KASPIEN HOLDINGS Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company's management believes necessary to achieve an understanding of its financial statements 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, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company's merchandise is sold, and other factors discussed in the Company's filings with theSecurities and Exchange Commission . The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K as of and for the fiscal year endedJanuary 29, 2022 .Kaspien provides a platform of software and services to empower brands to grow their online distribution channels on digital marketplaces such as Amazon, Walmart and Target, among others. The Company helps brands achieve their online retail goals through its innovative and proprietary technology, tailored strategies and mutually beneficial partnerships.
We are guided by 5 core principles:
• We are partner obsessed. Our customers are our partners. Every decision is
focused on building mutually beneficial relationships that deliver results.
• We are insights driven. We make data actionable. Our curiosity drives us to
discover opportunities early and often.
• We create simplicity. We challenge the status quo. We take the complicated and
simplify it.
• We take ownership. We make things happen. We hold ourselves accountable and
have a bias for action.
• We empower each other. We welcome and learn from diverse experiences. Our
empathy ignites innovation and empowers meaningful change.
The Company's results have been, and will continue to be, contingent upon management's ability to understand industry trends and to manage the business in response to those trends and general economic trends. Management monitors several key performance indicators to evaluate its performance, including:
Net Revenue: The Company measures total year over year sales growth. The Company measures its sales performance through several key performance indicators including number of partners, 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,
distribution costs, and Amazon commissions and fulfillment fees.
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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.
Selling, General and Administrative ("SG&A") Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges.
Balance Sheet and Ratios: The Company views cash and working capital (current
assets less current liabilities) as relevant indicators of its financial
position. See Liquidity and Cash Flows section for further discussion of these
items.
RESULTS OF OPERATIONS
Thirteen Weeks Ended October 29, 2022
Compared to the Thirteen Weeks Ended October 30, 2021 Net revenue and Gross profit. The following table sets forth a year-over-year comparison of the Company's Net revenue and Gross profit:
Thirteen Weeks Ended Change Thirty-Nine Weeks Ended Change
(amounts in thousands) October 29, October 30, October 29, October 30,
2022 2021 $ % 2022 2021 $ %
Net Revenue $ 29,145 $ 32,172 $ (3,027 ) -9.4 % $ 94,843 $ 107,680 $ (12,837 ) -11.9 %
Gross profit 6,575 8,004 (1,429 ) -17.9 % 20,155 26,636 (6,481 ) -24.3 %
% to sales 22.6 % 24.9 % 21.3 % 24.7 %
Net Revenue. Net revenue was $29.1 million for the thirteen weeks ended October
29, 2022 a 9.4% decrease from the comparable prior year period. Net revenue was
$94.8 million for the thirty-nine weeks ended October 29, 2022 a 11.9% decrease
from the comparable prior year period.
The primary source of revenue is the Retail as a Service ("RaaS") model, which
represented 96% of net revenue in the thirteen weeks ended October 29, 2022 . 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.
Total active partner count as of
Platform GMV for the three months endedOctober 29, 2022 was$63.9 million as compared to$63.5 million for the three months endedOctober 30, 2021 . Retail GMV decreased 7.8% to$30.4 million compared to$33.0 million in the comparable year-ago period. Subscription GMV increased 9.7% to$33.5 million , or 52.4% of total GMV, compared to$30.5 million , or 47.6% of total GMV, in the comparable year-ago period. 23
