KASPIEN HOLDINGS Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations provide information that the Company's management believes necessary to achieve an understanding of its financial condition and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products and services; general economic factors in markets where the Company's products and services are sold; and other factors including, but not limited to: cost of goods, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, interest rates, customer preferences, unemployment, labor costs, inflation, fuel and energy prices, weather patterns, climate change, catastrophic events, competitive pressures and insurance costs discussed in the Company's filings with theSecurities and Exchange Commission .
Key Performance Indicators
Management monitors a number of key performance indicators to evaluate its performance, including:
Net Revenue: The Company measures total year over year sales growth. Net sales performance is measured through several key performance indicators including number of partners and active product listings and sales per listing. Cost of Sales and Gross Profit: Gross profit is calculated based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales levels, mix of products sold, obsolescence and distribution costs. Distribution expenses include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated with product returns to vendors.
Selling, General and Administrative ("SG&A") Expenses: Included in SG&A expenses are payroll and related costs, general operating and overhead expenses and depreciation charges. SG&A expenses also include miscellaneous income and expense items, other than interest.
Balance Sheet and Ratios: The Company views cash, merchandise inventory, accounts payable leverage, and working capital as key indicators of its financial position. See "Liquidity and Capital Resources" for further discussion of these items.
Gross Merchandise Value ("GMV"): The total value of merchandise sold over a given time period through a customer-to-customer exchange site. It is the measurement of merchandise value sold across all channels and partners within our platform.
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Fiscal Year Ended January 28, 2023 ("fiscal 2022")
Compared to Fiscal Year Ended January 29, 2022 ("fiscal 2021")
The Company's fiscal year is a 52 or 53-week period ending the Saturday nearest
to January 31 . Fiscal 2022 and fiscal 2021 ended January 28, 2023 and January
29, 2022 , respectively. Both fiscal 2022 and fiscal 2021 had 52 weeks.
Net Revenue. Net revenue decreased 10.8% to $128.2 million compared to $143.7
million in fiscal 2021. The primary source of revenue is the Retail as a Service
("RaaS") model, which represented 98.7% of net revenue. Net revenue from
Walmart, Target and Other Marketplaces decreased to 1.3% in fiscal 2022 from
1.5% in fiscal 2021. Subscriptions and Other share of net revenue increased to
1.4% of net revenue from 1.3% of net revenue in the comparable period from the
prior year The following table sets forth net revenue by marketplace as a
percentage of total net revenue:
January 28, % to January 29, % to
2023 Total 2022 Total Change
Amazon US $ 121,561 94.8 % $ 134,125 93.3 % $ (12,564 )
Amazon International 3,241 2.5 % 5,576 3.9 % (2,335 )
Walmart, Target & Other Marketplaces 1,645 1.3 % 2,172 1.5 % (527 )
Subtotal Retail 126,447 98.6 % 141,873 98.7 % (15,426 )
Subscriptions & Other 1,781 1.4 % 1,840 1.3 % (59 )
Total $ 128,228 100.0 % $ 143,713 100.0 % $ (15,485 )
The Company generates revenue across a broad array of product lines primarily
through the Amazon Marketplace . Categories include apparel, baby, beauty,
electronics, health & personal care, home/kitchen/grocery, pets, sporting goods,
toys & art.
Annual platform GMV for fiscal year 2022 was $271.0 million , the same level as
fiscal 2021. Retail GMV decreased 9.2% to $137.1 million or 50.6% of total GMV,
compared to $151.0 million or 55.7% of total GMV in fiscal 2021. Subscription
GMV increased 15.7% to $133.9 million or 49.4% of total GMV, compared to $120.0
million or 44.3% of total GMV in fiscal 2021.
