CASPER SLEEP : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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,
home to our fabrication and test space, features state-of-the-art capabilities
to test against a wide range of factors affecting sleep quality, driving
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our innovation throughout the Sleep Economy. Casper Labs controls every aspect
of our product offerings, including design and construction, material
performance requirements, manufacturing protocols, supplier selection, packaging
specifications, and quality assurance. We 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.
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 continues to closely monitor 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.
Since the temporary closure of all our retail stores in North America in
mid-March 2020, we have reopened all of our 66 total stores as of the date of
this Quarterly Report on Form 10-Q, with each offering 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, including limiting
store hours and capacity in stores consistent with public health guidance and
best practices. We also continuously monitor developments related to COVID-19 in
locations where we have retail operations, and have developed procedures to
enable us to responsibly and efficiently open or close our stores and adjust our
service offerings as needed in response to changing COVID-19 conditions and
applicable guidance from government and public health officials. During the
three months ended September 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. These COVID-19-related impacts on our providers,
coupled with the lean levels of safety stock inventory we generally maintain as
part of our flexible manufacturing model, have been significant drivers of
increased delivery times for certain of our products through our e-commerce
platform and impacted order fulfillment for certain of our retail partners. As a
result, during the three months ended September 30, 2020, sales in our
e-commerce and retail partnership channels have been negatively impacted by
product and delivery supply chain constraints. We are actively qualifying and
on-boarding new suppliers, working in close partnership with existing suppliers
to re-build safety stock inventory levels, and enhancing internal inventory
planning and monitoring capabilities. Taken together, we expect these actions
and additional suppliers to significantly mitigate inventory constraints in
future quarters.
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In addition, while the stores of certain of our retail partners temporarily
closed due to the COVID-19 pandemic in the second quarter of 2020, our largest
partners remained open for business both in-store and online, and all of our
partners have resumed in-store operations as of the date of this Quarterly
Report on Form 10-Q. Accordingly, we have not experienced any material issues to
date with respect to our accounts receivables from our retail partners or needed
to materially increase our allowances for accounts receivable balances. We are,
however, continuing to work closely with our retail partners to monitor the
situation.

The COVID-19 pandemic has impacted, and we expect will continue to impact, our
revenues, results of operations and financial condition. 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.

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
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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 consist primarily of
advertising and marketing costs associated with our products and services as
well as consulting and contractor expenses. While sales and marketing expenses
may fluctuate 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 11 to our unaudited consolidated
financial statements
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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. The COVID-19 pandemic and certain supply chain disruptions have
impacted and continue to impact our quarterly comparability in 2020, and we may
experience atypical seasonal activity this year. 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 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 September 30, 2020 Compared to Three Months Ended September
30, 2019

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

                                          Three months ended September 30              Period over Period Change                 Three months ended September 30
                                              2020                2019              Dollar               Percentage                 2020                  2019
                                                               (in thousands, except percentages)                                      (as a % of Revenue)
Revenue                                   $  123,464$ 127,655$   (4,191)                    (3.3) %               100.0  %              100.0  %
Cost of goods sold                            54,944             62,942              (7,998)                   (12.7) %                44.5  %               49.3  %
Gross profit                                  68,520             64,713               3,807                      5.9  %                55.5  %               50.7  %
Operating expenses
Sales and marketing                           42,565             44,551              (1,986)                    (4.5) %                34.5  %               34.9  %
General and administrative                    39,518             41,311              (1,793)                    (4.3) %                32.0  %               32.4  %
Restructuring                                    155                681                (526)                   (77.2) %                 0.1  %                0.5  %
Total operating expenses                      82,238             86,543              (4,305)                    (5.0) %                66.6  %               67.8  %
Loss from operations                         (13,718)           (21,830)              8,112                    (37.2) %               (11.1) %              (17.1) %
Other (income) expense:
Net interest expense                           2,127                813               1,314                    161.6  %                 1.7  %                0.6  %
Other (income) expense, net                       (9)               287                (296)                  (103.3) %                   -  %                0.2  %
Total other expenses, net                      2,118              1,100               1,018                     92.5  %                 1.7  %                0.9  %
Loss before income taxes                     (15,836)           (22,930)              7,094                    (30.9) %               (12.8) %              (18.0) %
Income tax (benefit) expense                      20                 93                 (73)                   (78.2) %                   -  %                0.1  %
Net loss                                     (15,856)           (23,023)              7,167                    (31.1) %               (12.8) %              (18.0) %