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Thirteen weeks ended Thirty-nine weeks ended
October 29, 2022 October 30, 2021 Change October 29, 2022 October 30, 2021 Change
Amazon US $ 27,883 95.7 % $ 30,423 94.6 % -8.3 % $ 89,480 94.3 % $ 100,581 93.4 % -11.0 %
Amazon
International 528 1.8 % 738 2.3 % -28.5 % 2,807 3.0 % 4,295 4.0 % -34.6 %
Other Marketplaces 350 1.2 % 543 1.7 % -35.5 % 1,131 1.2 % 1,428 1.3 % -20.8 %
Subtotal Retail as
a Service 28,761 98.7 % 31,704 98.5 % -9.3 % 93,418 98.5 % 106,304 98.7 % -12.1 %
Subscriptions 384 1.3 % 468 1.5 % -17.9 % 1,425 1.5 % 1,376 1.3 % 3.6 %
Net revenue $ 29,145 100.0 % $ 32,172 100.0 % -9.4 % $ 94,843 100.0 % $ 107,680 100.0 % -11.9 %
Gross Profit. The following table sets forth a period over period comparison of the Company's gross profit:
Thirteen Weeks Ended Change Thirty-nine Weeks Change
(amounts in thousands) October 29, October 30, October 29, October 30,
2022 2021 $ % 2022 2021 $ %
Merchandise margin $ 12,691 $ 14,653 $ (1,962) -13.4 % $ 40,858 $ 49,309 $ (8,451) -17.1 %
% of net revenue 43.5 % 45.5 % -2.0 % 43.1 % 45.8 % -2.7 %
Fulfillment fees (3,888 ) (4,375 ) 487 -11.1 % (13,110 ) (16,218 ) 3,108 -19.2 % Warehousing and freight
(2,228 ) (2,274 ) 46 -2.0 % (7,593 ) (6,455 ) (1,138) 17.6 %
Gross profit $ 6,575 $ 8,004 $ (1,429) -17.9 % $ 20,155 $ 26,636 $ (6,481) -24.3 %
% of net revenue 22.6 % 24.9 % 21.3 % 24.7 %
Gross profit was $6.6 million for the thirteen weeks ended October 29, 2022 , as
compared to $8.0 million for the comparable prior year period. The decrease in
gross profit was primarily attributable to a reduction in net revenue on the
Amazon US Platform and a decrease in merchandise margin. Gross profit as a
percentage of net revenue for the thirteen weeks ended October 29, 2022 was
22.6% as compared to 24.9% for the thirteen weeks ended October 30, 2021 .
Merchandise margin for the thirteen-week period ending October 29, 2022 was
43.5% as compared to 45.5% for the comparable prior year period.
Gross profit for the thirty-nine weeks ended October 29, 2022 was $20.2 million ,
or 21.3% of net revenue, as compared to $26.6 million , or 24.7% of net revenue
for the comparable prior year period as increased net revenue was offset by
higher warehousing and freight expenses.
SG&A Expenses. The following table sets forth a period over period comparison of the Company's SG&A expenses:
Thirteen Weeks Ended Change Thirty-Nine Weeks Ended Change
(amounts in October 29, October 30, October 29, October 30,
thousands) 2022 2021 $ % 2022 2021 $ %
Selling expenses $ 4,206 $ 4,580 $ (374 ) -8.2 % $ 13,683 $ 15,571 $ (1,888 ) -12.1 %
General and
administrative
expenses 5,049 5,438 (389 ) -7.2 % 16,292 15,315 977 6.4 %
Total SG&A
expenses $ 9,255 $ 10,018 $ (763 ) -7.6 % $ 29,975 $ 30,886 $ (911 ) -2.9 %
As a % of total
revenue 31.8 % 31.1 % 31.6 % 28.7 %
For the thirteen weeks ended October 29, 2022 , SG&A expenses were $9.3 million
as compared to $10.0 million for the prior year period. Selling expenses
decreased $0.4 million for the thirteen weeks ended October 29, 2022 as compared
to the prior year period. General and administrative expenses decreased $0.4
million for the thirteen weeks ended October 29, 2022 .
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Consolidated depreciation and amortization expense for the thirteen weeks endedOctober 29, 2022 was$0.4 million as compared to$0.6 million for the comparable prior year period. For the thirty-nine weeks endedOctober 29, 2022 , SG&A were$30.0 million as compared to$30.9 million for the comparable prior year period. Selling expenses decreased$1.9 million for the thirty-nine weeks endedOctober 29, 2022 . General and administrative expenses increased$1.0 million for the thirty-nine weeks endedOctober 30, 2021 .
