2019.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(10) Leases

Rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Rental expense for operating leases were $6,111 and $4,415 for the three months ended June 30, 2020 and 2019, respectively and $11,746 and $7,404 for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, future minimum lease payments under non-cancelable operating leases consisted of the following:


2020 (remaining six months)	10,287
2021	20,676
2022	21,174
2023	21,069
2024	17,334
Thereafter	85,079
Total minimum lease payments	$	175,619

 The Company maintains leases for its office spaces and retail locations in each location as described in Note 1. 

(11) Income Taxes

Effective Tax Rate

The Company’s effective tax rate, which is calculated by dividing each period’s income tax provision by pretax income was 0.07% and 0.05% for the three months ended June 30, 2020 and 2019, respectively and 0.06% and 0.05% during the six month period ended June 30, 2020 and 2019, respectively. The effective tax rates for the period ended June 30, 2020 generally differ from the U.S. federal statutory tax rate primarily due to a full valuation allowance related to the Company’s U.S. deferred tax assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted into law. The Company has considered the impact of the business provisions in the CARES Act and determined that there is no material impact to the Company's accounting for income taxes.

Unrecognized Tax Benefits and Other Considerations

The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority.

The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state to be major tax jurisdictions.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

Future Changes in Unrecognized Tax Benefits

The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.

  (12) Accrued Expense

Accrued expenses consist of the following:


	June 30, 2020		December 31, 2019
Tax fees	$	14,413	$	14,033
General trade	19,190		30,568
Marketing	16,797		19,444
Other	10,411		9,085
Total Accrued Expenses	$	60,811	$	73,130

(13) Convertible Preferred Stock, Common Stock, and Stockholders’ Equity/(Deficit)

(a) Common Stock

On February 10, 2020, in connection with our IPO, all Class A common stock and Class B common stock were converted into common stock at a par value of $0.000001, and we issued and sold 8,350,000 shares of our common stock at a price to the public of $12.00 per share resulting in net proceeds to us of approximately $88.2 million after deducting the underwriting discount of approximately $6.5 million and offering expenses of approximately $5.5 million.

As of June 30, 2020, the Company had 170,000,000 shares of authorized common stock. Each holder of the Company's common stock is entitled to 1 vote per share on all matters to be voted upon by the stockholders. There are no cumulative rights. Subject to any preferential rights of any outstanding preferred stock, holders of the Company's common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the Company's Board of Directors out of legally available funds. If there is a liquidation, dissolution or winding up of the Company, holders of the Company's common stock would be entitled to share in the Company's assets remaining after the payment of liabilities and any preferential rights of any outstanding preferred stock.

Holders of the Company's common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of the Company's common stock will be fully paid and non-assessable. The rights, preferences and privileges of the holders of the Company's common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which the Company may designate and issue in the future

(b) Convertible Preferred Stock

On February 10, 2020, upon the closing of the Company's IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 20,485,054 shares of common stock.

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)


	Series seed preferred stock				Series A preferred stock					Series B preferred stock				Series C preferred stock		Series D preferred stock
Balance at December 31, 2019	3,951,636	$	1,826	4,753,421	$	12,983	2,378,594	$	54,895	5,440,496	$	169,098	2,688,765	$	81,159
Conversion of redeemable convertible preferred stock to common stock	(3,951,636)	(1,826)		(4,753,421)	(12,983)		(2,378,594)	(54,895)		(5,440,496)	(169,098)		(2,688,765)	(81,159)
Balance at June 30, 2020	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—

(14) Warrants

In 2014, the Company issued 2 warrants to purchase common stock that had an expiration date in 2024. The warrant issuances were to 1) a vendor in connection with a credit extension, and 2) a vendor in connection with the release of certain claims. Both warrants were fully vested when issued and were not provided as compensation for any service performed by the warrant holders. As such, they were marked at their fair market value on the date of issuance, and were no longer subject to re-measurement at each subsequent reporting date. The warrants were issued with an exercise price of $0.10 and were subsequently recorded at $8.9 in the consolidated statement of operations.

