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mwk-10q_20190930.htm

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 September 30, 2019


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

Commission File Number: 001-38937

Mohawk Group Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		83-1739858
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
37 East 18th Street, 7th Floor New York, NY		10003
(Address of principal executive offices)		(Zip Code)

(347) 676-1681

(Registrant’s telephone number, including area code)

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, $0.0001 par value per share

MWK

The Nasdaq Stock Market LLC

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒

As of November 5, 2019, the registrant had 17,710,659 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Stockholder’s Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	68
Item 4.	Mine Safety Disclosures	68
Item 5.	Other Information	68
Item 6.	Exhibits	69
Signatures		70

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

our future financial performance, including our revenue, costs of goods sold and operating expenses;

•

our ability to achieve and grow profitability;

•

the sufficiency of our cash to meet our liquidity needs and to execute our growth strategies;

•

our ability to maintain the security and availability of our technology platform, including our AIMEE (Artificial Intelligence Mohawk e-Commerce Engine) software platform;

•

our ability to successfully launch new products;

•

our ability to identify and complete merger and acquisition transactions;

•

our predictions about industry and market trends;

•

our ability to successfully expand internationally;

•

our ability to effectively manage our growth and future expenses;

•

our estimated total addressable market;

•

our ability to maintain, protect and enhance our intellectual property, including our AIMEE software platform;

•

our ability to comply with modified or new laws and regulations applying to our business;

•

the attraction and retention of qualified employees and key personnel;

•

our ability to successfully defend litigation brought against us; and

•

the increased expenses and obligations associated with being a public company.

We caution you that the foregoing list may not contain all the forward-looking statements made in this Quarterly Report on Form 10-Q.

We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected, or that the plans, intentions or expectations disclosed, in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make or enter into.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MOHAWK GROUP HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

	December 31, 2018			September 30, 2019
ASSETS
CURRENT ASSETS:
Cash	$	20,029		$	35,686
Accounts receivable—net		1,403			3,152
Inventory		30,552			25,908
Prepaid and other current assets		5,418			6,736
Total current assets		57,402			71,482
PROPERTY AND EQUIPMENT—net		268			140
GOODWILL AND OTHER INTANGIBLES—net		—			1,071
OTHER NON-CURRENT ASSETS		337			135
TOTAL ASSETS	$	58,007		$	72,828
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Credit facility	$	14,451		$	13,640
Accounts payable		15,404			15,453
Accrued and other current liabilities		9,708			10,880
Total current liabilities		39,563			39,973
OTHER LIABILITIES		26			8
TERM LOANS		13,049			13,339
Total liabilities		52,638			53,320
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY:
Common stock, par value $0.0001 per share—500,000,000 shares authorized and 11,534,190 shares outstanding at December 31, 2018; 500,000,000 shares authorized and 17,710,659 shares outstanding at September 30, 2019		1			2
Additional paid-in capital		76,348			117,791
Accumulated deficit		(71,020	)		(98,351	)
Accumulated other comprehensive income		40			66
Total stockholders’ equity		5,369			19,508
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	58,007		$	72,828

See notes to condensed consolidated financial statements.

MOHAWK GROUP HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019
NET REVENUE	$	24,672		$	40,603		$	53,576		$	88,817
COST OF GOODS SOLD		14,262			23,076			35,919			52,859
GROSS PROFIT		10,410			17,527			17,657			35,958
OPERATING EXPENSES:
Sales and distribution		11,560			17,307			28,516			38,409
Research and development		790			2,634			2,810			5,657
General and administrative		2,767			7,999			8,103			15,779
TOTAL OPERATING EXPENSES:		15,117			27,940			39,429			59,845
OPERATING LOSS		(4,707	)		(10,413	)		(21,772	)		(23,887	)
INTEREST EXPENSE—net		439			875			1,503			3,368
OTHER EXPENSE (INCOME)—net		(19	)		21			(45	)		53
LOSS BEFORE INCOME TAXES		(5,127	)		(11,309	)		(23,230	)		(27,308	)
PROVISION FOR INCOME TAXES		—			8			3			23
NET LOSS	$	(5,127	)	$	(11,317	)	$	(23,233	)	$	(27,331	)
Net loss per share, basic and diluted	$	(0.49	)	$	(0.75	)	$	(2.40	)	$	(2.11	)
Weighted-average number of shares outstanding, basic and diluted		10,532,926			15,134,422			9,687,078			12,971,641

See notes to condensed consolidated financial statements.