Gross Profit. Gross profit as a percentage of revenue was 19.0% in fiscal 2022
as compared to 22.8% in fiscal 2021. The decrease in the gross profit rate was
primarily due to a decrease in merchandise margin to 41.2% in fiscal 2022 as
compared to 44.8% in fiscal 2021 and a $0.6 million increase in warehousing and
freight expenses. The following table sets forth a year-over-year comparison of
the Company's gross profit:
Change
January 28, January 29,
(amounts in thousands) 2023 2022 $ %
Merchandise margin $ 52,893 $ 64,410 (11,517 ) (17.9 )%
% of net revenue 41.2 % 44.8 % (3.6 )%
Fulfillment fees (17,940 ) (21,655 ) 3,715 17.2 %
Warehousing and freight (10,563 ) (9,982 ) (581 ) (5.8 )%
Gross profit $ 24,390 $ 32,773 (8,383 ) (25.6 )%
% of net revenue 19.0 % 22.8 %
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Selling, General and Administrative Expenses. The following table sets forth a year-over-year comparison of the Company's SG&A expenses:
Change
January 28, January 29,
(amounts in thousands) 2023 2022 $ %
Selling expenses $ 18,427 $ 20,794 $ (2,367 ) (11.3 )%
General and administrative expenses 20,154 19,501 653 3.3 %
Depreciation and amortization expenses 1,233 2,096 (863 ) (41.2 )%
Total SG&A expenses $ 39,814 $ 42,391 As a % of total revenue 31.0 % 29.5 %
SG&A expenses decreased
SG&A expenses as a percentage of net revenue increased to 30.4% as compared to 29.5% in fiscal 2021. The increase in the rate as a percentage of net revenue was primarily due to lost leverage on the general and administrative expenses.
Depreciation and amortization expense. Consolidated depreciation and
amortization expense for fiscal 2022 was
Interest Expense. Interest expense in fiscal 2022 was$3.6 million , compared to interest expense of$1.9 million in fiscal 2021. The increase in interest expense was attributable to higher average borrowings on the Credit Facility and the Additional Subordinated Debt.
Income Tax Expense. The following table sets forth a year-over-year comparison of the Company's income tax expense:
(amounts in thousands) Change
January 28, January 29,
2023 2022 $
Income tax expense $ 43 $ 27 $ 16
Effective tax rate 0.2 % 0.3 % - %
The fiscal 2022 and fiscal 2021 income tax expense includes state taxes.
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Net Loss. The following table sets forth a year-over-year comparison of the
Company's net loss:
(amounts in thousands) Change
January 28, January 29,
2023 2022 $
Net loss $ (19,044 ) $ (8,031 ) $ (11,013 )
Net loss as a percentage of Net revenue (14.9 )% (5.6 )% (9.3 )%
Net loss was
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Flows: The consolidated financial statements for the year endedJanuary 28, 2023 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and satisfy liabilities and commitments in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the strategic initiative to reposition the Company as a platform of software and services and the availability of future funding.
The audited consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company incurred net losses of$19.0 million and$8.0 million for the fiscal 2022 and fiscal 2021, respectively, and has an accumulated deficit of$139.9 million as ofJanuary 28, 2023 . In addition, net cash used in operating activities during fiscal 2022 was$11.3 million . Net cash used in operating activities during fiscal 2021 was$14.5 million . There can be no assurance that we will be successful in further implementing our business strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability. Based on recurring losses from operations, negative cash flows from operations, the expectation of continuing operating losses for the foreseeable future, and uncertainty with respect to any available future funding, the Company has concluded that there is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's primary sources of liquidity are its borrowing capacity under its Credit Facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operateKaspien , including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and successful implementation of our strategy and planned activities. OnMarch 18, 2021 , the Company closed an underwritten offering of 416,600 shares of common stock of the Company, at a price to the public of$32.50 per share. The gross proceeds of the offering were approximately$13.5 million , prior to deducting underwriting discounts and commissions and estimated offering expenses. The Company used the net proceeds from the offering for general corporate purposes, including working capital to implement its strategic plans focused on brand acquisition, investments in technology to enhance its scalable platform and its core retail business. 21 -------------------------------------------------------------------------------- OnMarch 2, 2022 , the Company amended its subordinated loan pursuant to which the lenders made an additional$5.0 million secured term loan with a scheduled maturity date ofMarch 31, 2024 , which is the same maturity date as the existing loans under the Subordinated Loan Agreement. OnJuly 12, 2022 , the Company entered into a Securities Purchase Agreement (the "PIPE Purchase Agreement") with a single institutional investor for a private placement offering ("Private Placement") of the Company's common stock (the "Common Stock") or pre-funded warrants, with each pre-funded warrant exercisable for one share of Common Stock (the "Pre-Funded Warrants") and warrants exercisable for one share of Common Stock (the "Investor Warrants"). Pursuant to the PIPE Purchase Agreement, the Company issued and sold 1,818,182 shares (the "Shares") of its Common Stock or Pre-Funded Warrants in lieu thereof together with Investor Warrants to purchase up to 2,457,160 shares of Common Stock. Each share of Common Stock and accompanying Investor Warrant were sold together at a combined offering price of$3.30 per share.