In connection with the IPO, the above-mentioned warrants were exercised in full and reclassified into 181,133 shares of common stock.

In connection with the Subordinated Facility, as described in Note 7, on March 1, 2019, Casper entered into 2 warrant agreements with TriplePoint Venture Growth BDC Corp. and TriplePoint Capital LLC for 19,201 shares of Series D preferred stock and 12,801 shares of Series D preferred stock, respectively, at an exercise price per share of $31.24715, (the “TPC Warrants”). TriplePoint’s right under the warrant agreements to purchase the Series D preferred stock will be available for the greater of (i) seven years from March 1, 2019 or (ii) one year from the effective date of an initial public offering, subject to certain exercise conditions in the event our common stock is traded on a securities exchange.

The TPC Warrants may be separated and transferred from the debt and may be separately exercisable. Therefore, they are deemed to be freestanding financial instruments. The TPC Warrants are redeemable for preferred stock upon a deemed liquidation event and are considered redeemable under the SEC ASR 268. Therefore, they are an obligation that require or may require repurchase of shares by transferring assets upon a deemed liquidation event.

In accordance with ASC 470-20-25-2, the proceeds of each debt issuance are allocated between the debt and the respective warrant based on their relative fair values. Each TPC Warrant is recorded as a liability upon initial recognition, with a corresponding debit to record a debt discount. Each reporting period, the TPC Warrants are marked to market with changes in fair value recorded as an increase/decrease in the liability with a corresponding fair value adjustment in other income (expense). The debt discount is initially recorded with each TPC Warrant and is amortized to interest expense over the term of the associated debt using the effective interest method. The TPC Warrants were issued before a liability for the debt was recognized and, as a result, the associated debt discount is classified as a deferred asset, consistent with the treatment of the fees paid to lenders.

(15) Recently Issued Accounting Pronouncements

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recently Adopted Accounting Pronouncement

In the first quarter of 2019, Casper adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method and applying this approach to contracts not completed as of the date of adoption. ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue under GAAP and requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires certain disclosures regarding qualitative and quantitative information with respect to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Comparative prior period information has not been restated and continues to be reported in accordance with accounting standards in effect for those periods. Please see Note 5 for additional revenue disclosures.

There was no material effect of adoption of ASC 606 on our consolidated financial statements other than the impact on disclosures.

New Accounting Pronouncements, Not Yet Adopted

Accounting pronouncements not listed below were assessed and determined to be not applicable or are expected to have minimal impact on the consolidated financial statements.

Lease Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which supersedes the existing lease guidance under current GAAP. ASU 2016-02 is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard and leases continue to be classified as finance or operating. ASU 2016-02’s primary change is the requirement for entities to recognize a lease liability for payments and a right-of-use (“ROU”) asset representing the right to use the leased asset during the term of an operating lease arrangement. Lessees are permitted to make an accounting policy election not to recognize the asset and liability for leases with a term of 12 months or less. In addition, ASU 2016-02 expands the disclosure requirements of lease arrangements. Upon adoption, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, “Targeted Improvements”, which allows for a new, optional transition method that provides the option to use the effective date as the date of initial application on transition. Under this option, the comparative periods would continue to apply the legacy guidance in Accounting Standard Codification (“ASC”) 840, including the disclosure requirements, and a cumulative effect adjustment would be recognized in the period of adoption rather than the earliest period presented. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company is currently working to complete the design of new processes and internal controls, which include the implementation of a software solution and finalizing the evaluation of Casper’s population of leased assets to assess the effect of the new guidance on the financial statements. On April 8, 2020 the FASB extended the implementation deadline of ASC 842 for companies following the private company adoption calendar. As such, the Company plans to adopt the new guidance effective January 1, 2022, but has not determined which transition method will be utilized. The new standard provides a number of optional practical expedients in transition. The Company expects to elect the “package of practical expedients” which permits us not to reassess under the new

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements (the latter is not applicable to us). Casper expects the adoption of the new standard to have a material effect on the Consolidated Financial Statements upon adoption. While the Company continues to assess all of the effects of the adoption, it currently believes the most significant effects relate to the recognition of new ROU assets and lease liabilities on the consolidated balance sheets for operating leases, as well as providing significant new disclosures about leasing activities. 