MOHAWK GROUP HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019
NET LOSS	$	(5,127	)	$	(11,317	)	$	(23,233	)	$	(27,331	)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments		(19	)		13			57			26
Other comprehensive income (loss)		(19	)		13			57			26
COMPREHENSIVE LOSS	$	(5,146	)	$	(11,304	)	$	(23,176	)	$	(27,305	)

MOHAWK GROUP HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended September 30, 2018
	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive			Total Stockholders’ Equity
	Shares		Amount		Capital			Deficit			Income/(Loss)			(Deficit)
BALANCE—July 1, 2018		10,117,017	$	1	$	68,741		$	(57,303	)	$	33		$	11,472
Net loss		—		—		—			(5,127	)		—			(5,127	)
Issuance of 5,992,750 shares of series C preferred stock in April 2018 which converted at 0.2564 per share into 1,536,602 shares of common stock as part of the Merger (see Note 1)				—		(17	)		—			—			(17	)
Issuance of 1,915,916 shares of series C-1 preferred stock in September 2018 which converted at 0.2564 per share into 491,260 shares of common stock as part of the Merger (see Note 1)		491,260		—		6,417			—			—			6,417
Issuance of common stock as part of the Merger (see Note 1)		897,435		—		—			—			—			—
Issuance of common stock to holders of series B preferred stock for anti-dilution rights as part of the Merger (see Note 1)		28,478		—		—			—			—			—
Stock-based compensation		—		—		141			—			—			141
Other comprehensive loss		—		—		—			—			(19	)		(19	)
BALANCE—September 30, 2018		11,534,190	$	1	$	75,282		$	(62,430	)	$	14		$	12,867

	Three Months Ended September 30, 2019
	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive		Total Stockholders’ Equity
	Shares		Amount		Capital			Deficit			Income/(Loss)		(Deficit)
BALANCE—July 1, 2019		17,625,241	$	2	$	110,094		$	(87,034	)	$	53	$	23,115
Net loss		—		—		—			(11,317	)		—		(11,317	)
Issuance costs from Initial Public Offering				—		(21	)		—			—		(21	)
Issuance of 84,975 share of restricted common stock in August 2019 (see Note 7)		84,975		—		—			—			—		—
Stock-based compensation		—		—		7,716			—			—		7,716
Exercise of stock options		443		—		2			—			—		2
Other comprehensive income		—		—		—			—			13		13
BALANCE—September 30, 2019		17,710,659	$	2	$	117,791		$	(98,351	)	$	66	$	19,508

	Nine Months Ended September 30, 2018
	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Total Stockholders’ Equity
	Shares		Amount		Capital		Deficit			Income/(Loss)			(Deficit)
BALANCE—January 1, 2018		8,575,950	$	1	$	47,393	$	(39,197	)	$	(43	)	$	8,154
Net loss		—		—		—		(23,233	)		—			(23,233	)
Issuance of 5,992,750 shares of series C preferred stock in April 2018 which converted at 0.2564 per share into 1,536,602 shares of common stock as part of the Merger (see Note 1)		1,536,602		—		20,972		—			—			20,972
Issuance of 1,915,916 shares of series C-1 preferred stock in September 2018 which converted at 0.2564 per share into 491,260 shares of common stock as part of the Merger (see Note 1)		491,260		—		6,417		—			—			6,417
Issuance of common stock as part of the Merger (see Note 1)		897,435		—		—		—			—			—
Issuance of common stock to holders of series B preferred stock for anti-dilution rights as part of the Merger (see Note 1)		28,478		—		—		—			—			—
Stock-based compensation		—		—		482		—			—			482
Exercise of stock options		4,465		—		18		—			—			18
Other comprehensive income		—		—		—		—			57			57
BALANCE—September 30, 2018		11,534,190	$	1	$	75,282	$	(62,430	)	$	14		$	12,867