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Revenue

Revenue was $123.5 million for the three months ended September 30, 2020, a
decrease of $4.2 million, or 3.3%, compared to $127.7 million for the three
months ended September 30, 2019. North America revenue was up $2.2 million or
1.8% for the three months ended September 30, 2020 compared to the same period
in the prior year, and our European operations, which we closed at the end of
the second quarter of 2020, had revenue of $6.4 million for the three months
ended September 30, 2019. Direct-to-consumer revenue decreased $11.6 million, or
11.4%, compared to the three months ended September 30, 2019 driven primarily by
the closure of our European operations and reduced sales in our retail stores
due to limited store hours and offerings and depressed retail foot traffic due
to to public health and government pandemic orders, partially offset by a modest
increase in North America e-commerce sales. North America direct-to-consumer
revenue decreased $6.1 million or 6.3%, compared to the three months ended
September 30,2019. We ended the third quarter with a retail presence of 65
stores, an increase of 17 net new stores compared with our retail footprint in
the third quarter of 2019. While 64 of our 65 stores were open and operating as
of the end of the third quarter of 2020, operations were limited due to public
health and government pandemic orders. Sales to retail partners were up $7.4
million, or 28.3%, compared to the three months ended September 30, 2019. This
increase was driven by revenue growth with our existing partners, the
introduction of 7 new partners year over year to 21 total partners, and an
expansion of our product offerings. Despite certain of our retail partners'
stores being temporarily closed due to the COVID-19 pandemic, our largest retail
partners have generally remained open for business both in-stores and online.
North America retail partnership revenue increased $8.3 million or 32.6%,
compared to the three months ended September 30, 2019. Additionally, during the
three months ended September 30, 2020, we believe our revenue was negatively
impacted by supply chain constraints that extended the time required to fulfill
customer orders and resulted in lost orders. We have taken active measures which
we expect to mitigate these supply chain issues in future quarters.


Gross Profit and Cost of Goods Sold
Gross profit was $68.5 million for the three months ended September 30, 2020, an
increase of $3.8 million, or 5.9%, compared to $64.7 million for the three
months ended September 30, 2019. Cost of goods sold was $54.9 million for the
three months ended September 30, 2020, a decrease of $8.0 million, or 12.7%,
compared to $62.9 million for the three months ended September 30, 2019. Gross
margin for the three months ended September 30, 2020 was 55.5% compared to 50.7%
for the three months ended September 30, 2019. The increase in gross margin 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. Gross margin also benefited by 80 basis points due to a
partial reversal of a charge taken in the first quarter of 2020 associated with
a change in logistics providers.

Sales and Marketing Expense
Sales and marketing expenses were $42.6 million for the three months ended
September 30, 2020, a decrease of $2.0 million, or 4.5%, compared to $44.6
million for the three months ended September 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 34.5% for the three months ended
September 30, 2020, compared to 34.9% for the three months ended September 30,
2019, due to improved marketing efficiency.

General and Administrative Expenses
General and administrative expenses were $39.5 million for the three months
ended September 30, 2020, a decrease of $1.8 million, or 4.3%, compared to $41.3
million for the three months ended September 30, 2019. General and
administrative expenses decreased primarily due to lower payroll and operating
expenses associated with our corporate workforce working from home and limited
store operations, partially offset by increased expenses related to being a
public company. General and administrative expenses as a percentage of revenue
was
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32.0% for the three months ended September 30, 2020 compared to 32.4% for the
three months ended September 30, 2019 due primarily to the lower payroll and
operating expenses.
Restructuring Expenses
Restructuring expenses were $0.2 million for the three months ended September
30, 2020 related to the closure of our European operations. There were $0.7
million of restructuring expenses recorded in the same period of the prior year
related to severance charges in connection with a reduction in force in North
America. Restructuring expenses relate to costs associated with strategic shifts
in our business structure including exiting certain lines of business and
geographies.
Total Other Expenses, Net
Total other expenses, net were $2.1 million for the three months ended September
30, 2020, an increase of $1.0 million, or 92.5%, compared to $1.1 million for
the three months ended September 30, 2019. The increase in total other expenses,
net was due to interest incurred on higher outstanding balances of our debt
facilities.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30,
2019