(16) Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):


	Three months ended						Six months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Numerator
Net loss	$	(24,205)	$	(26,927)	$	(58,671)	$	(44,376)
Numerator for basic and diluted loss per share	$	(24,205)	$	(26,927)	$	(58,671)	$	(44,376)

Denominator
Weighted-average common shares outstanding	39,708,401		10,537,349		33,808,771		10,476,854
Denominator for basic and diluted net loss per share	39,708,401		10,537,349		33,808,771		10,476,854
Net loss per share attributable to common stockholders, basic and diluted	(0.61)		(2.56)		(1.74)		(4.24)

 Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares plus common equivalent shares for the period, including any dilutive effect from such shares. Common equivalent shares are convertible preferred stock, convertible preferred stock warrants, shares issuable upon the exercise of stock options and unvested shares of RSUs.

Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potential common shares outstanding would have been anti-dilutive.  

The following securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the three and six months ended June 30, 2020 and 2019.


	Three months ended			Six months ended
	June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019
Warrants to purchase common stock	33,311	214,444	33,311	214,444
Stock options and RSUs	6,977,117	4,750,253	6,977,118	4,727,557

CASPER SLEEP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(Unaudited)

(17) Subsequent Events

The Company has assessed subsequent events through the date of this Quarterly Report on Form 10-Q and has concluded the following required disclosure in the consolidated financial statements.

On August 6, 2020, the Senior Secured Facility was amended to extend the maturity date by 90 days.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 ended December 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 in San 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 on March 19, 2020, for a discussion of the factors that generally are expected to impact our business.

Impact of COVID-19 Pandemic

Casper 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.

In order to protect the health and safety of our employees, particularly given the severity of the pandemic in New York and California,, 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 in mid-March 2020, we temporarily closed our retail stores in North 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 in mid-May 2020, we have been reopening our retail store operations in North 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 ended June 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 ended June 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 in mid-March 2020, we reduced our corporate personnel by approximately 21%, and in April 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 late March 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

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.

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

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
	(in thousands, except percentages)													(as a % of sales revenue 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

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

The following table sets forth information comparing the components of operations and comprehensive loss for the periods indicated.


	Six months ended June 30						Period over Period Change						Six months ended June 30
	2020		2019		Dollar		Percentage		2020		2019
	(in thousands, except percentages)													(as a % of sales revenue 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

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 June 30,							Six months ended 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)

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

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:


	Three months ended June 30,				Six months ended 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.

(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

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 ended December 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 of June 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. In December 2018, we signed an agreement for a headquarters in New York for a period of 15 years with a five-year renewal option. Rent payments began on the new headquarters in January 2020.

Historical Cash Flows

The following table shows summary cash flow information for the six months ended June 30, 2020 and 2019:


	Six months ended June 30,
(in thousands)	2020		2019
Net cash flows used in operating activities:	$	(46,433)	$	(24,807)
Net cash used in investing activities	(10,777)		(24,643)
Net cash provided by financing activities	88,140		48,188
Effect of exchange rate changes	(290)		95
Net increase in cash and cash equivalents	$	30,640	$	(1,167)

Operating Activities. Net cash used in operating activities consists of net loss adjusted for certain non-cash items, including share-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 six months ended June 30, 2020, net cash used in operating activities was $46.4 million and was comprised primarily of net loss of $58.7 million, decreased by $15.2 million related to non-cash adjustments, primarily related to depreciation and amortization, and share based compensation. Changes in working capital increased cash used in operating activities by $3.0 million, primarily due to a decrease in accrued expenses of $12.3 million, a decrease in other liabilities of $5.0 million, and a decrease in accounts payable of $3.0 million, partially offset by a decrease in accounts receivable of $7.7 million and a decrease in prepaid expenses of $9.8 million.