Consolidated depreciation and amortization expense for the thirty-nine weeks
ended
Interest Expense. Interest expense was$0.9 million for the thirteen weeks endedOctober 29, 2022 compared to$0.4 million for the thirteen weeks endedOctober 30, 2021 . The increase in interest expense was due to increased short and long-term borrowings. Interest expense was$2.5 million for the thirty-nine weeks endedOctober 29, 2022 compared to$1.5 million for the thirty-nine weeks endedOctober 30, 2021 . The increase in interest expense was due to increased short and long-term borrowings. See Note 7 to the Condensed Consolidated Financial Statements for further detail on the Company's debt. Income Tax Expense. Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets As a result, there were insignificant tax expense amounts recorded during the thirteen weeks endedOctober 29, 2022 andOctober 30, 2021 . Net Loss. The net loss for the thirteen weeks endedOctober 29, 2022 was$3.6 million as compared to a net loss of$0.9 million for the comparable prior year period. LIQUIDITY Liquidity and Cash Flows: 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; successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic. The Company incurred a net loss of$12.4 million and$2.2 million for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 , respectively. The increase in the net loss was primarily attributable to a decrease in sales and gross margin. In addition, the Company has an accumulated deficit of$133.3 million as ofOctober 29, 2022 and net cash used in operating activities for the thirty-nine weeks endedOctober 29, 2022 was$12.2 million . Net cash used in operating activities for the thirty-nine weeks endedOctober 30, 2021 was$10.0 million . As disclosed in the Company's Annual Report on Form 10-K filedApril 29, 2022 , the Company experienced negative cash flows from operations during fiscal 2021 and 2020 and we expect to incur net losses in fiscal 2022. 25
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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; successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic. 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. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The unaudited condensed consolidated financial statements for the thirteen weeks endedOctober 29, 2022 were prepared pursuant to the rules and regulations of theSecurities and Exchange Commission . The information furnished in these unaudited condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for the fair presentation of such financial statements. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the strategic initiatives forKaspien and the availability of future funding. 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. As ofJanuary 29, 2022 , the Company had borrowings of$10.0 million under the Credit Facility. As ofOctober 29, 2022 andOctober 30, 2021 , the Company had no outstanding letters of credit. The Company had$5.2 million and$10.9 million available for borrowing under the Credit Facility as ofOctober 29, 2022 andOctober 30, 2021 , respectively. 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, investments in technology to enhance its scalable platform and its core retail business. 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 has agreed to issue and sell 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 will be sold together at a combined offering price of$3.30 per share. 26
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The Pre-Funded Warrants are immediately exercisable, at a nominal exercise price of$0.001 , and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. As ofOctober 29, 2022 109,416 Pre-Funded Warrants related to the Offering remain outstanding. 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 gross proceeds to the Company from the Private Placement, after deducting placement agent fees and other estimated offering expenses payable by the Company, were approximately$7.1 million . The Company intends to use the net proceeds from the private placement for working capital and other general corporate purposes. 27
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The following table sets forth a summary of key components of cash flow and
working capital:
As of or for the
Thirty-nine Weeks Ended Change
(amounts in thousands) October 29, October 30,
2022 2021 $
Operating Cash Flows $ (12,193 ) $ (9,990 ) $ (2,203 )
Investing Cash Flows (766 ) (1,046 ) 280
Financing Cash Flows 11,666 10,125 1,541
Capital Expenditures(1) (766 ) (1,046 ) 280
Cash, Cash Equivalents, and Restricted Cash (2) 3,528 5,644 (2,116 )
Merchandise Inventory (2) 37,353 30,248 7,105
(1) Included in Investing Cash Flows
(2) Cash and cash equivalents per condensed
consolidated balance sheets $ 769 $ 1,754 $ (985 )
Add: restricted cash 2,759 3,890 (1,131 )
Cash, cash equivalents, and restricted cash $ 3,528 $ 5,644 $ (2,116 ) Cash used in operations was
Cash used by investing activities was$0.8 million and$1.1 million for the thirty-nine weeks periods endedOctober 29, 2022 andOctober 30, 2021 , which consisted entirely of capital expenditures. Cash provided by financing activities was$11.7 million for the thirty-nine weeks endedOctober 29, 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 offering partially offset by the payment of short-term borrowings of$0.5 million . Cash provided by financing activities was$10.1 million for the thirty-nine weeks endedOctober 30, 2021 . The primary source of cash was 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 net proceeds of the offering were approximately$12.2 million . The Company used$6.3 million of the proceeds to pay down its Credit Facility. Capital Expenditures. During the thirteen weeks endedOctober 29, 2022 , the Company made capital expenditures of$0.8 million . The Company currently plans to spend approximately$1.0 million for capital expenditures during fiscal 2022. 28
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CRITICAL ACCOUNTING 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 continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes. 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. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K as of and for the year endedJanuary 29, 2022 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements. The Company's significant accounting policies are the same as those described in Note 1 to the Company's Consolidated Financial Statements on Form 10-K for the fiscal year endedJanuary 29, 2022 .
Recent Accounting Pronouncements:
The information set forth under Note 2, Recently Adopted Accounting Pronouncements section contained in Item 1, "Notes to Interim Condensed Consolidated Financial Statements", is incorporated herein by reference.
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KASPIEN HOLDINGS INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION
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