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

                                           Nine months ended September 30              Period over Period Change                  Nine months ended September 30
                                              2020                2019              Dollar               Percentage                 2020                  2019
                                                               (in thousands, except percentages)                                      (as a % of Revenue)
Revenue                                   $  346,704$ 312,319$   34,385                     11.0  %               100.0  %              100.0  %
Cost of goods sold                           168,155            157,342              10,813                      6.9  %                48.5  %               50.4  %
Gross profit                                 178,549            154,977              23,572                     15.2  %                51.5  %               49.6  %
Operating expenses
Sales and marketing                          113,220            113,994                (774)                    (0.7) %                32.7  %               36.5  %
General and administrative                   128,522            105,445              23,077                     21.9  %                37.1  %               33.8  %
Restructuring                                  5,595                681               4,914                    721.6  %                 1.6  %                0.2  %
Total operating expenses                     247,337            220,120              27,217                     12.4  %                71.3  %               70.5  %
Loss from operations                         (68,788)           (65,143)             (3,645)                     5.6  %               (19.8) %              (20.9) %
Other (income) expense:
Net interest expense                           6,435              1,355               5,080                    374.9  %                 1.9  %                0.4  %
Other (income) expense, net                     (742)               841              (1,583)                  (188.2) %                (0.2) %                0.3  %
Total other expenses, net                      5,693              2,196               3,497                    159.2  %                 1.6  %                0.7  %
Loss before income taxes                     (74,481)           (67,339)             (7,142)                    10.6  %               (21.5) %              (21.6) %
Income tax (benefit) expense                      46                 60                 (14)                   (23.3) %                   -  %                  -  %
Net loss                                     (74,527)           (67,399)             (7,128)                    10.6  %               (21.5) %              (21.6) %


Revenue
Revenue was $346.7 million for the nine months ended September 30, 2020, an
increase of $34.4 million, or 11.0%, compared to $312.3 million for the nine
months ended September 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, offset by the closure of our European operations
at the end of the second quarter of 2020. North America sales were up $41.1
million or 14.0% for the nine months ended September 30, 2020 compared to the
same period in the prior
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year and our European operations, which we closed at the end of the second
quarter of 2020, had revenue of $18.7 million for the nine months ended
September 30, 2019. Direct-to-consumer revenues increased $2.5 million, or 1.0%
compared to the nine months ended September 30, 2019 due primarily to strength
in our North American e-commerce channel, partially offset by the closure of our
European operations and reduced sales in our retail stores due to store closures
and depressed retail foot traffic related to the COVID-19 pandemic. Although 64
of our 65 stores were open and operating as of the end of the third quarter,
operations were limited due to public health and government pandemic orders.
North America direct-to-consumer revenue increased $8.0 million or 3.3%,
compared to the nine months ended September 30,2019. Sales to retail partners
increased by $31.9 million, or 59.4%, compared to the nine months ended
September 30, 2019. This increase was driven by revenue growth with our existing
partners, the introduction of 14 new partners compared to the same period in the
prior year to end the quarter with 21 partners, and the expansion of our product
offerings. North America retail partnership revenue increased $33.1 million or
63.5%, compared to the nine months ended September 30, 2019. Additionally,
during the three months ended September 30, 2020, we believe our revenue was
negatively impacted by supply chain constraints that extended the time required
to fulfill customer orders and resulting in lost orders. We have taken active
measures which we expect to mitigate these supply chain issues in future
quarters.
Gross Profit and Cost of Goods Sold
Gross profit was $178.5 million for the nine months ended September 30, 2020, an
increase of $23.6 million, or 15.2%, compared to $155.0 million for the nine
months ended September 30, 2019. Cost of goods sold was $168.2 million for the
nine months ended September 30, 2020, an increase of $10.8 million, or 6.9%,
compared to $157.3 million for the nine months ended September 30, 2019. Gross
margin for the nine months ended September 30, 2020 was 51.5% compared to 49.6%
for the nine months ended September 30, 2019. The increase in gross margin 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 and third quarters of 2020, lower
logistics costs. This was partially offset by increased discounting in the first
quarter of 2020 compared to the prior year as we cleared out our older
mattresses and launched our new products in March 2020.