For the six months ended June 30, 2019, net cash used in operating activities was $24.8 million and was comprised primarily of net loss of $44.4 million, decreased by $8.0 million related to non-cash adjustments, primarily related to depreciation and amortization, and share-based compensation. Changes in working capital decreased cash used in operating activities by $11.6 million, primarily due to an increase in accounts payable of $14.3 million and an increase in accrued expenses of $10.5 million, partially offset by an increase in prepaid expenses of $5.8 million and an increase in inventory of $5.1 million.

Investing Activities. Our net cash used in investing activities primarily consists of purchases of property and equipment and issuances of notes receivables.

For the six months ended June 30, 2020, net cash used in investing activities was $10.8 million and was comprised of purchases of property and equipment.

For the six months ended June 30, 2019, net cash used in investing activities was $24.6 million and was primarily comprised of $25.1 million in purchases of property and equipment, partially offset by a $0.5 million decrease in note receivable.

Financing Activities. For the six months ended June 30, 2020, net cash provided by financing activities was $88.1 million, primarily from the issuance of equity in our initial public offering and the exercise of stock options and warrants.

For the six months ended June 30, 2019, net cash provided by financing activities was $48.2 million and primarily consisted of $48.7 million from the issuance of equity and the exercise of stock options, partially offset by $0.5 million net repayment of our Senior Secured Facility.

Senior Secured Facility

As of June 30, 2020, we have a $25.0 million secured revolving credit facility (“Senior Secured Facility”) with Pacific Western Bank as lender that becomes due and payable on December 1, 2020, pursuant to an amendment effective as of August 6, 2020 extending the maturity of the Senior Secured Facility by ninety (90) days as we seek to refinance. As of June 30, 2020 we had $15.9 million outstanding and $7.6 million of letters of credit issued pursuant to the Senior Secured Facility with $1.5 million remaining available for borrowing.

Borrowings under the Senior Secured Facility accrue interest at an annual rate equal to the greater of (i) the prime rate or (ii) 3.50%. The “prime rate” is defined as the variable rate of interest, per annum, most recently announced by Pacific Western Bank, as its “prime rate,” whether or not such announced rate is the lowest rate available from Pacific Western Bank. A nominal annual fee is due each October 1, and, in accordance with the terms of the Senior Secured Facility, we paid a one-time success fee of $150,000 to Pacific Western Bank in the first quarter following the completion of our initial public offering of our equity securities.

The Senior Secured Facility contains certain affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, dividends and distributions, investments, mergers or consolidations and a minimum amount of cash resources or assets we are required to maintain. As of June 30, 2020, we were in compliance with all covenants and other obligations under the Senior Secured Facility.

Subordinated Facility

As of June 30, 2020, we have a $50.0 million secured growth capital loan facility (“Subordinated Facility”) with TriplePoint Venture Growth BDC Corp., as lender and collateral agent, and TriplePoint Capital LLC, as lender (or, together with TriplePoint Venture Growth BDC Corp., TriplePoint).

In connection with the Subordinated Facility, on March 1, 2019, we entered into two warrant agreements with TriplePoint Venture Growth BDC Corp. and TriplePoint Capital LLC for 19,201 shares of Series D preferred stock and 12,801 shares of Series D preferred stock, respectively, at an exercise price per share of $31.24715. TriplePoint’s right under the warrant agreements to purchase the Series D preferred stock will be available for seven years from March 1, 2019, subject to certain exercise conditions. In the event these warrant agreements are exercised, TriplePoint will have the right to purchase under the warrant agreements the common stock into which each share of the Series D preferred stock is convertible at the time of such exercise.