The Pre-Funded Warrants have been exercised in full, at a nominal exercise price
of
The Investor Warrants have an exercise price of$3.13 per share (subject to adjustment as set forth in the warrant), are exercisable upon issuance and will expire five years from the date of issuance. The Investor Warrants contain standard adjustments to the exercise price including for stock splits, stock dividend, rights offerings and pro rata distributions. The Private Placement closed onJuly 14, 2022 . The Company received approximately$6 million in gross proceeds from the Private Placement, before deducting discounts and commissions and estimated offering expenses. The Company used the net proceeds from the private placement for working capital and other general corporate purposes. OnJuly 12, 2022 , the Company also entered into a Securities Purchase Agreement (the "Registered Purchase Agreement") with a single institutional investor, pursuant to which the Company agreed to issue and sell 638,978 shares (the "Registered Shares") of its Common Stock or Pre-Funded Warrants in lieu thereof, with each Pre-Funded Warrant exercisable for one share of Common Stock (the "Offering"). The Company received approximately$2 million in gross proceeds from the Offering, before deducting discounts and commissions and estimated offering expenses. The Company used the net proceeds from the private placement for working capital and other general corporate purposes. In addition to the aforementioned current sources of existing working capital, the Company is continuing its efforts to generate additional sales and increase margins. There can be no assurance that any of the initiatives or strategic alternatives will be implemented, successful or consummated. The following table sets forth a two-year summary of key components of cash flow and working capital: 2022 vs. (amounts in thousands) 2022 2021 2021 Operating Cash Flows$ (11,282 ) $ (14,534 ) $ 3,252 Investing Cash Flows (898 ) (1,431 ) 533 Financing Cash Flows 10,983 14,233 (3,250 ) Capital Expenditures (898 ) (1,431 ) 533 End of Period Balances:
Cash, Cash Equivalents, and Restricted Cash (1) 3,626 4,823
(1,197 )
Merchandise Inventory 26,704 29,277 (2,573 )
Working Capital 12,533 16,334 (3,801 )
Cash and cash equivalents per Consolidated
(1) Balance Sheets $ 1,130 $ 1,218 (88 )
Add: Restricted cash 2,496 3,605 (1,109 )
Cash, cash equivalents, and restricted cash
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During fiscal 2022, cash used in operations was $11.3 million compared to $14.5
million in fiscal 2021. During 2022, cash used in operations consisted
primarily of a net loss of $18.8 million , partially offset by a $2.6 million
reduction in inventory and a $0.8 million increase in accounts payable. During
2021, cash used in operations consisted primarily of a net loss of $8.0 million ,
an increase of $4.8 million in inventory and the payment of $2.6 million in
accounts payable. See the Consolidated Statement of Cash Flows for further
detail.
The Company monitors various statistics to measure its management of inventory,
including inventory turnover (annual cost of sales divided by average
merchandise inventory balances), and accounts payable leverage (accounts payable
divided by merchandise inventory). Inventory turnover measures the Company's
ability to sell merchandise and how many times it is replaced in a year. This
ratio is important in determining the need for markdowns and planning future
inventory levels and assessing customer response to our merchandise. Inventory
turnover in fiscal 2022 and in fiscal 2021 was 3.7 and 4.0, respectively.
Accounts payable leverage measures the percentage of inventory being funded by
the Company's product vendors. The percentage is important in determining the
Company's ability to fund its business. Accounts payable leverage on inventory
for Kaspien was 26.4% as of January 28, 2023 compared with 20.7% as of January
29, 2022 .
Cash used in investing activities was $0.9 million in fiscal 2022, compared to
$1.4 million in fiscal 2021. During fiscal 2022 and fiscal 2021, cash used in
investing activities consisted entirely of capital expenditures.
The Company has historically financed its capital expenditures through
borrowings under its revolving credit facility and cash flow from operations.
The Company anticipates capital spending of approximately $1.0 million in fiscal
2023.
Cash provided by financing activities was $11.0 million in fiscal 2022, compared
to $14.2 million in fiscal 2021. In fiscal 2022, the primary source of cash was
$5.0 million raised from the issuance of subordinated debt and $7.1 million from
the Private Placement and Registered Shares offerings partially offset by the
payment of short-term borrowings of $1.2 million . In fiscal 2021, the primary
source of cash was $12.2 million raised from the underwritten offering of common
stock of the Company. Additional sources of cash included the $10.0 million in
proceeds from short term borrowings. The Company used $6.3 million of the
proceeds to pay down its Credit Facility.