	Nine Months Ended September 30, 2019
	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive		Total Stockholders’ Equity
	Shares		Amount		Capital		Deficit			Income/(Loss)		(Deficit)
BALANCE—January 1, 2019		11,534,190	$	1	$	76,348	$	(71,020	)	$	40	$	5,369
Net loss		—		—		—		(27,331	)		—		(27,331	)
Issuance of 2,406,618 shares of restricted common stock on March 20, 2019 (see Note 7)		2,406,618		—		—		—			—		—
Issuance of 88,548 shares of restricted common stock on May 17, 2019 and forfeiture of 69,141 shares of restricted common stock (see Note 7)		19,407		—		—		—			—		—
Issuance of 64,982 shares of restricted common stock on June 12, 2019 (see Note 7)		64,982		—		—		—			—		—
Issuance of 3,600,000 shares of common stock on June 14, 2019 (see Note 1)		3,600,000		1		29,606		—			—		29,607
Issuance of 84,975 share of restricted common stock in August 2019 (see Note 7)		84,975		—		—		—			—		—
Stock-based compensation		—		—		11,835		—			—		11,835
Exercise of stock options		487		—		2		—			—		2
Other comprehensive income		—		—		—		—			26		26
BALANCE—September 30, 2019		17,710,659	$	2	$	117,791	$	(98,351	)	$	66	$	19,508

See notes to condensed consolidated financial statements.

MOHAWK GROUP HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2018			2019
OPERATING ACTIVITIES:
Net loss	$	(23,233	)	$	(27,331	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		188			136
Provision for sales returns		128			236
Amortization of deferred financing costs and debt discounts		337			914
Stock-based compensation		482			11,835
Other		62			101
Changes in assets and liabilities:
Accounts receivable		48			(1,784	)
Inventory		(515	)		4,944
Prepaid and other current assets		(2,757	)		(2,307	)
Accounts payable, accrued and other liabilities		5,731			110
Cash used in operating activities		(19,529	)		(13,146	)
INVESTING ACTIVITIES:
Purchase of fixed assets		(25	)		(48	)
Purchase of Aussie Health Co. assets		—			(1,105	)
Proceeds on sale of fixed assets		35			6
Cash provided by (used in) investing activities		10			(1,147	)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options		—			2
Proceeds from issuance of Series C preferred stock - converted to common stock		23,061			—
Proceeds from issuance of Series C-1 preferred stock - converted to common stock		8,364			—
Proceeds from Initial Public Offering		—			36,000
Proceeds received from exercise of stock options		18			—
Issuance costs of Series C preferred stock - converted to common stock		(3,000	)		—
Issuance costs of Series C-1 preferred stock - converted to common stock		(1,036	)		—
Issuance costs from initial public offering		—			(5,446	)
Borrowings from Mid Cap credit facility		37,048			69,740
Repayments from Mid Cap credit facility		(32,519	)		(71,082	)
Repayments from Mid Cap term loan		(1,344	)		—
Debt issuance costs from Mid Cap credit facility		(369	)		(581	)
Debt issuance costs from Horizon term loan		—			(900	)
Deferred offering costs		(17	)		—
Insurance financing proceeds		—			3,833
Insurance obligation payments		—			(1,818	)
Capital lease financing proceeds		20			—
Capital lease obligation payments		(40	)		(42	)
Cash provided by financing activities		30,186			29,706
EFFECT OF EXCHANGE RATE ON CASH		—			1
NET CHANGE IN CASH AND RESTRICTED CASH FOR PERIOD		10,667			15,414
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD		5,797			20,708
CASH AND RESTRICTED CASH AT END OF PERIOD	$	16,464		$	36,122
RECONCILIATION OF CASH AND RESTRICTED CASH
CASH	$	15,785		$	35,686
RESTRICTED CASH—Prepaid and other assets		550			307
RESTRICTED CASH—Other non-current assets		129			129
TOTAL CASH AND RESTRICTED CASH	$	16,464		$	36,122
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	1,112		$	2,467
Cash paid for taxes	$	3		$	15
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease	$	25		$	—
Note payable on acquisition				$	195

See notes to condensed consolidated financial statements.

Mohawk Group Holdings, Inc.

Notes to condensed consolidated financial statements

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 and 2019 (Unaudited)

(In thousands, except share and per share data)

1.	ORGANIZATION AND DESCRIPTION OF BUSINESS

Mohawk Group Holdings, Inc. and subsidiaries (“Mohawk” or the “Company”) is a rapidly growing technology-enabled consumer products company that uses machine learning and data analytics to design, develop, market and sell products. Mohawk predominately operates through online retail channels such as Amazon and Walmart.