Borrowings under the Subordinated Facility accrue interest at the prime rate (which, as defined in the Subordinated Facility, shall be as published in the Wall Street Journal with a floor of 5.25%) plus an applicable margin set forth in the table of terms. The table of terms sets forth 18 options that range on term, amortization, interest rate and other features that can range from an annual interest rate of the prime rate plus 0.0% margin for a three-month interest-only term and up to a prime plus 7.25% margin for a 48-month interest-only term. End of term payments range from 0.25% of each advance for a three-month term up to 8.25% for each advance with a 48-month repayment option. The Subordinated Facility also has a 1.25% one-time facility fee for the committed amount, which is initially $50.0 million. There is a 1.5% prepayment penalty in the event that the loan is prepaid within the first 18 months with no prepayment penalty thereafter.

The Subordinated Facility contains certain affirmative and negative covenants, including, among others, restrictions on liens, indebtedness, mergers or acquisitions, investments, dividends or distributions, fundamental changes and affiliate transactions. As of June 30, 2020, we had $50.0 million outstanding and were in compliance with all covenants and other obligations under the Subordinated Facility.

Initial Public Offering

On February 10, 2020, in connection with our initial public offering, we issued and sold 8,350,000 shares of our common stock at a price to the public of $12.00 per share, resulting in net proceeds to us of approximately $88.2 million, after deducting the underwriting discount of approximately $6.5 million and offering expenses of approximately $5.5 million.

Contractual Obligations

There have been no material changes to our contractual obligations during the six months ended June 30, 2020 from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any material off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 15 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 Annual Report on Form 10-K for the year ended December 31, 2019. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates, foreign currency and inflation. All these market risks arise in the normal course of business, as we do not engage in speculative trading activities.

During the six months ended June 30, 2020, there have been no material changes to the information included under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2019. 

Item 4. Controls and Procedures.

Limitations on effectiveness of controls and procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of disclosure controls and procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to various claims, lawsuits and other legal proceedings, including intellectual property claims. Some of these claims, lawsuits and other legal proceedings involve highly complex issues, and often these issues are subject to substantial uncertainties. Accordingly, our potential liability with respect to a large portion of such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Management, with the assistance of legal counsel, periodically reviews the status of each significant matter and assesses potential financial exposure. We recognize provisions for claims or pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. If management’s estimates prove incorrect, we could incur a charge to earnings which could have a material adverse effect on our results of operations, financial condition, and cash flows. Beginning in June 2020, several putative class actions have been filed in the U.S. District Court for the Eastern District of New York and the New York State Supreme Court (New York County) by certain of our shareholders against us, our directors, certain of our officers, and certain of the underwriters of our initial public offering alleging violation of securities laws in connection with the initial public offering. We believe these lawsuits are without merit and intend to vigorously defend against them.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes in the risks affecting the Company since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, except for the following:

The COVID-19 pandemic has affected, and could continue to adversely affect, our business, financial condition and results of operations.

The COVID-19 pandemic continues to rapidly evolve. At this time, there continues to be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic and the various responses to it will impact our business, operations and financial results. We currently have third-party manufacturing partners in various locations, including China, Vietnam and the United States, among others. Certain of our suppliers and the manufacturers of certain of our products have been and may continue to be adversely impacted by the COVID-19 crisis. As a result, we have faced and may continue to face delays or difficulty sourcing products, which has negatively affected and could continue to negatively affect our business and financial results. Even if we are able to find alternate sources for such products, they may cost more, which could adversely impact our results of operations and financial condition. With respect to consumer demand, we have experienced changing consumer behavior in our direct-to-consumer channel since late February 2020, including a cessation in retail foot traffic due to the temporary closure of our North American retail stores, which has adversely affected our revenues. While the majority of our retail stores in North America have reopened as of the date of this filing, the situation surrounding COVID-19 remains fluid, and we may be required to close or limit service offerings in certain of our retail stores in response to guidance from applicable government and public health officials, which we expect will adversely affect our revenues. The COVID-19 pandemic has also caused us to cancel planned openings of new retail store locations and certain of our retail partners to temporarily close their stores where our products are sold, both of which we expect will further reduce our revenues and adversely affect our results of operations and financial condition.