Sales and Marketing Expense
Sales and marketing expenses were $113.2 million for the nine months ended
September 30, 2020, a decrease of $0.8 million, or 0.7%, compared to $114.0
million for the nine months ended September 30, 2019. Sales and marketing
expenses remained relatively flat 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 32.7% for the nine
months ended September 30, 2020, compared to 36.5% for the nine months ended
September 30, 2019, and due to improved marketing efficiencies driven in part by
lower online and offline media costs.
General and Administrative Expenses
General and administrative expenses were $128.5 million for the nine months
ended September 30, 2020, an increase of $23.1 million, or 21.9%, compared to
$105.4 million for the nine months ended September 30, 2019. General and
administrative expenses increased primarily due to the operating costs related
to our expanded retail presence of 17 net new stores compared to the third
quarter of 2019, as well as expenses related to being a public company. General
and administrative expenses as a percentage of revenue increased from 33.8% for
the nine months ended September 30, 2019 to 37.1% for the nine months ended
September 30, 2020 reflecting our increased investment in retail store
operations and expenses related to being a public company.
Restructuring Expenses
Restructuring expenses were $5.6 million for the nine months ended September 30,
2020. There were $0.7 million of restructuring expenses recorded in the same
period of the prior year related to severance charges in connection with a
reduction in force. 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.
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Total Other Expenses, Net
Total other expenses, net were $5.7 million for the nine months ended September
30, 2020, an increase of $3.5 million, or 159.2%, compared to $2.2 million for
the nine months ended September 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 nine months ended
September 30, 2020 and 2019, respectively.
                                                             Three months ended                          Nine months ended
                                                                September 30,                              September 30,
    (in thousands, except percentages)                 2020                          2019             2020               2019
Gross margin                                                    55.5  %                   50.7  %      51.5  %            49.6  %
Adjusted EBITDA                                               (7,495)                  (16,813)   $ (41,817)$ (53,807)


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
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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             Nine months ended
                                              September 30,                  September 30,
  (in thousands)                        2020                  2019        2020           2019
  Net loss                           (15,856)              (23,023)    $ (74,527)$ (67,399)
  Income tax expense                      20                    93            46             60
  Net interest expense                 2,127                   813         6,435          1,355
  Depreciation and amortization        3,313                 2,118         9,656          4,804
  Stock based compensation(a)          3,746                 2,122         9,691          5,648
  Restructuring(b)                       155                   681         5,595            681

  Legal settlements(c)                (1,000)                    -           500            138
  Transaction costs(d)                     -                   383           787            906
  Adjusted EBITDA                     (7,495)              (16,813)    $ (41,817)$ (53,807)





(a)  Represents non-cash stock-based compensation expense.
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(b)  Represents costs associated with strategic shifts in our business structure
including exiting certain lines of business and geographies. Associated costs
include severance and other employee separation costs, contract termination
expenses and asset impairment.
(c)  Amounts related to litigation settlements.
(d)  Represents expenses incurred for professional, consulting, legal, and
accounting services performed in connection with our initial public offering,
which are not indicative of our ongoing costs and which were discontinued
following the completion of our initial public offering.
Liquidity and Capital Resources
Sources of Funds
Our principal sources of liquidity are our cash and cash equivalents, our Senior
Secured Facility (as defined herein), our Subordinated Facility (as defined
herein), and working capital from operations. Cash and cash equivalents consist
primarily of cash on deposit with banks and investments in money market funds.
As of September 30, 2020, we had $96.1 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 from mid-March to mid-September 2020, which was initially
applicable to almost all our retail employees, reduced our corporate personnel
by approximately 21%, initiated the wind-down of our European operations, which
is expected to be largely completed by the end of 2020, temporarily ceased or
reduced rent payments with respect to our retail store locations that were
closed due to the pandemic, and continue to actively negotiate with our
landlords on rent deferrals and abatements. 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, along with the $96.1 million in cash and cash equivalents on our
balance sheet as of September 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.

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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 nine months
ended September 30, 2020 and 2019:

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