Related Party Transactions.
Directors Jonathan Marcus , Thomas Simpson , and Michael Reickert are the chief
executive officer of Alimco Re Ltd. ("Alimco"), the managing member of
Kick-Start III, LLC and Kick-Start IV, LLC ("Kick-Start"), and a trustee of the
Robert J. Higgins TWMC Trust (the "Trust"), an affiliate of RJHDC, LLC ("RJHDC"
and together with Alimco and Kick-Start, "Related Party Entities"),
respectively. The Related Party Entities are parties to the following
agreements with the Company entered into on March 30, 2020 :
• Subordinated Loan and Security Agreement (as amended), pursuant to which the
Related Party Entities made a
with a scheduled maturity date of
of twelve percent (12%) per annum and compounded on the last day of each
calendar quarter by becoming a part of the principal amount, and secured by a
second priority security interest in substantially all of the assets of the
Company andKaspien ;
• Common Stock Purchase Warrants ("Warrants"), pursuant to which the Company
issued warrants to purchase up to 244,532 shares of Common Stock to the Related
Party Entities (127,208 shares for
93,923 shares for RJHDC), subject to adjustment in accordance with the terms of
the Warrants, at an exercise price of
236,993 of the Warrants had been exercised by the Related Party Entities and
5,126 warrants remained outstanding;
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• Contingent Value Rights Agreement (the "CVR Agreement"), pursuant to which the
Related Party Entities received contingent value rights ("CVRs") representing
the contractual right to receive cash payments from the Company in an amount
equal, in the aggregate, to 19.9% of the proceeds (10.35% for
Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain
intercompany indebtedness owing to it by
Kaspien ; and
• Voting Agreement (the "Voting Agreement"), pursuant to which the
Entities, the Trust,
to how their respective shares of the Company's capital stock held by the
parties will be voted with respect to the designation, election, removal, and
replacement of members of the Board of Directors of the Company. On
2022, the parties entered into Amendment No. 1 to the Voting Agreement setting
forth their agreements and understandings with respect to how shares of the
Company's capital stock held by the parties thereto will be voted with respect
to (i) amending the Certificate of Incorporation of the Company to set the size
of the Board of Directors of the Company at four directors and (ii) the designation, election, removal, and replacement of members of the Board.
On
• An amendment to the Subordinated Loan and Security Agreement, pursuant to which
Subordinated Loan") with a scheduled maturity date of
accruing at the rate fifteen percent (15.0%) per annum, compounded on the last
day of each calendar quarter by becoming a part of the principal amount of the
Additional Subordinated Loan, and secured by a second priority security
interest in substantially all of the assets of the Company and
• Common Stock Purchase Warrant ("Alimco Warrant"), pursuant to which the Company
issued warrants to purchase up to 320,000 shares of Common Stock to
subject to adjustment in accordance with the terms of the Alimco Warrant, at an
exercise price of
• Registration Rights Agreement, pursuant to which
customary demand and piggyback registration rights with respect to the Warrant
Shares issued upon exercise of the Alimco Warrant; and
• Contingent Value Rights Agreement (the "Second CVR Agreement") pursuant to
which
representing the contractual right to receive cash payments from the Company in
an amount equal, in the aggregate, to 9.0% of the proceeds received by the
Company in respect of certain distributions by the Company or
recapitalizations or financings of the Company or
carve out for trade financing in the ordinary course); repayment of
intercompany indebtedness owing to the Company by
of any stock of the Company or
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Note 1 of the Notes to the Consolidated Financial Statements in this report includes a summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements. Management believes that of the Company's significant accounting policies and estimates, the following involve a higher degree of judgment or complexity: Merchandise Inventory and Return Costs. Merchandise inventory is stated at the lower of cost or net realizable value under the average cost method. Inventory valuation requires significant judgment and estimates, including obsolescence and any adjustments to net realizable value, if net realizable value is lower than cost. For all merchandise categories, the Company records obsolescence and any adjustments to net realizable value (if lower than cost) based on current and anticipated demand, customer preferences, and market conditions. 24 -------------------------------------------------------------------------------- Long-Lived Assets other thanGoodwill : Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally measured based on discounted estimated future cash flows. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less disposition costs. As ofJanuary 28, 2023 , for the purposes of the asset impairment test, the Company has one asset grouping.
Recently Issued Accounting Pronouncements.
The information set forth above may be found under Notes to Consolidated Statements, Note 2.
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