Due to the impacts of the COVID-19 pandemic on our business, operations and financial condition, we implemented an employee furlough program, which was initially applicable to almost all our retail employees. Further, we have reduced our corporate personnel by approximately 21%, initiated the wind-down of our European operations, temporarily ceased or reduced rent payments with respect to closed retail store locations, and are actively

negotiating with our landlords on rent deferrals and abatements. There can be no assurances that we will favorably resolve negotiations with our landlords, and all or some of these landlords could claim that our failure to pay rent is a default under the applicable lease. In addition, due to the severity of the outbreak in New York and California, where we have corporate offices, we continue to limit access to our offices and our corporate workforce has and continues to spend a significant amount of time working from home. Any of these actions may impact our employees’ morale and productivity and cause disruptions to our retail and corporate operations.

While the ultimate global economic impact and duration of the COVID-19 pandemic is difficult to assess or predict, the economic downturn caused by the pandemic could cause certain of our suppliers or retail partners to go out of business or otherwise cause supply chain and distribution constraints, result in increased costs or delays in the manufacturing of our products, or negatively impact consumers’ ability or willingness to pay for our products, any of which could have a material adverse effect on our business, financial condition or results of operations. The extent to which the COVID-19 pandemic will impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the transmission rate of the disease, the duration and extent of the pandemic, travel restrictions and social distancing in North America, the duration and extent of business closures and business disruptions, and the effectiveness of actions taken to contain, treat and prevent the disease.

 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser

None.

Use of Proceeds

In connection with our initial public offering, we issued and sold 8,350,000 shares of our common stock at a price to the public of $12.00 per share resulting in net proceeds to us of approximately $88.2 million, after deducting the underwriting discount of approximately $6.5 million and offering expenses of approximately $5.5 million. All shares issued and sold were registered pursuant to a registration statement on Form S-1 (File No. 333-235874), as amended ("the Registration Statement"), declared effective by the SEC on February 5, 2020.

The net proceeds of approximately $88.2 million from our initial public offering have been invested in money market funds. There has been no material change in the expected use of the net proceeds from our initial public offering as described in our final prospectus, filed with the SEC on February 7, 2020 pursuant to Rule 424(b)(4) relating to our Registration Statement.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On August 6, 2020, the Company's loan and security agreement ("Senior Secured Facility") with Pacific Western Bank was amended to extend the maturity date by 90 days. See Note 7 to our unaudited consolidated financial statements in this Form 10-Q for a description of the material terms of the Senior Secured Facility.

Item 6. Exhibits.

Incorporated by Reference

Filed/Furnished
Herewith

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

3.1

Amended and Restated Certificate of Incorporation

S-8

333-236377

4.1

2/11/20

3.2

Amended and Restated Bylaws

S-8

333-236377

4.2

2/11/20

10.1

Independent Contractor Agreement by and between Casper Sleep Inc. and Stuart Brown dated April 21, 2020

10.2

Sixth Amendment to Loan and Security Agreement, dated as of August 6, 2020, by and among Pacific Western Bank, Casper Sleep Inc., Casper Science LLC and Casper Sleep Retail LLC

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

CASPER SLEEP INC.

Date: August 11, 2020

By:

/s/ Philip Krim

Philip Krim

Chief Executive Officer

(principal executive officer)

Date: August 11, 2020

By:

/s/ Stuart Brown

Stuart Brown

Interim Chief Financial Officer

(principal financial and accounting officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Casper Sleep (CSPR) 10-Q2020 Q2 Quarterly report

Content analysis