Headquartered in New York, Mohawk’s offices can be found in China, Philippines, Israel, Poland, and the United States.

Merger—On September 4, 2018, pursuant to an Agreement and Plan of Merger and Reorganization among the Company, MGH Merger Sub, Inc. and Mohawk Group, Inc. (“MGI”), as amended by Amendment No. 1 dated as of April 1, 2018 (the “Merger Agreement”), MGI merged with Merger Sub, Inc., with MGI remaining as the surviving entity and becoming a wholly-owned operating subsidiary of the Company (the “Merger”). The Merger was a reverse recapitalization for financial reporting purposes. The Merger is reflected in the financial statements and financial disclosures as if the Merger was effective on January 1, 2017. Operations prior to the Merger are the historical operations of MGI.

Under the Merger Agreement, all outstanding shares of common stock, shares of preferred stock and warrants, excluding MGI’s Series C preferred stock (“Series C”) and warrants to purchase shares of Series C, converted to shares of common stock of the Company at a ratio of 1 to 0.3131 (the “Conversion”). All outstanding Series C converted on a 1 to 0.2564 basis to shares of common stock of the Company and all outstanding warrants to purchase shares of Series C converted to warrants to purchase shares of common stock of the Company on a 1 to 0.2564 basis. At the time of the merger, the Company had 0.9 million shares outstanding held by certain Series C holders.

Initial Public Offering—On June 14, 2019, the Company completed its initial public offering (“IPO”), selling 3,600,000 shares of common stock at a public offering price of $10.00 per share. Net proceeds to the Company from the offering were approximately $29.6 million, after deducting legal, underwriting and other offering expenses.

Liquidity, Going Concern and Initial Public Offering—The Company is an early-stage growth company. As a result, the Company is investing in launching new products, advancing its software, and its sales and distribution infrastructure to accelerate revenue growth and scale operations to support such growth. To fund this investment, the Company has incurred losses with the expectation that it will generate profitable revenue streams in the future. While management and the Company’s board of directors believes that the Company will eventually reach a scale where the growth of its product revenues will offset the continued investments required in launching new products, completing the development of its software, and managing its sales and distribution operations, they believe that the size and nascent stage of the Company’s target market justify continuing to invest in growth at the expense of short-term profitability.

In pursuit of the foregoing growth strategy, the Company incurred operating losses of $22.6 million and $29.4 million for the years ended December 31, 2017 and 2018, respectively, primarily due to the impact from its continued investment in launching new products, advancing its AIMEE software platform and building out its sales and distribution infrastructure. In addition, at December 31, 2017 and 2018, the Company had an accumulated deficit of $39.2 million and $71.0 million, respectively, cash on hand amounted to $5.3 million and $20.0 million, respectively, total outstanding borrowings from lenders amounted to $10.3 million and $27.5 million, respectively, and total available capacity on borrowings amounted to $5.6 million and $1.4 million at December 31, 2017 and 2018, respectively. Moreover, the Company has not had a sufficient track record of improvement of its operating cash outflows. As such, in the event that the Company was unsuccessful in its ability to continue to reduce its cash outflows or obtain additional financing if such reduction in cash outflows was not achieved, the Company would have been unable to meet its obligations as they became due within one year from the date these condensed consolidated financial statements were issued. These negative financial conditions raised substantial doubt about the Company’s ability to continue as a going concern.

Management plans to continue pursuing its growth strategy. In the past, the Company has successfully funded its losses to-date through equity financings, beginning in July 2014. As of December 31, 2018, the Company has raised over $72.6 million in equity financing to fund its operations since inception. Further, in October 2017, the Company improved its working capital flexibility by securing a $15 million credit facility (which could be increased, subject to certain conditions, to $30.0 million) and a $7.0 million term loan with MidCap Financial Trust (“MidCap”) and in November 2018, the Company exited the original credit facility with MidCap and entered into a new three-year, $25.0 million revolving credit facility with MidCap, which can be increased, subject to certain conditions, to $50.0 million. Furthermore, on December 31, 2018, the Company entered into a new term loan agreement with Horizon Technology Finance Corporation (“Horizon”) obtaining a five-year, $15.0 million term loan and repaying the outstanding amount of MidCap’s term loan of approximately $4.9 million. While there was no assurance that future investments in the Company’s equity or issuances of debt will occur, management believes its success in obtaining funding since inception will continue in the foreseeable future.

