Quarterly report pursuant to Section 13 or 15(d)

Basis of Presentation and Summary of Significant Accounting Policies

v3.22.2
Basis of Presentation and Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2022
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Winc and its wholly owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and are the responsibility of the Company’s management. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes as of and for the year ended December 31, 2021 as contained within the Company's filed Annual Report on Form 10-K, as filed with the SEC on March 30, 2022. The Company’s accounting policies are consistent with those presented in the audited condensed consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of December 31, 2021 contained in the above-referenced Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

 

Initial Public Offering and Reverse Stock Split

 

In November 2021, the Company completed its initial public offering ("IPO") through an underwritten sale of 1,692,308 shares of its common stock at a price of $13.00 per share. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $17.7 million.

 

Concurrent with the IPO, all then-outstanding shares of the Company's redeemable convertible preferred stock were automatically converted into an aggregate of 8,395,808 issued shares of common stock and reclassified into permanent equity. Following the IPO, there were no shares of redeemable convertible preferred stock outstanding.

 

In advance of the IPO, in October 2021, the Company’s Board of Directors and stockholders approved an 8-to-1 reverse stock split of the Company’s outstanding capital stock. Common stock par value was not affected by the reverse split. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split.

Reclassifications

 

Certain reclassifications have been made to the prior periods’ condensed consolidated financial statements in order to conform to the current period presentation. These reclassifications did not impact any prior amounts of net loss or cash flows.

 

Going Concern

 

As of June 30, 2022, the Company had $4.9 million of cash, $6.5 million of outstanding borrowings on the BoC Line of Credit, and an accumulated deficit of $79.9 million. For the six months ended June 30, 2022, the Company had negative cash flows from operating activities of $8.6 million and incurred a net loss of $8.2 million. In June 2022, the Company entered into an amendment to the BoC Credit Agreement (as defined in Note 9), which extended the maturity date of the BoC Line of Credit (as defined in Note 9) to December 31, 2022 and provided for an incremental reduction of the Company's borrowing capacity under the BoC Line of Credit during the periods prior to the maturity date, as further described in Note 9. Since June 30, 2022, the Company has repaid $1.1 million of the outstanding borrowings under the BoC Line of Credit, resulting in an outstanding balance of $5.4 million as of the date of this Quarterly Report on Form 10-Q. Through June 30, 2022, the Company has been dependent on debt and equity financing to fund its operations, including proceeds raised from the IPO.

 

If the Company is unable to obtain alternative financing, there are no assurances that the Company will be able to repay the BoC Line of Credit at maturity or satisfy its other obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s management believes it will continue to require third-party financing to support future operations until the Company achieves profitability. The Company continues to take steps to improve profitability and seek additional sources of capital, including potential opportunities to obtain inventory or accounts receivable factoring and new credit facilities. However, there can be no assurance that improvement in operating results will occur or that the Company will successfully implement its plans. In addition, there can be no assurances that an agreement for additional capital would ultimately be reached or that the additional capital would become available to the Company at all or on terms favorable to the Company. In the event cash flows from operations and factoring or borrowing arrangements are not sufficient, additional sources of financing, such as equity offerings, will be required in order to maintain the Company’s current and planned future operations.

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and

commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

COVID-19 Pandemic

 

In response to the COVID-19 pandemic, extraordinary actions were initially taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of the COVID-19 pandemic in regions throughout the world, including travel bans, quarantines, "stay-at-home" orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. While the impacts of the COVID-19 pandemic have generally stabilized during 2021 and 2022 and most of these measures have been rescinded, there remains uncertainty around the broader implications of the COVID-19 pandemic on the Company’s results of operations and overall financial performance, and the Company may be required to take precautionary measures in response to future COVID-19 pandemic developments, including the emergence of new variants. The COVID-19 pandemic has, to date, not had a direct material adverse impact on the Company's results of operations or ability to raise funds to sustain operations. The economic effects of the pandemic and resulting long-term societal changes are currently not predictable, and the future financial impacts could vary from those foreseen.

 

Emerging Growth Company Status

 

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "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 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 unaudited condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Significant estimates include, but are not limited to, fair value of financial instruments, fair value of acquired assets, revenue recognition, and stock-based compensation. Actual results may differ materially from these estimates.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The following table summarizes the allowance for doubtful accounts and sales returns as of the dates presented (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Beginning balance

 

$

176

 

 

$

238

 

Provision

 

 

1,884

 

 

 

4,009

 

Write-offs, net

 

 

(1,812

)

 

 

(4,071

)

Ending balance

 

$

248

 

 

$

176

 

 

Financing Arrangements

In June 2022, the Company entered into an agreement providing for the sale on a non-recourse basis of the proceeds from future sales from its DTC channel to a third-party financial institution in exchange for an advance of a portion of such proceeds. Total available advances under the agreement are $2.9 million, of which $2.6 million has been advanced as of June 30, 2022. In exchange for advances on future DTC sales, 9% of daily DTC receipts are applied towards the balance owed. As the advances are expected to be paid off within one year from being advanced, the balance is classified as Short-term advances on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2022. The Company presents cash proceeds as cash provided from financing activities in the unaudited condensed consolidated statements of cash flows. Fees under the agreement totaling $0.4 million, or 13.5% of the total advance of $2.9 million, are recorded in other income (expense) over the estimated term of the agreement. Eligible discounts, which reduce the fees, totaled less than $0.1 million for the three and six months ended June 30, 2022.

Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Accounting Standard Codification ("ASC") Leases (ASC 842) which supersedes FASB ASC 840, Leases (ASC 840) and provides principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. On January 1, 2022, the Company adopted ASC 842, which requires the recognition of right-of-use assets ("ROU assets") and related lease liabilities on the balance sheet using a modified retrospective approach. The condensed consolidated financial statements related to periods prior to January 1, 2022 were not restated, and continue to be reported under ASC 840, which did not require the recognition of operating lease

assets and liabilities on the balance sheet. As a result, the condensed consolidated financial statements related to periods prior to January 1, 2022 are not entirely comparative with current and future periods. As permitted under ASC 842, the Company elected several practical expedients that permit the Company to not reassess (1) whether existing contracts are or contain a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. In addition, the Company has elected not to recognize short-term leases on its balance sheet.

 

For identified leases, the Company used its incremental borrowing rate to discount the related future payment obligations as of January 1, 2022 to determine its lease liability as of adoption. As of the adoption date, the Company recognized a lease liability of $5.3 million and corresponding ROU assets of $5.2 million; there was no equity impact from the adoption. The difference between the lease liability and the ROU assets primarily represents the existing deferred rent liabilities before adoption, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the ROU assets.

 

The Company records rent expense for operating leases, including leases of office locations, on a straight-line basis over the lease term. The straight-line calculation of rent expense includes rent escalations on certain leases, as well as lease incentives provided by the landlords, including payments for leasehold improvements and rent-free periods. The Company begins recognition of rent expense on the commencement date, which is generally the date that the asset is made available for use. The lease liability is included in lease liabilities, current and lease liabilities, noncurrent within the condensed consolidated balance sheet, which are reduced as lease related payments are made. The ROU assets are amortized on a periodic basis over the expected term of the lease. See Note 12 for additional information.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is electing to early adopt the standard for its fiscal year beginning January 1, 2022. Adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (ASC 326), as amended, which sets forth a "current expected credit loss" model that requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to certain off-balance sheet credit exposures. The standard is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.