During the audit of the Company’s December 31, 2018 consolidated financial statements, the Company’s financial forecast for the next 12 months included revenue growth, margin expansion, a reduction of certain fixed costs, an improvement in inventory management and a reduction in operating cash deficit. In addition, management anticipated that the Company would not breach its financial covenants associated with its existing credit facility or term loan for the next twelve months. However, there was no assurance that management’s forecast would be attained or that the Company would be able to maintain its liquidity to fund operations and/or maintain compliance with its covenants without future equity investments or issuance of debt from outside sources. In the event of a breach of the Company’s financial covenants under the credit facility and/or its term loan, outstanding borrowings would become due on demand absent a waiver from the lenders.

These condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern and as such, include no adjustments that might be necessary in the event that the Company was unable to operate on this basis.

For the three and nine months ended September 30, 2019, the Company incurred operating losses of $10.4 million and $23.9 million, respectively. As of September 30, 2019, the Company had accumulated deficit of $98.4 million, cash on hand of $35.7 million, and total outstanding borrowing from lenders of $27.0 million with a total available capacity on borrowings of $0.8 million. On June 14, 2019, the Company completed its IPO, receiving net proceeds of approximately $29.6 million after deducting legal, underwriting and other offering expenses. As of September 30, 2019, the Company has raised over $102.3 million in equity financing to fund its operations since inception, including the net proceeds from the IPO.

The Company believes that, based on its current sales and expense level projections, the credit facility with MidCap (see Note 6), and the proceeds from the IPO, the Company will satisfy its estimated liquidity needs for the twelve months from the condensed consolidated financial statements issuance date. As such, the substantial doubt raised by the Company’s historical operating results has been mitigated.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and as required by Rule 10-01 of Regulation S-X. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of September 30, 2019, the results of operations for the three and nine months ended September 30, 2018 and 2019, the statements of stockholder’s equity for the three and nine months ended September 30, 2018 and 2019, and cash flows for the nine months ended September 30, 2018 and 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet as of December 31, 2018 included herein was derived from the Company’s audited consolidated financial statements as of that date, but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2018, included in the Company’s final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on June 13, 2019 (the “Prospectus”).

Use of Estimates—Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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 covered by the financial statements and accompanying notes. The most significant estimates relate to the determination of fair value of the Company’s common stock and stock-based compensation, prior to the Company’s IPO. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

Principles of Consolidation—The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels and through wholesale channels.

For direct to consumer sales, the Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third party online channels. For wholesale sales, the Company considers the customer purchase order to be the contract.

For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.

Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns was $0.3 million and $0.5 million at December 31, 2018 and September 30, 2019, respectively, which is included in accrued liabilities and represents the expected value of the refunds that will be due to its customers.

The Company evaluated principal versus agent considerations to determine whether it is appropriate to record platform fees paid to Amazon as an expense or as a reduction of revenue. Platform fees are recorded as sales and distribution expense and are not recorded as a reduction of revenue because the Company owns and controls all the goods before they are transferred to the customer. The Company can, at any time, direct Amazon and similarly with other third party logistics providers (“Logistics Providers”) to return the Company’s inventory to any location specified by the Company. Any returns made by customers directly to Logistics Providers are the responsibility of the Company to make customers whole and the Company retains the back-end inventory risk. Further, the Company is subject to credit risk (i.e., credit card chargebacks), establishes the prices of its products, can determine who fulfills the goods to the customer (Amazon, a Logistics Provider or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is recognized as revenue when the performance obligation is satisfied. Each of the Company’s contracts have a single distinct performance obligation, which is the promise to transfer individual goods.

For consumer product sales, the Company has elected to treat shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for its single performance obligation related to product sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. The Company bills customers for charges for shipping and handling on certain sales and such charges are recorded as part of net revenue. For the three months ended September 30, 2018 and 2019, the Company had no shipping and handling revenue. For the nine months ended September 30, 2018 and 2019, shipping and handling revenue was less than $0.1 million and $0.1 million, respectively.

For each contract, the Company considers the promise to transfer products to be the only identified performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.

All of the Company’s revenues as reflected on the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2019 are recognized at a point in time.

Sales taxes. Consistent with prior periods, sales taxes collected from customers are presented on a net basis and as such are excluded from net revenue.

Net Revenue by Category. The following tabl